Item 1. Business
(a) General development of business
Man-AHL Diversified I L.P., a Delaware limited partnership (the “Partnership”), was organized in September 1997 under the Delaware Revised Uniform Limited Partnership Act and commenced trading operations on April 3, 1998, for the purpose of engaging in the speculative trading of physical commodities, futures and forward contracts and related instruments. The Partnership was formerly named AHL Diversified (USA) L.P., but was renamed in February 2002. The Partnership is a “feeder” fund in a “master-feeder” structure, whereby the Partnership invests substantially all of its assets in Man AHL Diversified Trading Company L.P. (the “Trading Company”). Man-AHL (USA) Limited (the “Trading Advisor”), a United Kingdom company, is the Partnership’s and the Trading Company’s trading advisor. Man Investments (USA) Corp. (the “General Partner”), a Delaware corporation and a registered commodity pool operator under the Commodity Exchange Act, as amended, is the Partnership’s general partner and commodity pool operator. The Trading Advisor is an affiliate of the General Partner. Man Investments Holdings Limited, a United Kingdom holding company that is part of Man Group plc, a United Kingdom public limited company, is the sole shareholder of the Trading Advisor, and Man Investments Holdings Inc., a Delaware corporation that is part of Man Group plc, is the sole shareholder of the General Partner.
On January 28, 2008, the Partnership filed a registration statement under the Securities Exchange Act of 1934, which registration statement was subsequently amended. The registration statement became effective on or about March 28, 2008. The Partnership offers two classes of units of limited partnership interest in the Partnership (“Units”): Class A Units are generally offered; Class B Units are offered to employee benefit plans, IRAs and other retirement plans and accounts. The two Classes of Units are identical to each other except that Class B Units may be purchased, transferred, held and redeemed in a minimum amount of $10,000. Within Class A and Class B, Units will be issued in two separate Series. Except as described in section (c) below, Class A Series 1 (“Class A-1”) and Class B Series 1 (“Class B-1”) units are identical to Class A Series 2 (“Class A-2”) and Class B Series 2 (“Class B-2”) units, respectfully.
Although the Partnership uses the term “class” to distinguish between certain interests in the Partnership, the Partnership does not believe that the differences between such interests are sufficient to make them separate “classes” under Section 12(g) of the Securities Exchange Act of 1934, as all the interests in the Partnership, regardless of “class,” are of substantially similar character and the holders of which enjoy substantially similar rights and privileges. The holders of interests in the Partnership (regardless of “class”) share pro rata in the Partnership’s profits and losses, enjoying no preferences over one another during the life of the Partnership or upon dissolution and otherwise have identical rights under the Limited Partnership Agreement, the only differences among the “classes” relating to fees and minimum investment.
The General Partner became the general partner of the Partnership as of April 1, 2005 when Man-AHL (USA) Corp., the Partnership’s original general partner and trading advisor (“Man-AHL”), appointed it as such. In addition to the appointment of the General Partner, Man-AHL appointed the Trading Advisor to serve as the trading advisor to the Partnership commencing as of April 1, 2005. Following the appointments of the General Partner as a general partner and the Trading Advisor as the trading advisor, Man-AHL resigned as a general partner and trading advisor of the Partnership. The General Partner agreed to continue the Partnership without interruption or change. The General Partner controls and manages the business of the Partnership. Purchasers of Units, as the Partnership’s “Limited Partners,” have no right to participate in management or control of the Partnership. The offices of the Partnership, where its books and records are kept, are located at the office of the General Partner: HSBC Tower, 452 5th Ave., 25th Floor, New York, NY; telephone (212) 649-6600.
(b) Financial information about segments
The Partnership’s business constitutes only one segment, i.e., a speculative commodity pool. The Partnership does not engage in sales of goods and services. Financial information regarding the Partnership’s business is set forth in the Partnership’s Financial Statements incorporated into Item 8 hereof and attached as Exhibit 13.1 hereto.
(c) Narrative description of business
The Partnership engages in speculative trading of physical commodities, futures and forward contracts and related instruments, directly and indirectly through an investment in the Trading Company, pursuant to the trading strategies employed by the Trading Advisor. The Partnership invests substantially all of its assets in the Trading Company.
The investment objective of the Trading Advisor’s futures trading program (referred to herein as the “AHL Diversified Program”) is to deliver capital growth for commensurate levels of volatility over the medium term, independent of the movement of the stock and bond markets, through the speculative trading, directly and indirectly, of physical commodities, futures contracts, spot and forward contracts, options on the foregoing, exchanges of futures for physical transactions and other investments (sometimes hereinafter referred to as ‘futures’) on domestic and international exchanges and markets (including the interbank and over-the-counter markets).
The AHL Diversified Program employs a systematic, statistically based investment strategy that is designed to identify and capitalize on inefficiencies in markets around the world. A stable and robust trading and implementation infrastructure is then employed to capitalize on these trading opportunities. The trading systems are quantitative and primarily directional in nature, meaning that investment decisions are entirely driven by mathematical models based on market trends and other historic relationships. Trading takes place around-the-clock and real-time price information is used to respond to price moves across a diverse range of global markets.
The trading process is the product of continuing research and development performed by the Trading Advisor (inclusive of its affiliates) since 1987. Although the underlying investment methodology is proprietary and the precise details confidential, the guiding principles have remained unchanged through the years: diversification, discipline, efficiency, rigorous risk management and ongoing research.
The AHL Diversified Program invests in a diversified portfolio of instruments which may include futures, options and forward contracts, swaps and other financial derivative instruments both on and off exchange. The AHL Diversified Program trades globally in several market sectors, including, without limitation, currencies, bonds, energies, stock indices, interest rates, metals and agricultures.
In addition to sector and market diversification, the AHL Diversified Program seeks to achieve diversification by combining various systems driven by computerized processes or trading algorithms, which sample prices in real time and measure price momentum and breakouts. In aggregate, the systems run more than 2,000 price samples each day spread across the 150 or so markets traded. The trading algorithms aim mainly to capture price trends and close out positions when there is a high probability of a different trend developing, although the AHL Diversified Program may also include algorithmic systems based on quantitative fundamental data that can be captured efficiently, such as interest rate data. Another aspect of diversification is the fact that the various systems generate signals across different timeframes, ranging from intra-day to several months, which helps to reduce the risk of the AHL Diversified Program.
In line with the principle of diversification, the approach to portfolio construction and asset allocation is premised on the importance of deploying investment capital across the full range of sectors and markets. Particular attention is paid to correlation of markets and sectors, expected returns, trading costs and market liquidity. Portfolios are regularly reviewed and, when necessary, adjusted to reflect changes in these factors. The Trading Advisor also has a process for adjusting market risk exposure in real time to reflect changes in the volatility of individual markets.
The integrity of the AHL Diversified Program’s defined investment style is ensured by adherence to a rigorous control process. All the strategies and systems applied by the Trading Advisor are designed to target defined volatility levels rather than returns, and the investment process is underpinned by computer-supported
analytical instruments, disciplined real-time risk control and management information systems. As risk control is integral to each part of the investment process, risk management consists primarily of monitoring risk measures and ensuring the systems remain within prescribed limits. A proprietary risk measurement method similar to the industry standard “value-at-risk” helps ensure that the rule-based decisions that drive the investment process remain within predefined risk parameters. Margin-to-equity ratios are monitored daily, and the level of exposure in each market is quantifiable at any time and is adjusted in accordance with market volatility. Market correlation is closely monitored to prevent over-concentration of risk and ensure optimal portfolio weightings. Market liquidity is examined with the objective of ensuring that the Trading Company will be able to initiate and close out trades as indicated by AHL Diversified Program’s systems at market prices, while brokerage selection and trade execution are continually monitored with the objective of ensuring quality market access.
As the success of the AHL Diversified Program is largely dependent on its systems, the Trading Advisor is committed to investing in leading computer technology. The Trading Advisor (inclusive of affiliates) also maintains a disaster recovery site where a back-up trading system runs permanently and in parallel with the main system.
The AHL Diversified Program uses margin and considerable leverage to reach model allocations.
The AHL Diversified Program is supported by a dedicated team of investment specialists that continually seek to extend the range and versatility of the original investment techniques. As such, The Trading Advisor may increase the number and diversity of markets, strategies and instruments traded directly or indirectly by the AHL Diversified Program.
The Trading Advisor is paid a monthly management fee, payable in arrears, in an amount equal to 0.1667% of the month-end Net Asset Value of the Partnership (as defined in the Partnership’s Sixth Amended and Restated Limited Partnership Agreement, as the same may be amended or supplemented from time to time (the “Agreement”)) whether or not the Partnership is profitable (approximately 2% annually). The General Partner is paid a monthly general partner administrative fee in an amount equal to 0.0833% of the month-end Net Asset Value of the Partnership whether or not the Partnership is profitable (approximately 1% annually). The Trading Advisor may pay a portion of its management fee to the General Partner, and the General Partner may share a portion of its administrative fee with the Placement Agent (as defined below).
The Partnership will pay the Trading Advisor an incentive fee equal to 20% of the Net New Appreciation (as defined in the Agreement), if any, achieved by the Partnership as of the end of such calendar month. Net New Appreciation achieved during a calendar month means the excess, if any, of (a) the Net Asset Value of the Partnership as of the end of a calendar month (without reduction for any incentive fees accrued or paid to the Trading Advisor for the calendar month or for any redemptions or distributions effected during or as of the end of such calendar month and without increase for any additional capital contributions effected during or as of the end of such calendar month) over (b) the Net Asset Value of the Partnership as of the end of the most recent prior calendar month for which an incentive fee was accrued or paid to the Trading Advisor, with clause (b) reduced by the amount of the incentive fee accrued or paid for such prior calendar month and also reduced by any redemptions or distributions, and increased by any contributions, effected as of or subsequent to the end of such prior calendar month through the first day of the calendar month referred to in clause (a), above.
Man Investments Inc., an affiliate of the General Partner and Trading Advisor, is the lead placement agent for the Partnership (the “Placement Agent”). In connection with various services provided by the Placement Agent to the Partnership related to the offer and sale of interests in the Partnership and the ongoing servicing of its investors, the Partnership will pay the Placement Agent a servicing fee equal to, in respect to Class A-1 Units and Class B-1 Units, 0.1250% of the month-end Net Asset Value of such Units (approximately 1.5% annually), and in respect of Class A-2 Units and Class B-2 Units, 0.1042% of the month-end Net Asset Value of such Units (approximately 1.25% annually), whether or not the Partnership is profitable as of the end of each month. The Placement Agent may pass all or a portion of the servicing fee on to certain other selling and services agents. In addition, Units purchased through such selling and services agents may be subject to the payment of an additional upfront selling commission of up to 3% of the purchase price of the Units.
The Partnership’s organizational and initial offering fees and expenses were approximately $50,000 (including its pro-rata share of the Trading Company’s organizational fees and expenses) and have been paid by the Partnership. Such organizational fees and expenses (excluding promotional and offering fees and expenses) have been completely amortized. The Partnership pays all of its expenses incurred in the ordinary course of its business. The Partnership also pays its extraordinary expenses, if any.
The Trading Company utilizes Credit Suisse, Sydney Branch and J.P. Morgan Securities LLC, to clear its futures trading activity and Royal Bank of Scotland, JPMorgan Chase Bank, N.A. and Deutsche Bank AG, London Branch serve as the Trading Company’s foreign exchange prime brokers (collectively, the “Brokers”). The Partnership is charged brokerage commissions at institutional rates, inclusive of all applicable National Futures Association (the “NFA”), exchange, clearing and other transaction fees. In connection with trading spot and forward contracts in the interbank foreign currency markets, the Partnership pays clearing fees of between $3.25 and $4.00 per transaction as well as dealer profits, which cannot be quantified, embedded in dealer quotes.
The Partnership invests substantially all of its assets in the Trading Company. Most of the Trading Company’s assets will be held in cash or United States government securities in accounts in the name of the Trading Company at the brokers or a bank, which currently is JP Morgan Chase Bank, N.A. (Chicago, Illinois), and in order to conduct futures trading activities, will be transferred, as necessary, into segregated accounts at the brokers. Approximately 20% to 40% of the Trading Company’s assets will be committed as margin for futures positions. The brokers may receive compensating balance treatment and excess interest income on the Partnership’s assets, through the Trading Company, held at the brokers in the form of cash.
The Trading Company engages in trading on non-U.S. exchanges and markets. In connection with trading on non-U.S. exchanges and markets, the brokers may either maintain Trading Company assets in accordance with the requirements of the Commodity Futures Trading Commission (“CFTC”) Rule 30.7 or may redeposit Trading Company assets with non-U.S. banks and brokers which may not be subject to regulatory schemes comparable to those applicable to the Futures Brokers.
Regulation
Under the Commodity Exchange Act, as amended (the “CEA”), commodity exchanges and futures trading are subject to regulation by the CFTC. The NFA, a “registered futures association” under the CEA, is the only non-exchange self-regulatory organization for futures industry professionals. The CFTC has delegated to NFA responsibility for the registration of “commodity trading advisors,” “commodity pool operators,” “futures commission merchants,” “introducing brokers” and their respective associated persons and “floor brokers” and “floor traders.” The CEA requires commodity pool operators and commodity trading advisors, such as the General Partner and Trading Advisor, respectively, and commodity brokers or futures commission merchants, such as Royal Bank of Scotland, to be registered and to comply with various reporting and record keeping requirements. The CFTC may suspend a commodity pool operator’s or trading advisor’s registration if it finds that its trading practices tend to disrupt orderly market conditions or in certain other situations. In the event that the registration of the General Partner as a commodity pool operator or the Trading Advisor as a commodity trading advisor were terminated or suspended, the General Partner would be unable to continue to manage the business of the Partnership or Trading Advisor would be unable to implement the AHL Diversified Program on behalf of the Partnership. Should the General Partner’s or Trading Advisor’s registration be suspended, termination of the Partnership might result.
In addition to such registration requirements, the CFTC and certain commodity exchanges have established limits on the maximum net long or net short position which any person may hold or control in particular commodities. Most exchanges also limit the changes in futures contract prices that may occur during a single trading day.
The CFTC adopted a separate position limits rule for 28 so-called “exempt” (i.e. metals and energy) and agricultural futures and options contracts and their economically equivalent swap contracts. However, this rule was vacated by court action. Limits in spot months were to be 25% of the official estimated deliverable supply of
the underlying commodity and in a non-spot month a percentage of the average aggregate 12-month rolling open interest in all months (swaps and futures) for each contract. It is possible that, if these position limits are readopted without the defects found by the court when vacating the CFTC rule, the Trading Advisor will be required to modify its trading on behalf of its clients, including the Trading Company, with respect to certain futures contracts which may have an adverse affect the Partnership.
Currency forward contracts traded by the Trading Company are not currently subject to regulation by any United States (“U.S.”) Government agency.
Item 1A.
Item 1A. Risk Factors.
Risk of Loss. Investing in the Partnership is speculative and involves substantial risks. You should not invest unless you can afford to lose your entire investment.
General. The transactions in which the Advisor generally will engage in on behalf of the Partnership involve significant risks. Growing competition may limit the Advisor’s ability to take advantage of trading opportunities in rapidly changing markets. No assurance can be given that investors will realize a profit on their investment. Moreover, investors may lose all or some of their investment. Because of the nature of the trading activities, the results of the Partnership’s operations may fluctuate from month to month and from period to period. Accordingly, investors should understand that the results of a particular period will not necessarily be indicative of results in future periods.
Markets Are Volatile and Difficult to Predict. Trading in futures is a speculative activity. Futures prices may be highly volatile. Market prices are difficult to predict and are influenced by many factors, including: changes in interest rates; governmental, agricultural, trade, fiscal, monetary and exchange control programs and policies; weather and climate conditions; changing supply and demand relationships; national and international political and economic events; and the changing philosophies and emotions of market participants. In addition, governments intervene in particular markets from time to time, both directly and by regulation, often with the intent to influence prices. The effects of government intervention may be particularly significant in the financial instrument and currency markets, and may cause such markets to move rapidly.
Trading Is Highly Leveraged. The low margin deposits normally required in futures trading permit an extremely high degree of leverage. A relatively small movement in the price of a futures contract may result in immediate and substantial loss or gain to a trader holding a position in such contract. For example, if at the time of purchase 10% of the price of a futures contract is deposited as margin, a 10% decrease in the price of the futures contract would, if the contract were then closed out, result in a total loss of the margin deposit before any deduction for brokerage commissions. Consequently, like other leveraged investments, a futures trade may result in losses in excess of the amount invested. Forward contracts involve similar leverage and also may require deposits of margin as collateral. Swaps and OTC derivative instruments are also highly leveraged transactions.
Markets May Be Illiquid. At times, it may not be possible for the Advisor to obtain execution of a buy or sell order at the desired price or to liquidate an open position, either due to market conditions on exchanges or due to the operation of “daily price fluctuation limits” or “circuit breakers.” For example, most U.S. commodity exchanges limit fluctuations in most futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” During a single trading day, no trades may be executed at prices beyond the daily limit. Futures contract prices occasionally have moved to the daily limit for several consecutive days with little or no trading.
Even when futures prices have not moved to the daily limit, the Advisor might not be able to obtain execution of trades at favorable prices if little trading in the contracts which the Advisor wishes to trade is taking place. Also, an exchange or governmental authority may suspend or restrict trading on an exchange (or in particular futures traded on an exchange) or order the immediate settlement of a particular instrument.
Options trading may be restricted in the event that trading in the underlying instrument becomes restricted. Options trading also may be illiquid at times regardless of the condition of the market in the underlying instrument. In either event, it will be difficult for the Advisor to realize gain or limit losses on option positions by offsetting them or to change positions in the market.
Trading in OTC derivative instruments is conducted with individual counterparties rather than on organized exchanges. There have been periods during which forward contract dealers have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the bid and asked price.
Speculative Position Limits May Restrict Futures Trading. Speculative position limits prescribe the maximum net long or short futures contract and options positions which any person or group may hold or control in particular futures contracts. All futures contracts and options on futures contracts traded on commodity exchanges located in the United States, with the exception of contracts on certain major non-U.S. currencies, are subject to speculative position limits established either by the CFTC or the relevant exchange.
All trading accounts owned or managed by the Advisor and its principals will be combined for the purposes of speculative position limits. Such limits could adversely affect the profitability of the Trading Company and, consequently, of the Partnership. For example, the Advisor could be required to liquidate futures positions at an unfavorable time in order to comply with such limits. However, the Advisor does not believe that existing speculative position limits will materially adversely affect its ability to manage the Trading Company’s account.
Cash Flow. Futures contract gains and losses are marked-to-market daily for purposes of determining margin requirements. Option positions generally are not, although short option positions will require additional margin if the market moves against the position. Due to these differences in margin treatment between futures and options, there may be periods in which positions on both sides must be closed down prematurely due to short term cash flow needs. Were this to occur during an adverse move in a spread or straddle relationship, a substantial loss could occur.
Decisions Based on Trends and Technical Analysis. The trading decisions of the Advisor will be based in part on trading strategies which utilize mathematical analyses of technical factors relating to past market performance. The buy and sell signals generated by a technical, trend-following trading strategy are based upon a study of actual daily, weekly and monthly price fluctuations, volume variations and changes in open interest in the markets. The profitability of any technical, trend-following trading strategy depends upon the occurrence in the future of significant, sustained price moves in some of the markets traded. The Trading Company and, consequently, the Partnership may incur substantial trading losses:
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during periods when markets are dominated by fundamental factors that are not reflected in the technical data analyzed by the program;
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during prolonged periods without sustained moves in one or more of the markets traded; or
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during “whip-saw” markets, in which potential price trends start to develop but reverse before actual trends are realized.
In the past there have been prolonged periods without sustained price moves in various markets. Presumably, such periods will recur. A series of volatile reverses in price trends may generate repeated entry and exit signals in trend-following systems, resulting in unprofitable transactions and increased brokerage commission expenses. Technical, trend-following trading systems are used by many other traders. At times, the use of such systems may:
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result in traders attempting to initiate or liquidate substantial positions in a market at or about the same time;
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alter historical trading patterns;
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obscure developing price trends; or
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affect the execution of trades.
Trading in OTC Markets Will Expose the Partnership to Risks Not Applicable to Trading on Organized Exchanges. The Partnership, through the Trading Company, may engage in OTC derivative transactions, such as: currency forward contracts traded in the interbank market; options on currency forward contracts; and swap transactions.
In general, there is much less governmental regulation and supervision of transactions in the OTC markets than of transactions entered into on organized exchanges. Most of the protections afforded to participants on U.S. and certain non-U.S. exchanges, such as daily price fluctuation limits and the performance guarantee of an exchange clearinghouse, will not be available in connection with OTC transactions.
Consequently, the Partnership will be exposed to greater risk of loss through default than if it confined its trading to organized exchanges.
A portion of the Partnership’s assets may be traded in forward contracts. Such forward contracts are not traded on exchanges and are executed directly through forward contract dealers. There is no limitation on the daily price moves of forward contracts, and a dealer is not required to continue to make markets in such contracts. There have been periods during which forward contract dealers have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the bid and asked price. Arrangements to trade forward contracts may therefore experience liquidity problems. The Partnership therefore will be subject to the risk of credit failure or the inability of or refusal of a forward contract dealer to perform with respect to its forward contracts. When trading currency forward contracts, the Trading Company may hedge the foreign currencies in order to limit the Trading Company’s exposure to fluctuations in exchange rates. However, there is no guarantee that such hedging will be successful.
Exchanges for Physicals/Swaps/Risk. While not a regular practice for the Trading Company, it may in rare instances engage in transactions known as exchanges for physicals (“EFP”), exchanges for swaps (“EFS”), or exchanges for risk/over-the-counter derivatives (“EFR”). An EFP/EFS/EFR is a purchase or sale of a spot commodity/swap/derivative, as applicable, in conjunction with an offsetting sale or purchase of a corresponding futures contract involving the same or equivalent underlying commodity or instrument, without making an open and competitive trade for the futures contract on the exchange. EFPs, EFSs and EFRs are a permitted exception to the general requirement of the CEA that all futures contracts must be competitively executed on an exchange. They are permitted pursuant to the rules of the relevant exchanges, which vary from exchange to exchange. If the EFP, EFS or EFR does not comply with specific exchange requirements, particularly regarding possessing documentation evidencing possession of the underlying commodity or instrument, then the CFTC or the exchange may deem the transaction to be an illegal off-exchange futures contract. In addition, every EFP, EFS or EFR involves the transfer of an underlying commodity or entry into a swap or derivative on a bilateral basis, as applicable, with a counterparty in exchange for a related cleared futures contract. There is, therefore, counterparty credit risk if the counterparty or its clearing member on the futures leg fails to perform. Unlike other futures contracts that are deemed cleared by the clearinghouse upon trade matching or at the end of the business day, futures contracts arising out of EFPs, EFSs or EFRs may, under various clearinghouse rules, not be deemed accepted by the clearinghouse until the next business day.
Options on Futures Contracts Are More Volatile Than Futures Contracts. The Advisor may trade options on futures. Options are speculative in nature and are highly leveraged. The purchaser of an option risks losing the entire purchase price of the option. The seller (writer) of an option risks losing the difference between the premium received for the option and the price of the underlying futures contract that the writer must purchase upon exercise of the option. Additionally, the seller and writer of the options lose any commissions and fees associated with such transactions. This could subject the writer to unlimited risk in the event of an increase in the price of the contract to be purchased or delivered. Successful trading of options on futures contracts requires a trader to accurately determine near-term market volatility because it often has an immediate impact on the price of outstanding options. Accurate determination of near-term volatility is more important to successful options trading than it is to long-term futures contract trading strategies because such volatility generally does not have as significant an effect on the prices of futures contracts.
Trading on Non-U.S. Exchanges and Markets Will Expose the Partnership to Risks Not Applicable to Trading on U.S. Exchanges and Markets. The Partnership, through the Trading Company, may engage in trading on non-U.S. exchanges and markets. The Partnership will be subject to the risk of fluctuations in the currency exchange rate between the local currency and the U.S. dollar and to the possibility of exchange controls. Trading on such exchanges and markets generally involves other risks not applicable to trading on U.S. exchanges and markets.
For example, such exchanges and markets:
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may not provide the same assurances of the integrity (financial and otherwise) of the marketplace and its participants as do U.S. exchanges and markets;
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may exercise less regulatory oversight and supervision over transactions and participants in transactions;
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may not afford all participants an equal opportunity to execute trades;
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may be subject to a variety of political influences and the possibility of direct governmental intervention;
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may have different clearance and settlement procedures for transactions than U.S. exchanges and markets. There have been times when settlement procedures have been unable to keep pace with the volume of transactions on certain exchanges and markets, making it difficult to conduct trades; and
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may be “principals’ markets” in which performance is the responsibility only of the member with whom the trader has dealt (the counterparty) rather than the responsibility of an exchange or clearing association. Each transaction on such an exchange or market may subject the Partnership to the risk of the counterparty’s credit failure or inability or refusal to perform its obligations.
Institutional Risks. Institutions, such as the brokers, will have custody of the assets of the Partnership. These firms may encounter financial difficulties that impair the operating capabilities or the capital position of the Partnership, the Trading Company or the General Partner. The General Partner and Advisor will attempt to limit its transactions to well-capitalized and established brokers in an effort to mitigate such risks.
Counterparty Risk. The Partnership will be subject to the risk of the inability of counterparties to perform with respect to transactions, whether due to insolvency, bankruptcy or other causes, which could subject the Partnership to substantial losses. In an effort to mitigate such risks, the General Partner and Advisor will attempt to limit transactions to counterparties, which are established, well-capitalized and creditworthy.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
The Partnership does not own or use any physical properties in the conduct of its business. The General Partner and various service providers perform services for the Partnership from their offices.
Item 3.
Item 3. Legal Proceedings.
The General Partner is not aware of any pending legal proceedings to which either the Partnership is a party or to which any of its assets are subject. In addition there are no pending material legal proceedings involving either the General Partner or Trading Advisor.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information.
There is no trading market for the Units, and none is likely to develop. Units may be redeemed upon 10 days’ written notice to the General Partner at their Net Asset Value as of the last business day of each calendar month; provided, however, that each Limited Partner must maintain a minimum investment of $25,000 and $10,000, respectively of Class A-1 Units (or Class A-2 Units) and Class B-1 Units (or Class B-2 Units), in the Partnership following any redemption initiated by such Limited Partner in order to remain invested in the Partnership.
(b) Holders.
As of December 31, 2012, there were 1,807 holders of Class A-1 Units, 232 holders of Class A-2 Units, 1,463 holders of Class B-1 Units and 97 holders of Class B-2 Units.
(c) Dividends.
No distributions or dividends have been made on the Units, and the General Partner has no present intention to make any.
(d) Securities Authorized for Issuance Under Equity Compensation Plans.
None.
(e) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.
Pursuant to the Partnership’s Limited Partnership Agreement, the Partnership may admit additional Limited Partners to the Partnership and permit additional capital contributions to be made to the Partnership as of the last business day of any calendar month or at such other times as the General Partner may determine. On October 31, 2012, November 30, 2012 and December 31, 2012, the Partnership sold Class A-1 Units to existing and new Limited Partners in the amount of $6,831,626, $510,000 and $908,000, respectively; Class A-2 Units to existing and new Limited Partners in the amount of $0, $0 and $0, respectively; Class B-1 Units to existing and new Limited Partners in the amount of $128,900, $220,750 and $84,980, respectively; and Class B-2 Units to existing and new Limited Partners in the amount of $0, $62,000 and $0, respectively. There were no underwriting discounts or commissions in connection with the sales of the Units described above.
(f) Issuer Purchases of Equity Securities.
Pursuant to the Partnership’s Limited Partnership Agreement, a Limited Partner may redeem some or all of its Units as of the last business day of each calendar month at the then current month-end Net Asset Value. The redemption of Units has no impact on the value of Units that remain outstanding, and Units are not reissued once redeemed. The following table summarizes the amount of Units redeemed during the three months ended December 31, 2012:
Item 6.
Item 6. Selected Financial Data
The following is a summary of operations for the fiscal years 2012, 2011, 2010, 2009 and 2008 and total assets of the Partnership at December 31, 2012, 2011, 2010, 2009 and 2008.
* Allocated to the Partnership from its investment in the Trading Company. The Trading Company generates revenue from the trading of futures, foreign exchange and forward currency contracts.
** Expenses include the Partnership’s allocation of expenses from its investment in the Trading Company in addition to direct expenses of the Partnership.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to “Item 8. Financial Statements and Supplementary Data.” The information contained therein is essential to, and should be read in conjunction with, the following analysis.
Capital Resources and Liquidity
Units may be offered for sale as of the first business day, and may be redeemed as of the last business day, of each month.
The Partnership raises additional capital only through the sale of Units and capital is increased through trading profits (if any) and interest income. The Partnership does not engage in borrowing. The Partnership, not being an operating company, does not incur capital expenditures. It functions solely as a passive trading vehicle, investing the substantial majority of its assets in the Trading Company. Its remaining capital resources are used only as assets available to make further investments in the Trading Company and to pay Partnership expenses. Accordingly, the amount of capital raised for the Partnership should not have a significant impact on its operations.
Partnership assets not invested in the Trading Company are maintained in cash and cash equivalents in bank accounts or accounts with the JPMorgan Chase Bank, N.A. and are readily available to the Partnership. The Partnership may redeem any part or all of its limited partnership interest in the Trading Company at any month-end at the net asset value per unit of the Trading Company. The Trading Company’s assets are generally held as cash or cash equivalents which are used to margin futures and provide collateral for forward contracts and other over-the-counter contract positions and are withdrawn, as necessary, to pay redemptions (to the Partnership and other investors in the Trading Company). Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Trading Company’s futures trading, the Trading Company’s assets are highly liquid and are expected to remain so.
During its operations through December 31, 2012, the Partnership experienced no meaningful periods of illiquidity in any of the numerous markets in which it trades.
Critical Accounting Principles
The Partnership records its transactions in futures, forward and swap contracts, including related income and expenses, on a trade-date basis. Open futures contracts traded on an exchange are valued at fair value, which is based on the closing settlement price on the exchange where the futures contract is traded by the Partnership on the day with respect to which the Partnership’s Net Asset Value is being determined. Open forward contracts and other derivatives traded on the interbank market are valued at fair value at their settlement price on the day with respect to which the Partnership’s Net Asset Value is being determined. Open swap contracts, which are not traded on a national exchange, are valued at fair value using independent pricing services, which are using market observable inputs in their valuations. If the General Partner determines the fair value of an investment cannot be accurately determined pursuant to the foregoing methods, such investment shall be assigned such fair value as the General Partner may determine in its sole discretion.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, such as accrual of expenses, that affect the amounts and disclosures reported in the financial statements. Based on the nature of the business and operations engaged in by the Partnership, the General Partner believes that the estimates utilized in preparing the Partnership’s financial statements are appropriate and reasonable; however, actual results could differ from the estimates. The estimates do not provide a range of possible results that would require the exercise of subjective judgment. The General Partner further believes that, based on the nature of the business and operations
of the Partnership, no other reasonable assumptions relating to the application of the Partnership’s critical accounting estimates other than those to be used would likely result in materially different amounts from those reported. The Partnership’s significant accounting policies are described in detail in Note 2 to the Financial Statements.
Off-Balance Sheet Arrangements
Neither the Partnership nor the Trading Company engages in off-balance sheet arrangements with other entities.
Contractual Obligations
The Partnership does not enter into contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company or that would affect its liquidity or capital resources. The Partnership’s sole business is trading futures contracts, forward currency and other OTC contracts, both long (contracts to buy) and short (contracts to sell), and investing in cash and cash equivalents. All of the Partnership’s futures, forward and OTC contracts, other than certain currency forward contracts, are settled by offset, not delivery. The substantial majority of such contracts are for settlement within four to six months of the trade date and the substantial majority of such contracts are held by the Partnership for less than four to six months before being offset or rolled over into new contracts with similar maturities. The Partnership’s annual audited financial statements with the attached Trading Company’s annual audited financial statements, included as Exhibit 13.1 of this report, present a Condensed Schedule of Investments setting forth net unrealized appreciation (depreciation) of the Partnership’s open positions, both long and short, at December 31, 2012 fiscal year-end.
Results of Operations
Due to the nature of the Partnership’s trading, the Partnership’s income or loss from operations may vary widely from period to period. Management cannot predict whether the Partnership’s future Net Asset Value per Unit will increase or experience a decline. The Partnership was organized in September 1997 under the Delaware Revised Uniform Limited Partnership Act and commenced operations on April 3, 1998.
Performance Summary
The Partnership is a speculative managed futures fund which trades pursuant to the AHL Diversified Program, indirectly through its investment in the Trading Company. The AHL Diversified Program is a futures and forward price trend-following, trading system. The AHL Diversified Program is entirely quantitative in nature and implements trading positions on the basis of statistical analyses of past price histories. The AHL Diversified Program, like most trend-following systems, is designed in the anticipation that most of its trades will be unprofitable; the objective of overall profitability depending on the system identifying certain major trends which occur and recognizing significant profits from participating in such trends.
The past performance of the AHL Diversified Program is not necessarily indicative of its future results. This is the case with all speculative trading strategies. Moreover, the markets in which the AHL Diversified Program is active have seen major changes in recent years, including the influx of entirely different classes of market participants. These changed circumstances may mean that the markets in which the Trading Advisor has previously traded on behalf of the Trading Company are not necessarily representative of those in which it trades on behalf of the Trading Company currently.
As a speculative futures fund, the Partnership (through the Trading Company) effectively maintains all of its capital in reserve. The Trading Company does not “buy” or “sell” futures or forward contracts in the traditional sense; rather, through taking positions in these markets, the Trading Company, and thus the Partnership
indirectly, acquires loss/profit exposure and uses its capital to cover losses and provide margin (which constitutes a good faith deposit towards the Trading Company’s (but not the Partnership’s) obligation to pay such losses) to support its open positions. Each of the Partnership and the Trading Company maintains most of its capital in cash and cash equivalents.
Futures trading programs are proprietary and confidential. As is the case with any speculative futures fund, it is impossible to predict how the Partnership will perform. It is not possible, as it is in the case of an operating business, to predict performance trends, analyze future market conditions or evaluate the likely success or failure of the Partnership.
There are certain general market conditions in which the Partnership is more likely to be profitable than in others. For example, in trendless or stagnant markets, the AHL Diversified Program is unlikely to be profitable. On the other hand, trending markets with substantial price change momentum can be favorable to the AHL Diversified Trading Program. However, because of the continually changing population of market participants as well as supply and demand characteristics, it cannot be predicted how the AHL Diversified Program, and thus the Partnership, will perform in any given market conditions.
Net assets decreased $148,314,876 for the year ended December 31, 2012. This decrease was attributable to subscriptions in the amount of $58,013,435, redemptions in the amount of $162,044,482 and net loss from operations of $44,283,829.
For the year ended December 31, 2012, the Partnership accrued or paid total expenses of $21,715,345, including $7,001,823 in servicing fees, $14,330,711 in General Partner administrative fees and Trading Advisor management fees, and $382,811 in other expenses. Interest of $278,092 was earned or accrued on the Partnership’s cash and cash equivalent investments.
The Net Asset Value of a Class A-1 Unit decreased by $279.41 to $2,884.47. The Net Asset Value of a Class B-1 Unit decreased by $279.41 to $2,884.48. The Net Asset Value of a Class A-2 Unit decreased by $251.54 to $3,023.40. The Net Asset Value of a Class B-2 Unit decreased by $251.53 to $3,023.42.
In equities trading, performance was negative for the month of January. As a general theme, profits from long positions in US indices were outweighed by shorts in Asian bourses. The stock sector led returns in February, however, as the increased market confidence benefited a broad long positioning. Long exposure to stock indices added gains in March via US and Japanese indices. The strongest returns came from long positions in the NASDAQ 100 and S&P 500 as each rose 4.2% and 3.1%, respectively, on the back of a flurry of positive news from the US. In April, the stock sector provided losses as broad long exposure suffered from the fall in global equities over the first half of the month. Losses were spread across regions, although US, German and Japanese indices were the main detractors. A general long exposure to stocks struggled in May as investors sold off risky assets. Stocks experienced volatility following elections in Europe and a plethora of negative news flows such as banking woes in Spain, JP Morgan’s trading loss and China’s slower growth. Exposure to stocks and energies hurt performance in June. Within stocks, exposure to European and US equities generated losses. Stocks surged in June after EU leaders pleasantly surprised investors by announcing that they had agreed new steps to support the EU’s troubled members. After a volatile few months, stock trading detracted from performance in November. A long stance to US indices generated losses, despite the S&P 500 and NASDAQ 100 rising 0.3% and 1.1%, respectively, as losses incurred during the first half of November were not subsequently recouped. Amid the uncertainty, AHL returned a net profit in December to finish the year on a positive note. A broadly long exposure to equities was the main driver of performance, particularly from Japanese and other Asian Pacific index positions, as stocks benefitted from a well-received change of governing party in Japan, which was seen to be increasing the probability of new policies being adopted to stimulate Japanese growth.
Trading in bonds and short-term interest rates produced returns in January. Long positions in US Treasuries made up the majority of bond sector gains in January as prices jumped following the unexpected announcement by the Federal Reserve that interest rates would be held at near zero until at least 2014. In February, long exposure to fixed income assets dragged on performance as investors increasingly sought riskier assets during the month. Exposure to fixed income assets weighed on performance in March as safe haven assets fell out of favor. In bonds, long holdings of US Treasuries detracted the most from returns in March as prices fell following positive economic comments by the Federal Reserve, which led to reduced expectations for further quantitative easing. Long exposure to bonds provided positive performance in April as investors increased their demand in the uncertain environment. German sovereign bonds were the main driver as general risk aversion, anxiety over unending Eurozone bailouts and less than encouraging economic indicator data added to demand for bonds. In May, long exposure to bonds largely drove performance as investors increasingly flocked to “safe haven” assets. In particular, positions in German bonds, US Treasuries and UK Gilts proved well placed. A long exposure to the fixed income sector benefited in June from periods of increased demand for perceived safe haven assets as investors sought to preserve capital amid heightened risk aversion. However, some gains were given back in June as investors participated in the rally in risk assets during mid-period and at month-end. In July, the long exposure to bonds and interest rates drove performance as the deteriorating economic picture spurred investors to prioritize capital preservation over growth. However, some gains were given back towards the month-end and in August, long exposure to bonds continued to struggle as investors sold out of safe haven assets. In September, long exposure to bonds added to performance, with Italian and Japanese bonds being the most profitable. Bond holdings were negative in October as a result of long exposure to US Treasures, UK Gilts and bonds from commodity-focused economies. However, some gains were recovered by long exposure to French and Italian bonds. Long holdings of interest rate contracts also hurt performance over the period, notable detractors were Euribor and Eurodollar. Fixed income exposure also struggled in December as profits from long European and emerging market bonds were offset by losses from long positions in US Treasuries and Canadian bonds, in particular, as a result of US fiscal cliff negotiations.
Short positions in agricultural trading posted losses in January with exposure to cocoa and corn seeing some of the larger negative performances. The agricultural sector produced positive returns in March led by short coffee and long soya exposure. In July, long exposures to agriculturals proved well placed as fears of a renewed food shortage crisis re-emerged after droughts hit the U.S. and lowered supply expectations. In particular, corn and soya prices reached record levels while wheat prices remained elevated. However, short exposure to energies, especially crude oil and oil derivatives detracted from performance in July. Oil prices also benefited from anticipations of supply disruptions in August due to Western sanctions on Iran which came into effect from July, maintenance work in the North Sea and threats from Tropical Storm Isaac. In September, the energy allocation also lost value as long exposures to oil and short exposure to natural gas resulted in small losses.
In currencies, long US dollar exposure in January offset profits elsewhere in the sector as the greenback fell 1.3% on a trade-weighted basis after signs of an economic recovery in the US boosted investor risk appetite and saw the ‘safe-haven’ currency sell-off for much of the month. Long AUD/JPY proved the leading trade in February as the Australian dollar rallied after interest rates were left unchanged and hawkish Reserve Bank of Australia minutes led markets to revise their flat interest rate expectations. Whilst the US dollar ended the month of February flat on a trade-weighted basis, some short US dollar pairs still added gains as increased risk appetite meant the greenback generally lost ground to emerging market and commodity-linked currencies. Trading in currencies added to losses overall in March, however. Short exposure to the US dollar suffered after the greenback rallied on better-than-expected US jobs and housing data. The currency sector contributed excellent returns in July, with short Euro pairs proving profitable after the ECB cut interest rates. In August, currency trading detracted the most from performance due to a lack of clear trends. Both long and short US dollar exposures ended with modest losses, while euro trading posted losses from general short positioning. A short stance in commodities weighed on returns, as prices were supported by weakness in the US dollar. Currency trading was up in September driven by short US dollar pairs which generated profits as news of QE3 put downward pressure on the US dollar. However, returns in September were pegged back as short euro positions suffered a loss across a host of currencies, with the single currency rising 1% on a trade-weighted basis. Currency
trading added a small negative return in October. Short exposure to the US dollar (against commodity-linked currencies in particular) drove the losses as it rose 0.6% on a trade-weighted basis. On a positive note, currency pairs of long Asian currencies and short USD added gains. Currency trading continued to gain in November. Short US dollar positions (especially against emerging market and commodity-linked currencies) were the main return drivers. Additional gains came from short positions in the Japanese yen against the US and Australian dollar. The yen declined -3.3% on a trade-weighted basis, driven partly by the prospects of elections, expectations that the Bank of Japan may ease monetary policy aggressively and deterioration in Japan’s balance of payments. Currency trading proved rewarding in December, with short US dollar (especially against emerging market currencies) and short Japanese yen trades (particularly against USD, AUD, GBP and Euro) leading returns. US fiscal cliff negotiations weighed on the US dollar, whilst the Japanese yen weakened amid expectations of aggressive easing by Shinzo Abe’s new government.
The metals sector dragged on performance in 2012 with both precious and industrials detracting similar amounts. In the third quarter, aluminum, zinc and nickel contracts sustained the largest losses. However, precious metals especially did poorly, as long gold and silver exposures suffered a year-end sell off.
Net assets increased $71,477,500 for the year ended December 31, 2011. This increase was attributable to subscriptions in the amount of $184,077,163, redemptions in the amount of $66,387,092 and net loss from operations of $46,242,571.
For the year ended December 31, 2011, the Partnership accrued or paid total expenses of $23,668,015, including $7,631,473 in servicing fees, $15,559,687 in General Partner administrative fees and Trading Advisor management fees, and $476,855 in professional fees and other expenses. Interest of $765,963 was earned or accrued on the Partnership’s cash and cash equivalent investments.
The Net Asset Value of a Class A-1 Unit decreased by $307.37 to $3,163.88. The Net Asset Value of a Class B-1 Unit decreased by $307.37 to $3,163.89. The Net Asset Value of a Class A-2 Unit decreased by $273.38 to $3,274.94. The Net Asset Value of a Class B-2 Unit decreased by $273.38 to $3,274.95.
The almost weekly risk on/risk off nature of markets during the year hindered a large swathe of trend followers-particularly those deploying a fairly reactive trading approach, like the AHL Diversified Program-as positions were whipsawed on the back of sudden and sharp market reversals. Effective portfolio diversification (a key feature of the managed futures space) was also challenging as correlations amongst different asset classes remained particularly high. Many of the swings in sentiment were difficult to profit from as they were driven by short-term reactions to specific events (some of which were wholly unpredictable-such as March’s devastating earthquake in Japan, the Arab Spring uprisings and increased political uncertainty surrounding the Eurozone sovereign debt crisis), rather than market fundamentals.
Exposure to the stock sector in 2011 detracted the most from returns as global stock markets gyrated on uncertainty over the economic outlook combined with deep seated fears surrounding the outcome of the European sovereign debt crisis. Trading returns were negative for most of the year, apart from August when equity markets exhibited a more concerted sell-off.
Wild swings in Japanese indices and the effect of the Eurozone crisis on European indices caused the AHL Diversified Program the most challenges. March’s devastating earthquake in Japan significantly impacted our previously established long positions as Japanese equities outperformed in January and February on strong corporate earnings data. Unsurprisingly, long exposure to the Nikkei 225 and TOPIX suffered the most as both indices plunged over 8% during March and accounted for around 1% of losses for the AHL Diversified Program that month alone. Our systems subsequently reduced their long equity exposure and built up short positions in
Asian stock indices. However, further losses were attributed to the Nikkei in May and June as shorts were hurt by prices moving higher on signs that the Japanese economy was recovering more quickly than expected. Nevertheless, short exposure to Asian indices clawed back some gains during the third quarter as economic indicators pointed to a slow-down in Chinese growth and the rising yen proved detrimental for Japan’s export led economy.
Europe’s sovereign debt problems remained in the spotlight for much of the year with sentiment see-sawing as investors weighed up fears of a debt default by Greece and rising yields in Spain and Italy against repeated assurances by Eurozone leaders that the crisis could be contained. From October, markets took on an air of optimism as Eurozone leaders appeared to be finally decisively tackling the crisis. This short term uncertainty made equities trading very difficult. Thus despite markets like Germany’s DAX index and France’s CAC 40 index ending the year down by 14.7% and 17.0% respectively, sharp reversals during the year meant that our trading returns for these 2 contracts combined was around -1.0%.
Oscillating risk sentiment caused similar problems in currency trading, particularly in terms of US dollar positions. The traditional safe-haven asset fell in and out of favor several times over the year, eventually ending down 1.0% (on a trade weighted basis) for the 12 month trading period. Particularly notable was the effect of a debate around the raising of the US debt ceiling and the subsequent downgrade of the nation’s credit rating at the start of August. In July, short positions were rewarded as uncertainty in the US briefly brought the currency’s status as a safe haven asset into question as risk-wary investors fled to the safety of alternative currencies, causing a monthly decline of 1.3% (on a trade-weighted basis). However, by August, despite the downgrade, the US dollars’ safe haven status appeared to have been reaffirmed and short positions significantly detracted as the currency rallied on safe haven buying.
Elsewhere in currency trading, the AHL Diversified Program was alert to the risks associated with government interventions throughout the year. For the yen, the Bank of Japan intervened several times during 2011, causing several steep short-term declines in the value of the Yen while the Swiss National Bank went a step further and announced a ceiling in CHF/EUR exchange rate of 1.20. Nevertheless, both the yen and franc ended the year up 6.9% and 1.7% respectively on a trade weighted basis despite these interventions. An important facet of the AHL Diversified Program’s response to these interventions has been active risk management and continuing to develop proactive risk management tools to strive to protect our funds from incurring large losses.
Returning to performance drivers, the whipsaw theme continued in energies as positions in both natural gas and crude oil detracted on the long and short side due a series of conflicting supply and demand issues. Pessimism over the global economic outlook raised demand fears for WTI crude oil at certain points during the year. At other times prices rallied strongly in line with global stock markets, resulting in WTI crude oil ending the year up 8.2% overall. However, the lack of persistent directional price movement proved challenging, meaning that the AHL Diversified Program lost almost 1.0% to crude oil trades over the year. Meanwhile, natural gas prices recorded a 32.1% fall for 2011. However this move masked huge price swings over the first half of the year in particular, which disadvantaged our tendency to favor faster systems for this market. As a result, this market detracted over 1.0% from the AHL Diversified Program’s trading performance for the 12 month period.
On the positive side, market volatility, whilst disturbing established trends in many markets, proved to be supportive for safe haven assets. This played out well for the AHL Diversified Program’s trading in both bonds and short-term interest rates. In particular, a general long exposure to bonds and interest rates proved significantly beneficial with the resulting gains going some way towards offsetting losses elsewhere. In bonds, long exposure to US Treasuries and German Bunds accrued some of the largest profits as safe havens rallied for much of the year. During the second and third quarters in particular, a weakening global economic outlook and the escalating European sovereign debt crisis weighed on sentiment and investors flocked to the relative safety of fixed income. In the short-term interest rate space, long Eurodollar and Euribor contracts benefitted from the Federal Reserve’s pledge to keep interest rates at close to zero for the next two years in response to subdued economic growth, along with expectations that rates would also remain low in the troubled Eurozone.
A key facet of the fixed income space this year has been the incredibly low yields in developed bonds. In particular, in Q3 10 year US Treasuries yielded as little as 1.7% while some interest rate contracts implied negative yields. While these low yields signal a challenge for trend followers going forward, the AHL Diversified Program’s approach has been two-fold: first, continue to diversify the fixed income portfolio, including bonds of developing countries and a variety of interest rate swaps; and second, implement relative value strategies that can potentially profit from an evolving yield curve. At the same time, the AHL Diversified Program has added risk management tools to balance the expected risk/return trade-off as interest rates approach zero.
In the metals sector precious metals performed well, particularly longs in gold and silver which benefitted from safe-haven inflows. Gold rallied particularly strongly in the middle of the year, reaching an all-time closing high of $1900.23 per troy ounce at the beginning of September as the US debt rating downgrade and growing concerns over European sovereign debt drove increasingly nervous sentiment. Some gains were given back when the rally came to an abrupt end shortly after this record high was reached. Investors moved to cash to cover losses following correlated declines across markets, causing gold prices to fall 11.1% for the month of September. However, following further volatile moves, prices still ended the year up 10.1% overall and the AHL Diversified Program’s long gold exposure added value for the year. However, elsewhere in metals trading, long copper positions detracted overall. Copper prices remained fairly range-bound for much of the year, save for a sharp over 20% fall in September as a drop in Chinese imports weighed on prices.
Net assets increased $121,710,047 for the year ended December 31, 2010. This increase was attributable to subscriptions in the amount of $143,217,881, redemptions in the amount of $76,802,295 and net income from operations of $55,294,461.
For the year ended December 31, 2010, the Partnership accrued or paid total expenses of $18,217,094, including $6,045,761 in servicing fees, $11,764,805 in General Partner administrative fees and Trading Advisor management fees, and $406,528 in other expenses. Interest of $423,755 was earned or accrued on the Partnership’s cash and cash equivalent investments.
The Net Asset Value of a Class A-1 Unit increased by $418.22 to $3,471.25. The Net Asset Value of a Class B-1 Unit increased by $418.22 to $3,471.26. The Net Asset Value of a Class A-2 Unit increased by $466.40 to $3,548.32. The Net Asset Value of a Class B-2 Unit increased by $466.40 to 3,548.33.
One of the key themes of 2010 was a whipsawing in investor ‘risk off’ trading environment. Another was the escalating European sovereign debt crisis, which dominated headlines for the majority of the year. Countries such as Greece, Ireland, Spain and Portugal took centre stage as investors grew increasingly concerned that they would struggle to service their vast amounts of public debt over the coming years. Bailouts of Greece in May and then Ireland in November went some way to calming fears of a sovereign default. However, subsequent tough austerity measures led to worries over the future outlook for European economic growth and question marks remained as to whether more eurozone nations would need bailouts in 2011.
However, towards the second half of 2010, risk appetite rebounded sharply as the US Federal Reserve embarked on a further round of quantitative easing, coined ‘QE2’, in order to stimulate domestic growth and fend off deflation. Investors also shrugged off worries over eurozone sovereign debt and focused on a flurry of positive Q3 corporate earnings and some surprisingly positive economic data which raised optimism over the outlook for 2011.
A general long exposure to fixed income markets, particularly those based in Europe, the US and Japan, dominated the AHL Diversified Program’s gains. Prices surged on a broad ‘flight-to-safety’ theme, triggered by the onset of the eurozone sovereign debt crisis, and a prolonged low interest rate environment theme.
Long positions in US Treasuries accrued standout returns over the year as the Federal Reserve issued a cautious outlook on the US economy and economic releases early in 2010 proved disappointing. Additional support was given towards the second half of the year as rising speculation and then confirmation of an additional round of quantitative easing pushed prices higher. European bonds also secured notable gains as prices rose on news that the European Central Bank had started to buy eurozone government bonds in an attempt to stabilise nervous markets. Signs of economic weakness across the eurozone pushed prices higher as investors grew concerned over the future outlook for economic growth in the region. Elsewhere, UK Gilts received a boost from rumours that the Bank of England would also implement a further round of monetary easing to support economic growth and fend off the prospect of a double-dip recession. Equally important to bond sector returns was the systematic decrease in bond position sizes towards the end of the year as trends started to reverse.
In the short-term interest rate sector, it was predominantly long Eurodollar positions that drove performance. Prices surged after investors increasingly speculated that interest rates in the US would be held at record low rates for a prolonged period of time, in light of stubbornly high unemployment and news of another round of monetary easing.
Further positive performance was accrued from long positions in Short Sterling as prices pushed higher on worries that Britain’s emergency budget, which proposed deep cuts to public spending, would pose a threat to the UK’s economic recovery.
Lingering concerns over sovereign debt also benefited the currency sector. Short EUR positions generated strong gains as investors grew concerned over the stability of the region and the prospect of contagion across the eurozone. Traders increasingly shied away from the European single currency as concerns intensified that tough austerity measures to reign in eurozone debt would hinder longer-term economic growth prospects. As a result, the euro fell -9.0% on a trade- weighted basis over the year.
During the second half of the year, a number of short USD positions contributed to performance as the US dollar weakened 7.4% on a trade-weighed basis. Notable gains included long positions in commodity-linked currencies such as AUD and ZAR against USD. Both rallied 14.0% and 11.6% respectively as a rise in underlying raw materials and an increase in risk appetite provided support. Long AUD versus USD positions secured particularly strong gains as the Australian dollar was given a further boost by a number of solid domestic economic data releases combined and a succession of interest rate rises by the Reserve Bank of Australia.
Exposure to metals and agriculturals added to performance over the course of the year. Long positions in precious metals such as gold and silver accrued the largest gains in the metal sector. Both rallied strongly, 29.5% and 83.2% respectively, as demand for their perceived ‘safe-haven’ status surged in light of the increased market uncertainty. On the agricultural front, profits were particularly strong given the programme’s relatively low allocation to the sector. A generally long exposure to the sector proved beneficial as the S&P GSCI Agricultural Index rose 44.5% in 2010 after supply issues and strong demand caused prices to surge. Notable performers included long cotton trades as prices jumped 91.5% over the period.
On the negative side, both energies and stocks detracted from performance. In energies, both long and short positions in crude oil & other related products weighed on returns. Despite the WTI crude oil index rising 15.1%, conflicting supply and demand issues whipsawed prices throughout the year. Elsewhere, stock markets suffered significant sell offs in January and April hurting established long positions. Fluctuating economic data then led to ‘risk on’/’risk off’ conditions which caused a whipsawing of positions. While markets pushed higher at year end, leading to good gains from long positions, this was not enough to wipe out previous losses.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Introduction
Past Results Are Not Necessarily Indicative of Future Performance
The Partnership is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.
Market movements result in frequent changes in the fair market value of the Partnership’s open positions and, consequently, in its earnings and cash flow. The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which it trades.
The Partnership can rapidly acquire and/or liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s attempts to manage its market risk.
Materiality, as used in this section “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Partnership’s market sensitive instruments.
Quantifying the Partnership’s Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act 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 Partnership’s risk exposure in the various market sectors traded by the General Partner is quantified below in terms of Value at Risk. Due to the Partnership’s mark-to-market accounting, any loss in the fair value of the Partnership’s open positions is directly reflected in the Partnership’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one-day losses in the fair value of any given contract incurred during the time period over which historical price fluctuations are researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not exchange traded (almost exclusively currencies in the case of the Partnership), dealers’ margins have been used as Value at Risk.
The fair value of the Partnership’s futures and forward positions does not have any optionality component. However, the General Partner may also trade commodity options on behalf of the Partnership. The Value at Risk associated with options would be reflected in the margin requirement attributable to the instrument underlying each option.
In quantifying the Partnership’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership’s positions are rarely, if ever, 100% positively correlated have not been reflected.
The Partnership’s Trading Value at Risk in Different Market Sectors
The following table indicates the average, highest and lowest amount of trading Value at Risk associated with the Partnership’s open positions by market category for the year ended December 31, 2012. During 2012, the Partnership’s average capitalization was $442,694,303.75.
Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts during the fiscal year. Average Capitalization is the average of the Partnership’s capitalization at the end of quarter during the fiscal year 2012.
The following table indicates the amount of trading Value at Risk associated with the Partnership’s open positions by market category as of the year ended December 31, 2011. The Partnership’s total capitalization as of such date was $527,665,862.93.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions - unusual, but historically recurring from time to time - could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table - as well as the past performance of the Partnership - gives no indication of this “risk of ruin.”
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.
The Partnership also has non-trading cash flow risk as a result of holding its assets in cash and other short-term debt instruments for margin and cash management purposes. Although the General Partner does not anticipate that, even in the case of major interest rate movements, the Partnership would sustain a material mark-to-market loss on its securities positions, if short-term interest rates decline so will the Partnership’s cash management income. The Partnership also maintains a portion (approximately 10%) of its assets in cash in interest-bearing bank accounts. These cash balances are also subject (as well as any market risk they represent) to cash flow risk, which is not material.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the General Partner manages the Partnership’s primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures as well as the strategies used and to be used by the General Partner for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. There can be no assurance that the Partnership’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as of December 31, 2012, by market sector.
Financial Instruments. Interest rate movements directly affect the price of the sovereign bond 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 may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and other major industrialized countries. However, the Partnership also may take positions in futures contracts on the government debt of smaller nations. The General Partner anticipates that G-7 interest rates, both long-term and short-term, will remain the primary market exposure of the Partnership for the foreseeable future.
Currencies. Exchange rate risk is the principal market exposure of the Partnership. 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 Partnership trades in a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. As of December 31, 2012 the Partnership’s primary currency exposures were in the U.S. dollar versus the Euro, Yen, Swiss Franc, Czech Krone, Korean Won, Singapore Dollar, South African Rand, New Zealand Dollar and Australian Dollar. The primary exposures in the currency crosses were in the Yen versus the Canadian Dollar and in the Euro versus the Yen, British Pound, and Norwegian Krone.
Stock Indices. The Partnership’s primary equity exposure, through stock index futures, is to equity price risk in the G-7 countries. As of December 31, 2012, the Partnership’s primary exposures were in the [E Mini Nasdaq 100 (United States), Simex (Singapore), TOPIX (Japan), DAX (German) and Hang Seng (Hong Kong) stock
indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices. (Static markets would not cause major market changes but could make it difficult for the Partnership to avoid numerous small losses.)
Metals. The Diversified Portfolio used for the Partnership trades precious and base metals. The Partnership’s metals market exposure is in gold, silver, platinum, aluminum, copper, lead, nickel, tin and zinc.
Agricultural. The Partnership’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Grains, coffee and cotton accounted for the substantial bulk of the Partnership’s commodities exposure as of December 31, 2012. The Partnership also has market exposure to other agricultural commodities including live cattle, cocoa and the soybean complex.
Energy. The Partnership’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership as of December 31, 2012.
Foreign Currency Balances. The Partnership’s primary foreign currency balances are in Japanese yen, euro, British pounds and Hong Kong dollars. The Partnership controls the non-trading risk of these balances by regularly converting these balances back into dollars (no less frequently than twice a month).
Securities Positions. The Partnership’s only market exposure in instruments held other than for trading is in its securities portfolio. The Partnership holds only cash or interest-bearing, credit risk-free, short-term paper - typically U.S. Treasury instruments with durations no longer than 1 year. Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on the Partnership’s securities, although substantially all of these short-term instruments are held to maturity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
Risk management is an essential component of AHL’s investment management process. AHL has put in place a risk management framework which is designed to identify, monitor and mitigate the portfolio, operational and outsourcing risks relevant to its operations. AHL’s risk management framework is part of, and is supported by, the overarching risk management framework of its parent company, Man Group plc. Key principles of AHL’s risk management framework include the segregation of functions and duties where material conflicts of interest may arise and having an appropriate degree of independent and senior management oversight of business activities. As part of this independent oversight, AHL’s activities are subject to regular review by an internal audit function.
The AHL Diversified Program employs a systematic, statistically based investment strategy that is designed to identify and capitalize on inefficiencies in markets around the world. The trading systems are quantitative and primarily directional in nature, meaning that investment decisions are entirely driven by mathematical models based on market trends and other historic relationships. Portfolio risk management consists primarily of monitoring risk measures and ensuring the systems remain within prescribed limits. The major risk monitoring measures and focus areas include value-at-risk, stress testing, implied volatility, leverage, margin-to-equity ratios and net exposures to sectors and different currencies.
Diversification is also a key feature of AHL’s risk management, as well as its investment, process. The AHL Diversified Program is diversified across over 100 markets covering a wide range of sectors including, without limitation, currencies, bonds, energies, stock indices, interest rates, metals and agriculturals. As well as emphasizing sector and market diversification, the AHL Diversified Program has been constructed to achieve diversification by combining various systems driven by powerful computerized trading algorithms, most of which work by sampling prices in real time and measuring price momentum and breakouts. Another important
aspect of diversification is the fact that the various systems generate signals across different timeframes, ranging from two to three days to several months, which helps to reduce the risk of the AHL Diversified Program. In line with the principle of diversification, the approach to portfolio construction and asset allocation is premised on the importance of deploying investment capital across the full range of sectors and markets. Particular attention is paid to correlation of markets and sectors, expected returns, trading costs and market liquidity. Portfolios are regularly reviewed and, when necessary, adjusted to reflect changes in these factors. AHL also has a process for adjusting its market risk exposure in real time to reflect changes in the volatility, a measure of risk, of individual markets.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial statements meeting the requirements of Regulation S-X are listed following this report as Exhibit 13.1 and are incorporated by reference into this Item 8.
The following summarized quarterly financial information presents the results of operations for the periods ended March 31, June 30, September 30 and December 31, 2012 and 2011. This information has not been audited.
* Allocated to the Partnership from its investment in the Trading Company.
** Expenses include the Partnership’s allocation of expenses from its investment in the Trading Company in addition to direct expenses of the Partnership.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
The General Partner, with the participation of the General Partner’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the fiscal year for which this Annual Report on Form 10-K is being filed and, based on its evaluation, has concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
Section 404 of the Sarbanes-Oxley Act of 2002 requires the General Partner to evaluate annually the effectiveness of its internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of its internal control over financial reporting in all annual reports. There were no significant changes in the General Partner’s internal control over financial reporting during the three-month period ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The General Partner is responsible for establishing and maintaining adequate internal control over the financial reporting of the Partnership. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the accounting principles generally accepted in the United States of America. The General Partner’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 of the Partnership in accordance with the accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the General Partner; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
The management of the General Partner assessed the effectiveness of its internal control over financial reporting with respect to the Partnership as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on its assessment, management has concluded that, as of December 31, 2012, the General Partner’s internal control over financial reporting with respect to the Partnership is effective based on those criteria.
There were no significant changes in the General Partner’s internal controls with respect to the Partnership or in other factors applicable to the Partnership that could significantly affect these controls subsequent to the date of their evaluation.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
(a, b) Identification of Directors and Executive Officers
(i) As a limited partnership, the Partnership itself has no directors or executive officers. The Partnership’s affairs are managed by the General Partner. Man Investments (USA) Corp., a Delaware corporation, is the general partner of the Partnership.
Mr. Timothy Wong is the president of the General Partner and Ms. JingLu Eng is the senior managing fund accountant of the General Partner who serves as the Partnership’s principal financial officer and chief accounting officer. Their biographies are set forth below.
Timothy Wong, born November 1967, is the President of the General Partner. He is based in London and is responsible for the overall supervision of the General Partner’s activities in the U.S. Mr. Wong is listed with the CFTC as a Principal of the General Partner and is registered with the CFTC as an associated person of the General Partner as of May 17, 2012. Mr. Wong is also a Director of the Trading Advisor and is responsible for its research and investment management operations and is responsible for making the trading decisions on behalf of the Trading Company. He is listed with the CFTC as a Principal of the Trading Advisor and is registered with the CFTC as an associated person of the Trading Advisor as of March 24, 2003 and June 24, 2003, respectively. Mr. Wong is also an Associate Director of MIL, an investment advisor and an affiliate of the Trading Advisor, which he joined in October 1991 as a research analyst and later assumed overall responsibility for the day-to-day running of the research and investment management operations. In addition, Mr. Wong is the head of trading for MIL and the Trading Advisor.
Mr. Wong graduated from Oxford University in 1991 with a First in Engineering Science and subsequently gained an MSc in Statistics and Operational Research from London University in England. He is an associate of the UK Society of Investment Professionals.
JingLu Eng, age 43, is the Principal Financial Officer of Man Investments (USA) Corp. in its capacity as the General Partner of the Partnership. Prior to joining the General Partner in 2012, Ms. Eng was a senior manager within Investment Management division at Deloitte & Touche LLP, a U.S. audit, tax and advisory services firm, where her responsibilities included performing audits and attestation services for financial services firms, including hedge funds, private equity funds, commodity pools, fund of funds and mutual funds.
Ms. Eng received a BS in Accounting from Rutgers University, New Brunswick, New Jersey. She is a Certified Public Accountant in New Jersey and New York State and is a member of AICPA.
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
None.
(e) Business Experience
See Item 10 (a, b) above.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
Not applicable.
(h) Code of Ethics
The Partnership has no employees, officers or directors and is controlled by the General Partner. The General Partner has adopted an Executive Code of Ethics that applies to its principal executive officers, principal financial officer and principal accounting officer. A copy of this Executive Code of Ethics may be obtained at no charge by written request to Man Investments (USA) Corp., 452 5th Ave., 25th Floor, New York, NY 10018 or by calling: (212) 649-6600 (ask for the Chief Legal Officer).
(i) Audit Committee Financial Expert
Because the Partnership has no employees or directors, the Partnership has no audit committee. The Partnership is managed by the General Partner. Ms. JingLu Eng serves as the Partnership’s “audit committee financial expert.” Ms. Eng is not independent of the management of the General Partner. The General Partner is not required to have, and does not have, independent directors.
Item 11.
Item 11. Executive Compensation.
The Partnership itself has no officers, directors or employees. None of the principals, officers or employees of the General Partner receive compensation from the Partnership. The General Partner invests all or substantially all of the Partnership’s assets in the Trading Company. The Trading Advisor makes all trading decisions for the Trading Company. The General Partner receives a monthly general partner administrative fee from the Partnership in an amount equal to 0.0833% of the month-end Net Asset Value of the Partnership (approximately a 1% annually). The Partnership pays the Trading Advisor, an affiliate of the General Partner, a monthly management fee in an amount equal to 0.1667% of the Partnership’s month-end Net Asset Value (approximately 2% annually) and 20% of any Net New Appreciation, described above under Item 1, achieved by the Partnership as of the end of each calendar month. The Trading Advisor may pay a portion of its management fees to the General Partner.
The officers and employees of the General Partner and Trading Advisor are compensated by the General Partner and Trading Advisor in their respective positions. These officers receive no other compensation from the Partnership. The Partnership has no compensation plans or arrangements relating to a change in control of either the Partnership, the General Partner or the Trading Advisor.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(a) Securities authorized for issuance under equity compensation plans
None.
(b) Security Ownership of Certain Beneficial Owners
The General Partner knows of no persons who own beneficially more than 5% of the Partnership’s Units. All of the Partnership’s general partner interest is held by the General Partner.
(c) Security Ownership of Management
The Partnership has no officers or directors. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by the General Partner. As of December 31, 2012, the General Partner’s interest in the Partnership was valued at $537,590 which constituted 0.14% of total partners’ capital.
As of December 31, 2012, no director, executive officer or member of the General Partner beneficially owned Units in the Partnership.
(d) Changes in Control
There are no arrangements known to the Partnership or General Partner the operation of which would result in a change in control of the Partnership; provided, however, that pursuant to the Partnership’s Limited Partnership Agreement, the General Partner may admit additional or substitute general partners and may withdraw as general partner of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Partnership paid the General Partner and Trading Advisor aggregate administrative and management fees of $13,728,950 for the year ended December 31, 2012. The Partnership paid the Trading Advisor $0 in incentive fees for the year ended December 31, 2012. The Partnership paid Man Investments Inc., an affiliate of the General Partner and Trading Advisor that serves as the lead placement agent for the Partnership, $7,001,823 in servicing fees for the year ended December 31, 2012. The General Partner’s interest in the Partnership earned net loss of $52,075 for year ended December 31, 2012.
The Partnership has not and does not make any loans to the General Partner, its affiliates, their respective officers, directors or employees or the immediate family members of any of the foregoing, or to any entity, trust or other estate in which any of the foregoing has any interest, or to any other person (provided that the purchase of U.S. government instruments and the deposit of Partnership assets with banks, futures brokers and foreign exchange counterparties in connection with the trading operations of the Partnership are not considered to be loans).
None of the General Partner, its affiliates, their respective officers, directors and employees or the immediate family members of any of the foregoing, or any entity trust or other estate in which any of the foregoing has any interest has, to date, sold any asset, directly or indirectly, to the Partnership.
The Partnership has no directors, officers or employees and is managed by the General Partner. The General Partner is managed by its principals, none of whom is independent of the General Partner.
Item 14.
Item 14. Principal Accountant Fees and Services
(1) Audit Fees
The aggregate fees for professional services provided by Ernst & Young, LLP, the Partnership’s independent registered public accounting firm, for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s quarterly reports for the year ended December 31, 2012 were approximately $167,600.
The aggregate fees for professional services provided by Deloitte & Touche LLP, the Partnership’s independent registered public accounting firm, for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s quarterly reports for the year ended December 31, 2011 were approximately $220,883.
(2) Audit-Related Fees
There were no fees paid by the Partnership for assurance and related services rendered by Ernst & Young, LLP for the year ended December 31, 2012.
There were no fees paid by the Partnership for assurance and related services rendered by Deloitte & Touche LLP for the year ended December 31, 2011.
(3) Tax Fees
The aggregate fees for services rendered by Ernst & Young LLP for tax compliance, advice and planning services for the years ended December 31, 2012 and 2011 were approximately $115,988 and $106,219, respectively.
(4) All Other Fees
None.
(5) Pre-Approval Policies
Neither the Partnership nor the General Partner has an audit committee to pre-approve accountant and auditor fees and services. In lieu of an audit committee, the principals of the General Partner pre-approve all billings prior to the commencement of services.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The financial statements required by this Item are included herewith as Exhibit 13.1.
(a)(2) Financial Statement Schedules
All Schedules are omitted for the reason that they are not required or are not applicable because equivalent information has been included in the financial statements or the notes thereto.
(a)(3) Exhibits as required by Item 601 of Regulation S-K
The following exhibits are included herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 2013.
(Being the principal executive officer and the principal financial officer and chief accounting officer of Man Investments (USA) Corp. in its capacity as the General Partner of the Partnership.)
Man Investments (USA) Corp.
General Partner of Registrant
March 29, 2013
By
/s/ Timothy Wong
Timothy Wong
President, Chief Executive Officer
EXHIBIT 13.1 INDEX TO FINANCIAL STATEMENTS
Man-AHL
Diversified I L.P.
(A Delaware Limited Partnership)
Financial Statements as of and for the
Years Ended December 31, 2012, 2011 and 2010, with
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Man-AHL Diversified I L.P.
We have audited the accompanying statement of financial condition of Man-AHL Diversified I L.P. (the “Partnership”) as of December 31, 2012, and the related statements of operations, changes in partners’ capital and cash flows for the year then ended. 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 audit.
We conducted our audit 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. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit 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, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Man-AHL Diversified I L.P. at December 31, 2012, and the results of its operations, changes in partners’ capital and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
March 26, 2013
A member firm of Ernst & Young Global Limited
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Man-AHL Diversified I L.P.:
We have audited the accompanying statements of financial condition of Man-AHL Diversified I L.P. (a Delaware Limited Partnership) (the “Partnership”) as of December 31, 2011, and the related statements of operations, changes in partners’ capital, and cash flows for each of the two years in the period then ended. These financials are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the 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 Man-AHL Diversified I L.P. as of December 31, 2011, and the results of its operations, changes in partners’ capital, and its cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
March 23, 2012
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2012 AND 2011
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
STATEMENTS OF FINANCIAL CONDITION (continued)
AS OF DECEMBER 31, 2012 AND 2011
See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
Units and dollars have been rounded.
See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.
MAN-AHL DIVERSIFIED I L.P.
(A Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
1. ORGANIZATION OF THE PARTNERSHIP
Man-AHL Diversified I L.P. (a Delaware Limited Partnership) (the “Partnership”) was organized in September 1997 under the Delaware Revised Uniform Limited Partnership Act and commenced operations on April 3, 1998, for the purpose of engaging in the speculative trading of futures and forward contracts. The Partnership is a “feeder” fund in a “master-feeder” structure, whereby the Partnership invests substantially all of its assets in Man-AHL Diversified Trading Company L.P. (the “Trading Company”). Man Investments (USA) Corp. (the “General Partner”), a Delaware corporation, serves as the Partnership’s General Partner. The General Partner is a subsidiary of Man Group plc, a United Kingdom public limited company that is listed on the London Stock Exchange. The General Partner oversees the operations and management of the Partnership. The General Partner is registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator and commodity trading adviser and is a member of the National Futures Association (“NFA”) in such capacities.
Man-AHL (USA) Limited (the “Advisor”), a limited liability company incorporated in the United Kingdom, acts as trading advisor to the Partnership. The Advisor is an affiliate of the General Partner and a subsidiary of Man Group plc. The Advisor is registered with the CFTC as a commodity pool operator and commodity trading adviser and is a member of the NFA in such capacities, in addition to registration with the Financial Services Authority in the United Kingdom.
Man Investments Holdings Limited, a United Kingdom holding company that is part of Man Group plc, is the sole shareholder of the Advisor, and Man Investments Holdings Inc., a Delaware corporation that is part of Man Group plc, is the sole shareholder of the General Partner.
The Partnership’s units are distributed through the Partnership or other selling agents, including Man Investments Inc. (“MII”), an affiliate of the Advisor and General Partner. MII is a registered broker-dealer and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
The Partnership filed a registration statement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which became effective in March, 2008. The Partnership’s units are not, however, registered for sale through a public offering, and the General Partner does not intend to cause them to be so registered.
The Partnership offers two classes of units of limited partnership interests; Class A units are generally offered and Class B units are offered to retirement plan investors. Within Class A and Class B, units are issued in two separate series. They are Class A Series 1, Class A Series 2, Class B Series 1 and Class B Series 2. Except as described in Note 2 below in respect of fees, the classes of units are identical.
2. SIGNIFICANT ACCOUNTING POLICIES
The Partnership prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment in Man-AHL Diversified Trading Company L.P. - The Partnership’s investment in the Trading Company is valued at fair value at the Partnership’s proportionate interest in the net assets of the Trading Company. Investment transactions are recorded on a trade-date basis. In addition, the Partnership accrues its own expenses. The performance of the Partnership is directly affected by the performance of the Trading Company. Attached are the financial statements of the Trading Company, including the condensed schedule of investments and significant accounting policies, which are an integral part of these financial statements. Valuation of investments held by the Trading Company is discussed in the Trading Company’s notes to financial statements.
At December 31, 2012 and 2011, the Partnership owned 38,106.40 and 50,658.29 units, respectively, of the Trading Company. The Partnership’s aggregate ownership percentage of the Trading Company at December 31, 2012 and 2011 was 82.95% and 78.12%, respectively.
The Partnership is able to redeem its investment from the Trading Company on a monthly basis. As of December 31, 2012 the Partnership could redeem its investment without restriction at the month-end net asset value of the Trading Company.
Expenses - The Advisor earns a monthly management fee in an amount equal to 0.1667% (2% annually) of the Partnership’s month-end Net Asset Value, as defined in the Limited Partnership Agreement (the “Agreement”). In addition, the General Partner earns a monthly general partner fee in an amount equal to 0.0833% (1% annually) of the month-end Net Asset Value of Class A Series 1 and Class B Series 1 units. The general partner fee is included in management fees in the statements of operations.
The Advisor also earns a monthly incentive fee equal to 20% of any Net New Appreciation, as defined in the Agreement, achieved by the Partnership. The incentive fee is retained by the Advisor even if subsequent losses are incurred; however, no subsequent incentive fees will be paid to the Advisor until any such trading losses are recouped by the Partnership. During the years ended December 31, 2012 and 2011, no incentive fees were earned by the Advisor.
The Partnership pays a monthly servicing fee to MII, in an amount equal to 0.1250% (1.5% annually) of the month-end Net Asset Value of Class A Series 1 and Class B Series 1 units. The Partnership pays a monthly servicing fee to MII, in an amount equal to 0.1042% (1.25% annually) of the month-end Net Asset Value of Class A Series 2 and Class B Series 2 units. For all classes of units, MII serves as the placement agent for the Partnership.
Derivative Contracts - The Partnership’s operating activities involve trading, indirectly through its investment in the Trading Company, in derivative contracts that involve varying degrees of market and credit risk. With respect to the Partnership’s investment in the Trading Company, the Partnership has limited liability and, therefore, its maximum exposure to either market or credit loss is limited to the carrying value of its investment in the Trading Company, as set forth in the statements of financial condition.
As of December 31, 2012, the Trading Company utilized JPMorgan Chase (“JPM”) and Credit Suisse (“CS”) to clear its futures trading activity. As of December 31, 2012, the Trading Company utilized Royal Bank of Scotland (“RBS”) and Deutsche Bank (“DB”) to clear its forward trading activity.
During 2011, the Trading Company used MF Global Inc. (“MFG”), in addition to JPM and CS, to clear a portion of its futures trading activity and used MF Global U.K. (“MFG UK”), in addition to RBS and DB, to clear a portion of its forward trading activity. At December 31, 2012, the Trading Company had no open futures or forward contracts with either MFG or MFG UK. On October 31, 2011, MF Global Holdings Ltd., the parent of MFG and MFG UK, filed for Chapter 11 bankruptcy protection in the U.S. courts. The U.S. courts subsequently approved the appointment of James W. Giddens as U.S. Trustee to oversee the liquidation of MFG. The Financial Services Authority, the U.K. financial services regulator, has appointed Special Administrators to oversee the liquidation of MFG UK. At December 31, 2012, the Trading Company’s due from brokers balance includes an
estimated net balance at MFG UK of ($88,226) and an estimated net balance at MFG of $28,049. As of the date of the issuance of the financial statements, the General Partner is unable to determine the ultimate outcome, if any, of the above-mentioned bankruptcy and liquidation proceedings on the Trading Company’s financial condition or results of operations.
Cash - Cash balances are held with Citibank N.A.
Subscriptions Received in Advance - Subscriptions received in advance are comprised of cash received prior to the statements of financial condition date for which units were issued on the first day of the following month. Subscriptions received in advance do not participate in the earnings of the Partnership until the related units are issued.
Net Income (Loss) Per Unit - Net income (loss) per unit of Class A Series 1, Class A Series 2, Class B Series 1, or Class B Series 2 partnership interest is equal to the change in net asset value per unit of the respective classes, from the beginning of the year to the end of the year.
Income Taxes - The Partnership is not subject to federal, state, or local income tax. Such taxes are the liabilities of the individual partners and the amounts thereof will vary depending on the individual situation of each partner. Accordingly, there is no provision for income taxes in the accompanying financial statements. Accounting Standard Codification 740, Income Taxes, defines how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements and is applied to all open tax years. The Partnership has evaluated tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Based on this analysis of all significant tax jurisdictions and all open tax years subject to examination, there were no material tax positions not deemed to meet a more-likely-than-not-threshold. Therefore, no tax expense, including interest or penalties, was recorded for the year ended December 31, 2012. To the extent that the Partnership records interest and penalties, they would be included in interest expense and other expenses, respectively, on the statements of operations.
3. LIMITED PARTNERSHIP AGREEMENT
The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the number of units or unit equivalents held by each partner. However, no limited partner is liable for obligations of the Partnership in excess of its capital subscription and net profits or losses, if any.
The Partnership’s units are continuously offered as of the first business day of each month at net asset value, as defined in the Agreement. Limited partners may redeem any or all of their units as of the end of any month at net asset value per unit on 10 days prior written notice to the General Partner. The Partnership will be dissolved on December 31, 2037, or upon the occurrence of certain events, as specified in the Agreement.
The General Partner is required to make and maintain a general partner investment in the Partnership in an aggregate amount equal to the lesser of 1.01% of the net aggregate capital subscriptions of all partners, or $500,000.
Distributions (other than redemptions of units), if any, are made on a pro rata basis at the sole discretion of the General Partner. No distributions were declared or paid during the years ended December 31, 2012 and 2011.
Under the terms of the Agreement, the Partnership is liable for all costs associated with executing its business strategy. These costs include, but are not limited to, expenses associated with operations of the Partnership, such as management and incentive fees and other operating expenses, such as legal, audit, and tax return preparation fees.
4. FINANCIAL GUARANTEES
The Partnership enters into administrative and other professional service contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is not known; however, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
5. FINANCIAL HIGHLIGHTS
The following represents the ratios to average partners’ capital and other supplemental information for the years ended December 31, 2012, 2011 and 2010:
Includes amounts allocated from the Trading Company.
Financial highlights are calculated for limited partners taken as a whole for each series. An individual partner’s return and ratios may vary from these returns and ratios based on the timing of capital transactions.
6. SUBSEQUENT EVENTS
The Partnership accepts initial or additional subscriptions for limited partnership interests generally as of the first day of the month and redemption requests from limited partners as of the last business day of each calendar month. For the period subsequent to December 31, 2012 through the date of filing, limited partner subscriptions totaled approximately $5,205,151, and limited partner redemptions totaled approximately $22,424,383.
The General Partner has evaluated the impact of subsequent events on the Partnership through the date of filing these financial statements, and noted no subsequent events that require adjustment to or disclosure in these financial statements, except as noted above.
Man-AHL Diversified
Trading Company L.P.
(A Delaware Limited Partnership)
Financial Statements as of and for the
Years Ended December 31, 2012, 2011 and 2010, with
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Man-AHL Diversified Trading Company L.P.
We have audited the accompanying statement of financial condition, including condensed schedule of investments, of Man-AHL Diversified Trading Company L.P. (the “Partnership”) as of December 31, 2012, and the related statements of operations, changes in partners’ capital and cash flows for the year then ended. 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 audit.
We conducted our audit 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. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit 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, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Man-AHL Diversified Trading Company L.P. at December 31, 2012, and the results of its operations, changes in partners’ capital and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
March 26, 2013
A member firm of Ernst & Young Global Limited
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Man-AHL Diversified Trading Company L.P.:
We have audited the accompanying statement of financial condition of Man-AHL Diversified Trading Company L.P. (a Delaware Limited Partnership) (the “Partnership”) as of December 31, 2011, and the related statements of operations, changes in partners’ capital, and cash flows for each of the two years in the period then ended. These financials are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the 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 Man-AHL Diversified Trading Company L.P. as of December 31, 2011, and the results of its operations, changes in partners’ capital, and its cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
March 23, 2012
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2012 AND 2011
See notes to financial statements.
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
CONDENSED SCHEDULES OF INVESTMENTS
AS OF DECEMBER 31, 2012 AND 2011
See notes to financial statements.
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
See notes to financial statements.
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
See notes to financial statements.
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
* Amount was inadvertently omitted from the 2011 report filed with the SEC.
See notes to financial statements.
MAN-AHL DIVERSIFIED TRADING COMPANY L.P.
(A Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
1. ORGANIZATION OF THE TRADING COMPANY
Man-AHL Diversified Trading Company L.P. (a Delaware Limited Partnership) (the “Trading Company”) was organized in November 1997 under the Delaware Revised Uniform Limited Partnership Act and commenced operations on April 3, 1998, for the purpose of engaging in the speculative trading of futures, forward and swap contracts. Man Investments (USA) Corp. (the “General Partner”), a Delaware corporation, serves as the Trading Company’s general partner. The General Partner is a registered investment adviser and is a subsidiary of Man Group plc, a United Kingdom public limited company that is listed on the London Stock Exchange. The General Partner oversees the operations and management of the Trading Company. The General Partner is registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator and commodity trading adviser and is a member of the National Futures Association (“NFA”) in such capacities.
The Trading Company was formed to serve as a trading vehicle for certain limited partnerships sponsored by the General Partner in a “master-feeder” structure. The limited partners, Man-AHL Diversified I L.P., Man-AHL Diversified II L.P., and Man-AHL Diversified L.P. are limited partnerships whose general partner is the General Partner. Man-AHL Diversified L.P. fully redeemed from the Trading Company as of December 31, 2009 and transferred a portion of its assets to Man-AHL Diversified I L.P. on January 1, 2010.
Man-AHL (USA) Limited (the “Advisor”), a limited liability company incorporated in the United Kingdom, acts as trading advisor to the Trading Company. The Advisor is an affiliate of the General Partner and a subsidiary of Man Group plc. The Advisor is registered with the CFTC as a commodity pool operator and commodity trading adviser and is a member of the NFA in such capacities, in addition to registration with the Financial Services Authority in the United Kingdom. The Trading Company has engaged Man Investments Limited, a company organized under the Laws of the United Kingdom, to manage the foreign currency forward trading component of the AHL Diversified Program, at no additional cost to the Trading Company. The personnel of Man Investments Limited responsible for implementing the foreign currency forward trading component of the AHL Diversified Program on behalf of the Trading Company are the same as those of the Advisor who implement the AHL Diversified Program.
2. SIGNIFICANT ACCOUNTING POLICIES
The Trading Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Due from Brokers - Due from brokers consists of balances due from Credit Suisse (“CS”), JPMorgan Chase (“JPM”), Royal Bank of Scotland (“RBS”) and Deutsche Bank (“DB”). In general, the brokers pay the Trading Company interest monthly, based on agreed upon rates, on the Trading Company’s average daily balance.
Amounts due from brokers include cash held at brokers and cash posted as collateral. The amount of cash restricted as collateral held included in due from brokers on the statements of financial condition is $102,017,458 and $33,092,972 as of December 31, 2012 and 2011, respectively.
Expenses - Expenses are recognized on an accrual basis in the period in which they are incurred.
Derivative Contracts - In the normal course of business, the Trading Company enters into derivative contracts (“derivatives”) for trading purposes. Derivatives traded by the Trading Company include futures, forward and swap contracts. The Trading Company records derivatives at fair value. Futures contracts, which are traded on a national exchange, are valued at the close price as of the valuation day, or if no sale occurred on such day, at the close price on the most recent date on which a sale occurred. Forward contracts, which are not traded on a national exchange, are valued at fair value using independent pricing services, which use market observable inputs in their valuations. Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts. The Trading Company’s main swap contracts consist of interest rate swaps and credit default swaps. Swap contracts, which are not traded on a national exchange, are valued at fair value using independent pricing services, which use market observable inputs in their valuations.
Realized and unrealized changes in fair values are included in realized and unrealized gains and losses, respectively, on trading activities in the statements of operations. All trading activities are accounted for on a trade-date basis.
Foreign Currency - All assets and liabilities of the Trading Company denominated in foreign currencies are translated into U.S. dollar amounts at the mean between the bid and ask market rates for such currencies on the date of valuation. Purchases and sales of foreign investments are converted at the prevailing rate of exchange on the respective date of such transactions. The Trading Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in the fair value of investments held. Such fluctuations are included with the net realized and unrealized gains or losses on trading activities.
Cash and Cash Equivalents - Cash and cash equivalents include cash, short-term interest-bearing money market accounts and bank time deposits with original maturities of 90 days or less, held with Citibank N.A., JPMorgan Chase Bank, N.A. and Bank of America.
Income Taxes - The Trading Company is treated as a partnership for tax purposes and therefore not subject to federal, state, or local income tax. Such taxes are the liabilities of the individual partners and the amounts thereof will vary depending on the individual situation of each partner. Accordingly, there is no provision for income taxes in the accompanying financial statements. Accounting Standard Codification 740, Income Taxes, defines how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements and is applied to all open tax years. The Trading Company has evaluated tax positions taken or expected to be taken in the course of preparing the Trading Company’s tax returns to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Based on this analysis of all significant tax jurisdictions and all open tax years subject to examination, there were no material tax positions not deemed to meet a more-likely-than-not-threshold. Therefore, no tax expense, including interest or penalties, was recorded for the year ended December 31, 2012. To the extent that the Trading Company records interest and penalties, they would be included in interest expense and other expenses, respectively, on the statements of operations.
Net Income (Loss) Per Unit - Net income (loss) per unit of partnership interest is equal to the change in net asset value per unit from the beginning of the year to the end of the year.
3. PARTNERSHIP AGREEMENT
The Advisor is the sole trading advisor to the Trading Company.
The General Partner and limited partners share in the profits and losses of the Trading Company in proportion to the number of units or unit equivalents held by each partner. However, no limited partner is liable for obligations of the Trading Company in excess of its capital contribution and net profits or losses, if any. The General Partner owned no direct interest in the Trading Company during the years ended December 31, 2012 and 2011.
Distributions (other than redemption of units), if any, are made on a pro rata basis at the sole discretion of the General Partner.
Partner contributions occur as of the first day of any month at the opening net asset value. Limited partners may redeem any or all of their units as of the end of any month at net asset value per unit on 10 days’ prior written notice to the General Partner. The General Partner may suspend redemptions of units of the Trading Company only if the Trading Company’s ability to withdraw capital from any investment is restricted. The Trading Company will be dissolved on December 31, 2037, or upon the occurrence of certain events, as specified in the Trading Company’s limited partnership agreement.
4. FAIR VALUE MEASUREMENTS
The Trading Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date under current market conditions.
The inputs used to determine the fair value of the Partnership’s investments are summarized in the three broad levels listed below:
•
Level 1- quoted prices in active markets for identical assets or liabilities
•
Level 2 - investments with other significant observable inputs
•
Level 3 - investments with significant unobservable inputs, which may include the Trading Company’s own assumptions in determining the fair value of investments
Futures contracts are valued based on quoted prices from the exchange and are categorized as Level 1 investments in the fair value hierarchy. Forward contracts and swap contracts are valued at fair value using independent pricing services, which use market observable inputs in their valuations, and are categorized as Level 2 investments in the fair value hierarchy. As of December 31, 2012 and 2011, the Trading Company did not have any positions categorized as Level 3 investments in the fair value hierarchy.
The following is a summary categorization as of December 31, 2012 and 2011, of the Trading Company’s investments based on the level of inputs utilized in determining the value of such investments:
The Trading Company discloses the amounts of transfers and reasons for those transfers between Levels of the fair value hierarchy, based on the Levels assigned under the hierarchy at the reporting period end. There were no transfers between Levels as of December 31, 2012 based on the levels assigned at December 31, 2011.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The investment objective of the Trading Company is achieved by participation in the AHL Diversified Program directed on behalf of the Trading Company by Man-AHL (USA) Limited. The AHL Diversified Program is a futures and forward price trend-following trading system, entirely quantitative in nature, and implements trading positions on the basis of statistical analyses of past price histories. The objective of the AHL Diversified Program is to deliver substantial capital growth for commensurate levels of volatility over the medium term, independent of the movement of the stock and bond markets, through the speculative trading, directly and indirectly, of physical commodities, futures contracts, spot and forward contracts, options on the foregoing, exchanges of futures for physical transactions and other investments on domestic and international exchanges and markets (including the interbank and over-the-counter markets (“OTC”)). The AHL Diversified Program trades globally in several market sectors, including, without limitation, currencies, bonds, energies, stock indices, interest rates, metals and agriculture.
All the strategies and systems of the AHL Diversified Program are designed to target defined volatility levels rather than returns, and the investment process is underpinned by computer-supported analytical instruments and disciplined real-time risk and management information systems. A proprietary risk measurement method similar to the industry standard “value-at-risk” helps ensure that the rule-based decisions that drive the investment process remain within pre-defined risk parameters. Margin-to-equity ratios are monitored daily, and the level of exposure in each market is quantifiable at any time and is adjusted in accordance with market volatility. Market correlation is closely monitored to prevent over-concentration of risk and ensure optimal portfolio weightings. Market liquidity is examined with the objective of ensuring that the Trading Company will be able to initiate and close out trades as indicated by AHL Diversified Program’s systems at market prices, while brokerage selection and trade execution are continually monitored with the objective of ensuring quality market access.
Futures and forward contracts are recorded on traded date. Upon entering into futures and forward contracts, the Trading Company is required to deposit cash or collateral with the brokers. Gains or losses are realized when contracts are matured or closed. Unrealized gains or losses on open contracts (the difference between contract trade price and fair value) are reported in the statements of financial condition.
Interest rate swaps relate to contracts taken out by the Trading Company with major brokers in which the Trading Company either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest, on the same notional amount for a specified period of time. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Changes in the value of the interest rate swap agreements and amounts received or paid in connection with, are recognized as unrealized trading gains (losses) on open contracts and realized gains (losses) on closed contracts, respectively, in the statements of operations. The risks of interest rate swaps include changes in market value and the possible inability of the counterparty to fulfill its obligations under the agreement.
The Trading Company may enter into credit default swaps to manage its exposure to certain sectors of the market or to reduce credit risk. The Trading Company may enter into credit default swap agreements to provide a measure of protection against the default of an issuer (as buyer of protection) and/or gain credit exposure to an issuer to which it is not otherwise exposed (as seller of protection). Credit default swaps are agreements in which one party pays fixed periodic payments to a counterparty in consideration for a guarantee from the counterparty to make a specific payment should a negative credit event take place (e.g. default, bankruptcy or debt restructuring). The Trading Company may either buy or sell (write) credit default swaps. As a buyer, the Trading Company will either receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising of an index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising an index. As a seller (writer), the Trading Company will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities comprising an index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising of index. In the event of default by the counterparty, the Trading Company may recover amounts paid under the agreement either partially or in total by offsetting any payables and/or receivables with collateral held or pledged.
These periodic payments received or made under swap contracts by the Trading Company are included in net realized trading gains (losses) on closed contracts in the statements of operations. When the swap is terminated, the Trading Company will record a realized gain/(loss) equal to the difference between the proceeds from (or cost of) the closing transaction and the Trading Company’s basis in the contract, if any. Swap transactions involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the statements of financial condition. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.
As of December 31, 2012, the Trading Company utilized JPM and CS to clear its futures trading activity. As of December 31, 2012, the portion of net unrealized gains (losses) attributed to JPM and CS was $4,050,440 and $(2,817,349), respectively.
As of December 31, 2012, the Trading Company utilized RBS and DB to clear its forward trading activity. As of December 31, 2012, the portion of net unrealized gains (losses) attributed to RBS and DB was $2,525,183 and $2,985,195, respectively.
As of December 31, 2012, the total fair value and notional amount of credit default swaps where the Trading Company is the seller were $(759,721) and $390,000,000, respectively. The notional amount represents the maximum potential pay out that the Trading Company could be required to make if a credit event were to occur under each contract. The Trading Company has posted cash collateral of $23,200,000 with respective counterparties in the normal course of business. The maturity date for open credit default swaps is December 2017.
During 2011, the Trading Company used MF Global Inc. (“MFG”), in addition to JPM and CS, to clear a portion of its futures trading activity and used MF Global U.K. (“MFG UK”), in addition to RBS and DB, to clear a portion of its forward trading activity. At December 31, 2011, the Trading Company had no open futures or forward contracts with either MFG or MFG UK. On October 31, 2011, MF Global Holdings Ltd., the parent of MFG and MFG UK, filed for Chapter 11 bankruptcy protection in the U.S. courts. The U.S. courts subsequently approved the appointment of James W. Giddens as U.S. Trustee to oversee the liquidation of MFG. The Financial Services Authority, the U.K. financial services regulator, has appointed Special Administrators to oversee the liquidation of MFG UK. At December 31, 2012, the Trading Company’s due from brokers balance includes an estimated net balance at MFG UK of ($88,226) and an estimated net balance at MFG of $28,049. As of the date of the issuance of the financial statements, the General Partner is unable to determine the ultimate outcome, if
any, of the above-mentioned bankruptcy and liquidation proceedings on the Trading Company’s financial condition or results of operations.
During the year ended December 31, 2012, the Trading Company traded 212,768 exchange-traded futures contracts and settled 38,947 forward contracts and 193 swap contracts. During the year ended December 31, 2011, the Trading Company traded 512,338 exchange-traded futures contracts and settled 387,346 forward contracts.
The Trading Company trades derivative financial instruments that involve varying degrees of market and credit risk. Market risks may arise from unfavorable changes in interest rates, foreign exchange rates, or the fair values of the instruments underlying the contracts. All contracts are stated at fair value, and changes in those values are reflected in the net change in unrealized trading gains (losses) on open contracts in the statements of operations. Certain of the Trading Company’s OTC derivative contracts contain credit risk related contingent features. If the credit-risk-related contingent features underlying derivative instruments had been triggered as of December 31, 2012, the Trading Company would have been required to post additional collateral on derivative instruments. At December 31, 2012, the only OTC contracts in a net liability position were the credit default swaps. The ultimate amounts that may be required as payment to settle the derivative instruments in connection with the triggering of such credit contingency features as of December 31, 2012, may differ from the net liability amounts recorded as of December 31, 2012, and such differences can be material.
Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The credit risk from counterparty non-performance associated with OTC derivative contracts is the net unrealized trading gain, if any, included in the statements of financial condition. Forward contracts are entered into on an arm’s-length basis with RBS and DB. The Trading Company’s accounting policy is such that open contracts with the same counterparty are netted at the account level on the statements of financial condition, in accordance with master netting arrangements in place with each party, as applicable. Netting is effective across products and cash collateral when so specified in the applicable netting agreement. At December 31, 2012 and 2011, estimated credit risk with regard to forward contracts was $5,510,378 and $7,070,964, respectively. At December 31, 2012, estimated credit risk with regard to swap contracts was $431,271.
For exchange-traded contracts, the clearing organization functions as the central counterparty for each transaction and, therefore, bears the risk of delivery to and from counterparties, which mitigates the credit risk of these instruments.
The following table presents the fair value of the Trading Company’s derivative instruments and statement of financial condition location:
The following table presents the impact of derivative instruments on the statements of operations:
* Net amount is shown
Amounts in the table above exclude foreign exchange spot contracts.
Recent Accounting Pronouncements - In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires disclosure of both gross and net information related to offsetting and related arrangements, enabling users of financial statements to understand the effect of those arrangements on the entity’s financial position. The objective of this disclosure 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 international financial reporting standards. ASU 2011-11 is effective for interim and
annual periods beginning on or after January 1, 2013. Management is currently evaluating the implications of ASU 2011-11 and its impact on the Trading Company’s financial statements has not yet been determined.
In January 2013, the FASB issued Accounting Standards Update No. 2013-01, Balance Sheet (Topic 210): “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”. This update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815. The guidance is effective for interim and annual periods beginning on or after January 1, 2013. Management is evaluating the impact of this guidance on the Trading Company’s financial statement disclosures.
6. FINANCIAL GUARANTEES
The Trading Company enters into administrative and other professional service contracts that contain a variety of indemnifications. The Trading Company’s maximum exposure under these arrangements is not known; however, the Trading Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
7. FINANCIAL HIGHLIGHTS
The following represents the ratios to average partners’ capital and other supplemental information for the years ended December 31, 2012, 2011 and 2010:
Financial highlights are calculated for all partners taken as a whole. An individual partner’s return and ratios may vary from these returns and ratios based on the timing of capital transactions.
8. SUBSEQUENT EVENTS
The Trading Company accepts initial or additional subscriptions for limited partnership interests generally as of the first day of the month and redemption requests from limited partners as of the last business day of each calendar month. For the period subsequent to December 31, 2012 through the date of filing, limited partner subscriptions totaled $6,205,151, and limited partner redemptions totaled $22,424,383.
The General Partner has evaluated the impact of subsequent events on the Trading Company through the date of filing these financial statements, and noted no subsequent events that require adjustment to or disclosure in these financial statements, except as noted above.