Potomac Futures Fund 10Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number000-50735

POTOMAC FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)


New York		13-3937275

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue - 14^th Floor

New York, New York 10036

(Address of principal executive offices) (Zip Code)

(212) 296-1999

(Registrant’s telephone number, including area code)

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

Yes X No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	Accelerated filer	Non-accelerated filer X	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined inrule 12b-2 of the Exchange Act).

Yes No X

As of October 31, 2010, 25,819.3855 Limited Partnership Redeemable Units were outstanding.

POTOMAC FUTURES FUND L.P.

FORM 10-Q

INDEX


		Page
		Number

PART I - Financial Information:

Item 1.	Financial Statements:

	Statements of Financial Condition at September 30, 2010 (unaudited) and December 31, 2009	3

	Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2010 and 2009 (unaudited)	4

	Notes to Financial Statements, including the Financial Statements of CMF Campbell Master Fund L.P. (unaudited)	5 - 21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 – 25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26 – 27

Item 4.	Controls and Procedures	28

PART II - Other Information		29 – 32

Exhibits
Exhibit 31.1 Certification
Exhibit 31.2 Certification
Exhibit 32.1 Certification
Exhibit 32.2 Certification

PART I

Item 1. Financial Statements

Potomac Futures Fund L.P.
Statements of Financial Condition


	(Unaudited) September 30,		December 31,
	2010		2009

Assets:
Investment in Master, at fair value	$	39,556,511	$	52,227,304
Cash		39,823		105,370

Total assets	$	39,596,334	$	52,332,674

Liabilities and Partners’ Capital:
Liabilities:
Accrued expenses:
Brokerage fees	$	214,480	$	283,469
Management fees		65,597		86,598
Other		23,748		90,507
Redemptions payable		2,748,411		1,730,773

Total liabilities		3,052,236		2,191,347

Partners’ Capital:
General Partner, 337.4926 and 624.1683 unit equivalents outstanding at September 30, 2010 and December 31, 2009, respectively		459,365		839,974
Limited Partners, 26,511.1743 and 36,634.7661 Redeemable Units outstanding at September 30, 2010 and December 31, 2009, respectively		36,084,733		49,301,353

Total partners’ capital		36,544,098		50,141,327

Total liabilities and partners’ capital	$	39,596,334	$	52,332,674

Net asset value per unit	$	1,361.11	$	1,345.75

See accompanying notes to financial statements.

Potomac Futures Fund L.P.
Statements of Income and Expenses and Changes in Partners’ Capital
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Income:
Net realized gains (losses) on closed contracts allocated from Master	$	1,292,553		$	216,248		$	(298,345	)	$	(3,845,309	)
Change in net unrealized gains (losses) on open contracts allocated from Master		2,291,140			2,338,865			3,109,317			2,272,126
Interest income allocated from Master		10,569			13,457			27,367			44,778
Expenses allocated from Master		(43,297	)		(22,967	)		(139,303	)		(58,442	)

Total income (loss)		3,550,965			2,545,603			2,699,036			(1,586,847	)

Expenses:
Brokerage fees		643,222			1,005,655			2,137,724			3,428,819
Management fees		196,719			307,305			653,370			1,047,877
Other		45,466			35,268			146,978			157,429

Total expenses		885,407			1,348,228			2,938,072			4,634,125

Net income (loss)		2,665,558			1,197,375			(239,036	)		(6,220,972	)
Additions — Limited Partners		581,000			212,000			895,000			2,181,000
Redemptions — Limited Partners		(8,044,560	)		(9,101,992	)		(13,878,193	)		(26,340,714	)
Redemptions — General Partner		—			—			(375,000	)		(147,584	)

Net increase (decrease) in partners’ capital		(4,798,002	)		(7,692,617	)		(13,597,229	)		(30,528,270	)
Partners’ Capital, beginning of period		41,342,100			62,818,850			50,141,327			85,654,503

Partners’ Capital, end of period	$	36,544,098		$	55,126,233		$	36,544,098		$	55,126,233

Net asset value per unit (26,848.6669 and 39,805.7587 units outstanding at September 30, 2010 and 2009, respectively)	$	1,361.11		$	1,384.88		$	1,361.11		$	1,384.88

Net income (loss) per Redeemable Unit and General Partner unit equivalent	$	94.92		$	29.24		$	15.36		$	(120.70	)

Weighted average units outstanding		30,235.4398			45,235.6473			33,906.4130			49,218.3844

See accompanying notes to financial statements.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)


1.	General:

Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership which was organized on March 14, 1997 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, metals and softs. The commodity interests that are indirectly traded by the Partnership through its investment in the Master (as defined below) are volatile and involve a high degree of market risk. The Partnership was authorized to sell an unlimited number of redeemable units of limited partnership interest (“Redeemable Units”) during its initial offering period. The Partnership privately and continuously offers up to 250,000 Redeemable Units in the Partnership to qualified investors. There is no maximum number of units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”), a registered non-clearing futures commission merchant and a member of the National Futures Association (“NFA”). Morgan Stanley, indirectly through various subsidiaries, owns a majority interest in MSSB Holdings. Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership, owns a minority interest in MSSB Holdings. Citigroup Inc. (”Citigroup”), indirectly through various subsidiaries, wholly owns CGM. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup.

On January 1, 2005, the Partnership allocated substantially all of its capital to CMF Campbell Master Fund L.P. (the “Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 173,788.6446 units of the Master with cash equal to $172,205,653 and a contribution of open commodity futures and forward positions with a fair value of $1,582,992. The Master was formed in order to permit accounts managed by Campbell & Company, Inc. (“Campbell” or the “Advisor”) using Campbell’s Financial, Metal and Energy Large Portfolio Program (“FME”), a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended September 30, 2010.

As of September 30, 2010 and December 31, 2009, the Partnership owned approximately 91.9% and 83.5%, respectively, of the Master. The Partnership intends to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. The Master engages in such trading through a commodity brokerage account maintained with CGM. The Master’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Partners’ Capital are included herein.

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at September 30, 2010 and December 31, 2009, and the results of its operations for the three and nine months ended September 30, 2010 and 2009. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report onForm 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2009.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through the date the financial statements were filed. Actual results could differ from these estimates.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

The Master’s Statements of Financial Condition and Condensed Schedule of Investments as of September 30, 2010 and December 31, 2009 and Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2010 and 2009 are presented below:

CMF Campbell Master Fund L.P.
Statements of Financial Condition


	(Unaudited) September 30,		December 31,
	2010		2009
Assets:
Equity in trading account:
Cash	$	35,165,773	$	57,797,715
Cash margin		5,348,419		5,501,376
Net unrealized appreciation on open futures contracts		1,627,084		—
Net unrealized appreciation on open forward contracts		933,457		—
Options purchased, at fair value (cost $27,294 and $96,122 at September 30, 2010 and December 31, 2009, respectively)		29,687		94,039

Total assets	$	43,104,420	$	63,393,130


Liabilities and Partners’ Capital:
Liabilities:
Net unrealized depreciation on open futures contracts	$	—	$	366,940
Net unrealized depreciation on open forward contracts		—		431,591
Options premiums received, at fair value (premium $34,672 and $34,361 at September 30, 2010 and December 31, 2009, respectively)		30,396		35,406
Accrued expenses:
Professional fees		31,316		33,530

Total liabilities		61,712		867,467


Partners’ Capital:
General Partner, 0.0000 unit equivalents at September 30, 2010 and December 31, 2009		—		—
Limited Partners, 36,009.3884 and 56,557.8676 units outstanding at September 30, 2010 and December 31, 2009, respectively		43,042,708		62,525,663

Total liabilities and partners’ capital	$	43,104,420	$	63,393,130

Net asset value per unit	$	1,195.32	$	1,105.52

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
September 30, 2010
(Unaudited)


	Notional ($)/ Number					% of Partners’
	of Contracts		Fair Value			Capital
Futures Contracts Purchased
Energy		21	$	67,585			0.16	%
Grains		140		124,725			0.29
Interest Rates Non-U.S.		611		385,504			0.90
Interest Rates U.S.		535		216,097			0.50
Indices		345		87,003			0.20
Livestock		17		(160	)		(0.00	)*
Metals		77		634,755			1.47
Softs		102		203,520			0.47

Total futures contracts purchased				1,719,029			3.99


Futures Contracts Sold
Energy		22		(88,710	)		(0.20	)
Interest Rates Non-U.S.		21		(3,115	)		(0.01	)
Indices		6		(120	)		(0.00	)*

Total futures contracts sold				(91,945	)		(0.21	)


Unrealized Appreciation on Forward Contracts
Currencies		$146,281,976		3,816,670			8.87
Metals		68		303,001			0.70

Total unrealized appreciation on forward contracts				4,119,671			9.57


Unrealized Depreciation on Forward Contracts
Currencies		$117,516,694		(3,108,327	)		(7.22	)
Metals		15		(77,887	)		(0.18	)

Total unrealized depreciation on forward contracts				(3,186,214	)		(7.40	)


Options Purchased
Currencies
Calls		$2,230,803		27,055			0.06
Puts		$1,077,008,383		2,632			0.01

Total options purchased				29,687			0.07


Options Premiums Received
Currencies
Calls		$13,742,138		(28,600	)		(0.07	)
Puts		$7,609,125,631		(1,796	)		(0.00	)*

Total options premiums received				(30,396	)		(0.07	)

Total fair value			$	2,559,832			5.95	%



* Due to rounding.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

CMF Campbell Master Fund L.P.
Condensed Schedule of Investments
December 31, 2009


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

Futures Contracts Purchased
Energy		36	$	21,183			0.03	%
Grains		3		2,325			0.00	*
Interest RatesNon-U.S.		446		(283,167	)		(0.45	)
Interest Rates U.S.		507		(493,888	)		(0.79	)
Indices		455		441,278			0.71
Metals		18		(83,265	)		(0.13	)
Softs		22		(4,234	)		(0.00	)*

Total futures contracts purchased				(399,768	)		(0.63	)


Futures Contracts Sold
Energy		1		2,730			0.00	*
Grains		9		2,750			0.00	*
Interest RatesNon-U.S.		136		26,911			0.04
Interest Rates U.S.		2		437			0.00	*

Total futures contracts sold				32,828			0.04


Unrealized Appreciation on Forward Contracts
Currencies		$135,784,768		2,033,847			3.25
Metals		37		285,660			0.46

Total unrealized appreciation on forward contracts				2,319,507			3.71


Unrealized Depreciation on Forward Contracts
Currencies		$154,270,721		(2,642,315	)		(4.23	)
Metals		17		(108,783	)		(0.17	)

Total unrealized depreciation on forward contracts				(2,751,098	)		(4.40	)


Options Purchased
Currencies
Calls		$2,499,064,517		49,773			0.08
Puts		$430,245,216		44,266			0.07

Total options purchased				94,039			0.15


Options Premiums Received
Currencies
Calls		$13,333,773		(26,438	)		(0.04	)
Puts		$43,764,467,517		(8,968	)		(0.01	)

Total premiums received				(35,406	)		(0.05	)

Total fair value			$	(739,898	)		(1.18	)%


*		Due to rounding.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

CMF Campbell Master Fund L.P.
Statements of Income and Expenses and Changes in Partners’ Capital
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Income:
Net gains (losses) on trading of commodity interests:
Net realized gains (losses) on closed contracts	$	1,410,580		$	258,641		$	(580,712	)	$	(4,873,481	)
Change in net unrealized gains (losses) on open contracts		2,492,377			2,831,207			3,368,871			2,262,189

Gain (loss) from trading, net		3,902,957			3,089,848			2,788,159			(2,611,292	)
Interest income		11,457			16,320			29,887			60,078

Total income (loss)		3,914,414			3,106,168			2,818,046			(2,551,214	)

Expenses:
Clearing fees		32,578			19,963			89,523			48,121
Professional fees		14,379			7,837			63,601			28,810

Total expenses		46,957			27,800			153,124			76,931

Net income (loss)		3,867,457			3,078,368			2,664,922			(2,628,145	)
Additions — Limited Partners		581,000			212,000			895,000			2,181,000
Redemptions — Limited Partners		(6,908,044	)		(10,771,724	)		(23,012,990	)		(54,434,556	)
Distribution of interest income to feeder funds		(11,457	)		(16,320	)		(29,887	)		(60,078	)

Net increase (decrease) in Partners’ Capital		(2,471,044	)		(7,497,676	)		(19,482,955	)		(54,941,779	)
Partners’ Capital, beginning of period		45,513,752			80,030,859			62,525,663			127,474,962

Partners’ Capital, end of period	$	43,042,708		$	72,533,183		$	43,042,708		$	72,533,183


Net asset value per unit (36,009.3884 and 65,191.0739 Units outstanding at September 30, 2010 and 2009, respectively)	$	1,195.32		$	1,112.62		$	1,195.32		$	1,112.62


Net income (loss) per unit	$	108.15		$	47.10		$	90.49		$	(19.54	)


Weighted average units outstanding		39,986.9154			72,549.5908			46,891.4394			90,602.3699

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)


2.	Financial Highlights:

Changes in net asset value per unit for the three and nine months ended September 30, 2010 and 2009 were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net realized and unrealized gains (losses) allocated from Master*	$	103.05		$	36.68		$	39.89		$	(96.77	)
Interest income allocated from Master		0.35			0.30			0.83			0.93
Expenses **		(8.48	)		(7.74	)		(25.36	)		(24.86	)

Increase (decrease) for the period		94.92			29.24			15.36			(120.70	)
Net asset value per unit, beginning of period		1,266.19			1,355.64			1,345.75			1,505.58

Net asset value per unit, end of period	$	1,361.11		$	1,384.88		$	1,361.11		$	1,384.88


*		Includes Partnership brokerage fees and clearing fees allocated from the Master.

**		Excludes Partnership brokerage fees and clearing fees allocated from the Master.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Ratio to average net assets:***
Net investment income (loss) before incentive fees****		(9.6	)%		(9.0	)%		(9.6	)%		(9.0	)%

Operating expenses		9.7	%		9.1	%		9.6	%		9.1	%
Incentive fees		—	%		—	%		—	%		—	%

Total expenses		9.7	%		9.1	%		9.6	%		9.1	%


Total return:
Total return before incentive fees		7.5	%		2.2	%		1.1	%		(8.0	)%
Incentive fees		—	%		—	%		—	%		—	%

Total return after incentive fees		7.5	%		2.2	%		1.1	%		(8.0	)%


***		Annualized (other than incentive fee).

****		Interest income allocated from Master less total expenses.

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

Financial Highlights of the Master:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net realized and unrealized gains (losses)*	$	108.24		$	46.99		$	91.25		$	(19.91	)
Interest income		0.29			0.23			0.69			0.71
Expenses **		(0.38	)		(0.12	)		(1.45	)		(0.34	)

Increase (decrease) for the period		108.15			47.10			90.49			(19.54	)
Distribution of interest income to feeder funds		(0.29	)		(0.23	)		(0.69	)		(0.71	)
Net asset value per unit, beginning of period		1,087.46			1,065.75			1,105.52			1,132.87

Net asset value per unit, end of period	$	1,195.32		$	1,112.62		$	1,195.32		$	1,112.62


* Includes clearing fees.

** Excludes clearing fees.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Ratios to Average Net Assets:***
Net investment income (loss)****		(0.3	)%		(0.1	)%		(0.3	)%		0.0	%*****


Operating expenses		0.4	%		0.1	%		0.4	%		0.1	%


Total return		9.9	%		4.4	%		8.2	%		(1.7	)%


***		Annualized.

****		Interest income less total expenses.

*****		Due to rounding.

3. Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The customer agreements between the Partnership and CGM and the Master and CGM give the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210, Balance Sheet, has been met.

Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

The Master adopted ASC 815, Derivatives and Hedging, as of January 1, 2009 which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815 only expands the disclosure requirements for derivative instruments and related hedging activities and has no impact on the Statements of Financial Condition, Statements of Income and Expenses and Changes in Partners’ Capital. All of the commodity interests owned by the Master are held for trading purposes. The average number of futures contracts traded for the three months ended September 30, 2010 and 2009, based on a monthly calculation, were 2,060 and 1,768, respectively. The average number of futures contracts traded for the nine months ended September 30, 2010 and 2009, based on a monthly calculation, were 2,297 and 2,037, respectively. The average number of metals forward contracts traded for the three months ended September 30, 2010 and 2009, based on a monthly calculation, were 100 and 98, respectively. The average number of metals forward contracts traded for the nine months ended September 30, 2010 and 2009, based on a monthly calculation, were 100 and 94, respectively. The average notional values of currency forward contracts for the three months ended September 30, 2010 and 2009, based on a monthly calculation, were $435,914,516 and $573,810,611, respectively. The average notional values of currency forward contracts for the nine months ended September 30, 2010 and 2009, based on a monthly calculation, were $472,889,436 and $531,327,429, respectively. The average notional values of currency option contracts for the three months ended September 30, 2010 and 2009, based on a monthly calculation, were $36,593,784,402 and $75,881,155,627, respectively. The average notional values of currency option contracts for the nine months ended September 30, 2010 and 2009, based on a monthly calculation, were $43,865,779,322 and $94,760,114,836, respectively. The following tables indicate the fair values of derivative instruments of futures, forward and options contracts as separate assets and liabilities as of September 30, 2010 and December 31, 2009.


Assets	September 30, 2010

Futures Contracts
Energy	$	68,465
Grains		213,600
Interest Rates Non-U.S.		506,004
Interest Rates U.S.		221,163
Indices		172,929
Livestock		1,390
Metals		635,175
Softs		239,716

Total unrealized appreciation on open futures contracts	$	2,058,442


Liabilities
Futures Contracts
Energy	$	(89,590	)
Grains		(88,875	)
Interest Rates Non-U.S.		(123,615	)
Interest Rates U.S.		(5,066	)
Indices		(86,046	)
Livestock		(1,550	)
Metals		(420	)
Softs		(36,196	)

Total unrealized depreciation on open futures contracts	$	(431,358	)

Net unrealized appreciation on open futures contracts	$	1,627,084	*


Assets
Forward Contracts
Currencies	$	3,816,670
Metals		303,001

Total unrealized appreciation on open forward contracts	$	4,119,671


Liabilities
Forward Contracts
Currencies	$	(3,108,327	)
Metals		(77,887	)

Total unrealized depreciation on open forward contracts	$	(3,186,214	)

Net unrealized appreciation on open forward contracts	$	933,457	**


*		This amount is in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.

**		This amount is in “Net unrealized appreciation on open forward contracts” on the Master’s Statements of Financial Condition.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)


Assets	September 30, 2010

Options Purchased
Currencies	$	29,687

Total options purchased	$	29,687	***


Liabilities
Options Premiums Received
Currencies	$	(30,396	)

Total options premiums received	$	(30,396	)****


*** This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.

**** This amount is in “Options premiums received, at fair value” on the Master’s Statements of Financial Condition.

Assets	December 31, 2009

Futures Contracts
Energy	$	28,837
Grains		5,075
Interest RatesNon-U.S.		76,641
Interest Rates U.S.		437
Indices		480,732
Metals		410
Softs		19,185

Total unrealized appreciation on open futures contracts	$	611,317


Liabilities
Futures Contracts
Energy	$	(4,924	)
Interest RatesNon-U.S.		(332,897	)
Interest Rates U.S.		(493,888	)
Indices		(39,454	)
Metals		(83,675	)
Softs		(23,419	)

Total unrealized depreciation on open futures contracts	$	(978,257	)

Net unrealized depreciation on open futures contracts	$	(366,940	)*

Assets
Forward Contracts
Currencies	$	2,033,847
Metals		285,660

Total unrealized appreciation on open forward contracts	$	2,319,507


Liabilities

Forward Contracts
Currencies	$	(2,642,315	)
Metals		(108,783	)

Total unrealized depreciation on open forward contracts	$	(2,751,098	)

Net unrealized depreciation on open forward contracts	$	(431,591	)**


* This amount is in “Net unrealized depreciation on open futures contracts” on the Master’s Statements of Financial Condition.

** This amount is in “Net unrealized depreciation on open forward contracts” on the Master’s Statements of Financial Condition.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)


Assets	December 31, 2009

Options Purchased
Currencies	$	94,039

Total options purchased	$	94,039	***


Liabilities
Options Premiums Received
Currencies	$	(35,406	)

Total options premiums received	$	(35,406	)****


***		This amount is in “Options purchased, at fair value” on the Master’s Statements of Financial Condition.

****		This amount is in “Options premiums received, at fair value” on the Master’s Statements of Financial Condition.

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2010 and 2009.


	Three Months Ended			Three Months Ended			Nine months ended			Nine months ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
Sector	Gain (loss) from trading			Gain (loss) from trading			Gain (loss) from trading			Gain (loss) from trading
Currencies	$	735,747		$	2,299,932		$	394,295		$	1,470,394
Energy		(659,349	)		(871,574	)		(2,641,886	)		(662,653	)
Grains		596,097			84,963			655,258			84,963
Indices		325,881			1,486,707			(3,011,390	)		(1,475,502	)
Interest Rates U.S.		1,167,263			(227,827	)		2,828,152			364,535
Interest Rates Non-U.S.		486,333			(340,758	)		4,208,592			(2,088,282	)
Livestock		(39,780	)		—			(54,780	)		—
Metals		565,058			834,259			(198,989	)		(128,893	)
Softs		725,707			(175,854	)		608,907			(175,854	)

Total	$	3,902,957	*****	$	3,089,848	*****	$	2,788,159	*****	$	(2,611,292	)*****


*****		This amount is in “Gain (loss) from trading, net” on the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.


4.	Fair Value Measurements:

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in note 2 of the Master’s notes to the annual financial statements as of December 31, 2009.

Partnership’s Fair Value Measurements.The Partnership adopted ASC 820, Fair Value Measurements and Disclosures, as of January 1, 2008 which 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 market participants at the measurement date. ASC 820 establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

In 2009, the Partnership adopted amendments to ASC 820 which reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. These amendments to ASC 820 also reaffirm the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities. The adoption of the amendments to ASC 820 had no effect on the Partnership’s Financial Statements.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

The Partnership values investment in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments that are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).


			Quoted Prices
			in Active Markets		Significant Other		Significant
			for Identical		Observable Inputs		Unobservable
	9/30/2010		Assets (Level 1)		(Level 2)		Inputs (Level 3)

Assets
Investment in Master	$	39,556,511	$	—	$	39,556,511	$	—

Total fair value	$	39,556,511	$	—	$	39,556,511	$	—


			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable Inputs		Unobservable
	12/31/2009		Assets (Level 1)		(Level 2)		Inputs (Level 3)

Assets
Investment in Master	$	52,227,304	$	—	$	52,227,304	$	—

Total fair value	$	52,227,304	$	—	$	52,227,304	$	—

Master’s Investments.All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

Master’s Fair Value Measurements.The Master adopted ASC 820 as of January 1, 2008 which 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 market participants at the measurement date. ASC 820 establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Master did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

The Master considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended September 30, 2010 and December 31, 2009, the Master did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).


			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable Inputs		Unobservable
	9/30/2010		Assets (Level 1)		(Level 2)		Inputs (Level 3)
Assets
Futures	$	1,627,084	$	1,627,084	$	—	$	—
Forwards		933,457		225,114		708,343		—
Options purchased		29,687		—		29,687		—

Total assets		2,590,228		1,852,198		738,030		—


Liabilities
Options premiums received	$	30,396	$	—	$	30,396	$	—

Total liabilities		30,396		—		30,396		—

Total fair value	$	2,559,832	$	1,852,198	$	707,634	$	—


				Quoted Prices in
				Active Markets			Significant Other			Significant
				for Identical			Observable Inputs			Unobservable
	12/31/2009			Assets (Level 1)			(Level 2)			Inputs (Level 3)
Assets
Forwards	$	176,877		$	176,877		$	—		$	—
Options purchased		94,039			—			94,039			—

Total assets		270,916			176,877			94,039			—


Liabilities
Futures	$	366,940		$	366,940		$	—		$	—
Forwards		608,468			—			608,468			—
Options premiums received		35,406			—			35,406			—

Total liabilities		1,010,814			366,940			643,874			—

Total fair value	$	(739,898	)	$	(190,063	)	$	(549,835	)	$	—

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)


5.	Financial Instrument Risks:

In the normal course of its business, the Partnership, through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership/Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership’s/Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Master has credit risk and concentration risk as the sole counterparty or broker with respect to the Partnership’s/Master’s assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s/Master’s counterparty is an exchange or clearing organization.

As both a buyer and seller of options, the Master pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Master to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Master does not consider these contracts to be guarantees as described in ASC 460, Guarantees.

The General Partner monitors and attempts to control the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

6. Critical Accounting Policies

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through the date the financial statements were filed. As a result, actual results could differ from these estimates.

Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230, Statement of Cash Flows.

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in note 2 of the Master’s notes to the annual financial statements as of December 31, 2009.

Partnership’s and the Master’s Fair Value Measurements.The Partnership and the Master adopted ASC 820 as of January 1, 2008, which 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 market participants at the measurement date. The Partnership and the Master did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

The Partnership values investment in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investments in the Master reflects its proportional interest in the Master. As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments that are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

Futures Contracts. The Master trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery can not occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

The Master does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses and Changes in Partners’ Capital.

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Options.The Master may purchase and write (sell), both exchange listed and over-the-counter, options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.

ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.

Potomac Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)

The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States— 2007.

Subsequent Events.In 2009, the Partnership adopted ASC 855, Subsequent Events. The objective of ASC 855 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are filed. Management has assessed the subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment in the financial statements.

Recent Accounting Pronouncements. In January 2010, the FASB issued guidance, which, among other things, amends ASC 820, Fair Value Measurements and Disclosures, to require entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Partnership’s financial statements.

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateNo. 2010-09 (“ASU2010-09”), “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” which among other things amended ASC 855 to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between ASC 855 and the SEC’s requirements. All of the amendments in this update were effective upon issuance of this update. Management has included the provisions of these amendments in the financial statements.

Net Income (Loss) per Redeemable Unit and General Partner Unit Equivalent. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.

7. Subsequent Event:

In 2009, Morgan Stanley and Citigroup combined certain assets of the Global Wealth Management Group of Morgan Stanley & Co. Incorporated, including Demeter Management LLC (“Demeter”) and the Smith Barney division of CGM into a new joint venture, MSSB Holdings. As part of that transaction Ceres Managed Futures LLC (“Ceres” or the “General Partner”) was contributed to and, together with Demeter, became wholly-owned subsidiaries of MSSB Holdings. Demeter currently serves as commodity pool operator for various legacy Morgan Stanley sponsored commodity pools formed prior to the joint venture. Since their contribution to the joint venture, Demeter and Ceres have worked closely to align the operations and management of the commodity pools they oversee. As a result, MSSB Holdings, together with the unanimous support of the Boards of Directors of Demeter and Ceres, has determined that a combination of the assets and operations of Demeter and Ceres into a single commodity pool operator, Ceres, is in the best interest of limited partners and believes that this combination will achieve the intended benefits of the joint venture. Ceres will continue to be wholly-owned by MSSB Holdings. The targeted effective date of the combination is on or about December 1, 2010. Refer to Form 8-K filed on September 14, 2010 for additional information.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in sales of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the third quarter of 2010.

The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by income (loss) from its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2010, Partnership capital decreased 27.1% from $50,141,327 to $36,544,098. This decrease was attributable to a net loss from operations of $239,036 coupled with the redemption of 10,814.5231 Redeemable Units totaling $13,878,193 and the redemption of 286.6757 of General Partner unit equivalents totaling $375,000, which was partially offset by the additional sales of 690.9313 Redeemable Units totaling $895,000. Future redemptions can impact the amount of funds available for investment in the Master in subsequent periods.

The Master’s capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on trading, expenses, interest income, redemptions of units and distributions of profits, if any.

For the nine months ended September 30, 2010, the Master’s capital decreased 31.2% from $62,525,663 to $43,042,708. This decrease was attributable to the redemption of 21,351.5964 units totaling $23,012,990 and distribution of interest income to feeder funds totaling $29,887, which was partially offset by a net gain from operations of $2,664,922 coupled with the additional sales of 803.1172 units totaling $895,000. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

Critical Accounting Policies

Partnership’s and the Master’s Fair Value Measurements.The Partnership and the Master adopted ASC 820 as of January 1, 2008 which 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 market participants at the measurement date. The Partnership and the Master did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

The Partnership values investment in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investments in the Master reflects its proportional interest in the Master. As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments that are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

Results of Operations

During the Partnership’s third quarter of 2010, the net asset value per unit increased 7.5% from $1,266.19 to $1,361.11 as compared to an increase of 2.2% in the third quarter of 2009. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage fees and related fees in the third quarter of 2010 of $3,583,693. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, grains, U.S. and non-U.S. interest rates, metals, softs, and indices and were partially offset by losses in energy and livestock. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage fees and related fees in the third quarter of 2009 of $2,555,113. Gains were primarily attributable to the trading of commodity futures in currencies, grains, metals, and indices and were partially offset by losses in energy, and U.S. and non-U.S. interest rates, and softs.

Global financial markets recovered during the third quarter of 2010, most notably during September. Equities bounced from the lowest levels of the year to reach new highs. Currencies reflected the renewed global growth thesis as the currencies of emerging countries and commodity exporting countries strengthened considerably compared to other developed country currencies. However, interest rates have remained in a downward trend reflecting the general preference for lower risk assets even as appetite began to rise for higher risk assets.

The Partnership was profitable in currencies, agricultural sector, interest rates, equities and metals while recording losses in the energy sector.

In currencies, some of the biggest gains were registered in Australian dollar and Singapore dollar as these currencies strengthened considerably compared to U.S. dollar. Several countries, most notably Japan and Brazil intervened in the currency markets, trying to artificially weaken their respective currencies. However, this fundamental intervention did not appear to be very effective as these currencies resumed the trend soon after the intervention. In the agricultural sector, some of the biggest gains were registered in corn and cotton. As bullish trends began to emerge in these two products, the Partnership was well-positioned to capitalize on the trends. Interest rates contributed to gains as yields continued to remain at their lowest levels, primarily due to slower growth in global economies reflected by data such as unemployment. Global central banks discussed the possibility of quantitative easing to jump start the economies. In metals, gold and silver reached new highs as safe havens and also partly because of the weakening U.S. dollar. Equity indices also contributed to gains as the Partnership was positioned to benefit from the sharp reversal in global equities as positive earnings surprises from several equity sectors reversed the bearish trend.

The energy sector has been very difficult to trade in the current quarter. Crude oil and its derivative products have been range bound, yet volatile reflecting the general ambiguity in the markets about the global economic growth.

During the Partnership’s nine months ended September 30, 2010, the net asset value per unit increased 1.1% from $1,345.75 to $1,361.11 as compared to a decrease of 8.0% for the nine months ended September 30, 2009. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage fees and related fees in the nine months ended September 30, 2010 of $2,810,972. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, grains, U.S. and non-U.S. interest rates, and softs and were partially offset by losses in energy, livestock, metals and indices. The Partnership, through its investment in the Master, experienced a net trading loss before brokerage fees and related fees in the nine months ended September 30, 2009 of $1,573,183. Losses were primarily attributable to the trading of commodity futures in energy, non-U.S. interest rates, softs and indices and were partially offset by gains in currencies, grains, U.S. interest rates, and metals.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Master) depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and

demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership (and the Master) expects to increase capital through operations.

Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master was earned at a30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master’s assets in cashand/or place up to all of the Master’s assets in90-day U.S. Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. Twenty percent of the interest earned on U.S. Treasury bills purchased may be retained by CGM and/or credited to the General Partner. Interest income allocated from the Master for the three and nine months ended September 30, 2010 decreased by $2,888 and $17,411, respectively, as compared to the corresponding periods in 2009. The decrease in interest income is primarily due to lower average daily equity during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s account and upon interest rates over which neither the Partnership nor CGM has control.

Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Brokerage fees and fees for the three and nine months ended September 30, 2010 decreased by $362,433 and $1,291,095, respectively, as compared to the corresponding periods in 2009. The decrease in brokerage and fees is due to a decrease in average net assets during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009.

Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and nine months ended September 30, 2010 decreased by $110,586 and $394,507, respectively, as compared to the corresponding periods in 2009. The decrease in management fees is due to a decrease in average net assets during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreements between the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three and nine months ended September 30, 2010 and 2009. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considered the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by the Master are acquired for speculative trading purposes, and all or substantially all of the Partnership’s capital is subject to the risk of trading loss through its investment in the Master. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master’s and the Partnership’s main line of business.

The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law.

Market movements result in frequent changes in the fair market value of the Master’s open positions and, consequently, in their earnings and cash balances. The Master’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 Master’s open positions and the liquidity of the markets in which they trade.

The Master rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master’s past performance is not necessarily indicative of their future results.

Value at Risk is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master’s speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master’s losses in any market sector will be limited to Value at Risk or by the Master’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of anyone-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

The following table indicates the trading Value at Risk associated with the Master’s open positions by market category as of September 30, 2010, and the highest, lowest and average values during the three months ended September 30, 2010. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report onForm 10-K for the year ended December 31, 2009.

As of September 30, 2010, the Master’s total capitalization was $43,042,708 and the Partnership owned approximately 91.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Partnership’s Value at Risk for the portion of its assets that are traded indirectly through its investment in the Master as of September 30, 2010 was as follows:

September 30, 2010
(Unaudited)


						Three Months Ended September 30, 2010
			% of Total			High		Low		Average
Market Sector	Value at Risk		Capitalization			Value at Risk		Value at Risk		Value at Risk*
Currencies	$	1,887,608		4.39	%	$	3,076,532	$	1,369,669	$	1,986,603
Energy		151,050		0.35	%		479,500		64,850		296,119
Grains		232,000		0.54	%		335,050		30,989		162,978
Interest Rates U.S.		444,800		1.03	%		793,900		349,600		481,150
Interest Rates Non-U.S.		717,633		1.67	%		1,860,915		569,403		978,320
Livestock		14,750		0.03	%		24,600		5,275		11,667
Metals		898,350		2.09	%		901,371		321,332		553,126
Softs		246,400		0.57	%		317,000		125,100		204,551
Indices		1,245,739		2.89	%		1,557,772		450,112		1,043,389

Total	$	5,838,330		13.56	%

* Average of Month-end Values at Risk


Item 4.	Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2010 and, based on that evaluation, the General Partner’s CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.

The Partnership’sinternal control over financial reportingis a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:


	•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

	•	provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

	•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

There are no material changes to the discussion set forth under Part I, Item 3 “Legal Proceedings” in the Partnership’s Annual Report onForm 10-K for the fiscal year ended December 31, 2009, as updated by the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Reports ended March 31, 2010 and June 30, 2010.


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

For the three months ended September 30, 2010, there were additional sales of 448.2178 Redeemable Units totaling $581,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder.

Proceeds of net offering were used for the trading of commodity interests, including futures contracts, options, forwards and swap contracts.

The following chart sets forth the purchases of Redeemable Units by the Partnership.

These units were purchased by accredited investors as defined in Regulation D.

(d) Maximum Number

(or Approximate

(c) Total Number

Dollar Value) of

(a) Total

of Redeemable Units

Redeemable Units that

Number of

(b) Average

Purchased as Part

May Yet Be

Redeemable

Price Paid per

of Publicly Announced

Purchased Under the

Period

Units Purchased*

Redeemable Unit**

Plans or Programs

July 1, 2010 -
July 31, 2010

3,508.4505

1,241.25

N/A

August 1, 2010 -
August 31, 2010

722.7308

1,302.40

N/A

September 1, 2010 -
September 30, 2010

2,019.2422

1,361.11

N/A

6,250.4235

1,287.04

* Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

** Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day.


Item 3.	Defaults Upon Senior Securities – None


Item 4.	[Removed and Reserved]


Item 5.	Other Information – None.


Item 6.	Exhibits


3.1		Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated March 13, 1997 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(a)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated February 26, 1999 (filed as Exhibit 3.4 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(b)		Certificate of Change of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.3 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(c)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated April 1, 2001 (filed as Exhibit 3.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(d)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated April 21, 2003 (filed as Exhibit 3.5 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(e)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(e) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(f)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(f) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(g)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference).

(h)		Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 29, 2010 (filed as Exhibit 3.1(h) to the Form 8-K filed on June 30, 2010 and incorporated herein by reference).

3.2		Third Amended and Restated Limited Partnership Agreement, dated February 22, 2010 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on February 25, 2010 and incorporated herein by reference).

10.1		Form of Subscription Agreement (filed as Exhibit 10.1 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.2		Second Amended and Restated Customer Agreement between the Partnership and Salomon Smith Barney Inc., dated April 1, 2001 (filed as Exhibit 10.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

10.3		Second Amended and Restated Agency Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated July 29, 2010 (filed as Exhibit 10.3 to the Form 8-K filed on August 3, 2010 and incorporated herein by reference).

10.4		Joinder Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated June 1, 2009 (filed as Exhibit 10 to the Form 10-Q filed on August 14, 2009 and incorporated herein by reference).

10.5		Escrow Agreement among the Partnership, Smith Barney Futures Management Inc., Smith Barney Inc. and European American Bank, dated April 15, 1997 (filed as Exhibit 10.5 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.6		Management Agreement among the Partnership, Smith Barney Futures Management Inc. and Campbell & Company, Inc., dated April 1, 1997 (filed as Exhibit 10.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(a)		First Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management Inc., Campbell & Company, Inc. and SFG Global Investments, Inc., dated March 1, 1999 (filed as Exhibit 10.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(b)		Second Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management LLC and Campbell & Company, Inc., dated April 1, 2001 (filed as Exhibit 10.1(b) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

(c)		Letter extending Management Agreement between the General Partner and Campbell & Company, Inc. for 2009, dated June 9, 2009 (filed as Exhibit 10.6(c) to the Form 10-K filed on March 31, 2010 and incorporated herein by reference).

31.1		Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).

31.2		Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer, Secretary and Director).

32.1		Section 1350 Certification (Certification of President and Director).

32.2		Section 1350 Certification (Certification of Chief Financial Officer, Secretary and Director).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


POTOMAC FUTURES FUND L.P.

By:		Ceres Managed Futures LLC (General Partner)

By:		/s/ Walter Davis Walter Davis President and Director

Date: November 12, 2010

By:		/s/ Jennifer Magro Jennifer Magro Chief Financial Officer, Secretary and Director (Principal Accounting Officer)

Date: November 12, 2010

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Potomac Futures Fund (POTO) 10-Q2010 Q3 Quarterly report

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