Potomac Futures Fund (POTO) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number000-50735

POTOMAC FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

New York	13-3937275
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

(Address of principal executive offices) (Zip Code)

(855)672-4468

(Registrant’s telephone number, including area code)

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

YesX     No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YesX     No    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.__

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

  Yes        NoX

As of October 31, 2018, 14,145.3878 Limited Partnership Class A Redeemable Units were outstanding and 0.0000 Limited Partnership Class Z Redeemable Units were outstanding.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements.

Potomac Futures Fund L.P.

Statements of Financial Condition

	September 30,       2018 (Unaudited)		December 31,       2017
Assets:
Equity in trading account:
Unrestricted cash	$	14,224,114	$	18,417,831
Restricted cash		4,041,675		4,063,802
Net unrealized appreciation on open futures contracts		614,875		267,186
Net unrealized appreciation on open forward contracts		-		205,060
Total equity in trading account		18,880,664		22,953,879
Receivable from General Partner		15,309		4,123
Interest receivable		23,804		21,906
Cash at bank		-		436
Total assets	$	18,919,777	$	22,980,344
Liabilities and Partners’ Capital:
Liabilities:
Net unrealized depreciation on open forward contracts	$	216,478	$	-
Accrued expenses:
Ongoing selling agent fees		30,781		37,827
Management fees		23,215		28,563
General Partner fees		15,477		19,042
Professional fees		100,349		92,491
Redemptions payable to Limited Partners		259,705		539,044
Total liabilities		646,005		716,967
Partners’ Capital:
General Partner, Class Z, 246.4190 and 296.6740 Redeemable Units outstanding at September 30, 2018 and December 31, 2017, respectively		218,093		278,206
Limited Partners, Class A, 14,296.6568 and 16,183.6278 Redeemable Units outstanding at September 30, 2018 and December 31, 2017, respectively		18,055,679		21,985,171
Total partners’ capital (net asset value)		18,273,772		22,263,377
Total liabilities and partners’ capital	$	18,919,777	$	22,980,344
Net asset value per Redeemable Unit:
Class A	$	1,262.93	$	1,358.48
Class Z	$	885.05	$	937.75

See accompanying notes to financial statements.

1

Potomac Futures Fund L.P.

Condensed Schedule of Investments

September 30, 2018

(Unaudited)

	Notional ($)/Number     of Contracts		Fair Value		% of Partners’     Capital
Futures Contracts Purchased
Energy		51	$	178,511		0.98	%
Grains		5		(3,431)		(0.02)
Indices		232		204,175		1.12
Interest RatesNon-U.S.		126		(56,903)		(0.31)
Livestock		2		200		0.00	*
Metals		5		1,863		0.01
Total futures contracts purchased				324,415		1.78
Futures Contracts Sold
Energy		8		(18,487)		(0.10)
Grains		95		43,798		0.24
Indices		4		(2,543)		(0.01)
Interest Rates U.S.		295		110,462		0.60
Interest RatesNon-U.S.		411		47,156		0.26
Livestock		9		(8,810)		(0.05)
Metals		56		29,520		0.16
Softs		66		89,364		0.48
Total futures contracts sold				290,460		1.58
Net unrealized appreciation on open futures contracts			$	614,875		3.36	%
Unrealized Appreciation on Open Forward Contracts
Currencies	$	28,085,929	$	347,115		1.90	%
Metals		34		151,040		0.83
Total unrealized appreciation on open forward contracts				498,155		2.73
Unrealized Depreciation on Open Forward Contracts
Currencies	$	44,222,957		(567,553)		(3.11)
Metals		71		(147,080)		(0.80)
Total unrealized depreciation on open forward contracts				(714,633)		(3.91)
Net unrealized depreciation on open forward contracts			$	(216,478)		(1.18)	%

*      Due to rounding.

See accompanying notes to financial statements.

2

Potomac Futures Fund L.P.

Condensed Schedule of Investments

December 31, 2017

	Notional ($)/Number     of Contracts		Fair Value		% of Partners’     Capital
Futures Contracts Purchased
Energy		61	$	175,212		0.79	%
Grains		2		(2,840)		(0.01)
Indices		347		173,442		0.78
Interest Rates U.S.		14		7,062		0.03
Interest RatesNon-U.S.		204		(226,963)		(1.02)
Livestock		8		3,750		0.02
Metals		20		59,445		0.27
Softs		14		36,280		0.15
Total futures contracts purchased				225,388		1.01
Futures Contracts Sold
Energy		32		(82,350)		(0.37)
Grains		204		97,044		0.44
Indices		21		(4,735)		(0.02)
Interest Rates U.S.		213		27,605		0.12
Interest RatesNon-U.S.		240		446		0.00	*
Livestock		2		(1,540)		(0.01)
Metals		4		(3,000)		(0.01)
Softs		22		8,328		0.04
Total futures contracts sold				41,798		0.19
Net unrealized appreciation on open futures contracts			$	267,186		1.20	%
Unrealized Appreciation on Open Forward Contracts
Currencies	$	48,393,022	$	652,474		2.93	%
Metals		39		167,165		0.75
Total unrealized appreciation on open forward contracts				819,639		3.68
Unrealized Depreciation on Open Forward Contracts
Currencies	$	35,002,762		(539,534)		(2.42)
Metals		14		(75,045)		(0.34)
Total unrealized depreciation on open forward contracts				(614,579)		(2.76)
Net unrealized appreciation on open forward contracts			$	205,060		0.92	%

*      Due to rounding.

See accompanying notes to financial statements.

3

Potomac Futures Fund L.P.

Statements of Income and Expenses

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Investment Income:
Interest income	$	79,538		$	44,542		$	231,359		$	44,542
Interest income allocated from the Master *		-			20,646			-			92,905
Total investment income		79,538			65,188			231,359			137,447
Expenses:
Expenses allocated from the Master		-			1,123			-			125,277
Clearing fees related to direct investments		18,173			19,584			57,087			19,584
Ongoing selling agent fees		93,122			120,393			300,543			412,231
Management fees		70,170			90,832			226,368			311,353
General Partner fees		46,780			60,555			150,911			207,569
Professional fees		69,260			81,247			210,250			167,644
Total expenses		297,505			373,734			945,159			1,243,658
Expenses borne by the General Partner		(45,830	)		(49,074	)		(134,327	)		(122,242	)
Net expenses		251,675			324,660			810,832			1,121,416
Net investment loss		(172,137	)		(259,472	)		(579,473	)		(983,969	)
Trading Results:
Net gains (losses) on trading of commodity interests and investment in the Master:
Net realized gains (losses) on closed contracts		138,647			387,116			(842,312	)		387,116
Net realized gains (losses) on closed contracts allocated from the Master		-			(1,282,443	)		-			(903,323	)
Net change in unrealized gains (losses) on open contracts		(179,909	)		172,831			(76,688	)		172,831
Net change in unrealized gains (losses) on open contracts allocated from the Master		-			1,243,352			-			(252,646	)
Total trading results		(41,262	)		520,856			(919,000	)		(596,022	)
Net income (loss)	$	(213,399	)	$	261,384		$	(1,498,473	)		(1,579,991	)
Net income (loss) per Redeemable Unit **:
Class A	$	(13.80	)	$	12.53		$	(95.55	)	$	(75.52	)
Class Z	$	(5.18	)	$	12.94		$	(52.70	)	$	(38.02	)
Weighted average Redeemable Units outstanding:
Class A		14,683.8965			18,593.8538			15,338.3711			20,835.7588
Class Z		246.4190			296.6740			252.0029			377.5004

* Defined in Note 1.

** Represents the change in net asset value per Redeemable Unit during the period.

See accompanying notes to financial statements.

4

Potomac Futures Fund L.P.

Statements of Changes in Partners’ Capital

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	Class A						Class Z						Total
	Amount			Redeemable Units			Amount			Redeemable Units			Amount			Redeemable Units
Partners’ Capital, December 31, 2017	$	21,985,171			16,183.6278		$	278,206			296.6740		$	22,263,377			16,480.3018
Subscriptions - Limited Partners		50,000			38.2040			-			-			50,000			38.2040
Redemptions - General Partner		-			-			(50,000	)		(50.2550	)		(50,000	)		(50.2550	)
Redemptions - Limited Partners		(2,491,132	)		(1,925.1750	)		-			-			(2,491,132	)		(1,925.1750	)
Net income (loss)		(1,488,360	)		-			(10,113	)		-			(1,498,473	)		-
Partners’ Capital, September 30, 2018	$	18,055,679			14,296.6568		$	218,093			246.4190		$	18,273,772			14,543.0758
Partners’ Capital, December 31, 2016	$	17,486,619			12,965.3578		$	207,926			227.8640		$	17,694,545			13,193.2218
Subscriptions - General Partner		-			-			181,777			199.2080			181,777			199.2080
Subscriptions - Limited Partners		15,266,995			11,319.9380			-			-			15,266,995			11,319.9380
Redemptions - General Partner		-			-			(115,002	)		(130.3980	)		(115,002	)		(130.3980	)
Redemptions - Limited Partners		(8,571,647	)		(6,521.2110	)		-			-			(8,571,647	)		(6,521.2110	)
Net income (loss)		(1,564,726	)		-			(15,265	)		-			(1,579,991	)		-
Partners’ Capital, September 30, 2017	$	22,617,241			17,764.0848		$	259,436			296.6740		$	22,876,677			18,060.7588

See accompanying notes to financial statements.

5

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

1. Organization:

Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership organized on March 14, 1997 under the partnership laws of the State of New York to engage, directly and indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. andnon-U.S. interest rates, livestock, metals and softs. The Partnership commenced trading operations on October 1, 1997. The commodity interests traded directly by the Partnership, and which were previously traded indirectly through its investment in CMF Campbell Master Fund L.P. (the “Master”), prior to the Partnership’s full redemption from the Master effective July 14, 2017, are volatile and involve a high degree of market risk. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership is authorized to sell an unlimited number of redeemable units of limited partnership interest (“Redeemable Units”). The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. As of January 1, 2017, the General Partner became awholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to January 1, 2017, the General Partner was a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC. All trading decisions for the Partnership are made by Campbell & Company, LP (the “Advisor”).

During the reporting periods ended September 30, 2018 and 2017, the Partnership’s and the Master’s (prior to its termination effective July 31, 2017) commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During prior periods included in this report, the Partnership and the Master also deposited a portion of their cash innon-trading bank accounts at JPMorgan Chase Bank, N.A.

As of March 22, 2016, the Partnership began offering two classes of limited partnership interests, Class A Redeemable Units and Class Z Redeemable Units. All Redeemable Units issued prior to February 29, 2016 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in the Class A Redeemable Units were not changed. Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions, andnon-U.S. investors. Class Z Redeemable Units were first issued on July 1, 2016 at $1,000 per Redeemable Unit. Class Z Redeemable Units are offered to limited partners who receive advisory services from Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”) and may also be offered to certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units are identical, except that Class Z Redeemable Units are not subject to monthly ongoing selling agent fees.

On January 1, 2005, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the State of New York. Effective after the close of business on July 14, 2017, the Partnership fully redeemed its investment in the Master. As of July 17, 2017, all positions from the Master were transferred to the Partnership and the Advisor commenced trading the Partnership’s assets directly pursuant to the Campbell Managed Futures Portfolio, a proprietary, systematic trading program. Consequently, the General Partner liquidated the Master, effective July 31, 2017. The units of the Master were used solely for accounting purposes and did not represent legally distinct units. Prior to the Master’s termination of operations on July 31, 2017, the Master permitted accounts managed by the Advisor using the Campbell Managed Futures Portfolio to invest together in one trading vehicle. The General Partner was also the general partner of the Master. Expenses to investors as a result of the investment in the Master, prior to the Partnership’s full redemption from the Master effective July 14, 2017, were approximately the same as expenses to investors as a result of the Partnership trading directly, and redemption rights were not affected.

Generally, a limited partner in the Master (prior to its termination effective July 31, 2017) withdrew all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request had been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals were classified as a liability when the limited partner in the Master elected to redeem and informed the Master. However, a limited partner in the Master may have requested a withdrawal as of the end of any day if such request was received by the General Partner at least three days in advance of the proposed withdrawal day.

The General Partner is not aware of any material changes to the trading program other than as discussed above during the fiscal quarter ended September 30, 2018.

6

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

Prior to the Partnership’s full redemption from the Master effective July 14, 2017, the Partnership owned 100% of the Master. The performance of the Partnership was directly affected by the performance of the Master. The Partnership’s/Master’s trading of futures, forward, swap and option contracts, if applicable, on commodities are or were done primarily on U.S. and foreign commodity exchanges. The Partnership engages, and the Master engaged, in such trading through commodity brokerage accounts maintained with MS&Co.

The Master had entered into a foreign exchange brokerage account agreement and a futures brokerage account agreement with MS&Co. The Partnership has also entered into a foreign exchange brokerage account agreement and a futures brokerage account agreement with MS&Co. The Partnership pays and, indirectly through its investment in the Master prior to full redemption from the Master effective July 14, 2017, paid MS&Co. (or will reimburse MS&Co., if previously paid) its allocable share of all trading fees for the clearing and, where applicable, execution of transactions as well as exchange, user,give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”).

The Partnership has also entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives a monthly ongoing selling agent fee equal to 2.0% per year of the Partnership’s adjustedmonth-end net assets for Class A Redeemable Units. Class Z Redeemable Units are not subject to the ongoing selling agent fee. The ongoing selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisors of Morgan Stanley Wealth Management who sell Class A Redeemable Units in the Partnership.

Effective January 1, 2017, the General Partner instituted a cap on the Partnership’s operating expenses such that the General Partner will be responsible for any such expenses to the extent they exceed 0.50% of the Partnership’s net assets in any calendar year.

In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a Master Services Agreement, the Administrator furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.

2. Basis of Presentation and Summary of Significant Accounting Policies:

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017 and the changes in partners’ capital for the nine months ended September 30, 2018 and 2017. These financial statements present the results for interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2017. The December 31, 2017 information has been derived from the audited financial statements as of and for the year ended December 31, 2017.

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

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates, and those differences could be material.

Profit Allocation. The General Partner and each limited partner of the Partnership share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no limited partner is liable for obligations of the Partnership in excess of its capital contributions and profits, if any, net of distributions, redemptions and losses, if any.

7

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

Statement of Cash Flows. The Partnership has not provided a Statement of Cash Flows, as permitted by Accounting Standards Codification (“ASC”) 230,“Statement of Cash Flows.” The Changes in Partners’ Capital is included herein, and as of and for the periods ended September 30, 2018 and 2017, the Partnership carried no debt and substantially all of the Partnership’s and the Master’s investments, as applicable, were carried at fair value and classified as Level 1 and Level 2 measurements.

Partnership’s/Master’s Investments. The Partnership carried its investment in the Master, prior to its full redemption effective July 14, 2017, at fair value based on the Master’s net asset value per Redeemable Unit as calculated by the Master. The valuation of the Partnership’s/Master’s investments, including the classification within the fair value hierarchy of the investments held by the Partnership/Master, are described in Note 5, “Fair Value Measurements.”

All commodity interests of the Partnership, including derivative financial instruments and derivative commodity instruments, are held, and those of the Master were held, for trading purposes. The commodity interests for the Partnership/Master are or were recorded on the trade date and open contracts are or were recorded at fair value (as described in Note 5, “Fair Value Measurements”) at the measurement date. The Partnership’s/Master’s investments in commodity interests denominated in foreign currencies are or were translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses for the Partnership/Master are or were realized when contracts are or were liquidated and are or were determined by using thefirst-in,first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Partnership’s/Master’s Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Partnership’s/Master’s Statements of Income and Expenses.

The Partnership does not, and the Master did not, isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Partnership’s, and were included in the Master’s, Statements of Income and Expenses.

Partnership’s Cash. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At September 30, 2018 and December 31, 2017, the amount of cash held for margin requirements was $4,041,675 and $4,063,802, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. The Partnership’s restricted and unrestricted cash includes cash denominated in foreign currencies of ($85,106) (proceeds of $85,232) at September 30, 2018 and $149,600 (cost of $146,635) at December 31, 2017.

Income Taxes. Income taxes have not been recorded as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The Partnership follows the guidance of ASC 740,“Income Taxes,” which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are“more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions determined not to meet themore-likely-than-not threshold would be recorded as a tax benefit or liability in the Partnership’s Statements of Financial Condition for the current year. If a tax position does not meet the minimum statutory threshold to avoid the incurring of penalties, an expense for the amount of the statutory penalty and interest, if applicable, shall be recognized in the Statements of Income and Expenses in the period in which the position is claimed or expected to be claimed. The General Partner has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2014 through 2017 tax years remain subject to examination by U.S. federal and most state tax authorities.

Investment Company Status. Effective January 1, 2014, the Partnership adopted Accounting Standards Update2013-08,“Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses.

Net Income (Loss) per Redeemable Unit. Net income (loss) per Redeemable Unit for each Class is calculated in accordance with ASC 946,“Financial Services – Investment Companies.” See Note 3, “Financial Highlights.”

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form10-K for the year ended December 31, 2017.

8

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

3. Financial Highlights:

Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2018 and 2017 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	Class A			Class A			Class A			Class A
Per Redeemable Unit Performance (for a unit outstanding throughout the period): *
Net realized and unrealized gains (losses)	$	(2.14)		$	26.40		$	(57.98)		$	(28.63)
Net investment loss		(11.66)			(13.87)			(37.57)			(46.89)
Increase (decrease) for the period		(13.80)			12.53			(95.55)			(75.52)
Net asset value per Redeemable Unit, beginning of period		1,276.73			1,260.67			1,358.48			1,348.72
Net asset value per Redeemable Unit, end of period	$	1,262.93		$	1,273.20		$	1,262.93		$	1,273.20
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	Class A			Class A			Class A			Class A
Ratios to Average Limited Partners’ Capital: **
Net investment loss ***		(3.7)	%		(4.4)	%		(3.9)	%		(5.1)	%
Operating expenses before expenses borne by the General Partner and incentive fees		6.4	%		6.3	%		6.3	%		6.5	%
Expenses borne by the General Partner		(1.0)	%		(0.8)	%		(0.9)	%		(0.6)	%
Incentive fees		-	%		-	%		-	%		-	%
Operating expenses after expenses borne by the General Partner and incentive fees		5.4	%		5.5	%		5.4	%		5.9	%
Total return:
Total return before incentive fees		(1.1)	%		1.0	%		(7.0)	%		(5.6)	%
Incentive fees		-	%		-	%		-	%		-	%
Total return after incentive fees		(1.1)	%		1.0	%		(7.0)	%		(5.6)	%

* Net investment loss per Redeemable Unit is calculated by dividing the interest income less total expenses by the average number of Redeemable Units outstanding during the period. The net realized and unrealized gains (losses) per Redeemable Unit is a balancing amount necessary to reconcile the change in net asset value per Redeemable Unit with the other per unit information.

** Annualized (other than incentive fees).

*** Interest income, including interest income allocated from the Master prior to the Partnership’s full redemption from the Master effective July 14, 2017, less total expenses.

The above ratios and total return 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 partners’ capital of the Partnership and include the income and expenses allocated from the Master prior to the Partnership’s full redemption from the Master effective July 14, 2017.

9

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

4. Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity interests. Prior to its full redemption from the Master effective July 14, 2017, the Partnership invested substantially all of its assets through a “master/feeder” structure. The Partnership’spro-rata share of the results of the Master’s trading activities is shown in the Statements of Income and Expenses.

The futures brokerage account agreements with MS&Co. give the Partnership, and gave the Master, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Partnership nets, and the Master netted, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in their respective Statements of Financial Condition as the criteria under ASC 210-20,“Balance Sheet,”have been met.

Trading and transaction fees are based on the number of trades executed by the Advisor. All clearing fees paid to MS&Co. are directly charged to the Partnership and prior to the Partnership’s full redemption from the Master effective July 14, 2017, were borne by the Master and allocated to the Partnership.

All of the commodity interests owned by the Partnership are, and by the Master were, held for trading purposes. The monthly average number of futures contracts traded by the Partnership/Master during the three months ended September 30, 2018 and 2017 were 1,286 and 1,240, respectively. The monthly average number of futures contracts traded by the Partnership/Master during the nine months ended September 30, 2018 and 2017 were 1,327 and 1,786, respectively. The monthly average number of metals forward contracts traded by the Partnership/Master during the three months ended September 30, 2018 and 2017 were 145 and 268, respectively. The monthly average number of metals forward contracts traded by the Partnership/Master during the nine months ended September 30, 2018 and 2017 were 152 and 277, respectively. The monthly average notional values of currency forward contracts traded by the Partnership/Master during the three months ended September 30, 2018 and 2017 were $154,752,785 and $167,088,539, respectively. The monthly average notional values of currency forward contracts traded by the Partnership/Master during the nine months ended September 30, 2018 and 2017 were $159,450,559 and $182,419,867, respectively.

The following table summarizes the gross and net amounts relating to assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of September 30, 2018 and December 31, 2017, respectively.

			Gross Amounts     Offset in the		Amounts     Presented in the		Gross Amounts Not Offset in the     Statements of Financial Condition
September 30, 2018	Gross Amounts     Recognized		Statements of Financial Condition		Statements of Financial Condition		Financial Instruments		Cash Collateral Received/ Pledged *		Net Amount
Assets
Futures	$	823,209	$	(208,334)	$	614,875	$	-	$	-	$	614,875
Forwards		498,155		(498,155)		-		-		-		-
Total assets	$	1,321,364	$	(706,489)	$	614,875	$	-	$	-	$	614,875
Liabilities
Futures	$	(208,334)	$	208,334	$	-	$	-	$	-	$	-
Forwards		(714,633)		498,155		(216,478)		-		-		(216,478)
Total liabilities	$	(922,967)	$	706,489	$	(216,478)	$	-	$	-	$	(216,478)
Net fair value											$	398,397	*

10

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

			Gross Amounts     Offset in the		Amounts   Presented in the		Gross Amounts Not Offset in the     Statements of Financial Condition
December 31, 2017	Gross Amounts     Recognized		Statements of Financial Condition		Statements of Financial Condition		Financial Instruments		Cash Collateral Received/ Pledged *		Net Amount
Assets
Futures	$	722,562	$	(455,376)	$	267,186	$	-	$	-	$	267,186
Forwards		819,639		(614,579)		205,060		-		-		205,060
	$	1,542,201	$	(1,069,955)	$	472,246	$	-	$	-	$	472,246
Liabilities
Futures	$	(455,376)	$	455,376	$	-	$	-	$	-	$	-
Forwards		(614,579)		614,579		-		-		-		-
Net fair value	$	(1,069,955)	$	1,069,955	$	-	$	-	$	-	$	-
											$	472,246	*

* In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’snon-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. In certain instances, MS&Co. may not post collateral and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Partnership’s Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee funds may be available in the event of a default.

11

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

The following table indicates the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities for the Partnership as of September 30, 2018 and December 31, 2017, respectively.

Assets	September 30, 2018
Futures Contracts
Energy	$	179,334
Grains		54,725
Indices		255,030
Interest Rates U.S.		117,219
Interest RatesNon-U.S.		65,454
Livestock		200
Metals		42,555
Softs		108,692
Total unrealized appreciation on open futures contracts		823,209
Liabilities
Futures Contracts
Energy		(19,310	)
Grains		(14,358	)
Indices		(53,398	)
Interest Rates U.S.		(6,757	)
Interest RatesNon-U.S.		(75,201	)
Livestock		(8,810	)
Metals		(11,172	)
Softs		(19,328	)
Total unrealized depreciation on open futures contracts		(208,334	)
Net unrealized appreciation on open futures contracts	$	614,875		*
Assets
Forward Contracts
Currencies	$	347,115
Metals		151,040
Total unrealized appreciation on open forward contracts		498,155
Liabilities
Forward Contracts
Currencies		(567,553	)
Metals		(147,080	)
Total unrealized depreciation on open forward contracts		(714,633	)
Net unrealized depreciation on open forward contracts	$	(216,478	)	**

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

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

12

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

Assets	December 31, 2017
Futures Contracts
Energy	$	175,224
Grains		102,158
Indices		279,491
Interest Rates U.S.		45,321
Interest RatesNon-U.S.		9,980
Livestock		3,770
Metals		59,445
Softs		47,173
Total unrealized appreciation on open futures contracts		722,562
Liabilities
Futures Contracts
Energy		(82,362	)
Grains		(7,954	)
Indices		(110,784	)
Interest Rates U.S.		(10,654	)
Interest RatesNon-U.S.		(236,497	)
Livestock		(1,560	)
Metals		(3,000	)
Softs		(2,565	)
Total unrealized depreciation on open futures contracts		(455,376	)
Net unrealized appreciation on open futures contracts	$	267,186		*
Assets
Forward Contracts
Currencies	$	652,474
Metals		167,165
Total unrealized appreciation on open forward contracts		819,639
Liabilities
Forward Contracts
Currencies		(539,534	)
Metals		(75,045	)
Total unrealized depreciation on open forward contracts		(614,579	)
Net unrealized appreciation on open forward contracts	$	205,060		**

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

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

13

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2018 and 2017, respectively.

	Three Months Ended September 30,						Nine Months Ended September 30,
Sector	2018			2017**			2018			2017**
Currencies	$	108,024		$	319,656		$	158,726		$	(1,261,440)
Energy		(51,507)			5,224			497,103			(1,083,423)
Grains		(78,802)			(218,921)			(392,429)			(918,228)
Indices		151,656			910,147			(908,695)			4,095,808
Interest Rates U.S.		88,921			(57,730)			459,146			(426,733)
Interest RatesNon-U.S.		(286,967)			87,418			(289,000)			(816,228)
Livestock		(46,175)			(113,120)			(130,268)			(29,915)
Metals		(64,712)			(210,118)			(523,795)			(72,995)
Softs		138,300			(201,700)			210,212			(82,868)
Total	$	(41,262)	*	$	520,856	*	$	(919,000)	*	$	(596,022)	*

* This amount is in “Total trading results” in the Partnership’s/Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

** Prior to July 17, 2017, trading gains and losses were allocated to the Partnership through its investment in the Master, of which the Partnership owned 100%.

5. Fair Value Measurements:

Partnership’s /Master’s Fair Value Measurements.Fair value is defined as the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The fair value of exchange-traded futures, option and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value ofnon-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

The Partnership considers, and the Master considered, prices for commodity futures, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills,non-exchange-traded forward, swap and certain option contracts for which market quotations are or were not readily available are or were priced by pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the period ended September 30, 2018 and as of December 31, 2017 for the Partnership and for the period ended September 30, 2017 for the Master, the Partnership/Master did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Effective July 17, 2017, all positions from the Master have been transferred to the Partnership and thus the Master did not hold any of the Partnership’s investments subsequent to July 17, 2017.

14

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

September 30, 2018	Total		Level 1		Level 2		Level 3
Assets
Futures	$	823,209	$	823,209	$	-	$	-
Forwards		498,155		-		498,155		-
Total assets	�� $	1,321,364	$	823,209	$	498,155	$	-
Liabilities
Futures	$	208,334	$	208,334	$	-	$	-
Forwards		714,633		-		714,633		-
Total liabilities	$	922,967	$	208,334	$	714,633	$	-
December 31, 2017	Total		Level 1		Level 2		Level 3
Assets
Futures	$	722,562	$	722,562	$	-	$	-
Forwards		819,639		-		819,639		-
Total assets	$	1,542,201	$	722,562	$	819,639	$	-
Liabilities
Futures	$	455,376	$	455,376	$	-	$	-
Forwards		614,579		-		614,579		-
Total liabilities	$	1,069,955	$	455,376	$	614,579	$	-

6. Financial Instrument Risks:

In the normal course of business, the Partnership is and through its investment in the Master prior to its full redemption effective July 14, 2017, was party to financial instruments withoff-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include or may have included forwards, futures, options and swaps, whose values are or were based upon an underlying asset, index, or reference rate, and generally represent or represented 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 or may have been traded on an exchange, a swap execution facility orover-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 17.6% to 47.0% of the Partnership’s contracts are traded OTC.

15

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

Futures Contracts. The Partnership trades, and the Master traded, futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership, and may have been made or received by the Master, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership, or were recorded by the Master, as unrealized gains or losses. When the contract is closed, the Partnership records, and the Master recorded, 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. Net realized gains (losses) and net change in unrealized gains (losses) on futures contracts are included in the Partnership’s/Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Partnership agrees, and the Master agreed, to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Forward foreign currency contracts are valued daily by the Partnership and were valued daily by the Master, and the Partnership’s/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 Partnership’s/Master’s Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Partnership’s/Master’s 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 Partnership are, and by the Master were, cash settled based on prompt dates published by the LME. Variation margin may be made or received by the Partnership, and may have been made or received by the Master, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership or were recorded by the Master, as unrealized gains or losses. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership records, and the Master recorded, 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. Net realized gains (losses) and net change in unrealized gains (losses) on metal contracts are included in the Partnership’s/Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

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

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

16

Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

The General Partner monitors and attempts for the Partnership, and monitored and attempted for the Master, to mitigate 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 or had effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be, and the Master may have been, subject. These monitoring systems generally allow and allowed the General Partner to statistically analyze actual trading results withrisk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide and provided account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

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

In the ordinary course of business, the Partnership enters, and the Master entered, into contracts and agreements that contain or contained various representations and warranties and which provide or provided general indemnifications. The Partnership’s maximum exposure under these arrangements cannot be determined, as this could include future claims that have not yet been made against the Partnership. The Partnership considers, and the Master considered, the risk of any future obligation relating to these indemnifications to be remote.

7. Subsequent Events:

The General Partner evaluates events that occur after the balance sheet date but before and up until financial statements are available to be issued. The General Partner has assessed the subsequent events through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment to or disclosure in the financial statements.

17

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

Liquidity and Capital Resources

The Partnership does not have, nor does it expect to have, any capital assets. The Partnership does not, and the Master did not, engage in sales of goods or services. The Partnership’s only assets are, and the Master’s only assets were, its (i) equity in trading account, consisting of unrestricted cash, restricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts and investment in U.S. Treasury bills at fair value, if applicable, (ii) receivable from the General Partner, (iii) interest receivable and (iv) cash at bank. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the third quarter of 2018.

The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or option contract has increased or decreased by an amount equal to the daily limit, positions in that futures or option contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or option contracts and result in restrictions on redemptions.

There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

Other than the risks inherent in commodity futures, forwards, options, swaps and other derivatives trading and U.S. Treasury bills and money market mutual fund securities, the Partnership knows of no trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

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

For the nine months ended September 30, 2018, the Partnership’s capital decreased 17.9% from $22,263,377 to $18,273,772. This decrease was attributable to the net loss of $1,498,473, coupled with the redemptions of 1,925.1750 Class A limited partner Redeemable Units totaling $2,491,132 and redemptions of 50.2550 Class Z General Partner Redeemable Units totaling $50,000, which was partially offset by subscriptions of 38.2040 Class A limited partner Redeemable Units totaling $50,000. Future redemptions can impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Other than as discussed above, there are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.

Off-Balance Sheet Arrangements and Contractual Obligations

The Partnership does not have anyoff-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. As a result, actual results could differ from these estimates. The Partnership’s significant accounting policies are described in detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of the financial statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and net changes in unrealized gains (losses) in the Statements of Income and Expenses.

18

Results of Operations

During the Partnership’s third quarter of 2018, the net asset value per Class A Redeemable Unit decreased 1.1% from $1,276.73 to $1,262.93, as compared to an increase of 1.0% in the third quarter of 2017. During the Partnership’s third quarter of 2018, the net asset value per Class Z Redeemable Unit decreased 0.6% from $890.23 to $885.05, as compared to an increase of 1.5% in the third quarter of 2017. The Partnership experienced a net trading loss before fees and expenses in the third quarter of 2018 of $41,262. Losses were primarily attributable to the Partnership’s trading of commodity futures in energy, grains,non-U.S. interest rates, livestock and metals and were partially offset by gains in currencies, indices, U.S. interest rates and softs. The Partnership/Master, experienced a net trading gain before fees and expenses in the third quarter of 2017 of $520,856. Gains were primarily attributable to the Partnership/Master’s trading of commodity futures in currencies, energy, indices andnon-U.S. interest rates and were partially offset by losses in grains, U.S. interest rates, livestock, metals and softs.

The Partnership’s most notable losses were incurred within the global interest rate markets during July and September from long positions in European fixed income futures as central bank rhetoric grew more hawkish. Additional losses within the interest rate sector were incurred during August from short positions in U.S. fixed income futures as growing political turmoil surrounding the Trump Administration raised demand for the safety of government debt. Losses within the metals markets were primarily recorded during July from long positions in industrial metals futures as prices fell amid weakening Chinese manufacturing sentiment. Within the energy complex, losses were incurred during July from long positions in crude oil and its refined products as prices reversed lower as the OPEC nations signaled they intend to increase oil production this year. The Partnership’s losses for the quarter were partially offset by gains achieved within the global stock index sector during July from long positions in European, U.S., and Asian equity index futures as prices rallied as an outlook for growing global economic strength overcame trade war concerns. Additional gains were achieved during August within the currency sector from long U.S. dollar positions versus developed and emerging market currencies as their relative value decreased against the dollar due to weaker-than-expected economic data and a developing crisis among emerging markets. Further gains were experienced during August in the agricultural markets from short grain futures positions as prices dropped following trade turmoil, beneficial weather, and higher yield estimates.

During the Partnership’s nine months ended September 30, 2018, the net asset value per Class A Redeemable Unit decreased 7.0% from $1,358.48 to $1,262.93, as compared to a decrease of 5.6% in the nine months ended September 30, 2017. During the Partnership’s nine months ended September 30, 2018, the net asset value per Class Z Redeemable Unit decreased 5.6% from $937.75 to $885.05, as compared to a decrease of 4.2% in the nine months ended September 30, 2017. The Partnership experienced a net trading loss before fees and expenses in the nine months ended September 30, 2018 of $919,000. Losses were primarily attributable to the Partnership’s trading of commodity futures in grains, indices,non-U.S. interest rates, livestock and metals and were partially offset by gains in currencies, energy, U.S. interest rates and softs. The Partnership/Master, experienced a net trading loss before fees and expenses in the nine months ended September 30, 2017 of $596,022. Losses were primarily attributable to the Partnership/Master’s trading of commodity futures in currencies, energy, grains, U.S. andnon-U.S. interest rates, livestock, metals and softs and were partially offset by gains in indices.

The most significant losses were incurred within the global stock indices during February and May from long positions in Asian, European, and U.S. equity index futures as a more hawkish tone from the U.S. Federal Reserve and geopolitical events weakened investor demand for risk assets. Additional losses were experienced during August and September from long positions in European stock index futures as prices decreased due to global trade tensions coupled with uncertainty over BREXIT negotiations in the U.K. Within the metals complex, notable losses were recorded from February through July from both long and short positions in industrial metals futures as prices whipsawed amid concerns of sanctions, tariffs, and the fluctuating value of the U.S. dollar. In the agriculturals, losses were incurred in the grains markets during January, February, April, May, and July as weather and trade disputes resulted in short-term price volatility. Additional losses were incurred from positions in soft commodities and livestock during the second quarter. A portion of the Partnership’s losses for the first nine months of the year was offset by trading gains achieved during March through June, July, and August within the energy complex from long futures positions in crude oil and its refined products as prices rose amid supply concerns and increased demand. During January and June, gains were also experienced within the currency sector from positions in the Australian dollar, euro, Swedish krona, and Swiss franc. Additional gains within the currency sector were achieved during August from long U.S. dollar positions versus developed and emerging market currencies as their relative value decreased against the dollar due to weaker-than-expected economic data and a developing crisis among emerging markets. Further gains were achieved in the global interest rate sector during January, February, April, June, and September from short positions in U.S. interest rate futures as investors anticipated the U.S. Federal Reserve would be aggressive in raising interest rates in throughout the year.

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Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations and rapid inflation increases the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other factors, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership expects to increase capital through operations.

Prior to April 1, 2017, interest income on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account during each month was earned at the monthly average of the4-week U.S. Treasury bill discount rate. Effective April 1, 2017, interest income is earned on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s, prior to the Partnership’s full redemption from the Master effective July 14, 2017) brokerage account at MS&Co. during each month at a rate equal to the monthly average of the4-week U.S. Treasury bill discount rate. For the avoidance of doubt, the Fund will not receive interest on amounts in the futures brokerage account that are committed to margin. During the reporting period, any interest earned on the Partnership’s account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership. Interest income earned directly or allocated from the Master for the three and nine months ended September 30, 2018 increased by $14,350 and $93,912, respectively, as compared to the corresponding periods in 2017. The increase in interest income is primarily due to higher interest rates during the three and nine months ended September 30, 2018 as compared to the corresponding periods in 2017. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership’s and/or (prior to the Partnership’s full redemption from the Master effective July 14, 2017) the Master’s accounts, (2) the amount of Treasury bills and/or money market mutual fund securities held by the Partnership and/or (prior to July 14, 2017) the Master, and (3) interest rates over which the Partnership and MS&Co. have, and the Master had, no control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value of Class A Redeemable Units as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and nine months endedSeptember 30, 2018 decreased by $27,271 and $111,688, respectively, as compared to the corresponding periods in 2017. The decrease in ongoing selling agent fees is due to a decrease in average net assets attributable to Class A Redeemable Units during the three and nine months ended September 30, 2018 as compared to the corresponding periods in 2017.

Management fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. Management fees for the three and nine months ended September 30, 2018 decreased by $20,662 and $84,985, respectively, as compared to the corresponding periods in 2017. The decrease in management fees is due to a decrease in average net assets per Class during the three and nine months ended September 30, 2018 as compared to the corresponding periods in 2017.

General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership including, among other factors, (i) selecting, appointing and terminating the Partnership’s commodity trading advisor and (ii) monitoring the activities of the commodity trading advisor. These fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. General Partner fees for the three and nine months ended September 30, 2018 decreased by $13,775 and $56,658, respectively, as compared to the corresponding periods in 2017. The decrease in General Partner fees is due to a decrease in average net assets per Class during the three and nine months ended September 30, 2018 as compared to the corresponding periods in 2017.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three and nine months ended September 30, 2018 and 2017. The Advisor will not be paid incentive fees until the Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

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

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Item 3.Quantitative and Qualitative Disclosures about Market Risk.

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

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

Market movements for the Partnership result in frequent changes in the fair market value of the Partnership’s open positions and, consequently, in its earnings and cash balances. The market risk for the Partnership is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which the Partnership trades.

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

Quantifying the Partnership’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

The Partnership accounts for open positions on the basis of fair value accounting principles. Any loss in the market value of the Partnership’s open positions are directly reflected in the Partnership’s earnings and cash flow.

The Partnership’s risk exposure in the market sectors traded by the Advisor is estimated below in terms of Value at Risk. Please note that the Value at Risk model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either the General Partner or the Advisor in their daily risk management activities.

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

Exchange margin requirements have been used by the Partnership as the measure of its Value at Risk. Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in95%-99% of anyone-day interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-termone-day price fluctuation.

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the open positions by market category as of September 30, 2018 for the Partnership and December 31, 2017 for the Partnership/Master, and the highest, lowest and average value at any point during the three months ended September 30, 2018 and during the twelve months ended December 31, 2017. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of July 17, 2017, all positions from the Master have been transferred to the Partnership and the Master no longer traded any of the Partnership’s assets. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form10-K for the year ended December 31, 2017.

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As of September 30, 2018, the Partnership’s total capitalization was $18,273,772. The Partnership’s Value at Risk as of September 30, 2018 was as follows:

September 30, 2018
						Three Months Ended September 30, 2018
Market Sector	Value at Risk		% of Total    Capitalization			High    Value at Risk		Low    Value at Risk		Average    Value at Risk *
Currencies	$	1,784,804		9.77	%	$	1,837,579	$	396,599	$	1,095,126
Energy		168,405		0.92			207,141		86,627		160,053
Grains		119,104		0.65			236,412		102,652		148,173
Indices		941,412		5.15			1,006,853		601,183		950,786
Interest Rates U.S.		284,378		1.56			295,779		68,958		202,413
Interest RatesNon-U.S.		256,541		1.40			589,876		205,235		328,217
Livestock		12,964		0.07			30,030		12,964		20,711
Metals		340,229		1.86			341,893		89,741		259,262
Softs		129,897		0.71			140,996		33,275		126,427
Total	$	4,037,734		22.09	%

* Average ofmonth-end Values at Risk.

As of December 31, 2017, the Partnership’s total capitalization was $22,263,377. The Partnership’s Value at Risk as of December 31, 2017 was as follows:

December 31, 2017
						Twelve Months Ended December 31, 2017
Market Sector	Value at Risk		% of Total    Capitalization			High    Value at Risk		Low    Value at Risk		Average    Value at Risk *
Currencies	$	1,340,873		6.02	%	$	4,461,014	$	1,281,809	$	2,392,820
Energy		249,205		1.12			560,175		70,446		232,419
Grains		175,395		0.79			542,823		43,995		217,620
Indices		1,374,629		6.17			16,898,618		1,159,471		1,792,039
Interest Rates U.S.		130,842		0.59			326,612		16,689		109,966
Interest RatesNon-U.S.		392,746		1.76			1,115,652		214,037		611,244
Livestock		13,860		0.06			102,658		1,320		47,921
Metals		231,230		1.04			881,515		85,750		484,587
Softs		63,202		0.28			268,675		63,202		135,464
Total	$	3,971,982		17.83	%

* Annual average ofmonth-end Values at Risk.

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Item 4.Controls and Procedures.

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

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2018 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

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

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

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

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

There were no changes in the Partnership’sinternal control over financial reporting process during the fiscal quarter ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC (“MS&Co.”).

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Exchange Act, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC10-K filings for 2017, 2016, 2015, 2014, and 2013. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website atwww.morganstanley.com. Please refer to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2017 Audited Financial.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.

Regulatory and Governmental Matters.

On February 25, 2015, MS&Co. reached an agreement in principle with the United States Department of Justice, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against MS&Co. That settlement was finalized on February 10, 2016.

In October 2014, the Illinois Attorney General’s Office (“ILAG”) sent a letter to MS&Co. alleging that MS&Co. knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that MS&Co. pay ILAG approximately $88 million. MS&Co. and ILAG reached an agreement to resolve the matter on February 10, 2016.

On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intended to file a lawsuit related to approximately 30 subprime securitizations sponsored by MS&Co. NYAG indicated that the lawsuit would allege that MS&Co. misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. MS&Co. and NYAG reached an agreement to resolve the matter on February 10, 2016.

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On June 5, 2012, MS&Co. consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by the Commodity Futures Trading Commission (“CFTC”) to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibitoff-exchange futures transactions unless there is an Exchange for Related Position (“EFRP”). Specifically, the CFTC found that from April 2008 through October 2009, MS&Co. violated Section 4c(a) of the Commodity Exchange Act and CFTC Regulation 1.38 by executing, processing and reporting numerousoff-exchange futures trades to the Chicago Mercantile Exchange (“CME”) and Chicago Board of Trade (“CBOT”) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position. In addition, the CFTC found that MS&Co. violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Commodity Exchange Act and CFTC Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. MS&Co. entered into corresponding and related settlements with the CME and CBOT in which the CME found that MS&Co. violated CME Rules 432.Q and 538 and fined MS&Co. $750,000 and CBOT found that MS&Co. violated CBOT Rules 432.Q and 538 and fined MS&Co. $1,000,000.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime RMBS transactions sponsored and underwritten by those entities in 2007. Pursuant to the settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on June 28, 2016 without any findings of fraud.

On June 18, 2015, MS&Co. entered into a settlement with the SEC and paid a fine of $500,000 as part of the Municipalities Continuing Disclosure Cooperation Initiative to resolve allegations that MS&Co. failed to form a reasonable basis through adequate due diligence for believing the truthfulness of the assertions by issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule15c2-12 under the Exchange Act in connection with offerings in which MS&Co. acted as senior or sole underwriter.

On August 6, 2015, MS&Co. consented to and became the subject of an order by the CFTC to resolve allegations that MS&Co. violated CFTC Regulation 22.9(a) by failing to hold sufficient U.S. dollars in cleared swap segregated accounts in the United States to meet all U.S. dollar obligations to cleared swaps customers. Specifically, the CFTC found that while MS&Co. at all times held sufficient funds in segregation to cover its obligations to its customers, on certain days during 2013 and 2014, it held currencies, such as euros, instead of U.S. dollars, to meet its U.S. dollar obligations. In addition, the CFTC found that MS&Co. violated CFTC Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with CFTC Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, MS&Co. accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

On December 20, 2016, MS&Co. consented to and became the subject of an order by the SEC in connection with allegations that MS&Co. willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules15c3-3(e),17a-5(a), and17a-5(d) thereunder, by inaccurately calculating its Reserve Account requirement under Rule15c3-3 by including margin loans to an affiliate in its calculations, which resulted in making inaccurate records and submitting inaccurate reports to the SEC. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. consented to a cease and desist order, a censure, and a civil monetary penalty of $7,500,000.

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On September 28, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. regarding violations of CFTC Rule 166.3 by failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on multiple exchanges. The order and settlement required MS&Co. to pay a $500,000 penalty and cease and desist from violating Rule 166.3.

On November 2, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. fornon-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC. The order requires MS&Co. to pay a $350,000 penalty and cease and desist from further violations of the Commodity Exchange Act.

Civil Litigation

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., styledChina Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that MS&Co. misrepresented the risks of the STACK2006-1 CDO to CDIB, and that MS&Co. knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. On June 27, 2018, the Firm filed a motion for summary judgment and spoliation sanctions against CDIB. Based on currently available information, MS&Co. believes it could incur a loss of up to approximately $240 million pluspre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois, styledFederal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011, which alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by MS&Co. at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. On January 18, 2017, the court entered an order dismissing all claims related to an additional securitization at issue. After those dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $65 million. At September 25, 2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $37 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $37 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., pluspre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On May 17, 2013, plaintiff inIKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $133 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint.

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At September 25, 2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $23 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $23 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, pluspre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. in California state court styledCalifornia v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV (defined below), and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On September 30, 2016, the court granted MS&Co.’s demurrer, with leave to replead. On October 21, 2016, the California Attorney General filed an amended complaint. On January 25, 2017, the court denied MS&Co.’s demurrer with respect to the amended complaint.

Settled Civil Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styledFederal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On January 23, 2017, the parties reached an agreement to settle the litigation.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styledFederal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against MS&Co.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styledFederal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On December 21, 2016, the parties reached an agreement to settle the litigation.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against MS&Co. and/or its affiliates and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styledCambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints asserted claims on behalf of certain clients of plaintiff’s affiliates and alleged that defendants made untrue statements and material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans.

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The total amount of certificates allegedly issued by MS&Co. and/or its affiliates or sold to plaintiff’s affiliates’ clients by MS&Co. and/or its affiliates in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action in the United States District Court for the Southern District of New York (“SDNY”), styledGe Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, filed a second amended complaint, which asserted common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement to settle the litigation, which received final court approval on July 2, 2015.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of NY, styledAllstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, and alleged that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to the plaintiffs by MS&Co. was approximately $104 million. The complaint raised common law claims of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with the plaintiffs’ purchases of such certificates. On January 16, 2015, the parties reached an agreement to settle the litigation.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styledWestern and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleged that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

On September 2, 2011, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including MS&Co. and certain affiliates. A complaint against MS&Co. and certain affiliates and other defendants was filed in the Supreme Court of NY, styledFederal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleged that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass-through certificates with an original unpaid balance of approximately $11 billion. The complaint raised claims under federal and state securities laws and common law and sought, among other things, rescission and compensatory and punitive damages. On February 7, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styledMetropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleged that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten, and/or sold by MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and sought, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey, styledThe Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint.

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The amended complaint alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $1.073 billion. The amended complaint raised claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and included a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

On November 4, 2011, the Federal Deposit Insurance Corporation, as receiver for Franklin Bank S.S.B, filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styledFederal Deposit Insurance Corporation as Receiver for Franklin Bank, S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styledBank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. On July 28, 2015, the parties reached an agreement to settle the litigation, and on August 12, 2015, the plaintiff filed a stipulation of discontinuance with prejudice.

On September 23, 2013, the plaintiff inNational Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al.filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styledCommonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleged that MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. The complaint asserted claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and sought, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styledFederal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al.

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An amended complaint was filed on June 29, 2012 and alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raised claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. On July 13, 2018, the parties reached an agreement in principle to settle the litigation.

On May 3, 2013, plaintiffs inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $634 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 26, 2018, the parties entered into an agreement to settle the litigation.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

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Item 1A.Risk Factors.

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors.” in the Partnership’s Annual Report on Form10-K for the fiscal year ended December 31, 2017 and under Part II, Item 1A. “Risk Factors.” in the Partnership’s Quarterly Reports on Form10-Q for the quarters ended March 31, 2018 and June 30, 2018.

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

For the three months ended September 30, 2018, there were no additional subscriptions of Class A Redeemable Units. Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder. Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that Redeemable Units were purchased by accredited investors in a private offering.

Proceeds from the sale of Redeemable Units are used in the trading of commodity interests including futures, option and forward contracts.

The following chart sets forth the purchases of limited partner Redeemable Units for each Class by the Partnership.

Period	Class A (a) Total Number of Redeemable Units Purchased *		Class A (b) Average Price Paid per Redeemable Unit **		(c) Total Number of   Redeemable Units   Purchased as Part of   Publicly Announced   Plans or Programs	(d) Maximum Number (or   Approximate Dollar Value)   of Redeemable Units   that May Yet Be Purchased   Under the Plans or Programs
July 1, 2018 - July 31, 2018		288.5640	$	1,238.25	N/A	N/A
August 1, 2018 - August 31, 2018		128.1220	$	1,269.96	N/A	N/A
September 1, 2018 - September 30, 2018		205.6370	$	1,262.93	N/A	N/A
		622.3230	$	1,252.93

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

** Redemptions of Redeemable Units are effected as of the end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

Item 3. Defaults Upon Senior Securities. —None.

Item 4. Mine Safety Disclosures. —Not Applicable.

Item 5. Other Information. —None.

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Item 6. Exhibits.

31.1	Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed  herewith).
31.2	Rule13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director) (filed herewith).
32.1	Section 1350 Certification (Certification of President and Director) (filed herewith).
32.2	Section 1350 Certification (Certification of Chief Financial Officer and Director) (filed herewith).
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

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

POTOMAC FUTURES FUND L.P.
By:	Ceres Managed Futures LLC
	(General Partner)
By:	/s/ Patrick T. Egan
	Patrick T. Egan
	President and Director
Date: November 8, 2018
By:	/s/ Steven Ross
	Steven Ross
	Chief Financial Officer and Director
	(Principal Accounting Officer)
Date: November 8, 2018

The General Partner which signed the above is the only party authorized to act for the registrant. The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.

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