UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended June 30, 2006
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 number 0-32689
WORLD MONITOR TRUST II – SERIES F
(Exact name of Registrant as specified in its charter)
Delaware | 13-4058320 | |
(State or other Jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) | |
900 King Street, Suite 100, Rye Brook, New York | 10573 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (914) 307-7000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filter ¨ Non-accelerated filer þ
Indicate by check mark whether the Registrant is a shell company (ad defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
WORLD MONITOR TRUST II – SERIES F
FINANCIAL STATEMENTS
June 30, 2006
WORLD MONITOR TRUST II – SERIES F
STATEMENTS OF FINANCIAL CONDITION
June 30, 2006 (Unaudited) and December 31, 2005
June 30, 2006 | December 31, 2005 | |||||
ASSETS | ||||||
Cash in commodity trading accounts | $ | 386,792 | $ | 405,744 | ||
Investment in WMT Campbell Pool L.L.C. | 32,320,099 | 36,596,444 | ||||
Redemption receivable from WMT Campbell Pool L.L.C. | 50,052 | 279,989 | ||||
Total assets | $ | 32,756,943 | $ | 37,282,177 | ||
LIABILITIES | ||||||
Accrued expenses | $ | 70,316 | $ | 72,190 | ||
Commissions and other transaction fees payable | 187,139 | 224,437 | ||||
Incentive fee payable | 0 | 1,631 | ||||
Redemption payable | 12,598 | 228,956 | ||||
Total liabilities | 270,053 | 527,214 | ||||
TRUST CAPITAL | ||||||
Limited interests (209,380.042 and 231,089.673 interests outstanding) at June 30, 2006 and December 31, 2005 | 32,154,108 | 36,375,919 | ||||
Managing Owner interests (2,167 and 2,408 interests outstanding) at June 30, 2006 and December 31, 2005 | 332,782 | 379,044 | ||||
Total trust capital | 32,486,890 | 36,754,963 | ||||
Total liabilities and trust capital | $ | 32,756,943 | $ | 37,282,177 | ||
See accompanying notes.
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WORLD MONITOR TRUST II – SERIES F
STATEMENTS OF OPERATIONS
For the Periods April 1, 2006 to June 30, 2006 and March 26, 2005 to June 24, 2005 and
January 1, 2006 to June 30, 2006 and January 1, 2005 to June 24, 2005
(Unaudited)
For the Period April 1, 2006 to June 30, 2006 | For the Period March 26, 2005 to June 24, 2005 | For the Period January 1, 2006 to June 30, 2006 | For the Period January 1, 2005 to June 24, 2005 | |||||||||||||
NET (LOSS) FROM TRUST OPERATIONS: | ||||||||||||||||
REVENUES | ||||||||||||||||
Realized | $ | 0 | $ | 988 | $ | 0 | $ | (13,257 | ) | |||||||
Change in unrealized | 0 | 0 | 0 | 14,245 | ||||||||||||
Interest income | 3,674 | 2,050 | 7,119 | 2,957 | ||||||||||||
Total revenues | 3,674 | 3,038 | 7,119 | 3,945 | ||||||||||||
EXPENSES | ||||||||||||||||
Brokerage commissions | 508,752 | 548,629 | 1,042,067 | 1,064,667 | ||||||||||||
General and administrative | 70,993 | 590 | 125,886 | 107,860 | ||||||||||||
Total expenses | 579,745 | 549,219 | 1,167,953 | 1,172,527 | ||||||||||||
NET (LOSS) FROM TRUST OPERATIONS | (576,071 | ) | (546,181 | ) | (1,160,834 | ) | (1,168,582 | ) | ||||||||
NET INCOME (LOSS) ALLOCATED FROM WMT CAMPBELL POOL L.L.C.: | ||||||||||||||||
REVENUES | ||||||||||||||||
Realized | (645,546 | ) | 2,292,406 | (1,304,136 | ) | 560,206 | ||||||||||
Change in unrealized | (1,262,222 | ) | 3,347,072 | 1,256,414 | 3,538,405 | |||||||||||
Interest income | 419,911 | 251,253 | 824,542 | 462,633 | ||||||||||||
Total revenues | (1,487,857 | ) | 5,890,731 | 776,820 | 4,561,244 | |||||||||||
EXPENSES | ||||||||||||||||
Brokerage commissions and other transaction fees | 24,552 | 40,082 | 55,615 | 90,539 | ||||||||||||
Management fee | 168,692 | 189,999 | 345,608 | 361,557 | ||||||||||||
Total expenses | 193,244 | 230,081 | 401,223 | 452,096 | ||||||||||||
NET INCOME (LOSS) ALLOCATED FROM WMT CAMPBELL POOL L.L.C. | (1,681,101 | ) | 5,660,650 | 375,597 | 4,109,148 | |||||||||||
NET INCOME (LOSS) | $ | (2,257,172 | ) | $ | 5,114,469 | $ | (785,237 | ) | $ | 2,940,566 | ||||||
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND MANAGING OWNER INTEREST | ||||||||||||||||
Net income (loss) per weighted average limited and Managing Owner interest | $ | (10.49 | ) | $ | 19.77 | $ | (3.56 | ) | $ | 11.18 | ||||||
Weighted average number of limited and Managing Owner interests outstanding | 215,410 | 258,673 | 220,793 | 262,910 | ||||||||||||
See accompanying notes.
-3-
WORLD MONITOR TRUST II – SERIES F
STATEMENTS OF CHANGES IN TRUST CAPITAL
For the Periods January 1, 2006 to June 30, 2006 and
January 1, 2005 to June 24, 2005
(Unaudited)
Interests | Limited Interests | Managing Owner Interests | Total | ||||||||||||
For the period December 31, 2005 to June 30, 2006 | |||||||||||||||
Trust capital at December 31, 2005 | 233,497.673 | $ | 36,375,919 | $ | 379,044 | $ | 36,754,963 | ||||||||
Net (loss) for the period January 1, 2006 to June 30, 2006 | (777,616 | ) | (7,621 | ) | (785,237 | ) | |||||||||
Redemptions | (21,950.631 | ) | (3,444,195 | ) | (38,641 | ) | (3,482,836 | ) | |||||||
Trust capital at June 30, 2006 | 211,547.042 | $ | 32,154,108 | $ | 332,782 | $ | 32,486,890 | ||||||||
For the period December 31, 2004 to June 24, 2005 | |||||||||||||||
Trust capital at December 31, 2004 | 270,793.193 | $ | 38,509,087 | $ | 401,473 | $ | 38,910,560 | ||||||||
Net income for the period January 1, 2005 to June 24, 2005 | 2,907,642 | 32,924 | 2,940,566 | ||||||||||||
Redemptions | (14,800.115 | ) | (2,050,629 | ) | 0 | (2,050,629 | ) | ||||||||
Trust capital at June 24, 2005 | 255,993.078 | $ | 39,366,100 | $ | 434,397 | $ | 39,800,497 | ||||||||
Net Asset Value per Limited and Managing Owner Interest | ||||||
June 30, 2006 | December 31, 2005 | June 24, 2005 | December 31, 2004 | |||
$153.57 | $157.41 | $155.47 | $143.69 | |||
See accompanying notes.
-4-
WORLD MONITOR TRUST II – SERIES F
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1.ORGANIZATION
A. | General Description of the Trust |
The statement of financial condition as of June 30, 2006, and the statements of operations for the periods April 1, 2006 to June 30, 2006 (“Second Quarter 2006”), March 26, 2005 to June 24, 2005 (“Second Quarter 2005”), January 1, 2006 to June 30, 2006 (“Year-To-Date 2006”), and January 1, 2005 to June 24, 2005 (“Year-To-Date 2005”), and the statements of changes in trust capital for the periods January 1, 2006 to June 30, 2006 and January 1, 2005 to June 24, 2005, are unaudited. The December 31, 2005 references were taken from audited financial statements. In the opinion of Preferred Investment Solutions Corp. (“Preferred” or the “Managing Owner”), the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of World Monitor Trust II – Series F (“Series F”) as of June 30, 2006 and the results of its operations for the Second Quarter 2006, Second Quarter 2005, Year-To-Date 2006 and Year-To-Date 2005. The operating results for these interim periods may not be indicative of the results expected for a full year.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Series F’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2005.
World Monitor Trust II (the “Trust”) is a business trust organized under the laws of Delaware on April 22, 1999. The Trust consists of three separate and distinct series (“Series”): Series D, E and F. Series D, E and F commenced trading operations on March 13, 2000, April 6, 2000 and March 1, 2000, respectively, and each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Third Amended and Restated Declaration of Trust and Trust Agreement (the “Agreement”). The assets of each Series are segregated from those of the other Series, separately valued and independently managed. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts and may, from time to time, engage in cash and spot transactions. The trustee of the Trust is Wilmington Trust Company.
Effective December 6, 2004, Series F contributed its net assets to WMT Campbell Pool L.L.C. (the “Company”) and received a Voting Membership Interest in the Company. The Company was formed to function as an aggregate trading vehicle. The sole members of the Company are Series F and World Monitor Trust – Series A (“Series A”). Preferred is the Managing Owner of Series A and has been delegated administrative authority over the operations of the Company. The Company engages in the speculative trading of futures and forward contracts. The financial statements of the Company, including the condensed schedule of investments, are included in Section II of these financial statements and should be used in conjunction with Series F’s financial statements.
-5-
WORLD MONITOR TRUST II – SERIES F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 2.RELATED PARTIES
To the extent that general and administrative expenses exceeded 1.5% of Series F’s net asset value during the year (with a maximum of 0.5% attributable to expenses other than legal and audit expenses) such amounts are borne by the Managing Owner and its affiliates. General and administrative expenses did not exceed such limitations during the Second Quarter 2006, Year-to-Date 2006, Second Quarter 2005 and Year-to-Date 2005.
The expenses incurred by Series F for services performed by the Managing Owner and its affiliates for Series F were:
Second Quarter 2006 | Second Quarter 2005 | Year-To-Date 2006 | Year-To-Date 2005 | |||||||||
Brokerage commissions | $ | 508,752 | $ | 548,198 | $ | 1,042,068 | $ | 1,062,329 | ||||
General and administrative | 7,708 | 590 | 14,944 | 590 | ||||||||
$ | 516,460 | $ | 548,788 | $ | 1,057,012 | $ | 1,062,919 | |||||
Expenses payable to the Managing Owner and its affiliates as of June 30, 2006 and December 31, 2005 were $187,139 and $224,437, respectively.
Note 3.INVESTMENT IN WMT CAMPBELL POOL L.L.C.
Effective December 6, 2004, Series F invested a substantial portion of its assets in WMT Campbell Pool L.L.C. Series F’s investment in the Company represents approximately 99.49% and 99.57%, of the net asset value of the Company at June 30, 2006 and December 31, 2005, respectively. The investment in the Company is subject to the Organization Agreement of the Company.
Summarized information for this investment is as follows:
Net Asset Value December 31, 2005 | Gain | Redemptions | Net Asset Value June 30, 2006 | ||||||||||
WMT Campbell Pool L.L.C. | $ | 36,596,444 | $ | 375,597 | $ | (4,651,942 | ) | $ | 32,320,099 | ||||
Series F may make additional contributions to, or redemptions from, the Company on a weekly basis.
Note 4.DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS
Series F is exposed to various types of risks associated with the derivative instruments and related markets through its investment in the Company. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Company’s investment activities (credit risk).
-6-
WORLD MONITOR TRUST II – SERIES F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 4.DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)
Market Risk
Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Company’s net assets being traded, significantly exceeds the Company’s future cash requirements since the Company intends to close out its open positions prior to settlement. As a result, the Company is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Company considers the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Company’s commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when the Company enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contracts at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Company to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Company holds and the liquidity and inherent volatility of the markets in which the Company trades.
Credit Risk
When entering into futures or forward contracts, the Company is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions, entered into by the Company as the Company’s commodity broker is the sole counterparty. The Company has entered into a master netting agreement with its broker and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of the Company’s contracts is the net unrealized gain included in the statements of financial condition; however, counterparty non-performance on only certain of the Company’s contracts may result in greater loss than non-performance on all of the Company’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Company.
-7-
WORLD MONITOR TRUST II – SERIES F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 4.DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)
Credit Risk (Continued)
The Managing Owner attempts to minimize both credit and market risks by requiring the Trading Advisor of the Company to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, pursuant to the Trading Advisory Agreement among the Company, Preferred and the Trading Advisor, Preferred shall automatically terminate the Trading Advisor if the net asset value allocated to the Trading Advisor declines by 40% from the value at the beginning of any year or since the commencement of trading activities. Furthermore, the Third Amended and Restated Declaration of Trust and Trust Agreement provides that Series F will liquidate its positions, and eventually dissolve, if Series F experiences a decline in net asset value of 50% from the value at the beginning of any year or since the commencement of trading activities. In each case, the decline in net asset value is after giving effect for distributions, contributions and redemptions. Preferred may impose additional restrictions (through modifications of trading limitations and policies) upon the trading activities of the Trading Advisor as it, in good faith, deems to be in the best interest of Series F.
Series F’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate as belonging to Series F all assets of Series F relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At June 30, 2006 and December 31, 2005, such segregated assets totaled $3,200 and $348, respectively. Part 30.7 of the CFTC regulations also requires Series F’s futures commission merchant to secure assets of Series F related to foreign futures trading which totaled $0 and $0 at June 30, 2006 and December 31, 2005, respectively. There are no segregation requirements for assets related to forward trading.
-8-
WORLD MONITOR TRUST II – SERIES F
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 5.FINANCIAL HIGHLIGHTS
The following information presents per interest operating performance data and other supplemental financial data for the Second Quarter 2006, Second Quarter 2005, Year-To-Date 2006 and Year-To-Date 2005. This information has been derived from information presented in the financial statements.
Second Quarter | Year-To-Date | |||||||||||||||
2006 (Unaudited) | 2005 (Unaudited) | 2006 (Unaudited) | 2005 (Unaudited) | |||||||||||||
Per Interest Performance | ||||||||||||||||
(for a interest outstanding throughout the entire period) | ||||||||||||||||
Net asset value per interest at beginning of period | $ | 164.03 | $ | 135.58 | $ | 157.41 | $ | 143.69 | ||||||||
Net realized gain (loss) and change in net unrealized gain (loss) on commodity transactions(1), (3) | (8.84 | ) | 21.92 | (0.50 | ) | 16.19 | ||||||||||
Interest income(1), (3) | 1.97 | 0.98 | 3.77 | 1.77 | ||||||||||||
Expenses(1), (3) | (3.59 | ) | (3.01 | ) | (7.11 | ) | (6.18 | ) | ||||||||
Net increase (decrease) for the period | (10.46 | ) | 19.89 | (3.84 | ) | 11.78 | ||||||||||
Net asset value per interest at end of period | $ | 153.57 | $ | 155.47 | $ | 153.57 | $ | 155.47 | ||||||||
Total Return(4) | ||||||||||||||||
Total return before incentive fees | (6.38 | )% | 14.67 | % | (2.44 | )% | 8.20 | % | ||||||||
Incentive fees | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Total return after incentive fees | (6.38 | )% | 14.67 | % | (2.44 | )% | 8.20 | % | ||||||||
Supplemental Data | ||||||||||||||||
Ratios to average net asset value:(3) | ||||||||||||||||
Net investment income (loss) before incentive fees(2), (5) | (3.82 | )% | (5.81 | )% | (4.07 | )% | (6.56 | )% | ||||||||
Incentive fees(4) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Net investment income (loss) after incentive fees | (3.82 | )% | (5.81 | )% | (4.07 | )% | (6.56 | )% | ||||||||
Interest income(5) | 4.63 | % | 2.80 | % | 4.59 | % | 2.64 | % | ||||||||
Incentive fees(4) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Other expenses(5) | 8.45 | % | 8.61 | % | 8.66 | % | 9.20 | % | ||||||||
Total expenses | 8.45 | % | 8.61 | % | 8.66 | % | 9.20 | % | ||||||||
Total returns are calculated based on the change in value of an interest during the period. An individual Interestholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of redemptions.
(1) | Interest income per interest and expenses per interest are calculated by dividing interest income and expenses by the weighted average number of interests outstanding during the period. Net realized gain (loss) and change in net unrealized gain (loss) on commodity transactions is a balancing amount necessary to reconcile the change in net asset value per interest with the other per interest information. |
(2) | Represents interest income less total expenses (exclusive of incentive fees). |
(3) | Includes the Trust’s proportionate share of income and expenses of WMT Campbell Pool L.L.C. |
(4) | Not annualized. |
(5) | Annualized. |
-9-
SECTION II
WMT CAMPBELL POOL L.L.C.
FINANCIAL STATEMENTS
June 30, 2006
WMT CAMPBELL POOL L.L.C.
STATEMENTS OF FINANCIAL CONDITION
June 30, 2006 (Unaudited) and December 31, 2005
June 30, 2006 | December 31, 2005 | ||||||
ASSETS | |||||||
Equity in broker trading accounts | |||||||
Cash in commodity trading accounts | $ | 34,167,625 | $ | 40,427,991 | |||
Net unrealized gain (loss) on open contracts | 58,899 | (1,270,180 | ) | ||||
Total assets | $ | 34,226,524 | $ | 39,157,811 | |||
LIABILITIES | |||||||
Commissions payable | $ | 3,649 | $ | 5,377 | |||
Management fee payable | 65,475 | 78,910 | |||||
Redemptions payable | 52,581 | 316,109 | |||||
Total liabilities | 121,705 | 400,396 | |||||
MEMBERS’ CAPITAL (Net Asset Value) | |||||||
Member A | 1,784,720 | 2,160,971 | |||||
Member F | 32,320,099 | 36,596,444 | |||||
Total members’ capital | 34,104,819 | 38,757,415 | |||||
Total liabilities and members’ capital | $ | 34,226,524 | $ | 39,157,811 | |||
See accompanying notes.
-12-
WMT CAMPBELL POOL L.L.C.
CONDENSED SCHEDULES OF INVESTMENTS
June 30, 2006 (Unaudited) and December 31, 2005
June 30, 2006 | December 31, 2005 | |||||||||||||
Net Unrealized Gain (Loss) as a % of Trust Capital | Net Unrealized Gain (Loss) | Net Unrealized Gain (Loss) as a % of Trust Capital | Net Unrealized Gain (Loss) | |||||||||||
Futures Contracts | ||||||||||||||
Futures contracts purchased: | ||||||||||||||
Commodities | 0.27 | % | $ | 92,936 | (0.88 | )% | $ | (340,904 | ) | |||||
Interest rates | (0.16 | )% | (53,968 | ) | 0.03 | % | 13,407 | |||||||
Stock indices | 0.19 | % | 65,649 | (0.06 | )% | (24,587 | ) | |||||||
Net unrealized gain (loss) on futures contracts purchased | 0.30 | % | 104,617 | (0.91 | )% | (352,084 | ) | |||||||
Futures contracts sold: | ||||||||||||||
Commodities | (0.10 | )% | (35,343 | ) | 0.00 | % | 0 | |||||||
Interest rates | 0.87 | % | 297,979 | 0.67 | % | 258,268 | ||||||||
Stock indices | (0.09 | )% | (32,229 | ) | (0.02 | )% | (9,379 | ) | ||||||
Net unrealized gain on futures contracts sold | 0.68 | % | 230,407 | 0.65 | % | 248,889 | ||||||||
Net unrealized gain (loss) on futures contracts | 0.98 | % | $ | 335,024 | (0.26 | )% | $ | (103,195 | ) | |||||
Forward Contracts | ||||||||||||||
Forward contracts purchased: | ||||||||||||||
Net unrealized gain (loss) on forward contracts purchased | 0.27 | % | $ | 91,096 | (2.71 | )% | $ | (1,048,402 | ) | |||||
Forward contracts sold: | ||||||||||||||
Net unrealized (loss) on forward contracts sold | (1.08 | )% | (367,221 | ) | (0.30 | )% | (118,583 | ) | ||||||
Net unrealized (loss) on forward contracts | (0.81 | )% | $ | (276,125 | ) | (3.01 | )% | $ | (1,166,985 | ) | ||||
Net unrealized gain (loss) on futures and forward contracts | $ | 58,899 | $ | (1,270,180 | ) | |||||||||
See accompanying notes.
-13-
WMT CAMPBELL POOL L.L.C.
STATEMENTS OF OPERATIONS
For the Periods April 1, 2006 to June 30, 2006 and March 26, 2005 to June 24, 2005 and
January 1, 2006 to June 30, 2006 and January 1, 2005 to June 24, 2005
(Unaudited)
For the Period April 1, 2006 to June 30, 2006 | For the Period March 26, 2005 to June 24, 2005 | For the Period January 1, 2006 to June 30, 2006 | For the Period January 1, 2005 to June 24, 2005 | |||||||||||
REVENUES | ||||||||||||||
Realized | $ | (681,036 | ) | $ | 2,450,522 | $ | (1,376,132 | ) | $ | 585,511 | ||||
Change in unrealized | (1,332,028 | ) | 3,589,462 | 1,329,080 | 3,795,865 | |||||||||
Interest income | 443,071 | 269,801 | 870,548 | 497,396 | ||||||||||
Total revenues | (1,569,993 | ) | 6,309,785 | 823,496 | 4,878,772 | |||||||||
EXPENSES | ||||||||||||||
Commissions | 25,905 | 43,029 | 58,730 | 97,358 | ||||||||||
Management fee | 177,996 | 204,024 | 364,916 | 388,754 | ||||||||||
Incentive fee | 0 | 21,377 | 0 | 21,377 | ||||||||||
Total expenses | 203,901 | 268,430 | 423,646 | 507,489 | ||||||||||
NET GAIN (LOSS) | $ | (1,773,894 | ) | $ | 6,041,344 | $ | 399,850 | $ | 4,371,283 | |||||
See accompanying notes.
-14-
WMT CAMPBELL POOL L.L.C.
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)
For the Periods January 1, 2006 to June 30, 2006 and
January 1, 2005 to June 24, 2005
(Unaudited)
Members’ Capital | ||||||||||||
Member A | Member F | Total | ||||||||||
For the period December 31, 2005 to June 30, 2006 | ||||||||||||
Balances at December 31, 2005 | $ | 2,160,971 | $ | 36,596,444 | $ | 38,757,415 | ||||||
Net income for the period January 1, 2006 to June 30, 2006 | 24,253 | 375,597 | 399,850 | |||||||||
Redemptions | (400,504 | ) | (4,651,942 | ) | (5,052,446 | ) | ||||||
Balances at June 30, 2006 | $ | 1,784,720 | $ | 32,320,099 | $ | 34,104,819 | ||||||
For the period December 31, 2004 to June 24, 2005 | ||||||||||||
Balances at December 31, 2004 | $ | 2,980,766 | $ | 38,915,521 | $ | 41,896,287 | ||||||
Net income for the period January 1, 2005 to June 24, 2005 | 262,135 | 4,109,148 | 4,371,283 | |||||||||
Redemptions | (678,593 | ) | (3,234,749 | ) | (3,913,342 | ) | ||||||
Balances at June 24, 2005 | $ | 2,564,308 | $ | 39,789,920 | $ | 42,354,228 | ||||||
See accompanying notes.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1.ORGANIZATION
A. | General Description of the Company |
WMT Campbell Pool L.L.C. (the “Company”) is a limited liability company organized under the laws of Delaware on November 3, 2004 and commenced trading operations on December 6, 2004. The Company was formed to engage in the speculative trading of a diversified portfolio of futures contracts, options on futures contracts and forward currency contracts and may, from time to time, engage in cash and spot transactions. The Company currently consists of two members: World Monitor Trust – Series A (“Member A”) and World Monitor Trust II – Series F (“Member F”) (collectively, the “Members”). Preferred Investment Solutions Corp. (“Preferred”) is the Managing Owner of each of the Members. Upon making the initial capital contribution, each Member received Voting Membership Interests.
The Company is a Member managed limited liability company that is not registered in any capacity with, or subject directly to regulation by the Commodity Futures Trading Commission or the United States Securities and Exchange Commission.
B. | The Trading Advisor |
The Company entered into an advisory agreement with Campbell & Company, Inc. (the “Trading Advisor”) to make the trading decisions for the Company. The Trading Advisor manages approximately 100% of the assets of the Company pursuant to its Financial, Metal & Energy Large Portfolio.
Note 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. | Basis of Accounting |
The statement of financial condition, including the condensed schedule of investments, as of June 30, 2006, and the statements of operations for the periods April 1, 2006 to June 30, 2006 (“Second Quarter 2006”), March 26, 2005 to June 24, 2005 (“Second Quarter 2005”), January 1, 2006 to June 30, 2006 (“Year-To-Date 2006”), and January 1, 2005 to June 24, 2005 (“Year-To-Date 2005”), and the statements of changes in member capital for the periods January 1, 2006 to June 30, 2006 and January 1, 2005 to June 24, 2005, are unaudited. The December 31, 2005 references were taken from audited financial statements. In the opinion of Preferred, such financial statements reflect all adjustments, which were of a normal and recurring nature, necessary for a fair presentation of financial position as of June 30, 2006, and the results of operations for the Second Quarter 2006, Second Quarter 2005, Year-To-Date 2006 and Year-To-Date 2005. The operating results for these interim periods may not be indicative of the results expected for a full year.
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. | Basis of Accounting (Continued) |
Commodity futures and forward transactions are reflected in the accompanying statements of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) is reflected in the financial statements in accordance with Financial Accounting Standards Board Interpretation No. 39 – “Offsetting of Amounts Related to Certain Contracts.” The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The fair value of forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices. Any change in net unrealized gain or loss during the current period is reported in the statement of operations. Realized gains and losses on commodity futures and forward transactions are recognized in the period in which the contracts are closed.
Brokerage commissions include other trading fees and are charged to expense when contracts are entered into.
The Company has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards No. 102, “Statement of Cash Flows – Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.”
Consistent with standard business practices in the normal course of business, the Company has provided general indemnifications to its Trading Advisor and others when they act, in good faith, in the best interests of the Company. The Company is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
B. | Income Taxes |
The Company is treated as a partnership for Federal income tax purposes. As such, the Company is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Company may be subject to other state and local taxes in jurisdictions in which it operates.
C. | Capital Accounts |
The Company accounts for subscriptions, allocations and redemptions on a per member capital account basis.
The Company allocates profits and losses, prior to calculation of the incentive fee, for both financial and tax reporting purposes to its Members weekly on a pro rata basis based on each Member’s pro rata capital in the Company during the week. Each Member is then charged with the applicable incentive fee. Distributions (other than redemptions of capital) may be made at the sole discretion of the Members on a pro rata basis in accordance with the Members’ respective capital balances. The Company has not and does not presently intend to make any distributions.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. | Foreign Currency Transactions |
The Company’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently.
Note 3.FEES
A. | Organizational, General and Administrative Costs |
Under the WMT Campbell Pool L.L.C. Organization Agreement, Preferred may allocate administrative costs of the Company to the Members. Administrative costs include legal, audit, postage and other routine third party administrative costs.
B. | Management and Incentive Fees |
The Company pays the Trading Advisor a management fee at an annual rate of 2% of the Company’s assets determined as of the close of business each Friday. The sum of the amounts determined each Friday will be paid monthly. For purposes of determining the management fee, any distributions, redemptions or reallocation of assets made as of the last Friday of each week shall be added back to the assets and there shall be no reduction for (i) the weekly management fees calculated or (ii) any accrued but unpaid incentive fees due the Trading Advisor.
Additionally, the Members pay the Trading Advisor an incentive fee of 22% (the “Incentive Fee”) of “New High Net Trading Profits” (as defined in the Advisory Agreement).
Note 4.INCOME TAXES
There have been no differences between the tax basis and book basis of Members’ capital since inception of the Company.
Note 5.DEPOSITS WITH COMMODITY BROKER
The Company deposits funds with a commodity broker subject to Commodity Futures Trading Commission regulations and various exchange and commodity broker requirements. Margin requirements are satisfied by the deposit of cash with such commodity broker. The Company earns interest income on assets deposited with the commodity broker.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 6.SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Company are made subject to the terms of the Organization Agreement.
The Company is not required to make distributions, but could do so at the discretion of the Members. A Member can request and receive redemption of capital, subject to the terms in the Organization Agreement.
Note 7.DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS
The Company is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Company’s investment activities (credit risk).
Market Risk
Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Company’s net assets being traded, significantly exceeds the Company’s future cash requirements since the Company intends to close out its open positions prior to settlement. As a result, the Company is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Company considers the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Company’s commitments to purchase commodities is limited to the gross or face amount of the contract held. However, when the Company enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Company to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Company holds and the liquidity and inherent volatility of the markets in which the Company trades.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 7.DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)
Credit Risk
When entering into futures or forward contracts, the Company is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, a clearinghouse is backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions entered into by the Company, as the Company’s forward broker is the sole counterparty. The Company has entered into a master netting agreement with its forward broker and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of the Company’s contracts is the net unrealized gain included in the statement of financial condition; however, counterparty non-performance on only certain of the Company’s contracts may result in greater loss than non-performance on all of the Company’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Company.
Preferred attempts to minimize both credit and market risks by requiring the Company and its Trading Advisor to abide by various trading limitations and policies. Preferred monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, pursuant to the Advisory Agreement among the Company, Preferred and the Trading Advisor, the Company shall automatically terminate the Trading Agreement, if the net asset value allocated to the Trading Advisor declines by 40% from the value at the beginning of any year or since the effective date of the Advisory Agreement. The decline in net asset value is after giving effect for distributions, subscriptions and redemptions.
The Company’s commodity broker, in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate as belonging to the Company all assets of the Company relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At June 30, 2006 and December 31, 2005, such segregated assets totaled $5,484,466 and $4,041,188, respectively. Part 30.7 of the CFTC regulations also requires the Company’s futures commission merchant to secure assets of the Company related to foreign futures trading which totaled $29,018,183 and $39,656 at June 30, 2006 and December 31, 2005, respectively. There are no segregation requirements for assets related to forward trading.
As of June 30, 2006, all open futures contracts mature within nine months.
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WMT CAMPBELL POOL L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
_________________
Note 8.FINANCIAL HIGHLIGHTS
The following information presents the financial highlights of the Company for the Second Quarter 2006, Second Quarter 2005, Year-To-Date 2006 and Year-To-Date 2005. This information has been derived from information presented in the financial statements.
Second Quarter 2006 | Year-To-Date 2006 | |||||||||||
Member A | Member F | Member A | Member F | |||||||||
Total return(1) | (4.97 | )% | (4.97 | )% | 1.25 | % | 1.08 | % | ||||
Total expenses(2) | 2.12 | % | 2.12 | % | 2.23 | % | 2.22 | % | ||||
Net investment income(2) | 2.49 | % | 2.49 | % | 2.34 | % | 2.35 | % | ||||
Second Quarter 2005 | Year-To-Date 2005 | |||||||||||
Member A | Member F | Member A | Member F | |||||||||
Total return(1) | 15.48 | % | 16.40 | % | 10.80 | % | 11.68 | % | ||||
Total expenses(2) | 3.34 | % | 2.54 | % | 3.33 | % | 2.56 | % | ||||
Net investment income (2) | 0.23 | % | 0.23 | % | 0.06 | % | 0.06 | % | ||||
Total returns are based on average net asset value and are calculated for Members’ capital taken as a whole. An individual Member’s total returns and ratios may vary from the above returns and ratios based on the timing of redemptions.
(1) | Not annualized and includes realized and unrealized gains on securities transactions. |
(2) | Annualized. |
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WORLD MONITOR TRUST II – SERIES F
(a Delaware Business Trust)
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Report includes forward-looking statements that reflect Preferred Investment Solutions Corp.’s (“Preferred” or the “Managing Owner”) current expectations about the future results, performance, prospects and opportunities of the World Monitor Trust II – Series F (“Series F” or the “Trust”). The Managing Owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “should,” “estimate” or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause Series F’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the Managing Owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Effective December 6, 2004, Series F contributed its net assets to WMT Campbell Pool L.L.C. (the “Company”) and received a Voting Membership Interest in the Company. The Company was formed to function as an aggregate trading vehicle. The sole members of the Company are Series F and World Monitor Trust – Series A (“Series A”). Preferred is the Managing Owner of Series A and has been delegated administrative authority over the operations of the Company. The Company engages in the speculative trading of futures and forward contracts. The following discussion and analysis refers to Series F’s activities both directly and through its investment in the Company.
Critical Accounting Policies
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. Series F’s application of these policies involves judgments and actual results may differ from the estimates used.
The Managing Owner has evaluated the nature and types of estimates that it makes in preparing Series F’s financial statements and related disclosures and has determined that the valuation of its investments which are not traded on a United States or Internationally recognized futures exchange involves a critical accounting policy. The market values of futures (exchange traded) contracts are verified by the administrator who obtains valuation data from third party data providers such as Bloomberg and Reuters and compares those prices with Series F’s broker. The market value of currency swap and forward (non-exchange traded) contracts are extrapolated on a forward basis from the spot prices quoted as of 3 PM on the last business day of the reporting period. All values assigned by the administrator and confirmed by the Managing Owner are final and conclusive as to all Interest holders.
As such, if actual results vary from estimates used, they are anticipated to not have a material impact on the financial statements and related disclosures.
Liquidity and Capital Resources
Series F commenced operations on March 1, 2000 with gross proceeds of $5,185,012 allocated to commodities trading. Additional contributions raised through the continuous offering from the sales of interests for the period from March 1, 2000 (commencement of operations) to December 31, 2003 resulted in additional gross proceeds to Series F of $45,240,236. Series F’s interests were offered until it substantially achieved its subscription maximum of $50,000,000 on the sale of limited interests during July 2003.
Limited interests in Series F may be redeemed on a weekly basis. Redemptions of limited interests for the Second Quarter 2006, Year-To-Date 2006, and for the period from March 1, 2000 (commencement of operations) to June 30, 2006 were $1,419,404, $3,444,195 and $25,085,424, respectively. Redemptions of general interests for the Second Quarter 2006, Year-To-Date 2006, and for the period from March 1, 2000 (commencement of operations) to June 30, 2006 were $13,380, $38,641 and $228,589, respectively. Additionally interests owned in any series of World Monitor Trust II (Series D, E or F) were exchangeable, without any charge, for interests of one or more other series of World Monitor Trust II on a weekly basis for as long as limited interests in those series were being offered to the public. Series F and World Monitor Trust II – Series E are no longer offered to the public as those series substantially achieved their subscription maximums during July 2003 and June 2003, respectively. In addition, since July 2003, the offering of interests in Series D has been suspended. Accordingly, at this time interests may not be exchanged. Future redemptions will impact the amount of funds available for investment in commodity contracts in subsequent periods.
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At June 30, 2006, 100% of Series F’s net assets were allocated to commodities trading through the Company. A significant portion of the net assets was held in cash which was used as margin for trading in commodities. In as much as the sole business of Series F is to trade in commodities, Series F continues to own such liquid assets to be used as margin. The broker credits Series F and the Company with interest income on 100% of its average daily equity maintained in its accounts with them during each month.
The commodities contracts are subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example some commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent Series F from promptly liquidating its commodity futures positions.
Since Series F’s business is to trade futures and forward contracts, through it’s investment in the Company, it’s capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Series F’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Series F’s speculative trading as well as the development of drastic market occurrences could result in monthly losses considerably beyond Series F’s experience to date and could ultimately lead to a loss of all or substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Series F and its trading advisor to abide by various trading limitations and policies which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 4 to the financial statements for a further discussion on the credit and market risks associated with Series F’s futures contracts.
Series F does not have, nor does it expect to have, any capital assets.
Off-Balance Sheet Arrangements and Contractual Obligations
As of June 30, 2006, Series F had not utilized special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers, such as our accountants, undertake in performing services which are in the best interests of Series F. While Series F’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have material impact on Series F’s financial position.
Series F’s contractual obligations are with the Managing Owner, Trading Advisor and its commodity broker. Payments made under Series F’s agreement with the Trading Advisor are at a fixed rate, calculated as a percentage of Series F’s “New High Net Trading Profits”. In addition, management fee payments made to the Trading Advisor and fees paid to the Managing Owner are calculated as a fixed percentage of Series F’s Net Asset Values. As such, the Managing Owner cannot anticipate the amount of payments that will be required under these agreements for future periods as Net Asset Values are not known until a future date. Commission payments to the commodity broker are based on cost per executed trade and, as such, the Managing Owner cannot anticipate the amount of payments that will be required under the brokerage agreement for future periods as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party for various reasons. For a further discussion on these payments, see Note 3 of Series F’s 2005 Annual Report.
Results of Operations
The net asset value per Interest as of June 30, 2006 was $153.57, a decrease of 2.44% from the December 31, 2005 net asset value per Interest of $157.41 and a decrease of 6.38% from the March 31, 2006 net asset value per interest of $164.03. Past performance is not necessarily indicative of future results.
Series F’s trading losses before commissions and related fees were approximately $1,908,000 and $48,000 during Second Quarter 2006 and Year-To-Date 2006, compared to trading gains of approximately $5,640,000 and $4,100,000 during Second Quarter 2005 and Year-To-Date 2005, respectively. Due to the nature of Series F’s trading activities, a period to period comparison of its trading results is not meaningful. However, a detailed discussion of Series F’s Second Quarter 2006 trading results is presented below.
Second Quarter 2006 Economic Overview
News from the Federal Reserve (“Fed”) and its new chairman, Ben Bernanke, dominated the markets in the second quarter of 2006. Chairman Bernanke appears fully committed to fighting inflation and has quickly eliminated speculation that he might take a softer stance than his predecessor. The Fed continued to raise rates throughout the quarter. The Fed minutes have repeatedly stated that the Federal Open Market Committee’s (“FOMC”) actions will be data dependent and to this point that means the rate hike cycle is likely to continue at least for one addition meeting. As global liquidity and geopolitical concerns arose during the second quarter, U.S. Treasury yields found safe haven support.
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Inflation and housing were again the major factors within the U.S. economic landscape. As gasoline prices continued to rise, inflation data drew particular attention. The housing market was somewhat mixed and the outlook remains uncertain. Despite these factors, final first quarter Gross Domestic Product (“GDP”) was revised upwards to 5.3% from the original 4.6%. However, the impact of a weaker housing sector and high gasoline and energy prices may be starting to take a toll, as the preliminary GDP for the second quarter was lower than expected at 2.5%.
The Eurozone continued to experience economic improvement in the second quarter. However, like the U.S., the third quarter may present a somewhat less buoyant picture. The euro turned in a strong quarter benefiting from central bank currency diversification. Interest rates were a primary focus as the European Central Bank (“ECB”) hiked rates by 25 basis points to 2.75% at its June meeting with further increases anticipated later in the year. An ongoing pattern of improved economic data was noted, particularly from Germany. In the U.K., the Bank of England (“BOE”) made no rate changes; economic data was fairly decent but showed some strain as the third quarter began.
In Japan, speculation that the Bank of Japan (“BOJ”) would finally end its “zero interest rate” policy proved correct as they imposed a 0.25% rate during the first week of July. Japan was at the forefront of the short-lived liquidity crisis, which instigated a sell-off in global assets during the second quarter, and their equity market fell approximately 9%. Other Asian equity markets saw a similar fate with Korea, Hong Kong and Shanghai also experiencing weakness. Despite the temporary disruption, overall economic data from Japan, and the region in general, showed an improved tone. China’s growth continues to be strong, as second quarter GDP rose to a 10 year high of 11.2%. The Bank of China raised interest rates in April in an attempt to harness growth and its inflationary implications. Further rate hikes are expected.
The Canadian economy has been moving at a brisk pace all year and the Bank of Canada has steadily raised rates. However, the statement at the conclusion of its most recent meeting suggests that a pause may be on the horizon. The Canadian dollar strengthened in the second quarter of 2006 and Canada’s economic fortunes seem bright.
Currencies
Interest rates were the primary drivers of the currency sector in the second quarter of 2006. The U.S. dollar suffered against the euro as the ECB appears to be at the beginning of its rate hike cycle and the Fed appears to be close to the end. Additionally, a continued pattern of improving economic data in the Eurozone was noted throughout the quarter, particularly from Germany, the leading driver of the region’s growth. The euro also benefited from central bank currency diversification away from the U.S. dollar as the global reserve currency, as Russia, China, Sweden, and the United Arab Emirates were prominent in this trend, which is expected to continue. Despite this pressure, the U.S. dollar attracted flight to safety support in mid June when the Korean missile crisis emerged.
In Japan, the focus was also on interest rates, as market participants attempted to discern when the BOJ would end its long standing “zero interest rate” policy. The BOJ drained liquidity throughout the quarter in preparation for this eventuality. The Japanese economy continues to improve, as highlighted by one of the most watched economic indicators, the Tankan Report, which was released at the end of June and the second quarter saw the definitive conclusion of the nation’s deflationary era. The yen was pressured a bit in late June by the scandal surrounding BOJ Governor Fukui.
The Chinese yuan traded at 7.999 to the U.S. dollar in late June compared to 8.017 at the end of the first quarter and has gained slightly over 1% since its 2.1% revaluation in July 2005. Recent comments from Bank of China officials have hinted at a potentially faster pace, but the markets have lent little credence to this statement.
Energies
The energy sector was volatile in the second quarter of 2006. Crude ended the quarter around $74 per barrel, up approximately 8.5% from the end of the previous quarter. Geopolitical uncertainty regarding Iran, North Korea and Nigeria were supportive of crude. Additional support is coming from increased demand from China and India. The price at the pump for unleaded gasoline remains high, but demand continued to display a relatively inelastic pattern. The only component of the sector that fell was natural gas. With plenty of supply, moderate temperatures and a slow start to the hurricane season, prices of natural gas continued their downward slide.
Grains
The sector was mixed for the quarter. On the production side of the equation, weather played the single largest role in corn prices for the second quarter. On a week-by-week basis, as chances for seasonally beneficial precipitation ebbed and flowed, corn prices moved higher and lower respectively. The start of the period found the corn market firmly ensconced in an uptrend that began at the end of calendar year 2005, but prices fell off sharply in June after the release of a U.S. Department of Agriculture (“USDA”) Supply/Demand Report that raised questions about the demand for corn. The decline in corn prices, along with many other commodity markets, may have had its roots in a consumption-restricting announcement made by the Chinese government. The statement made was that internal growth needed to be slowed, in light of a too-rapidly expanding economy. The graphic profile of the wheat market is almost identical as that seen in corn. For most of the second quarter, soybean prices moved sideways. Due to China’s dependence on Brazilian soybean imports, the tightening credit situation in China will likely not have as great a bearing on U.S. soybean prices.
Indices
By and large, global equity indices were lower in the second quarter of 2006 versus the first quarter of 2006. For most of the quarter, U.S. stocks suffered from the uncertainty surrounding the interest rate environment and from fears that the U.S. economy was slowing, mainly due to higher energy prices and a softer housing sector. The S&P 500 ended the quarter down
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1.9% and the NASDAQ ended the quarter down 7.2%. Going forward U.S. equities are likely to remain highly sensitive to any events that might alter the outlook for the Fed, particularly inflation related data.
European markets had been strong for most of the year prior to the sell-off in May. Foreign money flows into Europe slowed significantly in May and were still at a somewhat reduced level in June. The German DAX ended the quarter down 4.8%, the French CAC 40 was down 4.9% and the British FTSE was down 2.2%.
Asian markets were very volatile, particularly in May and June, as a liquidity crunch was experienced in Japan and in various other sectors around the region. Indications of higher interest rates in Japan, Korea and China in coming months provided a negative tone, but the flow of economic data took on a positive tone and bodes well for the rest of the year. Japan’s Nikkei was down 9.1% for the quarter and Korea’s Kospi was down 4.7%. Australia’s All Ordinaries closed out the quarter down approximately 1%, but the strength in resource issues aided this market and the outlook for Australia is positive.
Interest Rates
U.S. Treasuries were in a rally mode for much of May and June as the markets evaluated the new Fed under Ben Bernanke. The FOMC appeared to be taking on a more aggressively anti-inflationary tone as the quarter progressed, with the Chairman and numerous Fed Governors focusing on the threat of inflation. After closing out the first quarter at 4.85%, the yield on the 10-year Treasury Note moved over 5.26% in mid June on the market view that that the Fed would continue to raise rates through the August meeting and possibly beyond. The softer tone of the statement accompanying the 25 basis point rate hike at the end of June caught the markets by surprise. While still recognizing the risk of inflation, the Fed gave greater credence to the potential for some economic slowing, and appeared to put into question the prospect of a further rate hike in August. As June concluded, the yield on the 10-year Treasury Note stood at 5.145%.
Outside of the U.S., the ECB raised rates 25 basis points in June to 2.75%. Statements by ECB President Jean Claude Trichet regarding inflation were mixed throughout the quarter, but were leaning towards the tightening side as June ended and additional ECB rate hikes are expected later this summer. Trichet has emphasized that inflation will remain elevated and that there is a risk of a surge in consumer prices. European data, particularly from Germany remains buoyant. The 10-year German Bund was yielding 4.07% at the end of June while the 30-year stood at 4.31%.
In the first week of July, the BOJ officially ended its “zero interest rate” policy by imposing a 0.25% rate, finally putting an end to the speculation that was rampant throughout the second quarter. Other Asian banks, including the Bank of Korea, raised rates in June and there are growing indications that the Bank of China will embark on a tightening bias to temper the expected 10% plus GDP growth and its inflationary potential. The Bank of Canada raised rates another 25 basis points but the accompanying statement hinted at a pause. The Reserve Bank of Australia held rates at 5.75% but there is speculation of an increase.
Metals
Gold had been in an upside surge for the entire year until things finally came to an end, at least temporarily, in late May. Global liquidity tightness, particularly in the Far East, which impacted other commodities as well as the equity and fixed income markets, served as a clear negative for gold and essentially put an end to the rally. Geopolitical concerns surrounding Iran, Iraq and Korea have been supportive for gold and are likely to aid the bull case in coming weeks. In addition, reserve asset diversification is likely to persist. Russia, China and Sweden, along with the United Arab Emirates and other petro-nations were active in that regard during the second quarter. Petrodollars have been flowing into gold for much of the year, although that slowed somewhat in June. Silver followed a similar pattern to gold, retaining its dependent relationship with the yellow metal.
The entire base metal complex was very volatile during the second quarter. Copper ended the quarter up 37% from the previous quarter, as labor and production problems in Mexico, Chile and Zambia added to the bullish scenario. With China forecast to see 10% plus GDP growth in 2006, the demand side of the equation still looks strong, as it does for most of Asia as well as the U.S. and Europe. Mines still lack the ability to significantly ramp up production, giving copper a solid fundamental base. After surging nearly 17% in May, zinc lost 15% in June but it is still up more than 75% for the year. Fundamentally, zinc presents the strongest picture among all the base metals as it faces a significant production deficit. Nickel rallied strongly for the quarter as well. While its fundamentals have improved, as stainless steel demand increased, the recent highs are vastly ahead of reasonable value.
Softs
The sector was mixed for the second quarter, with several markets experiencing significant sell-offs in May. Sugar had been extremely firm in the first quarter through mid second quarter, before undergoing a correction in May. Following a weak performance in May, which saw sugar decline over 11%, prices rebounded in June. However, the outlook is uncertain, as the weather in Brazil’s sugar producing areas has been crop friendly after a period of dry conditions. Coffee prices also fell in May, losing 10%. Brazilian weather has been excellent, which weighed on sentiment throughout the second quarter. The harvest has been moving at a brisk pace and at 35% complete for the season, is ahead of schedule. The second quarter saw cocoa prices trend higher. The Ivory Coast was the focus after the disarmament process broke down yet again. Cattle scored gains in May and June as the USDA announced an agreement with Japan to restart U.S. beef exports to that nation. Hogs also put in a strong June, as Far Eastern demand remained brisk.
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Quarterly Performance of Series F
The following is a summary of performance for the major sectors in which the Series F traded:
Currencies: (-) Long positions in the Australian dollar, and short positions in the Canadian dollar, Japanese yen, and Swiss franc contributed to losses in the second quarter of 2006.
Energies: (+) Profits on long and short positions in heating oil, and long positions in Brent crude resulted in a gain for the second quarter of 2006.
Indices: (-) Long positions in the S&P 500, the IBEX 35 and the Nikkei, as well as long and short positions in the DAX, and the DJ STOXX contributed to losses in the second quarter.
Interest Rates: (+) The interest rate sector was up for the second quarter of 2006. Short positions in Euribor, Eurodollar, Short Sterling and U.S. Treasury Notes and Bonds contributed to the sector’s profits for the quarter.
Metals: (+) The sector generated net profits for the second quarter of 2006 on gains in long gold, copper and zinc positions.
Series F average net assets have declined for the three and sixth month periods ending June 30, 2006 compared to the three and sixth month periods ending June 30, 2005 due to the effect of redemptions during 2005 and Year-to-Date 2006, in addition to negative trading performance between July 1, 2005 and June 30, 2006.
Interest income is earned on the average daily equity maintained in its accounts with the broker and, therefore, varies monthly according to interest rates, trading performance, and redemptions. Interest income increased approximately $170,000 and $366,000 during Second Quarter 2006 and Year-To-Date 2006, as compared to Second Quarter 2005 and Year-To-Date 2005, due to the higher overall interest rates in Second Quarter 2006 versus Second Quarter 2005 and Year-To-Date 2006 versus Year-To-Date 2005.
Commissions are calculated on Series F’s net asset value at the end of each week and, therefore, vary according to weekly trading performance, and redemptions. Other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the trading advisor executes, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions and other transaction fees decreased approximately$55,000 and $58,000 during Second Quarter 2006 and Year-To-Date 2006, as compared to Second Quarter 2005 and Year-To-Date 2005, due to the decrease in average net asset levels as discussed above.
All trading decisions for Series F are made by Campbell & Company, Inc. (the “Trading Advisor”). Management fees are calculated on Series F’s net asset value at the end of each week and, therefore, are affected by weekly trading performance, contributions and redemptions. Management fees decreased approximately $21,000 and $16,000 during Second Quarter 2006 and Year-To-Date 2006, as compared to Second Quarter 2005 and Year-To-Date 2005, due to the decrease in average net asset levels as discussed above.
Incentive fees are based on the New High Net Trading Profits generated by the Trading Advisor, as defined in the Advisory Agreement among the Trust, the Managing Owner and Trading Advisor. No incentive fees were earned during Second Quarter 2006, Year-To-Date 2006, Second Quarter 2005 and Year-To-Date 2005.
General and administrative expenses were approximately $71,000, $126,000, $600 and $108,000 for Second Quarter 2006, Year-To-Date 2006, Second Quarter 2005 and Year-To-Date 2005, respectively. These expenses include accounting, audit, tax and legal fees, as well as printing and postage costs related to reports sent to limited owners and are before reimbursements of costs incurred by the Managing Owner on behalf of Series F. To the extent that general and administrative expenses exceed 1.5% of Series F’s net asset value during such year (with a maximum of 0.5% attributable to other than legal and audit expenses) such amounts are borne by the Managing Owner and its affiliates. No such expenses exceeded these limits during Second Quarter 2006 and Year-To-Date 2006, Second Quarter 2005, and Year-To-Date 2005.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 305(c) of Regulation S-K requires disclosures during each interim reporting period of material changes in the quantitative and qualitative market risk information provided as of the end of the immediately preceding year. The following information should be read in conjunction with Series F’s Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2005.
The following table presents the trading value at risk associated with Series F’s open positions by market sector at June 30, 2006 and December 31, 2005. All open position trading risk exposures of Series F have been included in calculating the figure set forth below. At June 30, 2006 and December 31, 2005, Series F had total capitalizations of approximately $32.5 million and $36.8 million respectively.
June 30, 2006 | December 31, 2005 | |||||||||||
Market Sector | Value Risk | % of Total Capitalization | Value at Risk | % of Total Capitalization | ||||||||
Interest rates | $ | 588,336 | 1.81 | % | $ | 1,417,042 | 3.85 | % | ||||
Currencies | 737,302 | 2.27 | % | 1,543,091 | 4.20 | % | ||||||
Commodities | 362,800 | 1.12 | % | 737,755 | 2.01 | % | ||||||
Stock indices | 218,136 | 0.67 | % | 1,123,112 | 3.05 | % | ||||||
Total | $ | 1,906,574 | 5.87 | % | $ | 4,821,000 | 13.11 | % | ||||
The following table presents the average trading value at risk of Series F’s open positions by market sector for Second Quarter 2006 and Year-To-Date 2006 based upon Series F’s total average capitalization of approximately $34.0 million and $34.9 million, respectively.
Second Quarter 2006 | Year-To-Date 2006 | |||||||||||
Market Sector | Value Risk | % of Total Capitalization | Value at Risk | % of Total Capitalization | ||||||||
Interest rates | $ | 859,600 | 2.53 | % | $ | 921,565 | 2.63 | % | ||||
Currencies | 1,101,108 | 3.24 | % | 1,236,004 | 3.52 | % | ||||||
Commodities | 435,906 | 1.28 | % | 496,435 | 1.41 | % | ||||||
Stock indices | 531,384 | 1.56 | % | 751,637 | 2.14 | % | ||||||
Total | $ | 2,927,998 | 8.61 | % | $ | 3,405,641 | 9.70 | % | ||||
At June 30, 2006, the Fund experienced a decrease in its value at risk, relative to capitalization levels, as compared with the value at risk at December 31, 2005. The decrease was a portfolio-wide occurrence. The value at risk in the stock index sector declined the most. The greatest contributors to the reduced exposure were the DAX, S&P 500 and Dow Jones STOXX 50. The value at risk in currencies declined due to reduced exposure across almost all of the currencies traded. The most significant reductions were in the Japanese yen, the British pound, the Australian dollar and the South African rand. The decline in the value at risk in interest rates was primarily attributable to a reduction in the 2-year German Bond, Eurodollar and 5-year German BOBL. The value at risk in commodities declined primarily due to reduced exposure to the energy sector, specifically crude oil, natural gas, gasoil and heating oil.
ITEM 4. | CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, the Managing Owner carried out an evaluation, under the supervision and with the participation of the officers of the Managing Owner, including the Managing Owner’s co-chief executive officer, chief financial officer and director of fund administration, of the effectiveness of the design and operation of Series F’s disclosure controls and procedures. Based upon that evaluation, the Managing Owner’s co-chief executive officer, chief financial officer and director of fund administration concluded that Series F’s disclosure controls and procedures are effective.
In designing and evaluating Series F’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), the Managing Owner recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, as ours are designed to do, and the Managing Owner necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.
There have not been any changes in our internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 1. | Legal Proceedings – There are no material legal proceedings pending by or against Series F or the Managing Owner, or to which Series F or Managing Owner was a party during the period covered by this report. |
Item 1.A. | Risk Factors – There have been no material changes from risk factors as previously disclosed in the Series F’s Form 10-K for the fiscal year ended December 31, 2005. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds – None |
Item 3. | Defaults Upon Senior Securities – None |
Item 4. | Submission of Matters to a Vote of Security Holders – None |
Item 5. | Other Information – None |
Item 6. | Exhibits: |
3.1 and 4.1 | Third Amended and Restated Declaration of Trust and Trust Agreements of World Monitor Trust II dated as of October 1, 2004 (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.) | |
31.1 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
31.2 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
31.3 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.3 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
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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.
WORLD MONITOR TRUST II – SERIES F | ||||||||||
By: | Preferred Investment Solutions Corp. | |||||||||
Managing Owner | ||||||||||
By: | /s/ Kenneth A. Shewer | Date: August 14, 2006 | ||||||||
Kenneth A. Shewer | ||||||||||
Co-Chief Executive Officer | ||||||||||
By: | /s/ Maureen D. Howley | Date: August 14, 2006 | ||||||||
Maureen D. Howley | ||||||||||
Chief Financial Officer and Senior Vice President | ||||||||||
By: | /s/ David K. Spohr | Date: August 14, 2006 | ||||||||
David K. Spohr | ||||||||||
Vice President and Director of Fund Administration |