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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period endedSeptember 30, 2008
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 Number000-52604
SMITH BARNEY TIDEWATER FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York | 13-3811113 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No. | ) |
c/o Citigroup Managed Futures LLC
55 East 59th Street — 10th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 559-2011
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “large accelerated filer” and “accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
Yes No X
As of October 31, 2008, 32,931.2908 Limited Partnership Redeemable Units were outstanding.
SMITH BARNEY TIDEWATER FUTURES FUND L.P.
FORM 10-Q
INDEX
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PART I
Statements of Financial Condition
(Unaudited)
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets: | ||||||||
Equity in commodity futures trading account: | ||||||||
Cash | $ | 50,812,609 | $ | 52,812,263 | ||||
Cash margin | 6,475,020 | 11,753,495 | ||||||
Net unrealized appreciation on open futures contracts | 206,195 | 3,907,173 | ||||||
Unrealized appreciation on open forward contracts | 400,572 | 109,033 | ||||||
57,894,396 | 68,581,964 | |||||||
Interest receivable | 41,017 | 133,281 | ||||||
Total assets | $ | 57,935,413 | $ | 68,715,245 | ||||
Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Unrealized depreciation on open forward contracts | $ | 724,356 | $ | 463,237 | ||||
Accrued expenses: | ||||||||
Brokerage commissions | 309,893 | 369,698 | ||||||
Management fees | 94,730 | — | ||||||
Other | 62,920 | 34,623 | ||||||
Redemptions payable | 722,709 | 1,875,612 | ||||||
Total liabilities | 1,914,608 | 2,743,170 | ||||||
Partners’ Capital: | ||||||||
General Partner, 1,211.0353 and 689.7925 Unit equivalents outstanding in 2008 and 2007, respectively | 1,925,134 | 1,139,627 | ||||||
Limited Partners, 34,029.6432 and 39,241.8150 Redeemable Units of Limited Partnership Interest outstanding in 2008 and 2007, respectively | 54,095,671 | 64,832,448 | ||||||
Total partners’ capital | 56,020,805 | 65,972,075 | ||||||
Total liabilities and partners’ capital | $ | 57,935,413 | $ | 68,715,245 | ||||
See accompanying notes to financial statements.
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Smith Barney Tidewater Futures Fund L.P.
Schedule of Investments
September 30, 2008
(Unaudited)
Schedule of Investments
September 30, 2008
(Unaudited)
% of Partners’ | ||||||||
Fair Value | Capital | |||||||
Futures Contracts Purchased | ||||||||
Energy | $ | 136,835 | 0.24 | % | ||||
Currencies | 14,282 | 0.03 | ||||||
Grains | (742,732 | ) | (1.32 | ) | ||||
Indices | (42,745 | ) | (0.08 | ) | ||||
Interest Rates-U.S. | (26,723 | ) | (0.05 | ) | ||||
Interest Rates Non-U.S. | 122,732 | 0.22 | ||||||
Softs | (251,541 | ) | (0.45 | ) | ||||
Total futures contracts purchased | (789,892 | ) | (1.41 | ) | ||||
Futures Contracts Sold | ||||||||
Currencies | 11,831 | 0.02 | ||||||
Indices | 254,877 | 0.46 | ||||||
Interest Rates Non-U.S. | (346,268 | ) | (0.62 | ) | ||||
Livestock | 588,200 | 1.05 | ||||||
Softs | 532,967 | 0.95 | ||||||
Metals | (45,520 | ) | (0.08 | ) | ||||
Total futures contracts sold | 996,087 | 1.78 | ||||||
Net unrealized appreciation on open futures contracts | 206,195 | 0.37 | ||||||
Unrealized Appreciation on Open Forward Contracts | ||||||||
Metals | 400,572 | 0.71 | ||||||
Total unrealized appreciation on open forward contracts | 400,572 | 0.71 | ||||||
Unrealized Depreciation on Open Forward Contracts | ||||||||
Metals | (724,356 | ) | (1.29 | ) | ||||
Total unrealized depreciation on open forward contracts | (724,356 | ) | (1.29 | ) | ||||
Total fair value | $ | (117,589 | ) | (0.21 | )% | |||
See accompanying Notes to Financial Statements.
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Smith Barney Tidewater Futures Fund L.P.
Schedule of Investments
December 31, 2007
(Unaudited)
Schedule of Investments
December 31, 2007
(Unaudited)
% of Partners’ | ||||||||
Fair Value | Capital | |||||||
Futures Contracts Purchased | ||||||||
Currencies | $ | 547,906 | 0.83 | % | ||||
Energy | 540,652 | 0.82 | ||||||
Grains | 1,996,515 | 3.03 | ||||||
Indices | 41,706 | 0.06 | ||||||
Interest Rates U.S. | 91,642 | 0.14 | ||||||
Interest Rates Non-U.S. | (52,122 | ) | (0.08 | ) | ||||
Metals | 170,900 | 0.26 | ||||||
Softs | 411,050 | 0.62 | ||||||
Total futures contracts purchased | 3,748,249 | 5.68 | ||||||
Futures Contracts Sold | ||||||||
Currencies | 31,697 | 0.05 | ||||||
Indices | 28,092 | 0.04 | ||||||
Interest Rates Non-U.S. | 298,779 | 0.45 | ||||||
Livestock | 174,040 | 0.26 | ||||||
Softs | (373,684 | ) | (0.56 | ) | ||||
Total futures contracts sold | 158,924 | 0.24 | ||||||
Net unrealized appreciation on open futures contracts | 3,907,173 | 5.92 | ||||||
Unrealized Appreciation on Open Forward Contracts | ||||||||
Metals | 109,033 | 0.17 | ||||||
Total unrealized appreciation on open forward contracts | 109,033 | 0.17 | ||||||
Unrealized Depreciation on Open Forward Contracts | ||||||||
Metals | (463,237 | ) | (0.70 | ) | ||||
Total unrealized depreciation on open forward contracts | (463,237 | ) | (0.70 | ) | ||||
Total fair value | $ | 3,552,969 | 5.39 | % | ||||
See accompanying Notes to Financial Statements.
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Smith Barney Tidewater Futures Fund L.P.
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Income: | ||||||||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||||||||
Net realized gains (losses) on closed positions | $ | (14,776,024 | ) | $ | (56,003,003 | ) | $ | 7,366,901 | $ | (32,837,803 | ) | |||||
Change in net unrealized gains (losses) on open positions | (6,574,197 | ) | (204,253 | ) | (3,670,558 | ) | (547,995 | ) | ||||||||
Gain (loss) from trading, net | (21,350,221 | ) | (56,207,256 | ) | 3,696,343 | (33,385,798 | ) | |||||||||
Interest income | 200,748 | 805,502 | 738,227 | 2,583,828 | ||||||||||||
Total income (loss) | (21,149,473 | ) | (55,401,754 | ) | 4,434,570 | (30,801,970 | ) | |||||||||
Expenses: | ||||||||||||||||
Brokerage commissions, including clearing fees of $15,717, $77,088, $54,076 and $181,441 respectively | 1,068,238 | 1,346,206 | 3,698,205 | 4,645,318 | ||||||||||||
Management fees | 319,076 | 374,513 | 1,100,375 | 1,327,876 | ||||||||||||
Incentive fees | — | — | — | 3,497,877 | ||||||||||||
Other | 53,945 | 26,949 | 151,084 | 76,544 | ||||||||||||
Total expenses | 1,441,259 | 1,747,668 | 4,949,664 | 9,547,615 | ||||||||||||
Management fees waived | — | (110,604 | ) | — | (110,604 | ) | ||||||||||
Net expenses | 1,441,259 | 1,637,064 | 4,949,664 | 9,437,011 | ||||||||||||
Net income (loss) | (22,590,732 | ) | (57,038,818 | ) | (515,094 | ) | (40,238,981 | ) | ||||||||
Additions—Limited Partners | 275,000 | 14,093,000 | 6,990,000 | 34,921,000 | ||||||||||||
Additions—General Partner | — | — | 886,660 | 1,161,472 | ||||||||||||
Redemptions—Limited Partners | (4,264,376 | ) | (2,484,842 | ) | (17,312,836 | ) | (12,670,441 | ) | ||||||||
Net increase (decrease) in Partners’ Capital | (26,580,108 | ) | (45,430,660 | ) | (9,951,270 | ) | (16,826,950 | ) | ||||||||
Partners’ Capital, beginning of period | 82,600,913 | 111,574,388 | 65,972,075 | 82,970,678 | ||||||||||||
Partners’ Capital, end of period | $ | 56,020,805 | $ | 66,143,728 | $ | 56,020,805 | $ | 66,143,728 | ||||||||
Net Asset Value per Unit (35,240.6785 and 43,059.3689 Units outstanding at September 30, 2008 and 2007, respectively) | $ | 1,589.66 | $ | 1,536.11 | $ | 1,589.66 | $ | 1,536.11 | ||||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent | $ | (615.07 | ) | $ | (1,382.95 | ) | $ | (62.47 | ) | $ | (933.83 | ) | ||||
See accompanying notes to financial statements.
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1. | General: |
Smith Barney Tidewater Futures Fund L.P. (the “Partnership”) is a limited partnership which was organized on February 23, 1995 under the partnership laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership privately and continuously offers up to 100,000 Redeemable Units of Limited Partnership Interest (“Redeemable Units”) in the Partnership to qualified investors. There is no maximum number of units that may be sold by the Partnership.
Citigroup Managed Futures LLC, a Delaware Limited Liability Company, acts as the general partner (the “General Partner”) of the Partnership. The Partnership’s commodity broker is Citigroup Global Markets Inc. (“CGM”). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. (“CGMHI”), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. As of September 30, 2008, all trading decisions for the Partnership are made by Chesapeake Capital Corporation (the “Advisor”).
The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at September 30, 2008 and December 31, 2007, and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2008 and 2007. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report onForm 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2007.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from these estimates.
The Partnership 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” (“FAS 102”).
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.
2. | Financial Highlights: |
Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2008 and 2007 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net realized and unrealized gains (losses) * | $ | (610.34 | ) | $ | (1,395.22 | ) | $ | (49.15 | ) | $ | (874.44 | ) | ||||
Interest income | 5.48 | 19.28 | 18.86 | 68.93 | ||||||||||||
Expenses ** | (10.21 | ) | (7.01 | ) | (32.18 | ) | (128.32 | ) | ||||||||
Increase (decrease) for the period | (615.07 | ) | (1,382.95 | ) | (62.47 | ) | (933.83 | ) | ||||||||
Net Asset Value per Redeemable Unit, beginning of period | 2,204.73 | 2,919.06 | 1,652.13 | 2,469.94 | ||||||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 1,589.66 | $ | 1,536.11 | $ | 1,589.66 | $ | 1,536.11 | ||||||||
* | Includes brokerage commissions | |
** | Excludes brokerage commissions |
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Smith Barney Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2008
(Unaudited)
Notes to Financial Statements
September 30, 2008
(Unaudited)
2. | Financial Highlights (Continued): |
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||
Ratios to Average Net Assets: *** | ||||||||||||||||||||
Net investment income (loss) before incentive fees **** | (7.3 | ) | % | (4.0 | ) | %***** | (7.9 | ) | % | (5.2 | ) | %***** | ||||||||
Operating expenses | 8.5 | % | 7.8 | %***** | 9.3 | % | 9.2 | %***** | ||||||||||||
Incentive fees | — | % | — | % | — | % | 4.0 | % | ||||||||||||
Total expenses | 8.5 | % | 7.8 | % | 9.3 | % | 13.2 | % | ||||||||||||
Total return: | ||||||||||||||||||||
Total return before incentive fees | (27.9 | ) | % | (47.4 | ) | % | (3.8 | ) | % | (34.5 | ) | % | ||||||||
Incentive fees | — | % | — | % | — | % | (3.3 | ) | % | |||||||||||
Total return after incentive fees | (27.9 | ) | % | (47.4 | ) | % | (3.8 | ) | % | (37.8 | ) | % | ||||||||
*** | Annualized (other than incentive fee) | |
**** | Interest income less total expenses | |
***** | Percentages are after management fee waivers. The Advisor voluntarily waived its monthly management fee equal to 1/6 of 1% (2% per year) of average net assets as of September 1, 2007 and remained in effect through December 31, 2007. |
The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.
3. | Trading Activities: |
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities shown the Statements of Income and Expenses and Partners’ Capital.
The customer agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures positions.
All of the commodity interests owned by the Partnership are held for trading purposes. The average fair values of these interests during the nine and twelve months ended September 30, 2008 and December 31, 2007, based on a monthly calculation, were $2,903,104 and $5,464,542 respectively. The fair values of these commodity interests, including options thereon, if applicable, at September 30, 2008 and December 31, 2007, were ($117,589) and $3,552,969, respectively. Fair values for exchange-traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on other measures of fair value deemed appropriate by the General Partner.
Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions.
4. | Fair Value Measurements: |
Investments. All commodity interests (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on
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Smith Barney Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2008
(Unaudited)
Notes to Financial Statements
September 30, 2008
(Unaudited)
open contracts are included in equity in commodity futures trading account. Any change in net unrealized gain or loss from the preceding period is reported in the Statements of Income and Expenses and Partners’ Capital.
Fair Value Measurements. The Partnership adopted Statements of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership did not apply the deferral allowed by FASB Staff PositionsNo. FAS 157-2,Effective Date of FASB Statement No. 157, for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
The Partnership considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of September 30, 2008, the Partnership did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
9/30/2008 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Futures | $ | 206,195 | $ | 206,195 | $ | — | $ | — | ||||||||
Forwards | 400,572 | — | 400,572 | — | ||||||||||||
Total assets | 606,767 | 206,195 | 400,572 | — | ||||||||||||
Liabilities | ||||||||||||||||
Forwards | $ | 724,356 | — | $ | 724,356 | — | ||||||||||
Total liabilities | $ | 724,356 | $ | — | $ | 724,356 | $ | — | ||||||||
Total fair value | $ | (117,589 | ) | $ | 206,195 | $ | (323,784 | ) | $ | — | ||||||
5. | Financial Instrument Risks: |
In the normal course of its business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.
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Smith Barney Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2008
(Unaudited)
Notes to Financial Statements
September 30, 2008
(Unaudited)
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange-traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership’s assets is CGM.
As both a buyer and seller of options, the Partnership pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership does not consider these contracts to be guarantees as described in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees” (“FIN 45”).
The General Partner monitors and controls the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s business, these instruments may not be held to maturity.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Liquidity and Capital Resources
The Partnership does not engage in sales of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash, net unrealized appreciation on open futures contracts, unrealized appreciation on open forward contracts and interest receivable. Because of the low margin deposits normally required in commodity futures 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 losses occurred in the third quarter of 2008.
The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
For the nine months ended September 30, 2008, Partnership capital decreased 15.1% from $65,972,075 to $56,020,805. This decrease was attributable to the net loss from operations of $515,094, coupled with the redemption of 9,072.7874 Redeemable Units of Limited Partnership Interest totaling $17,312,836, which was partially offset by the addition of 3,860.6156 Redeemable Units of Limited Partnership totaling $6,990,000 and the addition of 521.2428 General Partner Unit equivalents totaling $886,660. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.
Critical Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from these estimates.
Investments. All commodity interests (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included in equity in commodity futures trading account. Any change in net unrealized gain or loss from the preceding period is reported in the Statements of Income and Expenses and Partners’ Capital.
Fair Value Measurements. For disclosures related to fair value measurements persuant to SFAS 157, refer to Note 4 in the notes to financial statements.
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Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for anagreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership’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 dates, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the Statements of Income and Expenses and Partners’ Capital.
Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnership’s income and expenses.
In 2007, the Partnership adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (FIN 48).” FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation 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 by the applicable tax authority. Tax positions with respect to tax at the partnership level not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The General Partner has concluded that the adoption of FIN 48 had no impact on the operations of the Partnership for the nine months ended September 30, 2008 and that no provision for income tax is required in the Partnership’s financial statements.
The following are the major tax jurisdictions for the Partnership and the earliest tax year subject to examination: United States – 2004.
Recent Accounting Pronouncements. On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how the Partnership accounts for derivatives (the Partnership does not have hedged items). Management is evaluating the enhanced disclosure requirements and does not believe that there will be any material impact on the financial statement disclosures.
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Results of Operations
During the Partnership’s third quarter of 2008, the Net Asset Value per Redeemable Unit decreased 27.9% from $2,204.73 to $1589.66 as compared to a decrease of 47.4% in the third quarter of 2007. The Partnership experienced a net loss on trading of commodity interests before brokerage commission and related fees in the third quarter of 2008 of $21,350,221. Losses were primarily attributable to the trading of commodity futures in currencies, energy, grains, non-U.S. interest rates, metals, and softs and were partially offset by gains in U.S. interest rates, livestock, and indices. The Partnership experienced a net loss on trading of commodity interest before brokerage commissions and related fees in the third quarter of 2007 of $56,207,256. Losses were primarily attributable to the trading of commodity futures in currencies, energy, U.S. and non-U.S. interest rates, livestock, metals, softs and indices and were partially offset by gains in grains.
The third quarter of 2008 presented an extremely volatile trading environment as the credit crisis deepened. Counterparty risk took center stage as some of the biggest broker-dealers teetered on the edge of bankruptcy. Managed futures, as an asset class, outperformed since counterparty risk is eliminated through exchange cleared trading. The crisis affected various asset classes in different ways. The U.S. Dollar strengthened against most developed country currencies. The fixed income sector experienced tremendous volatility as yield curves rapidly sloped upwards, indicating a strong preference for shorter maturity, less risky government treasuries. Crude oil set the highest exchange listed price of $147 while also dipping below $100 in the quarter. The agricultural sector also reflected a similar sentiment as prices of grains reached record levels earlier in the quarter while dipping to their lowest levels for the year as the quarter came to a close. Perhaps, the most visible sentiment of the market was reflected through stock index futures as most indices dropped precipitously. The Partnership was profitable in U.S. fixed income, livestock and stock indices while losses were seen in non-U.S. fixed income, currencies, metals, grains, energy and agricultural softs.
In the U.S. fixed income sector, small profits were realized as the focus of the U.S. Federal Reserve shifted from inflation to the credit crisis. The Partnership profited from short positions in global stock indices, which cratered to their lowest levels in a few years. Gains were also registered in livestock, primarily from live cattle and lean hogs.
In the non-U.S. fixed income sector, the Partnership recorded losses as international interest rates rapidly changed their course as the negative risk to the economies increased dramatically. In currencies, the Partnership realized losses, as the U.S. Dollar grew strong against some of the other developed country currencies. In the energy sector, long-term bullish trend in crude oil reversed, just as a new exchange listed record price of $147 was set. The Partnership recorded losses in the energy sector due to this sharp reversal, which reflected across the petroleum complex, including natural gas. In the grains sector, losses were registered as prices reversed from record levels at the beginning of the quarter before recovering later. Increased correlation between corn and crude oil prices has been notable in the recent past. Losses were registered in the metals sector as gold prices dropped sharply to their lowest level in a year. Industrial metals also exhibited a sharp reversal. Small losses were seen in agricultural softs, primarily from cocoa and coffee.
During the Partnership’s nine months ended September 30, 2008, the Net Asset Value per Redeemable Unit decreased 3.8% from $1,652.13 to $1,589.66 as compared to a decrease of 37.8% for the nine months ended September 30, 2007. The Partnership experienced net gains on trading of commodity interests before brokerage commissions and related fees during the nine months ended September 30, 2008 of $3,696,343. Gains were primarily attributable to the trading of commodity futures in currencies, energy, grains, U.S. interest rates, livestock, softs, and indices and were partially offset by losses in metals and non-U.S. interest rates. The Partnership experienced a net loss on trading of commodity interests before brokerage commissions and related fees during the nine months ended September 30, 2007 of $33,385,798. Losses were primarily attributable to the trading of commodity futures in currencies, energy, U.S. and non-U.S. interest rates, livestock, metals, softs, and indices and were partially offset by gains in grains.
Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership’s daily average equity maintained in cash was earned at a30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Partnership’s assets in cashand/or place
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all of the Partnership’s assets in90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills. Interest income for the three and nine months ended September 30, 2008 decreased by $604,754 and $1,845,601, respectively, as compared to the corresponding periods in 2007. The decrease in interest income is primarily due to lower daily average equity maintained in cash and lower U.S. Treasury bill rates during the three and nine months ended September 30, 2008 as compared to the corresponding periods in 2007.
Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Brokerage commissions and fees for the three and nine months ended September 30, 2008 decreased by $277,968 and $947,113, respectively, as compared to the corresponding periods in 2007. The decrease in brokerage commissions and fees is due to lower average adjusted net assets during the three and nine months ended September 30, 2008 as compared to the corresponding periods in 2007.
Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and nine months ended September 30, 2008 decreased by $55,437 and $227,501, respectively, as compared to the corresponding periods in 2007. The decrease in management fees is due to lower average adjusted net assets during the three and nine months ended September 30, 2008 as compared to the corresponding periods in 2007.
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, 2008. There were no incentive fees earned for the three months ended September 30, 2007. Trading performance for the nine months ended September 30, 2007 resulted in incentive fees of $3,497,877. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.
Market movements result in frequent changes in the fair value of the Partnership’s open positions and, consequently, in its earnings and cash flow. The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which it trades.
The Partnership 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.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification 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 maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of anyone-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.
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The following table indicates the trading Value at Risk associated with the Partnership’s open positions by market category as of September 30, 2008, and the highest, lowest and average values during the three months ended September 30, 2008. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of September 30, 2008, the Partnership’s total capital was $56,020,805. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report onForm 10-K for the year ended December 31, 2007.
September 30, 2008
(Unaudited)
(Unaudited)
Three Months Ended September 30, 2008 | ||||||||||||||||||||
% of Total | High | Low | Average | |||||||||||||||||
Market Sector | Value at Risk | Capital | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Currencies: | ||||||||||||||||||||
—Exchange Traded Contracts | $ | 589,239 | 1.05 | % | $ | 753,141 | $ | 507,387 | $ | 636,932 | ||||||||||
—OTC Contracts | 800,201 | 1.43 | % | 2,887,035 | 579,175 | 787,275 | ||||||||||||||
Energy | 666,750 | 1.19 | % | 2,113,750 | 666,750 | 1,305,450 | ||||||||||||||
Grains | 129,500 | 0.23 | % | 928,000 | 129,500 | 485,633 | ||||||||||||||
Interest Rates U.S. | 352,500 | 0.63 | % | 352,500 | 221,800 | 275,217 | ||||||||||||||
Interest Rates Non-U.S. | 870,019 | 1.55 | % | 1,551,980 | 835,978 | 1,121,247 | ||||||||||||||
Livestock | 212,400 | 0.38 | % | 212,400 | 191,100 | 208,200 | ||||||||||||||
Metals: | ||||||||||||||||||||
—Exchange Traded Contracts | 22,000 | 0.04 | % | 352,500 | 22,000 | 136,083 | ||||||||||||||
—OTC Contracts | 452,428 | 0.81 | % | 615,224 | 314,721 | 503,221 | ||||||||||||||
Softs | 751,674 | 1.34 | % | 984,009 | 748,676 | 881,932 | ||||||||||||||
Indices | 612,772 | 1.09 | % | 950,094 | 612,772 | 786,242 | ||||||||||||||
Total | $ | 5,459,483 | 9.74 | % | ||||||||||||||||
* | Average of month-end Values at Risk |
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Item 4T. | Controls and Procedures |
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined inRule 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2008 and, based on that evaluation, the CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.
The Partnership’sinternal control over financial reportingis a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. 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 U.S. generally accepted accounting principles, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and | |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended September 30, 2008 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 |
The following information supplements and amends our discussion set forth under Part I, Item 3 “Legal Proceedings” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2007, as updated by our Quarterly Report onForm 10-Q for the quarters ended March 31, 2008 and June 30, 2008.
Research Analyst Litigation
On September 30, 2008, the Court of Appeals for the Second Circuit vacated the District Court’s order granting class certification in the matter IN RE SALOMON ANALYST METROMEDIA. Thereafter, on October 1, 2008, the parties reached a settlement pursuant to which Citigroup will pay $35 million to members of the settlement class that purchased or otherwise acquired MFN securities during the class period. The settlement is subject to judicial approval. The proposed settlement amount is covered by existing litigation reserves.
Subprime-Mortgage-Related Litigation
Citigroup Inc., Citigroup Global Markets Inc. and several current and former officers and directors, and numerous other financial institutions, have been named as defendants in a class action lawsuit filed on September 30, 2008, alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933 arising out of offerings of Citigroup securities issued in 2006 and 2007. This action, LOUISIANA SHERIFFS’ PENSION AND RELIEF FUND v. CITIGROUP INC., et al., is currently pending in New York state court.
Citigroup Global Markets Inc., along with numerous other firms, has been named as a defendant in several lawsuits by shareholders of Ambac Financial Group, Inc. for which CGMI underwrote securities offerings. These actions assert that CGMI violated Sections 11 and 12 of the Securities Act of 1933 arising out of allegedly false and misleading statements contained in the registration statements and prospectuses issued in connection with those offerings. Several of these actions have been consolidated under the caption IN RE AMBAC FINANCIAL GROUP, INC. SECURITIES LITIGATION, pending in the United States District Court for the Southern District of New York, and in which a consolidated amended class action complaint was filed on August 22, 2008.
On September 12, 2008, defendants, including Citigroup Inc. and Citigroup Global Markets Inc., moved to dismiss the complaint in IN RE AMERICAN HOME MORTGAGE SECURITIES LITIGATION.
Auction Rate Securities-Related Litigation
On September 19, 2008, MILLER v. CALAMOS GLOBAL DYNAMIC INCOME FUND, et al., which had been pending in the United States District Court for the Southern District of New York and in which Citigroup Global Markets Inc. had been named as a defendant, was voluntarily dismissed.
On August 25, 2008, Lead Plaintiffs in IN RE CITIGROUP AUCTION RATE SECURITIES LITIGATION, pending in the United States District Court for the Southern District of New York, filed an amended consolidated class action complaint.
Citigroup Inc. and Citigroup Global Markets Inc., along with numerous other financial institutions, have been named as defendants in several lawsuits alleging that defendants artificially restrained trade in the market for auction rate securities in violation of the Sherman Act. These actions are (1) MAYOR AND CITY COUNCIL OF BALTIMORE, MARYLAND v. CITIGROUP INC., et al., and (2) MAYFIELD v. CITIGROUP INC., et al., and both are pending in the United States District Court for the Southern District of New York.
On August 7, 2008, Citigroup reached a settlement with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies, pursuant to which Citigroup agreed to offer to purchase at par ARS that are not auctioning from all Citigroup individual investors, small institutions (as defined by the terms of the settlement), and charities that purchased ARS from Citigroup prior to February 11, 2008. In addition, Citigroup agreed to pay a $50 million fine to the State of New York and a $50 million fine to the other state regulatory agencies.
A consolidated amended class action complaint was filed in IN RE MAT FIVE SECURITIES LITIGATION on October 2, 2008.
On July 21, 2008, the Court approved the voluntary dismissal without prejudice of FERGUSON FAMILY TRUST v. FALCON STRATEGIES TWO LLC, et al.
Citigroup and its administration and investment committees filed a motion to dismiss the purported class action complaint in LEBER v. CITIGROUP, INC., et al., on August 29, 2008. The motion is currently pending.
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Item 1A. | Risk Factors |
There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and under Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008.
In June 2008, several bills were proposed in the U.S. Congress in response to record energy and agricultural prices. Some of the pending legislation, if enacted, could limit trading by speculators in futures markets. Other potentially adverse regulatory initiatives could develop suddenly and without notice. At this time management is unable to determine the potential impact on the Partnership.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
For the three months ended September 30, 2008, there were additional sales of 141.7072 Redeemable Units totaling $275,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options and forwards contracts.
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The following chart sets forth the purchases of Redeemable Units by the Partnership.
(d) Maximum Number | ||||||||||||||||||||
(or Approximate | ||||||||||||||||||||
(c) Total Number | Dollar Value) of Shares | |||||||||||||||||||
of Shares (or Units) | (or Units) that | |||||||||||||||||||
(a) Total Number | (b) Average | Purchased as Part | May Yet Be | |||||||||||||||||
of Shares | Price Paid per | of Publicly Announced | Purchased Under the | |||||||||||||||||
Period | (or Units) Purchased* | Share (or Unit)** | Plans or Programs | Plans or Programs | ||||||||||||||||
July 1, 2008 - July 31, 2008 | 1,266.7088 | $ | 1,922.00 | N/A | N/A | |||||||||||||||
August 1, 2008 - August 31, 2008 | 645.0080 | $ | 1,716.34 | N/A | N/A | |||||||||||||||
September 1, 2008 - September 30, 2008 | 454.6311 | $ | 1,589.66 | N/A | N/A | |||||||||||||||
2,366.3479 | $ | 1,802.09 | ||||||||||||||||||
* | Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners. | |
** | Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day. |
Item 3. | Defaults Upon Senior Securities – None |
Item 4. | Submission of Matters to a Vote of Security Holders – None |
Item 5. | Other Information – None |
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Item 6. | Exhibits |
The exhibits required to be filed by Item 601 ofRegulation S-K are incorporated herein by reference to the exhibit index of the Partnership’s Annual Report onForm 10-K for the period ended December 31, 2007 and quarterly report on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008.
Exhibit – 31.1 –Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
Exhibit – 31.2 –Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).
Exhibit – 32.1 – Section 1350 Certification (Certification of President and Director).
Exhibit – 32.2 – Section 1350 Certification (Certification of Chief Financial Officer and Director).
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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.
SMITH BARNEY TIDEWATER FUTURES FUND L.P.
By: | Citigroup Managed Futures LLC | |
(General Partner) | ||
By: | /s/ Jerry Pascucci | |
Jerry Pascucci President and Director | ||
Date: | November 14, 2008 | |
By: | /s/ Jennifer Magro | |
Jennifer Magro Chief Financial Officer and Director | ||
Date: | November 14, 2008 | |
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