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, 2010
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number000-52604
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 Ceres Managed Futures LLC
522 5th Ave — 14th Floor
New York, New York 10036
(Address of principal executive offices) (Zip Code)
(212) 296-1999
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer X | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of October 31, 2010, 21,459.1186 Limited Partnership Redeemable Units were outstanding.
TIDEWATER FUTURES FUND L.P.
FORM 10-Q
INDEX
Ex 31.1 Certification
Ex 31.2 Certification
Ex 32.1 Certification
Ex 32.2 Certification
2
PART I
Item 1. Financial Statements
Tidewater Futures Fund L.P.
Statements of Financial Condition
Statements of Financial Condition
(Unaudited) September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets: | ||||||||
Equity in trading account: | ||||||||
Cash | $ | 19,992,517 | $ | 32,781,935 | ||||
Cash margin | 10,028,268 | 13,348,704 | ||||||
Net unrealized appreciation on open futures contracts | 3,795,718 | 3,623,720 | ||||||
Net unrealized appreciation on open forward contracts | 441,638 | 1,276,029 | ||||||
34,258,141 | 51,030,388 | |||||||
Interest receivable | 2,360 | 522 | ||||||
Total assets | $ | 34,260,501 | $ | 51,030,910 | ||||
Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Accrued expenses: | ||||||||
Brokerage fees | $ | 185,578 | $ | 276,417 | ||||
Management fees | 28,359 | 84,470 | ||||||
Other | 43,668 | 72,427 | ||||||
Redemptions payable | 628,146 | 868,945 | ||||||
Total liabilities | 885,751 | 1,302,259 | ||||||
Partners’ Capital: | ||||||||
General Partner, 281.2556 and 399.0301 unit equivalents outstanding at September 30, 2010 and December 31, 2009, respectively | 426,597 | 812,357 | ||||||
Limited Partners, 21,722.6584 and 24,027.7101 Redeemable Units outstanding at September 30, 2010 and December 31, 2009, respectively | 32,948,153 | 48,916,294 | ||||||
Total partners’ capital | 33,374,750 | 49,728,651 | ||||||
Total liabilities and partners’ capital | $ | 34,260,501 | $ | 51,030,910 | ||||
Net asset value per unit | $ | 1,516.76 | $ | 2,035.83 | ||||
See accompanying notes to financial statements.
3
Tidewater Futures Fund L.P.
Condensed Schedule of Investments
September 30, 2010
(Unaudited)
Condensed Schedule of Investments
September 30, 2010
(Unaudited)
Number of | % of Partners’ | |||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Currencies | 256 | 523,015 | 1.57 | % | ||||||||
Energy | 146 | 85,600 | 0.26 | |||||||||
Grains | 741 | 1,405,247 | 4.21 | |||||||||
Indices | 553 | 497,568 | 1.49 | |||||||||
Interest Rates U.S. | 101 | 88,781 | 0.27 | |||||||||
Interest Rates Non-U.S. | 1037 | 111,241 | 0.33 | |||||||||
Livestock | 313 | (78,270 | ) | (0.24 | ) | |||||||
Metals | 72 | 809,245 | 2.42 | |||||||||
Softs | 371 | 483,789 | 1.45 | |||||||||
Total futures contracts purchased | 3,926,216 | 11.76 | ||||||||||
Futures Contracts Sold | ||||||||||||
Currencies | 283 | 189,795 | 0.57 | |||||||||
Indices | 35 | (31,041 | ) | (0.09 | ) | |||||||
Softs | 342 | (289,252 | ) | (0.87 | ) | |||||||
Total futures contracts sold | (130,498 | ) | (0.39 | ) | ||||||||
Unrealized Appreciation on Open Forward Contracts | ||||||||||||
Metals | 90 | 441,638 | 1.32 | |||||||||
Total unrealized appreciation on open forward contracts | 441,638 | 1.32 | ||||||||||
Total fair value | $ | 4,237,356 | 12.69 | % | ||||||||
See accompanying notes to financial statements.
4
Tidewater Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2009
Condensed Schedule of Investments
December 31, 2009
Number of | % of Partners’ | |||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Currencies | 389 | $ | (605,857 | ) | (1.22 | )% | ||||||
Energy | 223 | 1,173,441 | 2.36 | |||||||||
Grains | 192 | 23,307 | 0.05 | |||||||||
Indices | 1,025 | 1,972,504 | 3.97 | |||||||||
Interest Rates U.S. | 87 | (238,297 | ) | (0.48 | ) | |||||||
Interest RatesNon-U.S. | 294 | (389,286 | ) | (0.78 | ) | |||||||
Metals | 119 | (898,300 | ) | (1.81 | ) | |||||||
Softs | 776 | 2,519,407 | 5.06 | |||||||||
Total futures contracts purchased | 3,556,919 | 7.15 | ||||||||||
Futures Contracts Sold | ||||||||||||
Currencies | 215 | (18,762 | ) | (0.04 | ) | |||||||
Grains | 278 | 235,663 | 0.47 | |||||||||
Interest Rates U.S. | 1 | 5,023 | 0.01 | |||||||||
Interest RatesNon-U.S. | 316 | (45,505 | ) | (0.09 | ) | |||||||
Livestock | 192 | (106,358 | ) | (0.21 | ) | |||||||
Softs | 240 | (3,260 | ) | (0.01 | ) | |||||||
Total futures contracts sold | 66,801 | 0.13 | ||||||||||
Unrealized Appreciation on Open Forward Contracts | ||||||||||||
Metals | 241 | 1,510,523 | 3.04 | |||||||||
Total unrealized appreciation on open forward contracts | 1,510,523 | 3.04 | ||||||||||
Unrealized Depreciation on Open Forward Contracts | ||||||||||||
Metals | 50 | (234,494 | ) | (0.47 | ) | |||||||
Total unrealized depreciation on open forward contracts | (234,494 | ) | (0.47 | ) | ||||||||
Total fair value | $ | 4,899,749 | 9.85 | % | ||||||||
See accompanying notes to financial statements.
5
Tidewater Futures Fund L.P.
Statements of Income and Expenses and Changes in Partners’ Capital
(Unaudited)
Statements of Income and Expenses and Changes in Partners’ Capital
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Income: | ||||||||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||||||||
Net realized gains (losses) on closed contracts | $ | (5,430,516 | ) | $ | 1,745,776 | $ | (8,977,831 | ) | $ | (1,352,059 | ) | |||||
Change in net unrealized gains (losses) on open contracts | 7,908,748 | 5,330,655 | (662,393 | ) | 2,278,973 | |||||||||||
Gain (loss) from trading, net | 2,478,232 | 7,076,431 | (9,640,224 | ) | 926,914 | |||||||||||
Interest income | 8,649 | 10,484 | 24,847 | 35,558 | ||||||||||||
Total income (loss) | 2,486,881 | 7,086,915 | (9,615,377 | ) | 962,472 | |||||||||||
Expenses: | ||||||||||||||||
Brokerage fees including clearing fees | 552,382 | 814,490 | 2,021,226 | 2,770,893 | ||||||||||||
Management fees | 160,037 | 245,320 | 585,013 | 837,100 | ||||||||||||
Other | 103,139 | — | 179,927 | 189,375 | ||||||||||||
Total expenses | 815,558 | 1,059,810 | 2,786,166 | 3,797,368 | ||||||||||||
Management fees waived | (53,970 | ) | — | (53,970 | ) | — | ||||||||||
Net expenses | 761,588 | 1,059,810 | 2,732,196 | 3,797,368 | ||||||||||||
Net income (loss) | 1,725,293 | 6,027,105 | (12,347,573 | ) | (2,834,896 | ) | ||||||||||
Additions — Limited Partners | 1,203,000 | 105,000 | 1,783,000 | 2,333,000 | ||||||||||||
Redemptions — Limited Partners | (2,118,158 | ) | (5,878,288 | ) | (5,539,328 | ) | (15,517,651 | ) | ||||||||
Redemptions — General Partner | — | — | (250,000 | ) | (1,486,124 | ) | ||||||||||
Net increase (decrease) in Partners’ Capital | 810,135 | 253,817 | (16,353,901 | ) | (17,505,671 | ) | ||||||||||
Partners’ Capital, beginning of period | 32,564,615 | 48,031,569 | 49,728,651 | 65,791,057 | ||||||||||||
Partners’ Capital, end of period | $ | 33,374,750 | $ | 48,285,386 | $ | 33,374,750 | $ | 48,285,386 | ||||||||
Net asset value per unit (22,003.9140 and 25,036.7635 units outstanding at September 30, 2010 and 2009, respectively) | $ | 1,516.76 | $ | 1,928.58 | $ | 1,516.76 | $ | 1,928.58 | ||||||||
Net income (loss) per Redeemable Unit and General Partner unit equivalents | $ | 80.67 | $ | 227.55 | $ | (519.07 | ) | $ | (53.88 | ) | ||||||
Weighted average units outstanding | 22,692.1401 | 27,158.9457 | 23,422.4772 | 30,257.5470 | ||||||||||||
See accompanying notes to financial statements.
6
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
1. | General: |
Tidewater Futures Fund L.P. (the “Partnership”) is a limited partnership organized on February 23, 1995 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. 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 150,000 redeemable units of limited partnership interest (“Redeemable Units”) in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.
Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”), a registered non-clearing futures commission merchant and a member of the National Futures Association (“NFA”). Morgan Stanley, indirectly through various subsidiaries, owns a majority interest in MSSB Holdings. Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership, owns a minority interest in MSSB Holdings. Citigroup Inc. (“Citigroup”), indirectly through various subsidiaries, wholly owns CGM. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup.
As of September 30, 2010, all trading decisions for the Partnership are made by Chesapeake Capital Corporation (the “Advisor”). The Partnership’s trading of futures, forwards and options contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. It engages in such trading through a commodity brokerage account maintained with CGM.
For the period from July 12, 2010 through September 14, 2010, the Advisor, in consultation with the General Partner, agreed to reduce temporarily the overall leverage of the Partnership’s assets traded pursuant to the Advisor’s Diversified 2XL Program (the “Program”) from 75% of the customary leverage utilized by the Program, to 50% of the customary leverage utilized by the Program.
Effective September 15, 2010, the Advisor, in consultation with the General Partner, has agreed to increase the overall leverage of the Partnership’s assets traded pursuant to the Program from 50% of the customary leverage utilized by the Program to 62.5% of the customary leverage utilized by the Program. The Advisor, in further consultation with the General Partner, will determine, if, and at what time, the partnership’s leverage may be readjusted.
For the period from August 1, 2010 through September 30, 2010, the Advisor agreed to reduce temporarily the management fee it receives from the Partnership from an annual rate of 2% of adjusted net assets to an annual rate of 1% of adjusted net assets. This partial waiver of the management fee was in effect until October 1, 2010. See Item 5. “Other Information” on page 20 for more information on the management fee waiver.
The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of their capital contribution and profits, if any, net of distributions.
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, 2010 and December 31, 2009 and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2010 and 2009. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2009.
The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through the date the financial statements were filed. As a result, actual results could differ from these estimates.
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.
7
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
2. | Financial Highlights: |
Changes in the net asset value per unit for the three and nine months ended September 30, 2010 and 2009 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net realized and unrealized gains (losses) * | $ | 89.52 | $ | 236.23 | $ | (489.84 | ) | $ | (21.58 | ) | ||||||
Interest income | 0.39 | 0.38 | 1.08 | 1.18 | ||||||||||||
Expenses ** | (9.24 | ) | (9.06 | ) | (30.31 | ) | (33.48 | ) | ||||||||
Increase (decrease) for the period | 80.67 | 227.55 | (519.07 | ) | (53.88 | ) | ||||||||||
Net asset value per unit, beginning of period | 1,436.09 | 1,701.03 | 2,035.83 | 1,982.46 | ||||||||||||
Net asset value per unit, end of period | $ | 1,516.76 | $ | 1,928.58 | $ | 1,516.76 | $ | 1,928.58 | ||||||||
* | Includes brokerage fees. | |
** | Excludes brokerage fees. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Ratios to average net assets:*** | ||||||||||||||||
Net investment income (loss) before incentive fees**** | (9.5 | )% | (8.8 | )% | (9.2 | )% | (9.3 | )% | ||||||||
Operating expenses | 9.6 | %***** | 8.9 | % | 9.3 | %***** | 9.3 | % | ||||||||
Incentive fees | — | % | — | % | — | % | — | % | ||||||||
Total expenses | 9.6 | % | 8.9 | % | 9.3 | % | 9.3 | % | ||||||||
Total return: | ||||||||||||||||
Total return before incentive fees | 5.6 | % | 13.4 | % | (25.5 | )% | (2.7 | )% | ||||||||
Incentive fee | — | % | — | % | — | % | — | % | ||||||||
Total return after incentive fees | 5.6 | % | 13.4 | % | (25.5 | )% | (2.7 | )% | ||||||||
*** | Annualized (other than incentive fees). | |
**** | Interest income less total expenses. | |
***** | Percentages are after management fee waivers. For the period from August 1, 2010 through September 30, 2010, the Advisor temporarily reduced the management fee it receives from the Partnership from an annual rate of 2% of adjusted net assets to an annual rate of 1% of adjusted net assets. |
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 are shown in the Statements of Income and Expenses and Changes in 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 and forward contracts. The Partnership nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210, Balance Sheet, has been met.
All of the commodity interests owned by the Partnership are held for trading purposes. The average number of futures contracts traded for the three months ended September 30, 2010 and 2009 were 3,392 and 2,522, respectively. The average number of futures contracts traded for the nine months ended September 30, 2010 and 2009 were 4,209 and 1,935, respectively. The average number of metals forward contracts traded for the three months ended September 30, 2010 and 2009 were 180 and 133, respectively. The average number of metals forward contracts traded for the nine months ended September 30, 2010 and 2009 were 271 and 78, respectively.
Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions.
The Partnership adopted ASC 815, Derivatives and Hedging as of January 1, 2009, which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815 only expands the
8
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
disclosure requirements for derivative instruments and related hedging activities and has no impact on the Statements of Financial Condition or Statements of Income and Expenses and Changes in Partners’ Capital. The following tables indicate the fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of September 30, 2010 and December 31, 2009.
Assets | September 30, 2010 | |||
Futures Contracts | ||||
Currencies | $ | 1,218,667 | ||
Energy | 165,921 | |||
Grains | 1,516,397 | |||
Indices | 560,890 | |||
Interest Rates U.S. | 91,953 | |||
Interest Rates Non-U.S. | 399,229 | |||
Metals | 809,245 | |||
Softs | 732,839 | |||
Total unrealized appreciation on open futures contracts | $ | 5,495,141 | ||
Liabilities | ||||
Futures Contracts | ||||
Currencies | $ | (505,857 | ) | |
Energy | (80,321 | ) | ||
Grains | (111,150 | ) | ||
Indices | (94,363 | ) | ||
Interest Rates U.S. | (3,172 | ) | ||
Interest Rates Non-U.S. | (287,988 | ) | ||
Livestock | (78,270 | ) | ||
Softs | (538,302 | ) | ||
Total unrealized depreciation on open futures contracts | $ | (1,699,423 | ) | |
Net unrealized appreciation on open futures contracts | $ | 3,795,718 | * | |
Assets | September 30, 2010 | |||
Forward Contracts | ||||
Metals | $ | 441,638 | ||
Total unrealized appreciation on open forward contracts | $ | 441,638 | ||
Net unrealized appreciation on open forward contracts | $ | 441,638 | ** | |
* | This amount is in “Net unrealized appreciation on open futures contracts” on the Statements of Financial Condition. | |
** | This amount is in “Net unrealized appreciation on open forward contracts” on the Statements of Financial Condition. |
9
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
Assets | December 31, 2009 | |||
Futures Contracts | ||||
Currencies | $ | 480,338 | ||
Energy | 1,173,441 | |||
Grains | 328,415 | |||
Indices | 1,983,702 | |||
Interest Rates U.S. | 5,023 | |||
Interest RatesNon-U.S. | 20,069 | |||
Livestock | 7,030 | |||
Softs | 2,690,297 | |||
Total unrealized appreciation on open futures contracts | $ | 6,688,315 | ||
Liabilities | ||||
Futures Contracts | ||||
Currencies | $ | (1,104,957 | ) | |
Grains | (69,445 | ) | ||
Indices | (11,198 | ) | ||
Interest Rates U.S. | (238,297 | ) | ||
Interest RatesNon-U.S. | (454,860 | ) | ||
Livestock | (113,388 | ) | ||
Metals | (898,300 | ) | ||
Softs | (174,150 | ) | ||
Total unrealized depreciation on open futures contracts | $ | (3,064,595 | ) | |
Net unrealized appreciation on open futures contracts | $ | 3,623,720 | * | |
Assets | ||||
Forward Contracts | ||||
Metals | $ | 1,510,523 | ||
Total unrealized appreciation on open forward contracts | $ | 1,510,523 | ||
Liabilities | ||||
Forward Contracts | ||||
Metals | $ | (234,494 | ) | |
Total unrealized depreciation on open forward contracts | $ | (234,494 | ) | |
Net unrealized appreciation on open forward contracts | $ | 1,276,029 | ** | |
* | This amount is in “Net unrealized appreciation on open futures contracts” on the Statements of Financial Condition. | |
** | This amount is in “Net unrealized appreciation on open forward contracts” on the Statements of Financial Condition. |
The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2010 and 2009.
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Sector | Gain (loss) from trading | Gain (loss) from trading | Gain (loss) from trading | Gain (loss) from trading | ||||||||||||
Currencies | $ | 46,596 | $ | 154,967 | $ | (1,099,088 | ) | $ | (3,485,196 | ) | ||||||
Energy | 116,290 | — | (2,618,575 | ) | (5,500 | ) | ||||||||||
Grains | (1,099,861 | ) | (6,466 | ) | (1,618,088 | ) | (58,078 | ) | ||||||||
Indices | 1,803,244 | 1,920,398 | (2,951,309 | ) | 1,747,786 | |||||||||||
Interest Rates U.S. | 456,156 | 192,319 | 1,277,594 | (710,496 | ) | |||||||||||
Interest Rates Non-U.S. | 164,389 | 140,232 | 3,534,638 | (1,411,148 | ) | |||||||||||
Livestock | 78,272 | 226,172 | (1,062,916 | ) | 1,211,792 | |||||||||||
Metals | 1,272,060 | 571,541 | (563,333 | ) | 297,239 | |||||||||||
Softs | (358,914 | ) | 3,877,268 | (4,539,147 | ) | 3,340,515 | ||||||||||
Total | $ | 2,478,232 | *** | $ | 7,076,431 | *** | $ | (9,640,224 | )*** | $ | 926,914 | *** | ||||
*** | This amount is in “Gain (loss) from trading, net” on the Statements of Income and Expenses and Changes in Partners’ Capital. |
10
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
4. | Fair Value Measurements: |
Partnership’s 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 as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.
Partnership’s Fair Value Measurements.The Partnership adopted ASC 820, Fair Value Measurements and Disclosures, as of January 1, 2008, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.
In 2009, the Partnership adopted amendments to ASC 820, which reaffirm that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. These amendments to ASC 820 also reaffirm the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. These amendments to ASC 820 are required for interim and annual reporting periods ending after June 15, 2009. Management has concluded that based on available information in the marketplace, there has not been a decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities. The adoption of the amendments to ASC 820 had no effect on the Partnership’s Financial Statements.
The Partnership considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments for which market quotations are not readily available and that are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2 ) or 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 | ||||||||||||||
09/30/2010 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Futures | $ | 3,795,718 | $ | 3,795,718 | $ | — | $ | — | ||||||||
Forwards | 441,638 | 441,638 | — | — | ||||||||||||
Total assets | 4,237,356 | 4,237,356 | — | — | ||||||||||||
Total fair value | $ | 4,237,356 | $ | 4,237,356 | $ | — | $ | — | ||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
12/31/2009 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Futures | $ | 3,623,720 | $ | 3,623,720 | $ | — | $ | — | ||||||||
Forwards | 1,276,029 | 1,276,029 | — | — | ||||||||||||
Total assets | 4,899,749 | 4,899,749 | — | — | ||||||||||||
Total fair value | $ | 4,899,749 | $ | 4,899,749 | $ | — | $ | — | ||||||||
11
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
5. | Financial Instrument Risks: |
In the normal course of 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, options and swaps, whose values are based upon an underlying asset, index or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specified terms on specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include swaps and certain forwards and option contracts. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership 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. The Partnership’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership has credit risk and concentration risk as the sole counterparty or broker with respect to the Partnership’s assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s counterparty is an exchange or clearing organization.
The General Partner monitors and attempts to control 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 may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s business, these instruments may not be held to maturity.
12
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
6. Critical Accounting Policies:
Use of Estimates.The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through the date the financial statements were filed. As a result, actual results could differ from these estimates.
Statement of Cash Flows.The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230, Statement of Cash Flows.
Partnership’s Investments.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 as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.
Partnership’s Fair Value Measurements.The Partnership adopted ASC 820 as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Partnership did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.
The Partnership considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by brokerdealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments for which market quotations are not readily available and that are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Futures Contracts.The Partnership trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership. When the contract is closed, the Partnership records a realized gain or loss equal to the
13
Tidewater Futures Fund L.P.
Notes to Financial Statements
September 30, 2010
(Unaudited)
Notes to Financial Statements
September 30, 2010
(Unaudited)
difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits directly with the exchange on which the contracts are traded. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
London Metals Exchange Forward Contracts.Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
Income Taxes.Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.
ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.
The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States — 2007.
Subsequent Events. In 2009, the Partnership adopted ASC 855, Subsequent Events. The objective of ASC 855 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are filed. Management has assessed the subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment in the financial statements.
Recent Accounting Pronouncements. In January 2010, the FASB issued guidance, which, among other things, amends ASC 820, Fair Value Measurements and Disclosures, to require entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Partnership’s financial statements.
In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-09 (“ASU 2010-09”), “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” which among other things amended ASC 855 to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between ASC 855 and the SEC’s requirements. All of the amendments in this update were effective upon issuance of this update. Management has included the provisions of these amendments in the financial statements.
Net Income (Loss) per Redeemable Unit and General Partner Unit Equivalents. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.
7. Subsequent Event:
In 2009, Morgan Stanley and Citigroup combined certain assets of the Global Wealth Management Group of Morgan Stanley & Co. Incorporated, including Demeter Management LLC (“Demeter”) and the Smith Barney division of CGM into a new joint venture, MSSB Holdings. As part of that transaction Ceres Managed Futures LLC (“Ceres” or the “General Partner”) was contributed to and, together with Demeter, became wholly-owned subsidiaries of MSSB Holdings. Demeter currently serves as commodity pool operator for various legacy Morgan Stanley sponsored commodity pools formed prior to the joint venture. Since their contribution to the joint venture, Demeter and Ceres have worked closely to align the operations and management of the commodity pools they oversee. As a result, MSSB Holdings, together with the unanimous support of the Boards of Directors of Demeter and Ceres, has determined that a combination of the assets and operations of Demeter and Ceres into a single commodity pool operator, Ceres, is in the best interest of limited partners and believes that this combination will achieve the intended benefits of the joint venture. Ceres will continue to be wholly-owned by MSSB Holdings. The targeted effective date of the combination is on or about December 1, 2010. Refer to Form 8-K filed on September 14, 2010 for additional information.
14
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 trading account, consisting of cash and cash equivalents, net unrealized appreciation on open futures contracts, net 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 illiquidity occurred in the third quarter of 2010.
The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by 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, 2010, Partnership capital decreased 32.9% from $49,728,651 to $33,374,750. This decrease was attributable to the net loss from operations of $12,347,573 coupled with the redemptions of 3,465.6275 Redeemable Units totaling $5,539,328 and 117.7745 General Partner unit equivalents totaling $250,000, which was partially offset by the addition of 1,160.5758 Redeemable Units totaling $1,783,000. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.
Critical Accounting Policies
Partnership’s 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 as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.
Partnership’s Fair Value Measurements.The Partnership adopted ASC 820 as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Partnership did not apply the deferral allowed by ASC 820 for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.
The Partnership considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended September 30, 2010 and December 31, 2009, the Partnership did not hold any derivative instruments for which market quotations are not readily available and that are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Futures Contracts.The Partnership trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits directly with the exchange on which the contracts are traded. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
London Metals Exchange Forward Contracts.Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership. A contract is considered offset when all long positions have been matched with a like member of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
15
Results of Operations
During the Partnership’s third quarter of 2010, the net asset value per unit increased 5.6% from $1,436.09 to $1,516.76 as compared to an increase of 13.4% in the third quarter of 2009. The Partnership experienced a net trading gain before brokerage fees and related fees in the third quarter of 2010 of $2,478,232. Gains were primarily attributable to the trading of commodity futures in energy, U.S. and non-U.S. interest rates, livestock, metals, and indices and were partially offset by losses in currencies, grains and softs. The Partnership experienced a net trading gain before brokerage fees and related fees in the third quarter of 2009 of $7,076,431. Gains were primarily attributable to the trading of commodity futures in currencies, U.S. and non-U.S. interest rates, livestock, metals, softs and indices and were partially offset by losses in grains.
Global financial markets recovered during the third quarter of 2010, most notably during September. Equities bounced from the lowest levels of the year to reach new highs. Currencies reflected the renewed global growth thesis as the currencies of emerging countries and commodity exporting countries strengthened considerably compared to other developed country currencies. However, interest rates have remained in a downward trend reflecting the general preference for lower risk assets even as appetite began to rise for higher risk assets.
The Partnership was profitable in energy, interest rates, metals and equity indices whereas losses were seen in currencies and grains.
The energy sector contributed to modest gains mostly from gas oil and heating oil. Interest rates contributed to gains as yields continued to remain at their lowest levels, primarily due to slower growth in global economies reflected by data such as unemployment. Global central banks discussed the possibility of quantitative easing to jump start the economies. In metals, substantial gains were contributed by precious and industrial metals. Gold and silver reached new highs as safe havens and also partly because of weakening U.S. Dollar, while industrial metals were buoyed by heightened demand from China and the developing world. Equity indices also contributed to gains as the Partnership was positioned to benefit from the sharp reversal in global equities as positive earnings surprises from several equity sectors reversed the bearish trend.
The Partnership registered losses in the currencies mostly from the Euro and U.S. Dollar Index. Several countries, most notably Japan and Brazil, intervened in the currency markets, trying to artificially weaken their respective currencies. However this fundamental intervention did not appear to be very effective as these currencies resumed the trend soon after the intervention. In grains, the Partnership recorded large losses in wheat mainly at the start of the quarter as prices surged to record prices due to a severe drought and export ban in Russia.
During the Partnership’s nine months ended September 30, 2010 the net asset value per unit decreased 25.5% from $2,035.83 to $1,516.76 as compared to a decrease of 2.7% in the third quarter of 2009. The Partnership experienced a net trading loss before brokerage fees and related fees for the nine months ended September 30, 2010 of $9,640,224. Losses were primarily attributable to the trading of commodity futures in currencies, energy, grains, livestock, metals, softs and indices and were partially offset by gains in U.S. and non-U.S. interest rates. The Partnership experienced a net trading gain before brokerage fees and related fees for the nine months ended September 30, 2009 of $926,914. Gains were primarily attributable to the trading of commodity futures in grains, livestock, metals, softs and indices and were partially offset by losses in currencies, energy, U.S. and non-U.S. interest rates.
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 average daily equity maintained in cash in the Partnership’s brokerage account was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Partnership’s assets in cash and/or place up to all of the Partnership’s assets in 90-day U.S. Treasury bills and pay the Partnership 80% of the interest earned on the U.S. Treasury bills purchased. Twenty percent of the interest earned on U.S. Treasury bills purchased may be retained by CGM and/or credited to the General Partner. Interest income for the three and nine months ended September 30, 2010 decreased by $1,835 and $10,711, respectively, as compared to the corresponding periods in 2009. The decrease in interest income is primarily due to lower average daily equity maintained in cash during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s account and upon interest rates over which neither the Partnership nor CGM has control.
Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage fees for the three and nine months ended September 30, 2010 decreased by $262,108 and $749,667, respectively, as compared to the corresponding periods in 2009. The decrease in brokerage fees is due to lower average adjusted net assets during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009.
Management fees are calculated as a percentage of the Partnership’s 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, 2010 decreased by $139,253 and $306,057, respectively, as compared to the corresponding periods in 2009. The decrease in management fees is due to lower average adjusted net assets as well as a temporary reduction in the management fee rate during the three and nine months ended September 30, 2010 as compared to the corresponding periods in 2009.
Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the management agreement among the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three and nine months ended September 30, 2010 or 2009. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.
In allocating the assets of the Partnership to the Advisor, the General Partner considered past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.
16
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.
The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law.
Market movements result in frequent changes in the fair 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 any one-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.
Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following table indicates the trading Value at Risk associated with the Partnership’s open positions by market category as of September 30, 2010, and the highest, lowest and average values during the three months ended September 30, 2010. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of September 30, 2010, the Partnership’s total capitalization was $33,374,750. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2009.
September 30, 2010
(Unaudited)
(Unaudited)
Three Months Ended September 30, 2010 | ||||||||||||||||||||
% of Total | High | Low | Average | |||||||||||||||||
Market Sector | Value at Risk | Capitalization | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Currencies | $ | 1,311,696 | 3.93 | % | $ | 1,686,290 | $ | 867,991 | $ | 1,093,675 | ||||||||||
Energy | 264,328 | 0.79 | % | 310,318 | 173,691 | 229,392 | ||||||||||||||
Grains | 1,093,250 | 3.28 | % | 1,142,755 | 163,960 | 651,350 | ||||||||||||||
Interest Rates U.S. | 173,800 | 0.52 | % | 173,800 | 88,900 | 153,500 | ||||||||||||||
Interest Rates Non-U.S. | 1,052,026 | 3.15 | % | 1,195,001 | 666,913 | 937,349 | ||||||||||||||
Livestock | 278,700 | 0.84 | % | 395,900 | 183,300 | 228,850 | ||||||||||||||
Metals | 1,197,179 | 3.59 | % | 1,197,179 | 601,999 | 840,393 | ||||||||||||||
Softs | 1,509,859 | 4.52 | % | 1,510,711 | 453,205 | 1,048,689 | ||||||||||||||
Indices | 1,675,030 | 5.02 | % | 2,034,464 | 1,055,959 | 1,259,822 | ||||||||||||||
Total | $ | 8,555,868 | 25.64 | % | ||||||||||||||||
* | Average of month-end Values at Risk. |
17
Item 4. Controls and Procedures
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010 and, based on that evaluation, the General Partner’s CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.
The Partnership’sinternal control over financial reportingis a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:
• | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; | ||
• | provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and | ||
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material changes to the discussion set forth under Part I, Item 3, “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as updated by the Partnership’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and under Part II, Item 1A, “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and June 30, 2010.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended September 30, 2010, there were additional sales of 850.7797 Redeemable Units totaling $1,203,000. 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. The Redeemable Units were purchased by accredited investors as defined in Regulation D.
Proceeds of net offering were used for the trading of commodity interests, including futures contracts, options, forwards and swap contracts.
The following chart sets forth the purchases of Redeemable Units by the Partnership.
(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, 2010 - July 31, 2010 | 989.9134 | $ | 1,340.60 | N/A | N/A | |||||||||||||||
August 1, 2010 - August 31, 2010 | 118.7524 | $ | 1,372.05 | N/A | N/A | |||||||||||||||
September 1, 2010 - September 30, 2010 | 414.1366 | $ | 1,516.76 | N/A | N/A | |||||||||||||||
1,522.8024 | $ | 1,390.96 | ||||||||||||||||||
* | Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on 15 days’ written notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners. | |
** | Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day. |
Item 3. Defaults Upon Senior Securities – None
Item 4. [Removed and Reserved]
Item 5. Other Information
Effective September 15, 2010, the Advisor, in consultation with the General Partner, determined that it was appropriate to begin increasing the overall leverage of the Partnership assets traded pursuant to the Advisor’s Diversified 2XL Program (the “Program”) to 62.5% of the customary leverage utilized by the Program. By agreement between the Advisor and the General Partner, the leverage employed by the Program since July 12, 2010, has been approximately 50% of the customary leverage utilized by the Program. Effective October 12, 2010, the Advisor, in consultation with the General Partner, determined that it was appropriate to increase the overall leverage of the Partnership assets traded pursuant to the Program to 75% of the customary leverage utilized by the Program. The Advisor, in further consultation with the General Partner, will determine if, and at what time, the leverage may be further readjusted. Such adjustments to the leverage employed will not exceed 100% of the customary leverage utilized by the Advisor in the Program.
Effective October 1, 2010, the Advisor agreed to reduce temporarily the management fee it receives from the Partnership to an annual rate of 1.5% of adjusted net assets. This temporary reduction of the management fee to an annual rate of 1.5% of adjusted net assets will remain in effect until October 31, 2010. Furthermore, effective November 1, 2010, the Advisor will receive a management fee from the Partnership equal to an annual rate of 2% of adjusted net assets.
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Item 6. Exhibits
3.1 | Second Amended and Restated Limited Partnership Agreement (filed as Exhibit 3.2 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
3.2 | Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of the State of New York (filed as Exhibit 3.1 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
(a) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated February 26, 1999 (filed as Exhibit 3.1(a) to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
(b) | Certificate of Change of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated January 31, 2000 (filed as Exhibit 3.2(g) to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |
(c) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated April 1, 2001 (filed as Exhibit 3.1(b) to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
(d) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.2(c) to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |
(e) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(c) to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
(f) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.2(e) to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |
(g) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 30, 2009 (filed as Exhibit 99.1(a) to current report on Form 8-K filed on September 30, 2009 and incorporated herein by reference). | |
(h) | Certificate of Amendment of the Certificate of Limited Partnership dated June 30, 2010 (filed as Exhibit 3.2(h) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference). | |
10.1 | Amended and Restated Management Agreement among the Partnership, the General Partner and Chesapeake Capital Corporation (filed as Exhibit 10.1 to the current report on Form 8-K filed on September 15, 2010 and incorporated herein by reference). | |
10.2 | Second Amended and Restated Customer Agreement between the Partnership and Salomon Smith Barney Inc. (filed as Exhibit 10.2 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
10.3 | Amended and Restated Agency Agreement between the Partnership, Smith Barney Futures Management LLC and Salomon Smith Barney Inc. (filed as Exhibit 10.3 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference). | |
10.4 | Form of Subscription Agreement (filed as Exhibit 10.4 to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |
10.5 | Joinder Agreement among Citigroup Managed Futures LLC (the former name of the General Partner), Citigroup Global Markets Inc. and Morgan Stanley Smith Barney LLC (filed as Exhibit 10 to the quarterly report on Form 10-Q filed on August 14, 2009 and in corporated herein by reference). |
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, Secretary and Director)
Exhibit 32.1 — Section 1350 Certification (Certification of President and Director)
Exhibit 32.2 — Section 1350 Certification (Certification of Chief Financial Officer, Secretary 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.
TIDEWATER FUTURES FUND L.P.
By: | Ceres Managed Futures LLC | ||
(General Partner) | |||
By: | /s/ Walter Davis | ||
Walter Davis President and Director | |||
Date: | November 12, 2010 | ||
By: | /s/ Jennifer Magro | ||
Jennifer Magro Chief Financial Officer, Secretary and Director (Principal Accounting Officer) | |||
Date: | November 12, 2010 | ||
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