UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number
0-50271
CERES ORION L.P.
(Exact name of registrant as specified in its charter)
New York | 22-3644546 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
c/o Ceres Managed Futures LLC
522 Fifth Avenue
New York, New York 10036
(Address and Zip Code of principal executive offices)
(855) 672-4468
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Redeemable Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
X
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
NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).Yes
X
NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2
of the Exchange Act.Large accelerated filer | Accelerated filer | Non-accelerated filerX | ||
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.__
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. __
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).Yes No
X
Limited Partnership Redeemable Units with an aggregate value of $353,942,883 were outstanding and held by
non-affiliates
as of the last business day of the registrant’s most recently completed second fiscal quarter.As of February 28, 2022, 108,246.6118 Limited Partnership Class A Redeemable Units were outstanding and 2,562.5842 Limited Partnership Class Z Redeemable Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
PART I
Item 1.
Business
.(a)
General development of business
. Ceres Orion L.P. (the “Partnership”) is a limited partnership organized on March 22, 1999, 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, option, swap and forward contracts. The sectors traded include currencies, energy, grains, livestock, indices, United States (“U.S.”) andnon-U.S.
interest rates, softs and metals. The commodity interests that are traded by the Partnership, directly and indirectly through its investment in the Funds (as defined below), are volatile and involve a high degree of market risk. The Partnership commenced trading on June 10, 1999. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets (directly or indirectly through its investment in the Funds) in U.S. Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates.During the initial offering period (March 31, 1999 through June 10, 1999) the Partnership sold 10,499 Redeemable Units at $1,000 per Redeemable Unit. The Partnership commenced trading activities on June 10, 1999.
Subscriptions and redemptions of Redeemable Units and General Partner contributions and redemptions for the years ended December 31, 2021, 2020 and 2019 are reported in the Statements of Changes in Partners’ Capital under “Item 8.
Financial Statements and Supplementary Data
.”Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership and is the trading manager (the “Trading Manager”) of Transtrend Master (as defined below) and NL Master (as defined below). The General Partner is a wholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses.
As of December 31, 2021, all trading decisions were made for the Partnership by Transtrend B.V. (“Transtrend”), John Street Capital Limited (“JSCL”), Northlander Commodity Advisors LLP (“Northlander”), Pan Capital Management L.P. (“Pan”), Greenwave Capital Management LLC (“Greenwave”), Quantica Capital AG (“Quantica”) and Breakout Funds LLC (“Breakout”) (each an “Advisor” and, collectively, the “Advisors”), each of which is a registered commodity trading advisor. On October 31, 2021, the Partnership fully redeemed its investment in CMF FORT Contrarian Master Fund LLC (“FORT Contrarian Master”). Also effective October 31, 2021, FORT L.P. (“FORT”) ceased to act as a commodity trading advisor to the Partnership. On September 30, 2020, the Partnership fully redeemed its investment in CMF Winton Master L.P. (“Winton Master”). Also effective September 30, 2020, Winton Capital Management Limited (“Winton”) ceased to act as a commodity trading advisor to the Partnership. On January 31, 2019, the Partnership fully redeemed its investment in CMF Willowbridge Master Fund L.P. (“Willowbridge Master”). Also effective January 31, 2019, Willowbridge Associates Inc. (“Willowbridge”) ceased to act as a commodity trading advisor to the Partnership. Effective as of the close of business on October 31, 2018, Systematica Investments Limited (“Systematica”) ceased to act as a commodity trading advisor to the Partnership. From February 1, 2019 until December 12, 2019, John Street Capital LLP (“John Street”) directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to John Street’s Systematic Strategy Program. On December 13, 2019, the Partnership, the General Partner, John Street, and JSCL entered into a deed of novation (the “JSCL Novation Agreement”) transferring all rights and obligations of John Street to JSCL. References herein to the “Advisors” may include, as relevant, John Street, FORT, Winton, Willowbridge and Systematica. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors either directly, through a managed account in the Partnership’s name, or indirectly, through its investment in the Funds. In addition, the General Partner may allocate the Partnership’s assets to additional
non-major
trading advisors (i.e., commodity trading advisors intended to be allocated less than 10% of the Partnership’s assets). Information about advisors allocated less than 10% of the Partnership’s assets may not be disclosed.Effective July 1, 2021, Breakout directly trades a portion of the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to an enhanced version of Breakout’s Propeller Program. The General Partner and Breakout have agreed that Breakout will trade the Partnership’s assets allocated to Breakout at 1.5 times the amount of the assets allocated. The amount of leverage may be increased or decreased in the future, subject to certain restrictions.
As of December 31, 2021, Greenwave directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to an enhanced version of Greenwave’s Flagship Plus 2X Program. The General Partner and Greenwave had agreed that Greenwave would trade the Partnership’s assets allocated to Greenwave at a level that was up to 2 times the amount of the assets allocated.
Effective October 1, 2020, Quantica directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to the Quantica Managed Futures Program. As of December 31, 2021, the General Partner and Quantica had agreed that Quantica would trade the Partnership’s assets allocated to Quantica at 0.75 times the amount of the assets allocated. The amount of leverage may be increased or decreased in the future.
1
Effective February 1, 2020, Pan directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to Pan’s Energy Trading Program.
JSCL directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to the Systematic Strategy Program. The General Partner and JSCL have agreed that JSCL will trade the Partnership’s assets allocated to it at a level that is up to 2 times the amount of assets allocated to it; provided that if the assets allocated to JSCL are $80 million or less, JSCL will trade the Partnership’s assets allocated to it at the level that is up to 1.5 times the amount of assets allocated to it. The amount of leverage may be increased or decreased in the future.
Prior to its termination effective October 31, 2018, Systematica directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to Systematica’s BlueTrend Program.
On June 1, 2011, the Partnership began offering “Class A” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to June 1, 2011 were deemed Class A Redeemable Units. The rights, powers, duties and obligations associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions and
non-U.S.
investors. Class Z Redeemable Units were first issued on August 1, 2011. Class Z Redeemable Units are offered to limited partners who receive advisory services from Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”) and certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Redeemable Units that a limited partner receives upon a subscription will generally depend upon the status of the limited partner, although the General Partner may determine to offer a particular Class of Redeemable Units to investors at its discretion.During the years ended December 31, 2021, 2020 and 2019, the Partnership’s/Funds’ commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. JPMorgan Chase Bank, N.A. (“JPMorgan”) was also a foreign exchange forward contract counterparty for certain Funds. During certain periods included in this report, the Partnership/Funds deposited a portion of their cash in
non-trading
bank accounts at JPMorgan.Effective February 28, 2018, the Partnership changed its name from Orion Futures Fund L.P. to Ceres Orion L.P.
The Partnership and CMF TT II, LLC (“Transtrend Master”) have, and prior to their respective full redemptions, Winton Master and Willowbridge Master had, entered into futures brokerage account agreements and foreign exchange brokerage account agreements with MS&Co. CMF NL Master Fund LLC (“NL Master”) has, and prior to its full redemption, FORT Contrarian Master had, entered into futures brokerage account agreements with MS&Co. Transtrend Master and NL Master are collectively referred to as the “Funds.” References herein to “Funds” may also include, as relevant, FORT Contrarian Master, Winton Master and Willowbridge Master.
Transtrend Master, and until their respective full redemptions, Winton Master and Willowbridge Master, each entered into certain agreements with JPMorgan in connection with trading in forward foreign currency contracts on behalf of the referenced Funds and indirectly, the Partnership. These agreements include a foreign exchange and bullion authorization agreement (“FX Agreement”), an International Swap Dealers Association, Inc. master agreement (“Master Agreement”), a schedule to the Master Agreement, a 2016 credit support annex for variation margin to the schedule and an institutional account agreement. In addition to Willowbridge Master, Willowbridge was party to the FX Agreement for Willowbridge Master. Under each FX Agreement, JPMorgan charges or charged a fee on the aggregate foreign currency transactions entered into on behalf of the respective Fund during a month.
The Partnership, directly and indirectly through its investment in the Funds, pays MS&Co. trading fees for the clearing, and where applicable, the execution of transactions.
The Partnership will be liquidated upon the first to occur of the following: December 31, 2055; the net asset value per Redeemable Unit of any Class decreases to less than $400 as of the close of any business day; or under certain other circumstances as set forth in the limited partnership agreement of the Partnership, as may be amended from time to time (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the aggregate net assets of the Partnership decline to less than $1,000,000.
On June 1, 2011, the Partnership allocated a portion of its assets to Transtrend Master, a limited liability company organized under the limited liability company laws of the State of Delaware. Transtrend Master permits accounts managed by Transtrend using the Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system, to invest together in one trading vehicle. Transtrend generally trades its Enhanced Risk Profile (US Dollar) using 1.5 times the leverage employed by the Standard Risk Profile. The General Partner is also the Trading Manager of Transtrend Master. Individual and pooled accounts managed by Transtrend, including the Partnership, are permitted to be members of Transtrend Master. The Trading Manager and Transtrend believe that trading through this structure promotes efficiency and economy in the trading process.
On April 1, 2019, the assets allocated to Northlander for trading were invested in NL Master, a limited liability company organized under the limited liability company laws of the State of Delaware. NL Master permits accounts managed by Northlander using the Northlander Commodity Program, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the Trading Manager of NL Master. Individual and pooled accounts currently managed by Northlander, including the Partnership, are permitted to be members of NL Master. The Trading Manager and Northlander believe that trading through this structure promotes efficiency and economy in the trading process.
2
On February 1, 2018, the assets allocated to FORT for trading were invested in FORT Contrarian Master, a limited liability company organized under the limited liability company laws of the State of Delaware. The Partnership fully redeemed its investment in FORT Contrarian Master on October 31, 2021.
On November 1, 2004, the assets allocated to Winton for trading were invested in Winton Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership fully redeemed its investment in Winton Master on September 30, 2020.
On August 1, 2014, the assets allocated to Willowbridge for trading were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership fully redeemed its investment in Willowbridge Master on January 31, 2019.
The General Partner is not aware of any material changes to any of the trading programs discussed above during the year ended December 31, 2021.
The Funds’ and the Partnership’s trading of futures, forward, swap and option contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. The Funds and the Partnership engage in such trading through commodity brokerage accounts maintained with MS&Co.
Generally, a limited partner/member in the Funds withdraws all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, a limited partner/member may request a withdrawal as of the end of any day if such request is received by the General Partner/Trading Manager at least three days in advance of the proposed withdrawal day.
Management fees, ongoing selling agent fees, the General Partner fee and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Transtrend, which are charged at the Transtrend Master level. Clearing fees are borne by the Funds and allocated to the Funds’ limited partners/members, including the Partnership. Clearing fees are also borne by the Partnership directly. Professional fees are borne by the Funds and allocated to the Partnership and are also charged directly at the Partnership level.
The General Partner fee, management fees, incentive fees and professional fees of the Partnership are allocated proportionally to each Class based on the net asset value of the Class.
For the period January 1, 2021 through December 31, 2021, the approximate average market sector distribution for the Partnership was as follows:
3
At December 31, 2021, the Partnership owned approximately 100.0% of Transtrend Master and 74.0% of NL Master. At December 31, 2020, the Partnership owned approximately 100.0% of Transtrend Master, 100.0% of FORT Contrarian Master and 81.4% of NL Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to limited partners as a result of investment in the Funds are approximately the same as they would be if the Partnership traded directly and redemption rights are not affected.
The General Partner administers the business and affairs of the Partnership, including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly fee (the “General Partner fee”) equal to 1/12 of 0.75% (0.75% per year) of
month-end
net assets.Month-end
net assets, for the purpose of calculating the General Partner fee, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.The General Partner, on behalf of the Partnership, has entered into management agreements (each, a “Management Agreement”) with the Advisors. The Advisors are not affiliated with one another, the General Partner or MS&Co., and are not responsible for the organization or operation of the Partnership.
Effective July 1, 2021, Breakout receives a monthly management fee equal to 1% per year of
month-end
net assets allocated to Breakout. As of December 31, 2021, Greenwave received a monthly management fee equal to 0.75% per year ofmonth-end
net assets allocated to Greenwave. Effective October 1, 2020, Quantica receives a monthly management fee equal to 0.60% per year ofmonth-end
net assets allocated to Quantica. To the extent that themonth-end
net assets allocated to Quantica are less than $50 million, Quantica will receive a management fee equal to 0.75% per year ofmonth-end
net assets allocated to Quantica. Effective February 1, 2020, Pan receives a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Pan. Effective April 1, 2019, Northlander receives a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Northlander. Effective February 1, 2019, JSCL (prior to the JSCL Novation Agreement, John Street) receives a monthly management fee of 1.35% per year ofmonth-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street). To the extent that themonth-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street) are less than $80 million, JSCL (prior to the JSCL Novation Agreement, John Street) will receive a monthly management fee equal to 1.5% per year ofmonth-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street). From February 1, 2018 until its termination on October 31, 2021, FORT received a monthly management fee equal to 1.15% per year ofmonth-end
net assets allocated to FORT. Prior to its termination on September 30, 2020, Winton received a monthly management fee equal to 1.5% per year ofmonth-end
net assets allocated to Winton. From April 1, 2018 until its termination on January 31, 2019, Willowbridge received a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Willowbridge. Prior to April 1, 2018, Willowbridge received a monthly management fee equal to 1.5% per year ofmonth-end
net assets allocated to Willowbridge. Prior to its termination effective October 31, 2018, Systematica received a monthly management fee equal to 1.0% per year ofmonth-end
net assets allocated to Systematica.Month-end
net assets, for the purpose of calculating management fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.Transtrend Master pays Transtrend a monthly management fee of 0.85% per year on the aggregate net assets of Transtrend Master as of the first day of each month. The management fee paid by Transtrend Master is allocated to the Partnership based on its proportionate ownership interest of Transtrend Master.
In addition, as of December 31, 2021, the Partnership was obligated to pay Greenwave, Pan and Breakout an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Greenwave, Pan and Breakout, respectively, for the Partnership during each calendar quarter. The Partnership is obligated to pay Quantica and Northlander an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Quantica and Northlander, respectively, for the Partnership during each calendar year. The Partnership is obligated to pay JSCL (prior to the JSCL Novation Agreement, John Street) an incentive fee, payable quarterly, equal to 22.5% of the New Trading Profits, as defined in its Management Agreement, earned by JSCL (prior to the JSCL Novation Agreement, John Street) for the Partnership during each calendar quarter. To the extent that the
month-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street) are less than $80 million, the Partnership will be obligated to pay JSCL (prior to the JSCL Novation Agreement, John Street) an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by JSCL (prior to the JSCL Novation Agreement, John Street) for the Partnership during each calendar quarter. Prior to its termination effective October 31, 2021, FORT was eligible to receive an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in its Management Agreement, earned by FORT for the Partnership. Prior to their respective terminations effective September 30, 2020 and January 31, 2019, Winton and Willowbridge were each eligible to receive an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Winton and Willowbridge for the Partnership during each calendar quarter. Prior to its termination effective October 31, 2018, Systematica was eligible to receive an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in its Management Agreement, earned by Systematica for the Partnership. Effective January 1, 2021, Transtrend is eligible to receive an incentive fee equal to 16% of the New Trading Profits, as defined in its Management Agreement, earned by Transtrend Master and payable at the end of each calendar half year. Prior to January 1, 2021, Transtrend was eligible to receive an incentive fee equal to 20% of the New Trading Profits, as defined in its Management Agreement, earned by Transtrend Master and payable at the end of each calendar half year. Only the incentive fees paid by Transtrend4
Master for New Trading Profits, as defined in its Management Agreement, earned for the Partnership are allocated to the Partnership. To the extent an Advisor incurs a loss for the Partnership, 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.
Each Management Agreement may be terminated upon notice by either party.
In allocating the assets of the Partnership among the Advisors, the General Partner considers, among other factors, each Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisors and may allocate the assets to additional advisors at any time.
The Partnership has entered into a futures brokerage account agreement with MS&Co. (the “Partnership Customer Agreement”). Under the Partnership Customer Agreement and the foreign exchange brokerage account agreement, the Partnership pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of trading fees for the clearing and, where applicable, the execution of transactions, as well as its allocable share of exchange, user,
give-up
and National Futures Association (“NFA”) fees (collectively, “clearing fees”) directly and indirectly through its investment in the Funds. Clearing fees are allocated to the Partnership based on its proportionate ownership interest of each Fund. The Partnership’s assets available for trading in commodity interests not held in the Funds’ brokerage accounts at MS&Co. and JPMorgan are deposited in the Partnership’s brokerage account at MS&Co. The Partnership’s cash deposited with MS&Co. is held in segregated bank accounts to the extent required by Commodity Futures Trading Commission (“CFTC”) regulations. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At December 31, 2021 and 2020, the amount of cash held by the Partnership for margin requirements was $17,796,571 and $23,403,438, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Funds’, except for Transtrend Master’s) brokerage account during each month at the rate equal to the monthly average of the4-week
U.S. Treasury bill discount rate. MS&Co. has agreed to pay Transtrend Master interest on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the4-week
U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of these interest credits, daily funds do not include monies due to Transtrend Master on or with respect to futures, forward, or option contracts that have not been received. The Partnership Customer Agreement may generally be terminated upon notice by either party.The Partnership has entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee at a flat annual rate equal to 0.75% per year of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 0.75% and dividing the result thereof by 12). For the period from July 1, 2020 to December 31, 2020, the ongoing selling agent fee for Class A Redeemable Unit holders was paid at a flat annual rate of 1.00% of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 1.00% and dividing the result thereof by 12). Prior to July 1, 2020, the ongoing selling agent fee was $15.00 each for futures transactions and up to an equivalent amount for swaps and $7.50 each per side for options transactions, with respect to Class A Redeemable Units. The ongoing selling agent fee for Class A Redeemable Unit holders prior to July 1, 2020 was reduced by applicable floor brokerage fees and did not exceed 2.00% of adjusted
month-end
net assets per year, calculated monthly. Class Z Redeemable Units are not subject to an ongoing selling agent fee. The Partnership may pay an ongoing selling agent fee to other properly licensed and/or registered selling agents who sell Class A Redeemable Units, and such additional selling agents may share all or a substantial portion of such fees with their properly registered or exempted financial advisors who have sold Class A Redeemable Units.As of November 1, 2018, the Partnership entered into an alternative investment placement agent agreement (the “Harbor Selling Agreement”), by and among the Partnership, the General Partner, Morgan Stanley Distribution Inc. (“MSDI”), and Harbor Investment Advisory, LLC, a Maryland limited liability company (“Harbor”), which supersedes and replaces the alternative investment selling agent agreement, dated January 19, 2018, between the Partnership, the General Partner and Harbor. Pursuant to the Harbor Selling Agreement, MSDI and Harbor have been appointed as a
non-exclusive
selling agent andsub-selling
agent, respectively, of the Partnership for the purpose of finding eligible investors for Redeemable Units through offerings that are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder and for Harbor to serve as an investment advisor to its customers investing in one or more of the partnerships party to the Harbor Selling Agreement; provided, that, included within such appointment, Harbor will provide certain services to certain holders of Redeemable Units of the Partnership, who had acquired such Redeemable Units prior to such holders becoming clients of Harbor. The Harbor Selling Agreement continues in effect until September 30, 2022 unless terminated in certain circumstances as set forth in the Harbor Selling Agreement, including by any party on thirty days’ prior written notice, after which the General Partner or the Partnership may, in its sole discretion, renew the Harbor Selling Agreement for additionalone-year
periods. Pursuant to the Harbor Selling Agreement, the Partnership pays Harbor a monthly ongoing selling agent fee at a flat annual rate equal to 0.75% per year of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 0.75% and dividing the result thereof by 12). For the period from July 1, 2020 to December 31, 2020, the ongoing selling agent fee for Class A Redeemable Unit holders was paid at a flat annual rate of 1.00% of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 1.00% and5
dividing the result thereof by 12). Prior to July 1, 2020, the Partnership paid Harbor an ongoing selling agent fee equal to $15.00 per round turn, swaps by up to an equivalent amount and options transactions by $7.50 each per side, with respect to Class A Redeemable Units held by Harbor clients. The ongoing selling agent fee for Class A Redeemable Unit holders prior to July 1, 2020 was reduced by applicable floor brokerage fees and did not exceed 2.00% of adjusted
month-end
net assets per year, calculated monthly.The General Partner has delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a master services agreement, the Administrator furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.
(b)
Financial Information about Segments
. The Partnership’s business consists of only one segment, speculative trading of commodity interests. The Partnership does not engage in sales of goods or services. The Partnership’s capital as of December 31, 2021 was $361,858,030.(c)
Narrative Description of Business. See Paragraphs (a) and (b) above.
(i) through (xii) — Not applicable.
(xiii) — The Partnership has no employees.
(d)
Financial Information About Geographic Areas
. The Partnership does not engage in sales of goods or services or own anylong-lived
assets, and therefore this item is not applicable.(e)
Available Information
. The Partnership does not have an Internet address. The Partnership will provide paper copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports free of charge upon request.(f)
Reports to Security Holders
. Not applicable.(g)
Enforceability of Civil Liabilities Against Foreign Persons
. Not applicable.(h)
Smaller Reporting Companies
. Not applicable.6
Item 1A.
Risk Factors
.Risks Relating to our Business
As a result of leverage, small changes in the price of the Partnership’s positions may result in major losses.
The trading of commodity interests is speculative, volatile and involves a high degree of leverage. A small change in the market price of a commodity interest contract can produce major losses for the Partnership. Market prices can be influenced by, among other things, changing supply and demand relationships, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events, weather and climate conditions, insects and plant disease, purchases and sales by foreign countries, changing interest rates, pandemics, epidemics and other public health crises.
An investor may lose all of their investment.
Due to the speculative nature of trading commodity interests, an investor could lose all of their investment in the Partnership.
The Partnership will pay substantial fees and expenses regardless of profitability.
Regardless of its trading performance, the Partnership will incur fees and expenses, including, but not limited to, ongoing selling agent fees, clearing fees, management fees, and the General Partner fee. Substantial incentive fees may be paid to one or more of the Advisors even if the Partnership experiences a net loss for the full year.
An investor’s ability to redeem or transfer Redeemable Units is limited.
An investor’s ability to redeem Redeemable Units is limited and no market exists for the Redeemable Units.
Conflicts of interest exist.
The Partnership is subject to numerous conflicts of interest including those that arise from the fact that:
1. | The General Partner and the Partnership’s/Funds’ commodity broker are affiliates; |
2. | Each of the Advisors, the Partnership’s/Funds’ commodity broker, the General Partner, and their respective principals and affiliates may trade in commodity interests for their own accounts; |
3. | An investor’s financial advisor will receive ongoing compensation for providing services to the investor’s account with respect to Class A Redeemable Units; and |
4. | The General Partner, on behalf of the Partnership, may purchase shares from money market mutual funds affiliated and/or unaffiliated with the General Partner. |
Investing in Redeemable Units may not provide the desired diversification of an investor’s overall portfolio.
One of the Partnership’s objectives is to add an element of diversification to a traditional stock and bond portfolio, but any benefit of portfolio diversification is dependent upon the Partnership/Funds achieving positive returns and such returns being independent of stock and bond market returns.
Past performance is no assurance of future results.
The Advisors’ trading strategies may not perform as they have performed in the past, and past performance does not necessarily predict future returns. The Advisors have from time to time incurred substantial losses in trading on behalf of clients.
An investor’s tax liability may exceed cash distributions.
Investors are taxed on their share of the Partnership’s income, even though the Partnership does not intend to make any distributions.
The General Partner may allocate the Partnership’s assets to undisclosed advisors.
The General Partner at any time may select and allocate the Partnership’s assets to undisclosed advisors. Investors may not be advised of such changes in advance, or at all. Investors must rely on the ability of the General Partner to select commodity trading advisors and allocate assets among them.
7
Regulatory changes could restrict the Partnership’s operations and increase its operational costs.
Regulatory changes could adversely affect the Partnership by restricting its markets or activities, limiting its trading and/or increasing the costs or taxes to which investors are subject. Pursuant to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, the CFTC and the Securities and Exchange Commission (the “SEC”) have promulgated rules to regulate trading in swaps and swap dealers and to mandate additional reporting and disclosure requirements and continue to promulgate rules regarding capital and margin requirements, to require that certain swaps be traded on an exchange or a swap execution facility, and to require that derivatives (such as those traded by the Partnership) be moved into central clearinghouses. The CFTC and the prudential regulators that oversee swap dealers have adopted rules regarding margin requirements for certain derivatives. In addition, the CFTC and such prudential regulators have adopted rules regarding capital requirements for swap dealers. These rules may negatively impact the manner in which swap contracts are traded and/or settled, increase the cost of such trading, and limit trading by speculators (such as the Partnership) in futures and over-the-counter (“OTC”) markets.
Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person or a group of persons may hold or control in particular futures and options on futures. In January 2021, the CFTC finalized new rules that impose position limits on certain futures and option contracts and physical commodity swaps that are “economically equivalent” to such contracts. In addition to speculative position limits, most commodity exchanges also limit fluctuations in futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Such regulations could have an adverse effect on an Advisor’s trading for the Partnership/Funds. The trading instructions of an Advisor may have to be modified, and positions held by the Partnership/Funds may have to be liquidated, in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership/Funds by increasing transaction costs to liquidate positions and limiting potential profits on liquidated positions.
The General Partner, the Partnership or the Funds and their respective service providers (including the Advisors) and operations are potentially vulnerable to cyber-security attacks or incidents.
Like other business enterprises, the use of the internet and other electronic media and technology exposes the General Partner, the Partnership, the Funds and their respective service providers and operations, to potential risks from cyber-security attacks or incidents (collectively, “cyber events”). Cyber events may include, for example, unauthorized access to systems, networks or devices, infection from computer viruses or other malicious software code, mishandling or misuse of information and attacks which shut down, disable, slow or otherwise disrupt operations, business processes or website access or functionality. In addition to intentional cyber events, unintentional cyber events can occur. Unintentional cyber events may include, for example, the inadvertent release of confidential information, the mishandling or misuse of information and/or technological limitations or hardware failures (in the markets or otherwise) that constrain the Partnership’s and/or the Funds’ ability to gather, process and communicate information efficiently and securely, without interruption.
Any cyber event could adversely affect the Partnership’s and/or the Funds’ business, financial condition or results of operations and cause the Partnership and/or the Funds to incur financial loss and expense, as well as face exposure to regulatory penalties or legal claims, reputational damage and additional costs associated with corrective measures. A cyber-security breach could also jeopardize a limited partner’s personal, confidential, proprietary or other information processed and stored in, and transmitted through, the General Partner’s or a service provider’s computer systems. A cyber event may cause the Partnership, the Funds or their respective service providers to lose proprietary information, suffer data corruption, lose operational capacity (such as, for example, the loss of the ability to process transactions, calculate the Partnership’s net asset value, or allow investors to transact business) and/or fail to comply with applicable privacy and other laws. Among other potentially harmful effects, cyber events also may result in theft, unauthorized monitoring and failures in the physical infrastructure or operating systems that support the Partnership, the Funds or their respective service providers.
The nature of malicious cyber-attacks is becoming increasingly sophisticated and none of the General Partner, the Partnership nor the Funds can control whether a cyber event will adversely affect the cyber systems of the Advisors or other third-party service providers.
8
Tax Laws are subject to change at any time.
Tax laws and court and Internal Revenue Service (“IRS”) interpretations thereof are subject to change at any time, possibly with retroactive effect.
Prospective investors are urged to consult with their tax advisors with respect to regulatory or administrative developments and proposals, and their potential effects on them based on their unique circumstances.
The continuing spread of a new strain of coronavirus, which causes the viral disease known as
COVID-19,
may adversely affect our investments and operations.Since its discovery in December 2019, a new strain of coronavirus, which causes the viral disease known as
COVID-19,
has spread from China to many other countries, including the United States. The outbreak has been declared a pandemic by the World Health Organization, and the U.S. Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak.Thedirectives and increased remote work protocols. If the pandemic continues to be prolonged or the actions of governments and central banks are unsuccessful, including actions to facilitate the comprehensive distribution of effective vaccines, the adverse impact on the global economy will deepen.
COVID-19
pandemic and related voluntary and government-imposed social and business restrictions has impacted global economic conditions and adversely affected various industries (including, but not limited to, transportation, hospitality and entertainment), resulting in volatility in the global financial markets, disruption in global supply chains, increased unemployment, and operational challenges such as the temporary and permanent closures of businesses,sheltering-in-place
Given the continuing development of this situation, it is not possible to accurately predict how the market disruptions caused by
COVID-19
will further impact the U.S. and other world economies or the value of the Partnership’s/Funds’ investments, or for how long the effects of such events will continue. Nevertheless, the novel coronavirus continues to present material uncertainty and risk with respect to the Partnership’s/Funds’ investments and operations.Item 2.
Properties
.The Partnership does not own or lease any properties. The General Partner operates from facilities provided by Morgan Stanley and/or one of its subsidiaries.
9
Item 3.
Legal Proceedings
.This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.
On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC (“MS&Co.”).
MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2021, 2020, 2019, 2018, and 2017. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at
www.morganstanley.com
. We refer you to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2020 Audited Financial Statement.In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.
MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.
During the preceding five years, the following administrative, civil, or criminal actions pending, on appeal or concluded against MS&Co. or any of its principals are material within the meaning of CFTC Rule 4.24(l)(2) or 4.34(k)(2):
10
Regulatory and Governmental Matters.
On September 28, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. regarding violations of CFTC Rule 166.3 by failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on multiple exchanges. The order and settlement required MS&Co. to pay a $500,000 penalty and cease and desist from violating CFTC Rule 166.3.
On November 2, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. for non-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC. The order requires MS&Co. to pay a $350,000 penalty and cease and desist from further violations of the Commodity Exchange Act.
On September 30, 2020, the SEC entered into a settlement order with MS&Co. settling an administrative action which relates to MS&Co.’s violations of the order marking requirements of Regulation SHO of the Exchange Act resulting from its improper use of aggregation units in structuring the Firm’s equity swaps business. The order found that MS&Co. improperly operated its equity swaps business without netting certain “long” and “short” positions as required by Rule 200(c) of Regulation SHO. The order found that the long exposure to an equity security (the “Long Unit”) and the short exposure to an equity security (the “Short Unit”) were not independent from one another and did not have separate trading strategies or objectives without regard to each other, and that the Long and Short Units were not eligible for the exception in Rule 200(f) of Regulation SHO. The order found that MS&Co. willfully violated Section 200(g) of Regulation SHO. MS&Co. consented, without admitting or denying the findings and without adjudication of any issue of law or fact, to a censure; to cease and desist from committing or causing future violations; to pay a civil penalty of $5 million; and to comply with the undertaking enumerated in the order.
Civil Litigation
On May 17, 2013, plaintiff infiled a complaint against MS&Co. and certain affiliates in the Supreme Court of the State of New York County (“Supreme Court of NY”). The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $133 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 11, 2016, the Appellate Division, First Department (“First Department”) affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At December 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $22 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $22 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al.
11
In August of 2017, MS&Co. was named as a defendant in a purported antitrust class action in the United States District Court for the Southern District of New York (“SDNY”) styledPlaintiffs allege, inter alia, that MS&Co., together with a number of other financial institution defendants, violated U.S. antitrust laws and New York state law in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for securities lending. The class action complaint was filed on behalf of a purported class of borrowers and lenders who entered into stock loan transactions with the defendants. The class action complaint seeks, among other relief, certification of the class of plaintiffs and treble damages. On September 27, 2018, the court denied the defendants’ motion to dismiss the class action complaint. A decision on plaintiffs’ motion for class certification is pending.
Iowa Public Employees’ Retirement System et al. v. Bank of America Corporation et al.
S
ettled Civil Litigation
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., styled, in the Supreme Court of NY. The complaint related to a $275 million credit default swap (“CDS”) referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserted claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. On March 22, 2021, the parties entered into a settlement agreement. On April 16, 2021, the court entered a stipulation of voluntary discontinuance, with prejudice.
China
Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al.
On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois, styledA corrected amended complaint was filed on April 8, 2011, which alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by MS&Co. at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On November 4, 2021, the Firm entered into an agreement to settle the litigation.
Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al.
On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styledAn amended complaint was filed on June 29, 2012 and alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raised claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. On July 13, 2018, the parties reached an agreement in principle to settle the litigation.
Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al.
12
On May 3, 2013, plaintiffs infiled a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $634 million. The complaint alleged causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and sought, among other things, compensatory and punitive damages. On June 26, 2018, the parties entered into an agreement to settle the litigation.
Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.
On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. in California state court styled, on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleged that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserted violations of the California False Claims Act and other state laws and sought treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached an agreement to settle the litigation.
California v. Morgan Stanley, et al.
Beginning on March 25, 2019, MS&Co. was named as a defendant in a series of putative class action complaints filed in the United States District Court for the SDNY, the first of which is styled. Each complaint alleged a conspiracy to fix prices and restrain competition in the market for unsecured bonds issued by the following Government-Sponsored Enterprises: the Federal National Mortgage Association; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. The purported class period for each suit is from January 1, 2012 to June 1, 2018. Each complaint raised a claim under Section 1 of the Sherman Act and sought, among other things, injunctive relief and treble compensatory damages. On May 23, 2019, plaintiffs filed a consolidated amended class action complaint styled, with a purported class period from January 1, 2009 to January 1, 2016. On June 13, 2019, the defendants filed a joint motion to dismiss the consolidated amended complaint. On August 29, 2019, the court denied MS&Co.’s motion to dismiss. On December 15, 2019, MS&Co. and certain other defendants entered into a stipulation of settlement to resolve the action as against each of them in its entirety. On June 16, 2020, the court granted final approval of the settlement.
Alaska Electrical Pension Fund v. BofA Secs., Inc., et al
In re GSE
Bonds Antitrust Litigation
Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.
Item 4.
Mine Safety Disclosures
.
13
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
.(a) | Market Information . The Partnership has issued no stock. There is no public market for the Redeemable Units. |
(b) | Holders . The number of holders of Redeemable Units as of February 28, 2022 was 2,814 for Class A Redeemable Units and 38 for Class Z Redeemable Units. |
(c) | Dividends . The Partnership did not declare any distributions in 2021 or 2020. The Partnership does not intend to declare distributions in the foreseeable future. |
(d) | Securities Authorized for Issuance Under Equity Compensation Plans . None. |
(e) | Performance Graph . Not applicable. |
(f) | Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities . For the twelve months ended December 31, 2021, there were subscriptions of 2,047.8500 Redeemable Units of Class A totaling $6,021,943 and 256.7220 Redeemable Units of Class Z totaling $309,685. For the twelve months ended December 31, 2020, there were subscriptions of 1,768.3640 Redeemable Units of Class A totaling $4,739,834 and 57.1160 Redeemable Units of Class Z totaling $62,500. For the twelve months ended December 31, 2019, there were subscriptions of 7,968.6900 Redeemable Units of Class A totaling $22,602,847 and 1,288.0100 Redeemable Units of Class Z totaling $1,470,323. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as described in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering. |
Proceeds of net offering were used for the trading of commodity interests including futures, option and forward contracts and any other interests pertaining thereto, including interests in commodity pools.
(g) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers . |
The following chart sets forth the purchases of Redeemable Units for each Class by the Partnership.
Period | Class A (a) Total Number of Redeemable Units Purchased* | Class A (b) Average Price Paid per Redeemable Unit** | (c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
October 1, 2021 - October 31, 2021 | 507.9070 | $ | 3,224.57 | N/A | N/A | |||||||||||
November 1, 2021 - November 30, 2021 | 290.8490 | $ | 3,194.79 | N/A | N/A | |||||||||||
December 1, 2021 - December 31, 2021 | 655.5600 | $ | 3,219.06 | N/A | N/A | |||||||||||
1,454.3160 | $ | 3,216.13 |
* | Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner may compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners. |
** | Redemptions of Redeemable Units are effected as of the end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions. |
14
Item 6.
Reserved
.Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.Overview
The Partnership seeks to achieve substantial capital appreciation through speculative trading, directly or indirectly through its investment in the Funds, in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals. The Partnership/Funds may employ futures, options on futures and forward contracts in those markets. The Partnership/Funds may also engage in swap transactions and other derivative transactions with the approval of the General Partner/Trading Manager.
The General Partner/Trading Manager manages all business of the Partnership/Funds. The General Partner has delegated its responsibility for the investment of the Partnership’s capital to the Advisors. The General Partner/Trading Manager engages a team of approximately 20 professionals whose primary emphasis is on attempting to maintain quality control among the Advisors to the funds operated or managed by the General Partner/Trading Manager. A full-time staff of due diligence professionals use proprietary technology and
on-site
evaluations to monitor new and existing futures money managers. The accounting and operations staff provide processing of subscriptions and redemptions and reporting to limited partners and regulatory authorities. The General Partner also engages staff involved in marketing and sales support.Responsibilities of the General Partner include:
• | due diligence examinations of the Advisors; |
• | selection, appointment and termination of the Advisors; |
• | negotiation of the Management Agreements; and |
• | monitoring the activity of the Advisors. |
In addition, the General Partner/Trading Manager will prepare, or will assist the Administrator in preparing, the books and records and will provide, or will assist the Administrator in providing, the administrative and compliance services that are required by law or regulation, from time to time, in connection with the operation of the Partnership/Funds. While the Partnership and the Funds have the right to seek lower commission rates from other commodity brokers at any time, the General Partner/Trading Manager believes that the customer agreements and other arrangements with the commodity broker are fair, reasonable, and competitive.
The programs traded by each Advisor on behalf of the Partnership are: Breakout – an enhanced version of Breakout’s Propeller Program; Quantica – Quantica Managed Futures Program; Pan – Energy Trading Program, Transtrend – Diversified Trend Program – Enhanced Risk Portfolio (US Dollar); Northlander – Northlander Commodity Program; JSCL – Systematic Strategy Program; prior to its termination effective January 31, 2022, Greenwave – an enhanced version of the Flagship Plus 2X Program; prior to its termination effective October 31, 2021, FORT – Global Contrarian Program; prior to its termination effective September 30, 2020, Winton – Diversified Macro Strategies; from February 1, 2019 until December 12, 2019, John Street – Systematic Strategy Program; prior to its termination effective January 31, 2019, Willowbridge – wPraxis Futures Trading Approach; and prior to its termination effective October 31, 2018, Systematica – BlueTrend Program. As of December 31, 2021 and September 30, 2021, the Partnership’s assets were allocated among the Advisors in the following approximate percentages:
December 31, 2021 | September 30, 2021 | |||||||||||||||
Advisor | December 31, 2021 | (percentage of net assets) | September 30, 2021 | (percentage of net assets) | ||||||||||||
Transtrend | $ | 56,579,756 | 16 | % | $ | 67,992,844 | 19 | % | ||||||||
FORT | $ | - | 0 | % | $ | 36,334,517 | 10 | % | ||||||||
Northlander | $ | 31,271,064 | 9 | % | $ | 27,179,757 | 8 | % | ||||||||
JSCL | $ | 102,282,327 | 28 | % | $ | 105,030,253 | 29 | % | ||||||||
Pan | $ | 24,089,029 | 7 | % | $ | 22,819,054 | 6 | % | ||||||||
Greenwave | $ | 18,655,140 | 5 | % | $ | 15,104,931 | 4 | % | ||||||||
Quantica | $ | 55,673,228 | 15 | % | $ | 67,033,860 | 18 | % | ||||||||
Breakout | $ | 20,866,322 | 6 | % | $ | 23,081,431 | 6 | % | ||||||||
Unallocated | $ | 52,441,164 | 14 | % | $ | - | 0 | % |
15
Breakout Funds, LLC
The portion of the Partnership’s assets that are allocated to Breakout are traded directly in a managed account in the name of the Partnership pursuant to an enhanced version of Breakout’s Propeller Program.
The Propeller Program is a discretionary global macro strategy that utilizes both fundamental and quantitative methods to identify market opportunities. Breakout aims to improve upon the traditional global macro strategy by using more of a tactical approach, with a shorter-term time horizon. At any given time, Breakout develops and monitors 1 to 7 high conviction themes, with a time horizon of 1 to 10 days. Independent of trade conviction, the portfolio manager will not engage in a trade without a minimum of a three to one expected reward/risk ratio. Key differentiators include low downside volatility and low historical drawdowns. In order to control downside volatility, Breakout engages in rigorous risk management with a focus on liquid markets and defined risk. The returns are uncorrelated to actively managed macro, CTA, and equity strategies.
Quantica Capital AG
The portion of the Partnership’s assets that are allocated to Quantica are traded directly in a managed account in the name of the Partnership pursuant to the Quantica Managed Futures Program. The Quantica Managed Futures Program is a fully systematic investment program that aims to detect medium-term trend-following market inefficiencies in a diversified, liquid investment universe. Quantica’s investment philosophy centers on the belief that quality risk-adjusted returns can be systematically captured from liquid markets by statistically analyzing risk-adjusted outperformance of one market versus other markets in the investment universe. The goal of the investment philosophy is to generate optimized long-term risk-adjusted compounded returns that are largely uncorrelated to traditional asset classes such as stocks and bonds. To achieve this goal, Quantica employs a unique and proprietary, fully systematic approach to medium term trend-following that is based on risk-adjusted, relative trend identification that delivers style-consistent trend-following returns with the ability to enhance efficiency and diversification.
Pan Capital Management LP
The portion of the Partnership’s assets that are allocated to Pan are traded directly in a managed account in the name of the Partnership pursuant to Pan’s Energy Trading Program, a proprietary, discretionary trading program. The Energy Trading Program’s primary objective is to produce absolute returns through active trading of the U.S. energy markets, while offering investors an opportunity to diversify their overall portfolios. The Energy Trading Program also strives to minimize the risk of capital loss.
Pan trades listed exchange-traded futures and options on futures in the U.S. natural gas market and, with the consent of the General Partner, other liquid U.S. energy markets, including, but not limited to, electricity and crude oil. With the General Partner’s consent Pan may also trade swaps on behalf of the Partnership. Pan bases energy trading on fundamental analysis rather than market timing and seeks to structure trades with asymmetric risk return.
Pan firmly believes solid and thorough fundamental analysis, rigorous risk management and deep understanding of energy markets are required to achieve the Energy Trading Program’s investment objectives.
Transtrend B.V.
The portion of the Partnership’s assets that are currently allocated to Transtrend for trading are not invested in commodity interests directly. Transtrend’s allocation of the Partnership’s assets is currently invested in Transtrend Master. Transtrend trades Transtrend Master’s assets, and thereby the Partnership’s assets, in accordance with its Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system. Transtrend generally trades its Enhanced Risk Profile using 1.5 times the leverage employed by the Standard Risk Profile.
Transtrend Master currently trades Financial Instruments (i.e., futures, options, options on futures, swaps, swaps on futures, forward contracts on foreign exchange, interest rates, interest rates instruments, commodities and equity related indices and instruments and other indices) on U.S. and
non-U.S.
exchanges, other venues and/or OTC markets. One of the potential strengths of the program is the disciplined, systematic and dynamic nature of market participation. The overall performance is determined by the entirety of all markets and all trades. In a systematic market approach, the disciplined application by Transtrend and a consistent participation by the client are both essential to realize the pursued returns over the course of time, although profitability cannot be guaranteed and clients may incur substantial losses on their investment.Transtrend’s market approach attempts to benefit from directional price moves in outright Financial Instruments and in intra-market and inter-market combinations of Financial Instruments.
Under the Diversified Trend Program’s Standard Risk Profile, Transtrend generally commits an average of approximately 16% of the assets in a client’s account as margin or a premium for Financial Instruments positions. Such percentage has varied, however, and is affected by various factors including, without limitation, nominal account size, market conditions, traded markets or the level of margins set by brokers and clearing houses. The Diversified Trend Program’s Enhanced Risk Profile generally includes 1.5 times the leverage, and as such the average margin commitments, of the Standard Risk Profile.
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Northlander Commodity Advisors LLP
The portion of the Partnership’s assets that are allocated to Northlander for trading are not invested in commodity interests directly. Northlander’s allocation of the Partnership’s assets is currently invested in NL Master. Northlander trades the Partnership’s assets allocated to it pursuant to its Northlander Commodity Program. The Northlander Commodity Program is a commodity focused trading program which invests in energy products globally, but with an emphasis on European power, European gas, European emissions, and international coal markets. The program is an absolute return strategy which seeks to identify value in mispriced markets through careful fundamental analysis by focusing on market dynamics and market structure and then expressing its thesis through its proprietary portfolio construction and risk management procedures.
John Street Capital Limited/John Street Capital LLP
The portion of the Partnership’s assets that are allocated to JSCL (and prior to the JSCL Novation Agreement, John Street) are traded directly in a managed account in the name of the Partnership pursuant to JSCL’s/John Street’s Systematic Strategy Program. The Systematic Strategy Program seeks to profit from price movements in global markets and employs a systematic approach to trading. This means that the vast majority of the Systematic Strategy Program’s trades will be made without discretion, based on the orders generated by the advisor’s proprietary trading system. The Systematic Strategy Program employs a multi-model approach, applying different trading methods across different time horizons with the goal of having a diversified mix of potential return drivers within the strategy.
The Systematic Strategy Program trades exchange-traded futures and OTC derivatives. The exchange-traded futures represent a wide range of underlying asset classes, including, but not limited to, equities, bonds, interest rates, currencies, energies, metals and agricultural products.
Greenwave Capital Management LLC
The portion of the Partnership’s assets that were allocated to Greenwave were traded directly in a managed account in the name of the Partnership pursuant to an enhanced version of Greenwave’s Flagship Plus 2X Program. Greenwave’s Flagship Plus 2X Program employed a discretionary global macro approach with an emphasis on G20 currencies. Greenwave incorporated a
two-step
investment process. It began with top down, macroeconomic analysis to determine the fundamental themes in which to engage. The goal was to identify the dominant drivers in the current market environment with a focus on central bank activity, political trends and geopolitical events. From this, Greenwave developed fundamental themes typically looking six to twelve months forward.In the second step, Greenwave employed a multi-layered quantitative process to identify the optimal timing and trade location at which to deploy risk in these themes. While themes were typically six to twelve months in duration, Greenwave would tactically trade around these core exposures. In addition, Greenwave would take shorter term tactical trades based purely on technical analysis when the opportunity presented itself.
Finally, as part of the enhancement agreed upon with the General Partner, Greenwave could have from time to time increased or decreased exposures on a discretionary basis with the goal of exploiting potential opportunities created during market stress or episodes of volatility.
FORT L.P.
The portion of the Partnership’s assets that were allocated to FORT for trading were not invested in commodity interests directly. FORT’s allocation of the Partnership’s assets was invested in FORT Contrarian Master. FORT traded the Partnership’s assets allocated to it pursuant to its Global Contrarian Program, a systematic, technical, trend-anticipating futures trading strategy.
The Global Contrarian Trading Program attempted to profit from emerging trends by identifying price behaviors that signaled possible turning points. Rather than attempting to identify existing trends, the Global Contrarian Trading Program attempted to anticipate trends before they occurred. Trading decisions were based primarily on an analysis of market prices, volume and volatility; factors external to the trading markets were incorporated only in rare cases. The Global Contrarian Trading Program generally operated on the theory that market prices reflect all known factors affecting supply and demand of a particular financial instrument.
The Global Contrarian Trading Program was designed to incorporate concepts akin to “channels,” which FORT defined using systematic, mathematical tools. The Global Contrarian Trading Program estimated a large number of channels and identified a confluence of channels to find resistance and support points. FORT believed that this style was markedly different from most trend-following strategies, which were generally late to enter and exit a trend. In contrast, the Global Contrarian Trading Program was designed to enter and exit a trend early. The Global Contrarian Trading Program generally sought to anticipate and capitalize on short to intermediate-term trends. Because the Global Contrarian Trading Program sought to anticipate trends in market prices, it had the potential to perform well even in what standard trend-following systems perceived as directionless periods.
The Global Contrarian Trading Program took positions while a market was moving against one of its signals. As a result, its performance could have been much more volatile than traditional trend-following models, but the potential for diversification was much greater. In an attempt to reduce the volatility of returns, the allocation of the Global Contrarian Trading Program’s capital was geographically diversified across Asia, Europe, Australia and North America. This diversification also provided the Global Contrarian
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Trading Program with opportunities to seek profits in a variety of market environments.
Total risk was measured primarily by using theratio, which was targeted not to exceed 14% for a fully funded account, although FORT could have adjusted the foregoing target from time to time. Theratio was monitored systematically as well as by FORT’s trading principals.
margin-to-equity
margin-to-equity
Winton Capital Management Limited
The portion of the Partnership’s assets that were allocated to Winton for trading were not invested in commodity interests directly. Winton’s allocation of the Partnership’s assets was invested in Winton Master. Winton traded the Diversified Macro Strategies, a proprietary, systematic trading program, on behalf of Winton Master.
The investment objective of the Diversified Macro Strategies was to achieve long-term investment growth.
The Diversified Macro Strategies followed a disciplined investment process that was based on statistical analysis of historical data. The initial stage of the process involved collecting, cleaning and organizing large amounts of data. The Diversified Macro Strategies used a wide variety of data inputs including factors that were intrinsic to markets, such as price, volume and open interest; and those that were external to markets, such as economic statistics, industrial and commodity data and public company financial data. Winton conducted statistical research into the data in an attempt to quantify the probability of particular markets rising or falling, conditional on a variety of quantifiable factors. Winton’s research was used to develop mathematical models that attempted to forecast market returns, the variability or volatility associated with such returns (often described as “risk”), and the correlation between markets and transaction costs. These forecasts were used in investment strategies that determined what positions should have been held to maximize profit within a certain range of risk. As a result of Winton’s research, Winton expected that the investments made in accordance with this process should have had an improved chance of being successful, which was expected to lead to profits over the
long-term.
Winton’s investment programs were operated as automated, computer-based investment systems. The programs were modified over time as Winton monitored its operation and undertook further research. Changes to the programs occurred as a result of, amongst other things, the discovery of new relationships, changes in market liquidity, the availability of new data or the reinterpretation of existing data.
Most of Winton’s investment decisions were made strictly in accordance with the output of the programs. However, Winton could have, in exceptional circumstances (such as the occurrence of events that fall outside the input parameters of the programs), made investment decisions based on other factors and took action to override the output of the programs to seek to protect the interests of investors.
Willowbridge Associates Inc.
The portion of the Partnership’s assets that were allocated to Willowbridge for trading were not invested in commodity interests directly. Willowbridge’s allocation of the Partnership’s assets were invested in Willowbridge Master. Willowbridge traded the Partnership’s assets allocated to it in accordance with the wPraxis Futures Trading Approach, a proprietary, discretionary trading system. The wPraxis Futures Trading Approach utilized a fully discretionary trading strategy to build a portfolio consisting of futures on currency, fixed income, stock indices and commodities. The approach could have traded commodities, futures, forwards, options, swaps, spot contracts in the commodities, currencies and fixed income markets. All positions were closely monitored to evaluate risk parameter status. As markets moved, positions were refined and expectations updated in response to existing market conditions.
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Systematica Investments Limited
Systematica directly traded a managed account in the name of the Partnership pursuant to Systematica’s BlueTrend Program. The BlueTrend Program had maximum flexibility to invest in a wide range of derivative instruments, including currencies, futures, options and, with prior written approval of the General Partner, swaps and other derivative instruments. Derivative instruments could have been exchange-traded or OTC, as permitted by the Commodity Exchange Act and the rules promulgated thereunder. The BlueTrend Program could have engaged in short sales. The BlueTrend Program could also have retained amounts in cash pending reinvestment or if this was considered appropriate to the investment objective.
The BlueTrend Program sought to achieve its investment objective through the implementation of a systematic trading model or portfolio of systematic trading models. Such model(s) traded in a number of foreign exchange and commodity instruments, and derivatives relating to those instruments, including swaps, indices, forwards, futures and option contracts.
Specific Fund level performance information is included in Note 6 to the Partnership’s financial statements included in “Item 8.
Financial Statements and Supplementary Data
.”For the period January 1, 2021 through December 31, 2021, the average allocation by commodity market sector for each of the Funds was as follows:
Transtrend Master | ||||||||||
Currencies | 26.1 | % | ||||||||
Energy | 11.9 | % | ||||||||
Grains | 8.9 | % | ||||||||
Indices | 15.6 | % | ||||||||
Interest Rates U.S. | 4.6 | % | ||||||||
Interest Rates Non-U.S. | 13.1 | % | ||||||||
Livestock | 3.1 | % | ||||||||
Metals | 9.3 | % | ||||||||
Softs | 7.4 | % | ||||||||
NL Master | ||||||||||
Energy | 100.0 | % |
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(a)
Liquidity
.The Partnership does not engage in sales of goods or services. Its assets are its (i) investment in the Funds, (ii) redemptions receivable from the Funds, (iii) equity in trading account, consisting of unrestricted and restricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts, options purchased at fair value and investment in U.S. Treasury bills at fair value, if applicable, and (iv) 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, through its investment in the Funds and direct investments. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2021.
To minimize the risk relating to low margin deposits, the Partnership and Funds follow certain trading policies, including:
(i) | The Partnership/Funds invest their assets only in commodity interests that an Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that an Advisor believes will permit it to enter and exit trades without noticeably moving the market. |
(ii) | An Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Partnership’s net assets allocated to that Advisor. |
(iii) | The Partnership/Funds may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged. |
(iv) | The Partnership/Funds do not employ the trading technique commonly known as “pyramiding,” in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities. |
(v) | The Partnership/Funds do not utilize borrowings other than short-term borrowings if the Partnership/Funds take delivery of any cash commodities. |
(vi) | The Advisors may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Partnership/Funds. “Spreads” and “straddles” describe commodity futures trading strategies involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets. |
(vii) | The Partnership/Funds will not permit the churning of their commodity trading accounts. The term “churning” refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, driven by the desire to generate commission income. |
From January 1, 2021 through December 31, 2021, the Partnership’s average margin to equity ratio (the percentage of assets on deposit required for margin) was approximately 13.8%. The foregoing margin to equity ratio takes into account cash held in the Partnership’s name, as well as the allocable value of the positions and cash held on behalf of the Partnership in the name of the Funds.
i.e.,
In the normal course of business, the Partnership and the Funds are parties to financial instruments with
off-balance-sheet
risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options, and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or OTC. Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those 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. The General Partner estimates that at any given time approximately 1.0% to 5.6% of the Partnership’s/Funds’ contracts are traded OTC.20
As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds 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/Funds do not consider these contracts to be guarantees.
The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations due to changes in market prices of investments held. Such fluctuations are included in total trading results in the Partnership’s/Funds’ Statements of Income and Expenses.
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds 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 and the Funds are exposed to market risk equal to the value of the futures and forward contracts held 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/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Partnership’s/Funds’ Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk as MS&Co. or an MS&Co. affiliate are counterparties or brokers with respect to the Partnership’s and the Funds’ assets. For certain OTC contracts traded by certain Funds, JPMorgan is the counterparty with respect to those assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.
The General Partner/Trading Manager monitors and attempts to mitigate the Partnership’s/Funds’ 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/Funds may be subject. These monitoring systems generally allow the General Partner/Trading Manager to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, exchange-cleared swaps, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions. (See also “Item 8.
Financial Statements and Supplementary Data
.” for further information on financial instrument risk included in the notes to financial statements.)The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Funds’ business, these instruments may not be held to maturity.
The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
Other than the risks inherent in U.S. Treasury bills, money market mutual fund securities, commodity futures, forward, option and swap contracts, the Partnership and the Funds know of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership’s/Funds’ liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the Partnership shall terminate under certain circumstances including a decrease in net asset value per Redeemable Unit to less than $400 as of the close of business on any business day. In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the Partnership’s aggregate net assets decline to less than $1,000,000.
(b)
Capital Resources
.(i) The Partnership has made no material commitments for capital expenditures.
(ii) The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by net income or losses on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be predicted. Market movements in commodities are dependent upon fundamental and technical factors which the Advisors may or may not be able to identify, such as changing supply and demand relationships, pandemics, epidemics and other public health crises, weather, government, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. Partnership expenses consist of, among other things, clearing fees, ongoing selling agent fees, management fees, the General Partner fee and expenses allocated from Funds. The level of these expenses is dependent upon trading performance and the level of net assets maintained. In addition, the amount of interest income earned by the Partnership/Funds is dependent upon (1) the average daily equity maintained in cash in the Partnership’s and/or the Funds’ accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or the Funds and (3) interest rates over which none of the Partnership, the Funds, MS&Co. or JPMorgan has control.
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No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem some or all of their Redeemable Units at the net asset value per Redeemable Unit as of the end of each month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions. Redemptions are generally funded out of the Partnership’s cash holdings and/or redemptions from the Funds. For the year ended December 31, 2021, 18,931.4120 limited partner Redeemable Units of Class A were redeemed totaling $55,866,712, 563.8280 limited partner Redeemable Units of Class Z were redeemed totaling $688,845 and 753.5340 General Partner Redeemable Units of Class Z were redeemed totaling $925,001. For the year ended December 31, 2020, 48,307.6010 limited partner Redeemable Units of Class A were redeemed totaling $130,096,487, 986.6240 limited partner Redeemable Units of Class Z were redeemed totaling $1,068,080 and 1,234.3940 General Partner Redeemable Units of Class Z were redeemed totaling $1,400,000. For the year ended December 31, 2019, 62,979.8050 limited partner Redeemable Units of Class A were redeemed totaling $170,139,279, 749.6080 limited partner Redeemable Units of Class Z were redeemed totaling $822,040 and 1,436.9980 General Partner Redeemable Units of Class Z were redeemed totaling $1,590,064.
The Partnership continues to offer Redeemable Units at the net asset value per Redeemable Unit as of the end of each month. For the year ended December 31, 2021, there were subscriptions of 2,047.8500 limited partner Redeemable Units of Class A totaling $6,021,943 and 256.7220 limited partner Redeemable Units of Class Z totaling $309,685. For the year ended December 31, 2020, there were subscriptions of 1,768.3640 limited partner Redeemable Units of Class A totaling $4,739,834 and 57.1160 limited partner Redeemable Units of Class Z totaling $62,500. For the year ended December 31, 2019, there were subscriptions of 7,968.6900 limited partner Redeemable Units of Class A totaling $22,602,847 and 1,288.0100 limited partner Redeemable Units of Class Z totaling $1,470,323.
(c)
Results of Operations
.For the year ended December 31, 2021, the net asset value per Redeemable Unit for Class A increased 16.2% from $2,769.71 to $3,219.06. For the year ended December 31, 2021, the net asset value per Redeemable Unit for Class Z increased 17.1% from $1,134.16 to $1,328.23. For the year ended December 31, 2020, the net asset value per Redeemable Unit for Class A increased 1.5% from $2,728.91 to $2,769.71. For the year ended December 31, 2020, the net asset value per Redeemable Unit for Class Z increased 2.5% from $1,106.01 to $1,134.16. For the year ended December 31, 2019, the net asset value per Redeemable Unit for Class A increased 4.6% from $2,608.11 to $2,728.91. For the year ended December 31, 2019, the net asset value per Redeemable Unit for Class Z increased 7.0% from $1,034.06 to $1,106.01.
The Partnership experienced a net trading gain of $80,650,513 before fees and expenses in 2021. Gains were primarily attributable to the Partnership’s/Funds’ trading in energy, grains, indices, livestock and softs and were partially offset by losses in currencies, U.S. and
non-U.S.
interest rates and metals.During the first quarter of 2021, the most notable gains were achieved within the energy markets during February and March from long positions in European carbon emission futures as prices surged higher on an outlook for growth in global industrial demand. Within the agricultural sector, gains were experienced during February from long futures positions in the grains as prices advanced amid adverse weather in key growing regions in North and South America threatening crop plantings. Gains were also recorded within the global stock index markets during all three months of the first quarter primarily from long positions in U.S. and Asian equity index futures amid continued strong investor demand for risk assets. Additional gains were achieved within the metals markets during February from long positions in copper futures as prices rallied on optimism global manufacturing demand would accelerate post-COVID. Further gains were recorded during March within the global fixed income sector from short positions in U.S. Treasury bond futures as interest rates moved higher amid growing inflationary concerns, pushing prices lower. The Partnership’s overall trading gains for the first quarter were partially offset by trading losses within the currency sector from long positions in the euro, Australian dollar, Canadian dollar and Japanese yen versus the U.S. dollar as the value of U.S. currency advanced as the pace of the U.S. vaccine rollout accelerated.
During the second quarter of 2021, the Partnership’s most significant gains were achieved within the energy sector during April, May, and June from long futures positions in crude oil and its refined products, natural gas, coal, freight, and carbon emissions as prices surged higher amid optimism for a rebound in global economic strength as more countries eased COVID-related lockdown measures. Gains within the agricultural sector were recorded during April and June from long positions in corn futures as supply constraints and growing consumption demand boosted prices. Within global stock indices, gains were experienced during April from long positions in U.S. and Asian equity index futures as prices advanced on steady investor demand for risk assets. Additional gains were achieved within the metals sector during April and May from long positions in copper futures as prices moved higher amid signs of tightening global stockpiles. A portion of the Partnership’s gains for the second quarter was offset by losses incurred within the global fixed income sector during April, May, and June from short positions in U.S. and European fixed income futures as central banks signaled they would remain committed to easing policies. Further losses were experienced within the currencies during June from long positions in the Canadian dollar versus the U.S. dollar as the relative value of the U.S. currency moved higher.
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During the third quarter of 2021, the Partnership’s most significant gains were achieved within the energy sector during July, August and September from long positions in natural gas, coal, and European electrical power futures as a combination of supply and demand factors boosted energy prices globally. Gains were also recorded in the agricultural markets during July, August and September from long positions in coffee, cotton, and sugar futures as inflationary pressures impacted the prices of consumer products. Further gains were experienced within the global stock index sector during July and August from long positions in U.S., European, and Asian equity index futures as global stock prices advanced on steady investor appetite for risk assets. A portion of the Partnership’s gains for the third quarter was offset by losses incurred within the global fixed income sector during August and September primarily from long positions in European and U.S. fixed income futures. Within the metals, losses were recorded during August and September from long positions in copper and gold futures as a strengthening U.S. dollar adversely impacted demand for both precious and industrial metals. Smaller losses were incurred within the currencies during July from short positions in the Japanese yen.
During the fourth quarter of 2021, the Partnership’s most significant gains were achieved within the energy sector during November and December from long positions in carbon emission futures as an outlook for increased energy consumption and growing environmental regulations pushed prices higher. Additional gains in the energies were recorded during November and December from short positions in natural gas futures. Within the global stock index sector, gains were achieved during October and December from long positions in U.S. and European equity index futures as steady investor demand for risk assets boosted stock prices. A portion of the Partnership’s gains for the fourth quarter was offset by losses incurred within the global fixed income sector during October and December from long positions in European fixed income futures as prices declined amid speculation the European Central Bank’s fight against inflation would push interest rates higher. Losses within the metals markets were recorded during November from long positions in gold futures as a strengthening U.S. dollar weakened demand for precious metals.
The Partnership experienced a net trading gain of $28,633,083 before fees and expenses in 2020. Gains were primarily attributable to the Partnership’s/Funds’ trading in energy, grains, U.S. and non U.S. interest rates and metals and were partially offset by losses in currencies, indices, livestock and softs.
During the first quarter of 2020, the most notable losses were incurred within the global stock index sector during February from long positions in U.S., European, and Asian equity index futures as stock prices reversed dramatically lower late in the month as the
COVID-19
coronavirus threatened global economic stability. Losses in the currency sector were primarily incurred from long positions in the Mexican peso during February and March as the value of the Mexican currency slumped against the U.S. dollar. In the agricultural sector, losses were incurred from positions in livestock futures during January and from grains and soft commodities during March. The Partnership’s overall trading losses for the quarter were partially offset by trading gains achieved during January and February from long positions in global fixed income futures as bond prices rallied on safe-haven demand asCOVID-19
grew into a global pandemic. Additional gains were recorded within the energy sector during each month of the quarter from short positions in natural gas and European electricity futures as the growing economic slowdown limited demand for power and electricity production. Meanwhile, the most significant gains in the metals were achieved during January and February from long positions in palladium.During the second quarter of 2020, the Partnership’s most significant losses were incurred within the energy sector during June from short positions in coal futures as prices rallied amid supply constraints and increased import demand from China. Within the currency markets, losses were recorded during May and June from short positions in the euro versus the U.S. dollar as the effects of the
COVID-19
quarantine pulled the dollar lower. Further losses were experienced within the agricultural sector during June primarily from long positions in lean hog futures as supply overhang weighed on prices. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the global interest rate markets during April from long positions in U.S., European, and Asian fixed income futures as safe-haven demand strengthened amid the growing coronavirus pandemic. Additional gains were recorded within the global stock index sector during April, May, and June from long positions in U.S., European, and Asian equity index futures as global stocks rebounded higher. In the metals markets, gains were achieved during May and June from long positions in gold and silver futures as precious metals prices advanced on increased investor demand.23
During the third quarter of 2020, the Partnership’s most significant gains came from within the metals markets during July and August from long positions in silver futures as the combined effects of a weakening U.S. dollar and continued uncertainty over the strength of the global economy spurred investor demand for precious metals. Within the energy complex, gains were recorded during August from long positions in natural gas futures as prices surged higher as a heatwave in the Western U.S. boosted cooling and power generation demand. Additional gains were achieved within the global stock index sector during July and August from long positions in U.S., Asian, and European equity index futures as stock prices continued to rally. Gains were also recorded during July and September from long positions in U.S. and European fixed income futures. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the agricultural sector during August from short positions in corn and wheat futures as prices spiked on concerns adverse weather in the Midwest could damage crops. Within the currency sector, losses were recorded during September primarily from long positions in the euro versus the U.S. dollar as a resurgence of the coronavirus in the Eurozone depressed the value of the region’s currency.
During the fourth quarter of 2020, the most significant gains were experienced during November and December from long positions in the Mexican peso, New Zealand dollar, Canadian dollar and Chinese renminbi versus the U.S. dollar as the value of the U.S. dollar weakened against most of its foreign counterparts as
COVID-19
cases continued to rise in the U.S. Within the global stock index sector, gains were recorded during November and December from long positions in U.S. and Asian equity index positions as investor appetite for risk assets buoyed stock prices. Gains in the metals sector were experienced during November and December from long positions in both industrial and precious metals. Additional gains were achieved within the grains markets during November and December from long positions in soybean futures as prices advanced on increased import demand from China. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the energy sector during November from short positions in European electricity futures as prices surged on increased winter power demand. Smaller losses were incurred from long positions in European fixed income futures during November.The results of operations for the twelve months ended 2019 is discussed under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.” in the Partnership’s Annual Report on Form10-K
for the fiscal year ended December 31, 2019.Interest income is earned on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s, except for Transtrend Master’s) brokerage account during each month at the rate equal to the monthly average of the
4-week
U.S. Treasury bill discount rate. MS&Co. will pay monthly interest to Transtrend Master on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the4-week
U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For the avoidance of doubt, the Partnership/Funds will not receive interest on amounts in the futures brokerage account that are committed to margin. Any interest earned on the Partnership’s and/or each Fund’s cash account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership and/or the Funds, as applicable. Any interest income earned on collateral or excess cash deposited by certain of the Funds and held by JPMorgan in its capacity as such Funds’ forward foreign currency counterparty will be retained by such Funds, and the Partnership will receive its allocable portion of such interest from the applicable Fund. Interest income earned by the Partnership for the three and twelve months ended December 31, 2021 decreased by $22,298 and $1,294,172, respectively, as compared to the corresponding periods in 2020. The decrease in interest income is primarily due to lower interest rates during the three and twelve months ended December 31, 2021 as compared to the corresponding periods in 2020. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership’s and/or the Funds’ accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or the Funds and (3) interest rates over which none of the Partnership, the Funds, MS&Co. or JPMorgan has control.Certain clearing fees are based on the number of trades executed by the Advisors for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees related to direct investments for the three and twelve months ended December 31, 2021 decreased by $59,618 and $1,812,133, respectively, as compared to the corresponding periods in 2020. The decrease in these clearing fees is primarily due to a decrease in the number of direct trades made by the Partnership during the three and twelve months ended December 31, 2021 as compared to the corresponding periods in 2020.
Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value for Class A Redeemable Units as of the end of each month and are affected by trading performance, subscriptions and redemptions. Prior to July 1, 2020, ongoing selling agent fees were based on the number of trades executed by the Advisors and the adjusted
month-end
net asset value of Class A Redeemable Units calculated monthly. Accordingly, ongoing selling agent fees prior to July 1, 2020 must be compared in relation to the number of trades executed during the period as well as the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and twelve months ended December 31, 2021 decreased by $238,081 and $1,677,159, respectively, as compared to the corresponding periods in 2020. The decrease in ongoing selling agent fees is primarily due changes in the calculation of the ongoing selling agent fee for Class A Redeemable Units as described in Notes 3d and 3e to the Partnership’s financial statements included in “Item 8.Financial Statements and Supplementary Data
.” effective July 1, 2020 and January 1, 2021, respectively.24
Management fees, except fees payable to Transtrend, 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, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees payable to Transtrend are charged at the Transtrend Master level and are affected by trading performance, subscriptions and redemptions of Transtrend Master. Management fees for the three and twelve months ended December 31, 2021 decreased by $93,037 and $1,234,726, respectively, as compared to the corresponding periods in 2020. The decrease in management fees is due to lower average adjusted net assets during the three and twelve months ended December 31, 2021 as compared to the corresponding periods in 2020.
Fees are paid to the General Partner for administering the business and affairs of the Partnership including, among other things, (i) selecting, appointing and terminating the Partnership’s commodity trading advisors, (ii) allocating and reallocating the Partnership’s assets among the commodity trading advisors and (iii) monitoring the activities of the commodity trading advisors. These 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, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. The General Partner fee for the three and twelve months ended December 31, 2021 decreased by $10,778 and $419,814, respectively, as compared to the corresponding periods in 2020. The decrease in the General Partner fee is due to lower average adjusted net assets during the three and twelve months ended December 31, 2021 as compared to the corresponding periods in 2020.
Incentive fees paid by the Partnership are based on the New Trading Profits, as defined in the respective Management Agreements among the Partnership, the General Partner and each Advisor, generated by each Advisor at the end of the quarter, calendar half year or annually, as applicable. Trading performance for the three and twelve months ended December 31, 2021 resulted in incentive fees of $1,367,173 and $13,699,396, respectively. Trading performance for the three and twelve months ended December 31, 2020 resulted in incentive fees of $2,175,517 and $7,422,575, respectively. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid an incentive fee until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.
The Partnership pays professional fees, which generally include legal, accounting expenses, administrative, filing, reporting and data processing fees. Professional fees for the years ended December 31, 2021 and 2020 were $1,005,392 and $970,961, respectively.
In the General Partner’s opinion, the Partnership’s Advisors continue to employ trading methods consistent with the objectives of the Partnership. The General Partner monitors the Advisors’ performance on a daily, weekly, monthly and annual basis to assure these objectives are met.
Commodity futures markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership/Funds depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, pandemics, epidemics, and other health crises, 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 Advisors are able to identify them, the Funds and the Partnership expect to increase capital through operations.
In allocating the assets of the Partnership among the Advisors, the General Partner considers, among other factors, each Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time. Each Advisor’s percentage allocation and trading program is described in the “Overview” section of this Item 7.
(d)
Off-balance Sheet Arrangements
. None.(e)
Contractual Obligations
. None.(f)
Operational Risk
.The Partnership, directly or indirectly through its investment in the Funds, is exposed to market risk and credit risk, which arise in the normal course of its business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk
Technological Risk
25
computer systems, and adversely affect the Partnership’s business, financial condition or results of operations.
Legal/Documentation Risk
non-compliance
with applicable legal and regulatory requirements.Financial Control Risk
(g)
Critical Accounting Policies
.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. As a result, actual results could differ from these estimates. A summary of the Partnership’s significant accounting policies is described in Note 2 to the Partnership’s financial statements included in “Item 8.
Financial Statements and Supplementary Data
.”The Partnership’s most significant accounting policy is the valuation of its investment in the Funds and in futures, option and forward contracts and U.S. Treasury bills, as applicable. The Partnership carries its investment in Transtrend Master and NL Master based on the Partnership’s (1) net contributions to Transtrend Master and NL Master and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of Transtrend Master and NL Master. The Partnership carried its investment in FORT Contrarian Master based on the Partnership’s (1) net contributions to FORT Contrarian Master and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of FORT Contrarian Master. The Partnership carried its investment in Winton Master based on Winton Master’s net asset value per redeemable unit as calculated by Winton Master. The Partnership carried its investment in Willowbridge Master based on Willowbridge Master’s net asset value per redeemable unit as calculated by Willowbridge Master. The fair value of exchange-traded futures, option and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of
non-exchange-traded
foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.26
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
.The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by the Partnership/Funds are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ 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/Funds’ main line of business.
The limited partners will not be liable for losses exceeding the current net asset value of their investment. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
Market movements result in frequent changes in the fair value of the Partnership’s/Funds’ open contracts and, consequently, in their earnings and cash balances. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors. These primarily include factors which affect energy price levels, including supply factors and weather conditions, but could also include 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/Funds’ open contracts and the liquidity of the markets in which they trade.
The Partnership/Funds rapidly acquire and liquidate 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/Funds’ past performances is not necessarily indicative of their future results.
“Value at Risk” is a measure of the maximum amount which the Partnership/Funds could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s/Funds’ speculative trading and the recurrence in the markets traded by the Partnership/Funds 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/Funds’ 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/Funds’ losses in any market sector will be limited to Value at Risk or by the Partnership’s/Funds’ attempts to manage their market risk.Materiality as used in this section is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Partnership’s/Funds’ market sensitive instruments.
Quantifying the Partnership’s Trading Value at Risk
The following quantitative disclosures regarding the Partnership’s/Funds’ market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor except for statements of historical fact (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period).
The Partnership’s/Funds’ risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership’s/Funds’ mark-to-market accounting, any loss in the fair value of the Partnership’s/Funds’ open positions, including investment in the Funds, is directly reflected in the Partnership’s earnings (realized or unrealized) and cash balances.
Exchange margin requirements have been used by the Partnership/Funds as the measure of their Value at Risk. Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in
95%-99%
of anyone-day
interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-termone-day
price fluctuation.In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership/Funds), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a
futures-equivalent
margin is not available, dealers’ margins have been used.The fair value of the Partnership’s/Funds’ futures and forward positions does not have any optionality component. However, the Advisors do trade commodity options. Where this instrument is a futures contract, the futures margin has been used, and where this instrument is a physical commodity, the
futures-equivalent
margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership/Funds in almost all cases fluctuate to a lesser extent than those of the underlying instruments.In quantifying the Partnership’s/Funds’ Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been added to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership’s/Funds’ positions are rarely, if ever, 100% positively correlated have not been reflected.
27
The Partnership’s and the Funds’ Trading Value at Risk in Different Market Sectors
Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. As of December 31, 2021, JSCL, Pan, Greenwave, Quantica and Breakout directly traded managed accounts in the name of the Partnership. Transtrend and Northlander trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the master funds over which they have been granted limited authority to make trading decisions. The first two trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly and through its investment in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly (i.e. in the managed accounts in the Partnership’s name traded by JSCL, Pan, Greenwave, Quantica and Breakout, as applicable) and indirectly by each Fund separately as of December 31, 2021 and 2020.
The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of December 31, 2021 and 2020. As of December 31, 2021, the Partnership’s total capitalization was $361,858,030.
December 31, 2021
Market Sector | Value at Risk | % of Total Capitalization | ||||||
Currencies | $ | 7,342,187 | 2.03 | % | ||||
Energy | 14,090,651 | 3.89 | ||||||
Grains | 2,932,799 | 0.81 | ||||||
Indices | 6,845,313 | 1.89 | ||||||
Interest Rates U.S. | 1,437,916 | 0.40 | ||||||
Interest Rates Non-U.S. | 2,696,233 | 0.75 | ||||||
Livestock | 952,985 | 0.26 | ||||||
Metals | 2,477,971 | 0.68 | ||||||
Softs | 2,377,888 | 0.66 | ||||||
Total | $ | 41,153,943 | 11.37 | % | ||||
As of December 31, 2020, the Partnership’s total capitalization was $359,254,745.
December 31, 2020
Market Sector | Value at Risk | % of Total Capitalization | ||||||
Currencies | $ | 9,132,601 | 2.54 | % | ||||
Energy | 9,244,038 | 2.57 | ||||||
Grains | 2,833,843 | 0.79 | ||||||
Indices | 8,908,326 | 2.48 | ||||||
Interest Rates U.S. | 2,377,558 | 0.66 | ||||||
Interest Rates Non-U.S. | 6,931,554 | 1.93 | ||||||
Livestock | 835,043 | 0.23 | ||||||
Metals | 4,572,824 | 1.27 | ||||||
Softs | 2,340,934 | 0.65 | ||||||
Total | $ | 47,176,721 | 13.12 | % | ||||
28
The following tables indicate the trading Value at Risk associated with the Partnership’s direct investments and indirect investments in the Funds by market category as of December 31, 2021 and 2020, the highest and lowest at any point and average value during the years. All open position trading risk exposures have been included in calculating the figures set forth below.
As of December 31, 2021 and 2020, the Partnership’s Value at Risk for the portion of its assets that were traded directly was as follows:
December 31, 2021
Twelve Months Ended December 31, 2021 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Currencies | $ | 1,840,289 | 0.51 | % | $ | 6,665,910 | $ | 1,679,705 | $ | 3,854,279 | ||||||||||
Energy | 8,607,368 | 2.38 | 10,751,047 | 4,470,947 | 7,043,654 | |||||||||||||||
Grains | 858,443 | 0.24 | 3,853,094 | 726,045 | 1,834,983 | |||||||||||||||
Indices | 2,539,386 | 0.70 | 11,729,602 | 2,092,198 | 4,777,741 | |||||||||||||||
Interest Rates U.S. | 553,290 | 0.15 | 3,783,562 | 313,058 | 1,505,505 | |||||||||||||||
Interest Rates Non-U.S. | 752,788 | 0.21 | 6,868,118 | 645,511 | 3,606,934 | |||||||||||||||
Livestock | 269,610 | 0.07 | 977,708 | 93,704 | 559,894 | |||||||||||||||
Metals | 1,078,797 | 0.30 | 3,978,117 | 676,242 | 2,299,063 | |||||||||||||||
Softs | 1,086,622 | 0.30 | 3,534,137 | 1,006,127 | 1,662,532 | |||||||||||||||
Total | $ | 17,586,593 | 4.86 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
December 31, 2020
Twelve Months Ended December 31, 2020 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Currencies | $ | 3,389,760 | 0.94 | % | $ | 5,269,055 | $ | 629,154 | $ | 2,431,899 | ||||||||||
Energy | 6,184,256 | 1.72 | 13,521,727 | 3,760,820 | 9,244,751 | |||||||||||||||
Grains | 1,383,941 | 0.39 | 5,718,941 | 720,538 | 2,426,904 | |||||||||||||||
Indices | 3,781,386 | 1.05 | 7,746,319 | 92,887 | 2,743,407 | |||||||||||||||
Interest Rates U.S. | 1,010,762 | 0.28 | 2,043,671 | 214,773 | 1,107,710 | |||||||||||||||
Interest Rates Non-U.S. | 3,157,105 | 0.88 | 7,123,169 | 771,101 | 4,310,725 | |||||||||||||||
Livestock | 341,231 | 0.09 | 5,779,951 | 240,768 | 2,315,619 | |||||||||||||||
Metals | 1,909,578 | 0.53 | 7,087,231 | 376,349 | 3,682,732 | |||||||||||||||
Softs | 1,558,845 | 0.43 | 7,007,411 | 662,448 | 2,278,312 | |||||||||||||||
Total | $ | 22,716,864 | 6.31 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
29
At December 31, 2021, Transtrend Master’s total capitalization was $56,580,003 and the Partnership owned 100.0% of Transtrend Master. As of December 31, 2021, Transtrend Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Transtrend for trading) was as follows:
December 31, 2021
Twelve Months Ended December 31, 2021 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Currencies | $ | 5,501,898 | 9.72 | % | $ | 6,059,954 | $ | 2,844,891 | $ | 4,276,357 | ||||||||||
Energy | 1,609,110 | 2.84 | 2,823,937 | 1,010,513 | 1,917,083 | |||||||||||||||
Grains | 2,074,356 | 3.67 | 2,194,459 | 690,338 | 1,453,799 | |||||||||||||||
Indices | 4,305,927 | 7.61 | 4,524,201 | 1,398,613 | 2,638,501 | |||||||||||||||
Interest Rates U.S. | 884,626 | 1.56 | 1,273,527 | 110,012 | 722,704 | |||||||||||||||
Interest Rates Non-U.S. | 1,943,445 | 3.43 | 4,360,437 | 555,327 | 2,185,233 | |||||||||||||||
Livestock | 683,375 | 1.21 | 800,030 | 152,062 | 493,212 | |||||||||||||||
Metals | 1,399,174 | 2.47 | 2,536,086 | 794,627 | 1,488,952 | |||||||||||||||
Softs | 1,291,266 | 2.28 | 1,992,444 | 750,065 | 1,212,201 | |||||||||||||||
Total | $ | 19,693,177 | 34.79 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
At December 31, 2020, Transtrend Master’s total capitalization was $66,632,519 and the Partnership owned 100.0% of Transtrend Master. As of December 31, 2020, Transtrend Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Transtrend for trading) was as follows:
December 31, 2020
Twelve Months Ended December 31, 2020 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Currencies | $ | 5,319,265 | 7.98 | % | $ | 19,590,628 | $ | 2,199,776 | $ | 7,438,615 | ||||||||||
Energy | 1,497,415 | 2.25 | 4,454,924 | 700,276 | 2,010,461 | |||||||||||||||
Grains | 1,449,902 | 2.18 | 3,515,820 | 1,045,499 | 1,963,809 | |||||||||||||||
Indices | 2,271,081 | 3.41 | 8,833,776 | 651,665 | 3,853,934 | |||||||||||||||
Interest Rates U.S. | 915,405 | 1.37 | 1,720,048 | 192,556 | 1,019,051 | |||||||||||||||
Interest Rates Non-U.S. | 2,795,726 | 4.20 | 6,121,339 | 1,122,144 | 2,420,152 | |||||||||||||||
Livestock | 493,812 | 0.74 | 1,129,893 | 159,940 | 436,792 | |||||||||||||||
Metals | 2,536,086 | 3.81 | 4,082,966 | 1,242,232 | 2,670,773 | |||||||||||||||
Softs | 782,089 | 1.17 | 2,736,946 | 596,029 | 1,355,694 | |||||||||||||||
Total | $ | 18,060,781 | 27.11 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
30
At December 31, 2021, NL Master’s total capitalization was $42,253,950 and the Partnership owned approximately 74.0% of NL Master. As of December 31, 2021, NL Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Northlander for trading) was as follows:
December 31, 2021
Twelve Months Ended December 31, 2021 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Energy | $ | 5,235,369 | 12.39 | % | $ | 12,881,816 | $ | 670,621 | $ | 3,221,401 | ||||||||||
Total | $ | 5,235,369 | 12.39 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
At December 31, 2020, NL Master’s total capitalization was $14,337,973 and the Partnership owned approximately 81.4% of NL Master. As of December 31, 2020, NL Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Northlander for trading) was as follows:
December 31, 2020
Twelve Months Ended December 31, 2020 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Energy | $ | 1,579,543 | 11.02 | % | $ | 1,579,543 | $ | 74,383 | $ | 443,187 | ||||||||||
Total | $ | 1,579,543 | 11.02 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
31
As of October 31, 2021, the Partnership redeemed its investment in FORT Contrarian Master.
At December 31, 2020, FORT Contrarian Master’s total capitalization was $57,965,478 and the Partnership owned 100.0% of FORT Contrarian Master. As of December 31, 2020, FORT Contrarian Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to FORT for trading) was as follows:
December 31, 2020
Twelve Months Ended December 31, 2020 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||
Currencies | $ | 423,576 | 0.73 | % | $ | 1,988,707 | $ | 202,069 | $ | 838,490 | ||||||||||
Energy | 276,619 | 0.48 | 1,165,186 | 142,190 | 564,762 | |||||||||||||||
Indices | 2,855,859 | 4.93 | 5,798,597 | 449,691 | 2,778,753 | |||||||||||||||
Interest Rates U.S. | 451,391 | 0.78 | 1,702,197 | 145,815 | 695,438 | |||||||||||||||
Interest Rates Non-U.S. | 978,723 | 1.69 | 4,211,112 | 495,790 | 2,131,137 | |||||||||||||||
Metals | 127,160 | 0.22 | 257,510 | 15,972 | 87,974 | |||||||||||||||
Total | $ | 5,113,328 | 8.83 | % | ||||||||||||||||
* Annual average of daily Values at Risk.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership/Funds is typically many times the applicable maintenance margin requirement (margin requirements generally range between 1% and 15% of contract face value, although an exchange may increase margin requirements on short notice) as well as many times the capitalization of the Partnership/Funds. The magnitude of the Partnership’s/Funds’ open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of the Partnership’s/Funds’ positions, certain market conditions—unusual, but historically recurring from time to time —could cause the Partnership/Funds to incur severe losses over a short period of time. The foregoing Value at Risk tables—as well as the past performance of the Partnership/Funds—give no indication of this “risk of ruin.”
32
Non-Trading Risk
The Partnership/Funds have non-trading market risk on their foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.
A decline in short-term interest rates would result in a decline in the Partnership’s cash management income. This cash flow risk is not considered to be material.
Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality and multiplier features of the Partnership’s/Funds’ market-sensitive instruments, in relation to the Partnership’s/Funds’ net assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s/Funds’ market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership/Funds manage their primary market risk exposures— constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Partnership’s/Funds’ primary market risk exposures, as well as the strategies used and to be used by the General Partner and the Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s/Funds’ risk control to differ materially from the objectives of such strategies. Government interventions, pandemics, epidemics, and other public health crises, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the management strategies of the Partnership/Funds. There can be no assurance that the Partnership’s/Funds’ current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short or long term. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership/Funds at December 31, 2021 by market sector. It may be anticipated, however, that these market exposures will vary materially over time.
Currencies
. The Partnership’s/Funds’ currency exposure is to exchange rate fluctuations, primarily fluctuations that disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner/Trading Manager does not anticipate that the risk profile of the Partnership’s/Funds’ currency sector will change significantly in the future.Equities
. The Partnership’s/Funds’ primary equity exposure is to equity price risk in the G20 countries. The stock index futures traded by the Partnership/Funds are limited to futures on broadly based indices. As of December 31, 2021, the Partnership’s/Funds’ primary exposures were in the VIX Volatility Index (U.S.), S&P 50 Index (U.S.), S&P/TSX 60 (Canada), SPI 200 (Australia), VSTOXX (Europe), andH-Shares
(China) stock indices. The Partnership/Funds are primarily exposed to the risk of adverse price trends or static markets in the major European, U.S., and Pacific Rim indices, as well as in global emerging markets. Static markets would not cause major market changes but would make it difficult for the Partnership/Funds to avoid being “whipsawed” into numerous small losses.Interest Rates
. Interest rate movements directly affect the price of the futures positions held by the Partnership/Funds and indirectly the value of their stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially affect the Partnership’s/Funds’ profitability. The Partnership’s/Funds’ primary interest rate exposure is to interest rate fluctuations in the United States and the other G8 countries. However, the Partnership/Funds may also take futures positions on the government debt of smaller economies — e.g., Australia.Commodities:
Grains
. The Partnership’s/Funds’ trading risk exposure in the grains is primarily to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Corn, canola, wheat, and the soybean complex accounted for the majority of the Partnership’s/Funds’ grain exposure as of December 31, 2021.Metals
. The Partnership’s/Funds’ primary metal market exposure as of December 31, 2021 was to fluctuations in the prices of copper, tin, palladium, silver, gold, iron, nickel and platinum.Softs
. The Partnership’s/Funds’ trading risk exposure in the soft commodities is to agricultural-related price movements, which are often directly affected by severe or unexpected weather conditions. Coffee, cocoa, cotton, and sugar accounted for the majority of the Partnership’s/Funds’ soft commodities exposure as of December 31, 2021.Energy
. The Partnership’s/Funds’ primary energy market exposure is to oil and natural gas price movements, often resulting from political developments in the Middle East, weather conditions, and other factors contributing to supply and demand. Further energy market exposure is to the carbon emission, European power, and coal markets which are subject to price movements driven by geopolitical events, climate related regulation, and supply and demand related factors. Energy prices can be volatile and substantial profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets in the future.Livestock
. The Partnership’s/Funds’ primary risk exposure in livestock is to fluctuations in cattle and hog prices.33
Freight and Shipping.
The Partnership’s/Funds’ primary risk exposure in freight and shipping is to changes in the costs involved in the transportation of raw materials.Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only
non-trading
risk exposure of the Partnership/Funds as of December 31, 2021.Foreign Currency Balances
. The Partnership/Funds may hold various foreign currency balances. The Advisors regularly convert foreign currency balances to U.S. dollars in an attempt to control the Partnership’s/Funds’non-trading
risk.Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner/Trading Manager monitors and attempts to mitigate the Partnership’s/Funds’ 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/Funds may be subject.
The General Partner/Trading Manager monitors the Partnership’s/Funds’ performance and the concentration of their open positions, and consults with the Advisors concerning the Partnership’s/Funds’ overall risk profile. If the General Partner/Trading Manager felt it necessary to do so, the General Partner/Trading Manager could require the Advisors to close out positions as well as enter positions traded on behalf of the Partnership/Funds. However, any such intervention would be a highly unusual event. The General Partner/Trading Manager primarily relies on the Advisors’ own risk control policies while maintaining a general supervisory overview of the Partnership’s/Funds’ market risk exposures.
The Advisors apply their own risk management policies to their trading. The Advisors often follow diversification guidelines, margin limits and stop loss points to exit a position. The Advisors’ research of risk management often suggests ongoing modifications to their trading programs.
As part of the General Partner’s risk management, the General Partner periodically meets with each Advisor to discuss its risk management and to look for any material changes to the Advisor’s portfolio balance and trading techniques. Each Advisor is required to notify the General Partner of any material changes to its programs.
34
Item 8.
Financial Statements and Supplementary Data
.CERES ORION L.P.
The following financial statements and related items of the Partnership are filed under this Item 8: Oath or Affirmation, Management’s Report on Internal Control over Financial Reporting, Report of Independent Registered Public Accounting Firm (PCAOB ID: 42), for the years ended December 31, 2021, 2020, and 2019; Statements of Financial Condition at December 31, 2021 and 2020; Condensed Schedules of Investments at December 31, 2021 and 2020; Statements of Income and Expenses for the years ended December 31, 2021, 2020 and 2019; Statements of Changes in Partners’ Capital for the years ended December 31, 2021, 2020 and 2019; and Notes to Financial Statements. Additional financial information has been filed as Exhibits to this Form 10-K.
35
To the Limited Partners of
Ceres Orion L.P.
To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.
By: Patrick T. Egan |
President and Director |
Ceres Managed Futures LLC |
General Partner, |
Ceres Orion L.P. |
Ceres Managed Futures LLC |
522 Fifth Avenue |
New York, NY 10036 |
(855) 672-4468 |
36
Management’s Report on Internal Control Over Financial Reporting
The management of Ceres Orion L.P. (the “Partnership”), Ceres Managed Futures LLC, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934, as amended, and for our assessment of internal control over financial reporting. The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Partnership’s internal control over financial reporting includes those policies and procedures that:
(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and |
(iii) | provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Ceres Orion L.P. has assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth in the issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management concluded that the Partnership maintained effective internal control over financial reporting as of December 31, 2021 based on the criteria referred to above.
Internal Control-Integrated Framework (2013)
Patrick T. Egan | Steven Ross | |||
President and Director | Chief Financial Officer and Director | |||
Ceres Managed Futures LLC General Partner, | Ceres Managed Futures LLC General Partner, | |||
Ceres Orion L.P. | Ceres Orion L.P. |
37
Report of Independent Registered Public Accounting Firm
To the Partners of Ceres Orion L.P.,
Opinion on the Financial Statements
We have audited the accompanying statements of financial condition of Ceres Orion L.P. (the “Partnership”), including the condensed schedules of investments, as of December 31, 2021 and 2020, the related statements of income and expenses, and changes in partners’ capital for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2021 and 2020, and the results of its operations and changes in its partners’ capital for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2021 and 2020, by correspondence with the custodian and brokers. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to those charged with governance and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. We determined that there are no critical audit matters.
/s/ Ernst & Young LLP |
We have served as the auditor of the Partnership since 2017.
Boston, MA
March 18, 2022
38
Ceres Orion L.P.
Statements of Financial Condition
December 31, 2021 and 2020
December 31, 2021 | December 31, 2020 | |||||||
Assets: | ||||||||
Investment in the Funds (1) | $ | 87,850,946 | $ | 136,268,790 | ||||
Redemptions receivable from the Funds | 4,643,766 | 2,439,045 | ||||||
Equity in trading account: | ||||||||
Unrestricted cash (Note 3c) | 255,092,796 | 206,600,821 | ||||||
Restricted cash (Note 3c) | 17,796,571 | 23,403,438 | ||||||
Net unrealized appreciation on open futures contracts | 0 | 6,233,600 | ||||||
Options purchased, at fair value (premiums paid $6,040,660 and $2,680,600 at December 31, 2021 and 2020, respectively) | 13,241,142 | 2,470,392 | ||||||
Total equity in trading account | 286,130,509 | 238,708,251 | ||||||
Interest receivable (Note 3c) | 8,159 | 13,252 | ||||||
Total assets | $ | 378,633,380 | $ | 377,429,338 | ||||
Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Net unrealized depreciation on open futures contracts | $ | 1,400,643 | $ | 0 | ||||
Options written, at fair value (premiums received $5,733,790 and $3,631,000 at December 31, 2021 and 2020, respectively) | 6,649,119 | 2,311,171 | ||||||
Accrued expenses: | ||||||||
Ongoing selling agent fees (Notes 3d and 3e) | 225,873 | 304,105 | ||||||
Management fees (Note 3b) | 237,202 | 268,910 | ||||||
General Partner fees (Note 3a) | 231,254 | 234,070 | ||||||
Incentive fees (Note 3b) | 5,219,344 | 1,837,005 | ||||||
Professional fees | 351,627 | 302,374 | ||||||
Redemptions payable to General Partner (Note 7) | 350,001 | 1,400,000 | ||||||
Redemptions payable to Limited Partners (Note 7) | 2,110,287 | 11,516,958 | ||||||
Total liabilities | 16,775,350 | 18,174,593 | ||||||
Partners’ Capital (Notes 1 and 7): | ||||||||
General Partner, Class Z, 3,070.7533 and 3,824.2873 Redeemable Units outstanding at December 31, 2021 and 2020, respectively | 4,078,652 | 4,337,368 | ||||||
Limited Partners, Class A, 109,712.3338 and 126,595.8958 Redeemable Units outstanding at December 31, 2021 and 2020, respectively | 353,170,511 | 350,633,583 | ||||||
Limited Partners, Class Z, 3,469.9432 and 3,777.0492 Redeemable Units outstanding at December 31, 2021 and 2020, respectively | 4,608,867 | 4,283,794 | ||||||
Total partners’ capital (net asset value) | 361,858,030 | 359,254,745 | ||||||
Total liabilities and partners’ capital | $ | 378,633,380 | $ | 377,429,338 | ||||
Net asset value per Redeemable Unit: | ||||||||
Class A | $ | 3,219.06 | $ | 2,769.71 | ||||
Class Z | $ | 1,328.23 | $ | 1,134.16 | ||||
(1)
Defined in Note 1.
See accompanying notes to financial statements.
39
Ceres Orion L.P.
Condensed Schedule of Investments
December 31, 2021
Number of Contracts | Fair Value | % of Partners’ Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Currencies | 377 | $ | 184,170 | 0.05 | % | |||||||
Energy | ||||||||||||
NATURAL GAS FUTR DEC22 | 2,643 | 7,354,680 | 2.03 | |||||||||
NAT GAS LAST DAY Dec22 | 324 | 4,084,700 | 1.13 | |||||||||
NATURAL GAS FUTR Nov22 | 2,206 | 5,659,453 | 1.57 | |||||||||
Other | 9,415 | 6,445,494 | 1.78 | |||||||||
Grains | 1,031 | 11,298 | 0.00 | * | ||||||||
Indices | 801 | 111,957 | 0.03 | |||||||||
Interest Rates U.S. | 174 | 39,530 | 0.01 | |||||||||
Interest Rates Non-U.S. | 678 | (781,525 | ) | (0.22) | ||||||||
Livestock | 137 | 116,515 | 0.03 | |||||||||
Metals | 534 | 897,934 | 0.25 | |||||||||
Softs | 1,030 | (327,420 | ) | (0.09) | ||||||||
Total futures contracts purchased | 23,796,786 | 6.57 | ||||||||||
Futures Contracts Sold | ||||||||||||
Currencies | 594 | (270,449 | ) | (0.07) | ||||||||
Energy | ||||||||||||
NAT GAS LAST DAY Mar22 | 699 | (7,601,640 | ) | (2.10) | ||||||||
Other | 16,799 | (15,199,704 | ) | (4.20) | ||||||||
Grains | 773 | (191,934 | ) | (0.05) | ||||||||
Indices | 531 | (83,321 | ) | (0.02) | ||||||||
Interest Rates U.S. | 207 | (195 | ) | (0.00) | * | |||||||
Interest Rates Non-U.S. | 276 | 13,356 | 0.00 | * | ||||||||
Livestock | 85 | (52,462 | ) | (0.01) | ||||||||
Metals | 398 | (756,914 | ) | (0.21) | ||||||||
Softs | 922 | (1,054,166 | ) | (0.30) | ||||||||
Total futures contracts sold | (25,197,429 | ) | (6.96) | |||||||||
Net unrealized depreciation on open futures contracts | $ | (1,400,643 | ) | (0.39) | % | |||||||
Options Purchased | ||||||||||||
Calls | ||||||||||||
Energy | 1,985 | $ | 12,576,831 | 3.48 | % | |||||||
Puts | ||||||||||||
Energy | 1,206 | 664,311 | 0.18 | |||||||||
Total options purchased (premiums paid $6,040,660) | $ | 13,241,142 | 3.66 | % | ||||||||
Options Written | ||||||||||||
Calls | ||||||||||||
Energy | 1,510 | $ | (4,167,011 | ) | (1.15) | % | ||||||
Puts | ||||||||||||
Energy | 2,437 | (2,482,108 | ) | (0.69) | ||||||||
Total options written (premiums received $5,733,790) | $ | (6,649,119 | ) | (1.84) | % | |||||||
Investment in the Funds | ||||||||||||
CMF TT II, LLC | $ | 56,580,003 | 15.64 | % | ||||||||
CMF NL Master Fund LLC | 31,270,943 | 8.64 | ||||||||||
Total investment in the Funds | $ | 87,850,946 | 24.28 | % | ||||||||
* | Due to rounding. |
See accompanying notes to financial statements.
40
Ceres Orion L.P.
Condensed Schedule of Investments
December 31, 2020
Number of Contracts | Fair Value | % of Partners’ Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Currencies | 1,645 | $ | 947,605 | 0.26 | % | |||||||
Energy | 14,777 | 3,242,381 | 0.90 | |||||||||
Grains | 2,971 | 6,008,789 | 1.67 | |||||||||
Indices | 1,030 | 1,256,496 | 0.35 | |||||||||
Interest Rates U.S. | 733 | 29,578 | 0.01 | |||||||||
Interest Rates Non-U.S. | 5,422 | 487,480 | 0.14 | |||||||||
Livestock | 208 | 123,572 | 0.03 | |||||||||
Metals | 585 | 2,898,137 | 0.81 | |||||||||
Softs | 1,881 | 1,746,166 | 0.49 | |||||||||
Total futures contracts purchased | 16,740,204 | 4.66 | ||||||||||
Futures Contracts Sold | ||||||||||||
Currencies | 8 | (3,856 | ) | (0.00) | * | |||||||
Energy | 8,877 | 324,465 | 0.09 | |||||||||
Grains | 2,462 | (6,855,706 | ) | (1.91) | ||||||||
Indices | 354 | 50,799 | 0.01 | |||||||||
Interest Rates U.S. | 501 | (70,696 | ) | (0.02) | ||||||||
Interest Rates Non-U.S. | 760 | (101,298 | ) | (0.03) | ||||||||
Livestock | 191 | (225,435 | ) | (0.06) | ||||||||
Metals | 324 | (1,636,565 | ) | (0.46) | ||||||||
Softs | 1,747 | (1,988,312 | ) | (0.54) | ||||||||
Total futures contracts sold | (10,506,604 | ) | (2.92) | |||||||||
Net unrealized appreciation on open futures contracts | $ | 6,233,600 | 1.74 | % | ||||||||
Options Purchased | ||||||||||||
Calls | ||||||||||||
Energy | 1,358 | $ | 2,221,530 | 0.62 | % | |||||||
Puts | ||||||||||||
Energy | 1,214 | 248,862 | 0.07 | |||||||||
Total options purchased (premiums paid $2,680,600) | $ | 2,470,392 | 0.69 | % | ||||||||
Options Written | ||||||||||||
Calls | ||||||||||||
Energy | 1,878 | $ | (873,797 | ) | (0.24) | % | ||||||
Puts | ||||||||||||
Energy | 1,347 | (1,437,374 | ) | (0.40) | ||||||||
Total options written (premiums received $3,631,000) | $ | (2,311,171 | ) | (0.64) | % | |||||||
Investment in the Funds | ||||||||||||
CMF TT II, LLC | $ | 66,632,519 | 18.55 �� | % | ||||||||
CMF FORT Contrarian Master Fund LLC | 57,968,789 | 16.14 | ||||||||||
CMF NL Master Fund LLC | 11,667,482 | 3.24 | ||||||||||
Total investment in the Funds | $ | 136,268,790 | 37.93 | % | ||||||||
* | Due to rounding. |
See accompanying notes to financial statements.
41
Ceres Orion L.P.
Statements of Income and Expenses
For the Years Ended
December 31, 2021, 2020 and 2019
2021 | 2020 | 2019 | ||||||||||
Investment Income: | ||||||||||||
Interest income | $ | 75,635 | $ | 511,674 | $ | 2,243,877 | ||||||
Interest income allocated from the Funds | 20,010 | 878,143 | 7,402,235 | |||||||||
Total investment income | 95,645 | 1,389,817 | 9,646,112 | |||||||||
Expenses: | ||||||||||||
Expenses allocated from the Funds | 4,653,637 | 2,425,300 | 3,064,354 | |||||||||
Clearing fees related to direct investments (Note 3c) | 2,330,487 | 4,142,620 | 5,384,435 | |||||||||
Ongoing selling agent fees (Notes 3d and 3e) | 2,689,795 | 4,366,954 | 11,879,238 | |||||||||
Management fees (Note 3b) | 3,099,562 | 4,114,638 | 5,411,434 | |||||||||
General Partner fees (Note 3a) | 2,752,823 | 3,172,637 | 4,132,207 | |||||||||
Incentive fees (Note 3b) | 10,462,247 | 7,084,063 | 2,906,619 | |||||||||
Professional fees | 1,005,392 | 970,961 | 1,226,099 | |||||||||
Total expenses | 26,993,943 | 26,277,173 | 34,004,386 | |||||||||
Net investment loss | (26,898,298 | ) | (24,887,356 | ) | (24,358,274 | ) | ||||||
Trading Results: | ||||||||||||
Net gains (losses) on trading of commodity interests and investment in the Funds: | ||||||||||||
Net realized gains (losses) on closed contracts | 41,538,947 | 28,169,965 | 20,220,080 | |||||||||
Net realized gains (losses) on closed contracts allocated from the Funds | 45,478,864 | (18,830,522 | ) | 31,305,655 | ||||||||
Net change in unrealized gains (losses) on open contracts | (2,459,393 | ) | 8,961,484 | (1,669,805 | ) | |||||||
Net change in unrealized gains (losses) on open contracts allocated from the Funds | (3,907,905 | ) | �� | 10,332,156 | 193,333 | |||||||
Total trading results | 80,650,513 | 28,633,083 | 50,049,263 | |||||||||
Net income (loss) | $ | 53,752,215 | $ | 3,745,727 | $ | 25,690,989 | ||||||
Net income (loss) per Redeemable Unit* (Note 8): | ||||||||||||
Class A | $ | 449.35 | $ | 40.80 | $ | 120.80 | ||||||
Class Z | $ | 194.07 | $ | 28.15 | $ | 71.95 | ||||||
Weighted average Redeemable Units outstanding: | ||||||||||||
Class A | 115,137.0873 | 152,193.5660 | 197,078.5971 | |||||||||
Class Z | 6,985.6753 | 9,346.2383 | 10,037.7007 | |||||||||
* | Represents the change in net asset value per Redeemable Unit. |
See accompanying notes to financial statements.
42
Ceres Orion L.P.
Statements of Changes in Partners’ Capital
For the Years Ended
December 31, 2021, 2020 and 2019
Class A | Class Z | Total | ||||||||||||||||||||||
Amount | Redeemable Units | Amount | Redeemable Units | Amount | Redeemable Units | |||||||||||||||||||
Partners’ Capital, December 31, 2018 | $ | 595,031,425 | 228,146.2478 | $ | 11,027,050 | 10,663.8345 | $ | 606,058,475 | 238,810.0823 | |||||||||||||||
Subscriptions - Limited Partners | 22,602,847 | 7,968.6900 | 1,470,323 | 1,288.0100 | 24,073,170 | 9,256.7000 | ||||||||||||||||||
Redemptions - General Partner | - | - | (1,590,064 | ) | (1,436.9980 | ) | (1,590,064 | ) | (1,436.9980 | ) | ||||||||||||||
Redemptions - Limited Partners | (170,139,279 | ) | (62,979.8050 | ) | (822,040 | ) | (749.6080 | ) | (170,961,319 | ) | (63,729.4130 | ) | ||||||||||||
Net income (loss) | 24,975,794 | - | 715,195 | - | 25,690,989 | - | ||||||||||||||||||
Partners’ Capital, December 31, 2019 | 472,470,787 | 173,135.1328 | 10,800,464 | 9,765.2385 | 483,271,251 | 182,900.3713 | ||||||||||||||||||
Subscriptions - Limited Partners | 4,739,834 | 1,768.3640 | 62,500 | 57.1160 | 4,802,334 | 1,825.4800 | ||||||||||||||||||
Redemptions - General Partner | - | - | (1,400,000 | ) | (1,234.3940 | ) | (1,400,000 | ) | (1,234.3940 | ) | ||||||||||||||
Redemptions - Limited Partners | (130,096,487 | ) | (48,307.6010 | ) | (1,068,080 | ) | (986.6240 | ) | (131,164,567 | ) | (49,294.2250 | ) | ||||||||||||
Net income (loss) | 3,519,449 | - | 226,278 | - | 3,745,727 | - | ||||||||||||||||||
Partners’ Capital, December 31, 2020 | 350,633,583 | 126,595.8958 | 8,621,162 | 7,601.3365 | 359,254,745 | 134,197.2323 | ||||||||||||||||||
Subscriptions - Limited Partners | 6,021,943 | 2,047.8500 | 309,685 | 256.7220 | 6,331,628 | 2,304.5720 | ||||||||||||||||||
Redemptions - General Partner | 0 | 0 | (925,001 | ) | (753.5340 | ) | (925,001 | ) | (753.5340 | ) | ||||||||||||||
Redemptions - Limited Partners | (55,866,712 | ) | (18,931.4120 | ) | (688,845 | ) | (563.8280 | ) | (56,555,557 | ) | (19,495.2400 | ) | ||||||||||||
Net income (loss) | 52,381,697 | - | 1,370,518 | - | 53,752,215 | - | ||||||||||||||||||
Partners’ Capital, December 31, 2021 | $ | 353,170,511 | 109,712.3338 | $ | 8,687,519 | 6,540.6965 | $ | 361,858,030 | 116,253.0303 | |||||||||||||||
Net asset value per Redeemable Unit:
Class A | Class Z | |||||||
2019 | $ | 2,728.91 | $ | 1,106.01 | ||||
2020 | $ | 2,769.71 | $ | 1,134.16 | ||||
2021 | $ | 3,219.06 | $ | 1,328.23 | ||||
See accompanying notes to financial statements.
43
Ceres Orion L.P.
Notes to Financial Statements
1. | Organization: |
Ceres Orion L.P. (the “Partnership”) is a limited partnership organized on March 22, 1999, 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, option, swap and forward contracts. The sectors traded include currencies, energy, grains, livestock, indices, United States (“U.S.”) and
non-U.S.
interest rates, softs and metals. The commodity interests that are traded by the Partnership, directly and indirectly through its investment in the Funds (as defined below), are volatile and involve a high degree of market risk. The Partnership commenced trading on June 10, 1999. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is0 maximum number of Redeemable Units that may be sold by the Partnership. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets (directly or indirectly through its investment in the Funds) in U.S. Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates.Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership, is the trading manager (the “Trading Manager”) of Transtrend Master (as defined below) and NL Master (as defined below) and was the trading manager of FORT Contrarian Master (defined below). The General Partner is a wholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses.
As of December 31, 2021, all trading decisions were made for the Partnership by Transtrend B.V. (“Transtrend”), John Street Capital Limited (“JSCL”), Northlander Commodity Advisors LLP (“Northlander”), Pan Capital Management L.P. (“Pan”), Greenwave Capital Management LLC (“Greenwave”), Quantica Capital AG (“Quantica”) and Breakout Funds LLC (“Breakout”) (each an “Advisor” and, collectively, the “Advisors”), each of which is a registered commodity trading advisor. On October 31, 2021, the Partnership fully redeemed its investment from CMF FORT Contrarian Master Fund LLC (“FORT Contrarian Master”). Also effective October 31, 2021, FORT L.P. (“FORT”) ceased to act as a commodity trading advisor to the Partnership. On September 30, 2020, the Partnership fully redeemed its investment in CMF Winton Master L.P. (“Winton Master”). Also effective September 30, 2020, Winton Capital Management Limited (“Winton”) ceased to act as a commodity trading advisor to the Partnership. On January 31, 2019, the Partnership fully redeemed its investment in CMF Willowbridge Master Fund L.P. (“Willowbridge Master”). Also effective January 31, 2019, Willowbridge Associates Inc. (“Willowbridge”) ceased to act as a commodity trading advisor to the Partnership. From February 1, 2019 until December 12, 2019, John Street Capital LLP (“John Street”) directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to John Street’s Systematic Strategy Program. On December 13, 2019, the Partnership, the General Partner, John Street, and JSCL entered into a deed of novation (the “JSCL Novation Agreement”) transferring all rights and obligations of John Street to JSCL. References herein to the “Advisors” may include, as relevant, John Street, Winton, Willowbridge and FORT. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors either directly, through a managed account in the Partnership’s name, or indirectly, through its investment in the Funds. In addition, the General Partner may allocate the Partnership’s assets to additional
non-major
trading advisors (i.e., commodity trading advisors intended to be allocated less than 10% of the Partnership’s assets). Information about advisors allocated less than 10% of the Partnership’s assets may not be disclosed.Effective July 1, 2021, Breakout directly trades a portion of the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to an enhanced version of Breakout’s Propeller Program. The General Partner and Breakout have agreed that Breakout will trade the Partnership’s assets allocated to Breakout at 1.5 times the amount of the assets allocated. The amount of leverage may be increased or decreased in the future, subject to certain restrictions.
44
Ceres Orion L.P.
Notes to Financial Statements
As of December 31, 2021, Greenwave directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to an enhanced version of Greenwave’s Flagship Plus 2X Program. The General Partner and Greenwave had agreed that Greenwave would trade the Partnership’s assets allocated to Greenwave at a level that was up to 2 times the amount of the assets allocated.
Effective October 1, 2020, Quantica directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to the Quantica Managed Futures Program. The General Partner and Quantica have agreed that Quantica will trade the Partnership’s assets allocated to Quantica at 0.75 times the amount of the assets allocated. The amount of leverage may be increased or decreased in the future.
Effective February 1, 2020, Pan directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to Pan’s Energy Trading Program.
JSCL directly trades the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to the Systematic Strategy Program. The General Partner and JSCl have agreed that JSCL will trade the Partnership’s assets allocated to it at a level that is up to 2 times the amount of assets allocated to it; provided that if the assets allocated to JSCL are $80 million or less, JSCL will trade the Partnership’s assets allocated to it at the level that is up to 1.5 times the amount of assets allocated to it. The amount of leverage may be increased or decreased in the future.
On June 1, 2011, the Partnership began offering “Class A” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to June 1, 2011 were deemed Class A Redeemable Units. The rights, powers, duties and obligations associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions and
non-U.S.
investors. Class Z Redeemable Units were first issued on August 1, 2011. Class Z Redeemable Units are offered to limited partners who receive advisory services from Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”) and certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Redeemable Units that a limited partner receives upon a subscription will generally depend upon the status of the limited partner, although the General Partner may determine to offer a particular Class of Redeemable Units to investors at its discretion.During the periods covered by this report, the Partnership’s/Funds’ commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. JPMorgan Chase Bank, N.A. (“JPMorgan”) was also a foreign exchange forward contract counterparty for certain Funds.
The Partnership and CMF TT II, LLC (“Transtrend Master”) have, and prior to their respective full redemptions, Winton Master and Willowbridge Master had, entered into futures brokerage account agreements and foreign exchange brokerage account agreements with MS&Co. CMF NL Master Fund LLC (“NL Master”) has, and prior to its full redemption, FORT Contrarian Master had, entered into futures brokerage account agreements with MS&Co. Transtrend Master and NL Master are collectively referred to as the “Funds.” References herein to “Funds” may also include, as relevant, FORT Contrarian Master, Winton Master and Willowbridge Master.
Transtrend Master, and until their respective full redemptions, Winton Master and Willowbridge Master, each entered into certain agreements with JPMorgan in connection with trading in forward foreign currency contracts on behalf of the referenced Funds and indirectly, the Partnership. These agreements include a foreign exchange and bullion authorization agreement (“FX Agreement”), an International Swap Dealers Association, Inc. master agreement (“Master Agreement”), a schedule to the Master Agreement, a 2016 credit support annex for variation margin to the schedule and an institutional account agreement. In addition to Willowbridge Master, Willowbridge was party to the FX Agreement for Willowbridge Master. Under each FX Agreement, JPMorgan charges or charged a fee on the aggregate foreign currency transactions entered into on behalf of the respective Fund during a month.
The Partnership will be liquidated upon the first to occur of the following: December 31, 2055; the net asset value per Redeemable Unit of any Class decreases to less than $400 as of the close of any business day; or under certain other circumstances as set forth in the limited partnership agreement of the Partnership, as may be
45
Ceres Orion L.P.
Notes to Financial Statements
amended from time to time (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the aggregate net assets of the Partnership decline to less than $1,000,000.
The General Partner has delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a master services agreement, the Administrator furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.
2. | Basis of Presentation and Summary of Significant Accounting Policies: |
a. | Use of Estimates. |
b. | Profit Allocation |
c. | Statement of Cash Flows “Statement of Cash Flows.” |
d. | Partnership’s Investment in the Funds. |
e. | Partnership’s/Funds’ Derivative Investments. first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Partnership’s/Funds’ Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Partnership’s/Funds’ Statements of Income and Expenses. |
The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations due to changes in market prices of investments held. Such fluctuations are included in total trading results in the Partnership’s/Funds’ Statements of Income and Expenses.
f. | Partnership’s Cash. |
46
Ceres Orion L.P.
Notes to Financial Statements
foreign currencies of $(325,571) (proceeds of $302,404) and $(3,186,405) (proceeds of $3,163,920) at December 31, 2021 and 2020, respectively. |
g. | Income Taxes Income Taxes “more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions determined not to meet themore-likely-than-not threshold would be recorded as a tax benefit or liability in the Partnership’s Statements of Financial Condition for the current year. If a tax position does not meet the minimum statutory threshold to avoid the incurring of penalties, an expense for the amount of the statutory penalty and interest, if applicable, shall be recognized in the Partnership’s Statements of Income and Expenses in the years in which the position is claimed or expected to be claimed. The General Partner has concluded that there are 0 significant uncertain tax positions that would require recognition in the financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2018 through 2021 tax years remain subject to examination by U.S. federal and most state tax authorities. |
h. | Investment Company Status. 2013-08 “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” |
i. | Net Income (Loss) Per Redeemable Unit. “Financial Services - Investment Companies.” |
3. | Agreements: |
a. | Limited Partnership Agreement: |
The General Partner administers the business and affairs of the Partnership, including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly fee (the “General Partner fee”) equal to 1/12 of 0.75% (0.75% per year) of
month-end
net assets.Month-end
net assets, for the purpose of calculating the General Partner fee, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.b. | Management Agreement: |
The General Partner, on behalf of the Partnership, has entered into management agreements (each, a “Management Agreement”) with the Advisors. The Advisors are not affiliated with one another, the General Partner or MS&Co., and are not responsible for the organization or operation of the Partnership.
Effective July 1, 2021, Breakout receives a monthly management fee equal to 1% per year of
month-end
net assets allocated to Breakout. As of December 31, 2021, Greenwave received a monthly management fee equal to 0.75% per year ofmonth-end
net assets allocated to Greenwave. Effective October 1, 2020, Quantica receives a monthly management fee equal to 0.60% per year ofmonth-end
net assets allocated to Quantica. To the extent that themonth-end
net assets allocated to Quantica are less than $50 million, Quantica will receive a management fee equal to 0.75% per year ofmonth-end
net assets allocated to Quantica. Effective February 1, 2020, Pan receives a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Pan. Effective April 1, 2019, Northlander receives a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Northlander. Effective February 1, 2019, JSCL (prior to the JSCL Novation Agreement, John Street) receives a monthly47
Ceres Orion L.P.
Notes to Financial Statements
management fee of 1.35% per year of
month-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street). To the extent that themonth-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street) are less than $80 million, JSCL (prior to the JSCL Novation Agreement, John Street) will receive a monthly management fee equal to 1.5% per year ofmonth-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street). From February 1, 2018 until its termination on October 31, 2021, FORT received a monthly management fee equal to 1.15% per year ofmonth-end
net assets allocated to FORT. Prior to its termination on September 30, 2020, Winton received a monthly management fee equal to 1.5% per year ofmonth-end
net assets allocated to Winton. From April 1, 2018 until its termination on January 31, 2019, Willowbridge received a monthly management fee equal to 1.25% per year ofmonth-end
net assets allocated to Willowbridge.Month-end
net assets, for the purpose of calculating management fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.Transtrend Master pays Transtrend a monthly management fee of 0.85% per year on the aggregate net assets of Transtrend Master as of the first day of each month. The management fee paid by Transtrend Master is allocated to the Partnership based on its proportionate ownership interest of Transtrend Master.
In addition, as of December 31, 2021, the Partnership was obligated to pay Greenwave, Pan and Breakout an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Greenwave, Pan and Breakout, respectively, for the Partnership during each calendar quarter. The Partnership is obligated to pay Quantica and Northlander an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Quantica and Northlander, respectively, for the Partnership during each calendar year. The Partnership is obligated to pay JSCL (prior to the JSCL Novation Agreement, John Street) an incentive fee, payable quarterly, equal to 22.5% of the New Trading Profits, as defined in its Management Agreement, earned by JSCL (prior to the JSCL Novation Agreement, John Street) for the Partnership during each calendar quarter. To the extent that the
month-end
net assets allocated to JSCL (prior to the JSCL Novation Agreement, John Street) are less than $80 million, the Partnership will be obligated to pay JSCL (prior to the JSCL Novation Agreement, John Street) an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by JSCL (prior to the JSCL Novation Agreement, John Street) for the Partnership during each calendar quarter. Prior to its termination effective October 31, 2021, FORT was eligible to receive an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in its Management Agreement, earned by FORT for the Partnership. Prior to their respective terminations effective September 30, 2020 and January 31, 2019, Winton and Willowbridge were each eligible to receive an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Winton and Willowbridge for the Partnership during each calendar quarter. Effective January 1, 2021, Transtrend is eligible to receive an incentive fee equal to 16% of the New Trading Profits, as defined in its Management Agreement, earned by Transtrend Master and payable at the end of each calendar half year. Prior to January 1, 2021, Transtrend was eligible to receive an incentive fee equal to 20% of the New Trading Profits, as defined in its Management Agreement, earned by Transtrend Master and payable at the end of each calendar half year. Only the incentive fees paid by Transtrend Master for New Trading Profits, as defined in its Management Agreement, earned for the Partnership are allocated to the Partnership. To the extent an Advisor incurs a loss for the Partnership, 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.Each Management Agreement may be terminated upon notice by either party.
In allocating the assets of the Partnership among the Advisors, the General Partner considers, among other factors, each Advisor’s past performance, trading style, volatility of markets traded and fee
48
Ceres Orion L.P.
Notes to Financial Statements
requirements. The General Partner may modify or terminate the allocation of assets to the Advisors and may allocate the assets to additional advisors at any time.
c. | Customer Agreement: |
The Partnership has entered into a futures brokerage account agreement with MS&Co. (the “Partnership Customer Agreement”). Under the Partnership Customer Agreement and the foreign exchange brokerage account agreement (described in Note 1, “Organization”), the Partnership pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of trading fees for the clearing and, where applicable, the execution of transactions, as well as its allocable share of exchange, user,
give-up
and National Futures Association (“NFA”) fees (collectively, “clearing fees”) directly and indirectly through its investment in the Funds. Clearing fees are allocated to the Partnership based on its proportionate ownership interest of each Fund. The Partnership’s assets available for trading in commodity interests not held in the Funds’ brokerage accounts at MS&Co. and JPMorgan are deposited in the Partnership’s brokerage account at MS&Co. The Partnership’s cash deposited with MS&Co. is held in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At December 31, 2021 and 2020, the amount of cash held by the Partnership for margin requirements was $17,796,571 and $23,403,438, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Funds’, except for Transtrend Master’s) brokerage account during each month at the rate equal to the monthly average of the4-week
U.S. Treasury bill discount rate. MS&Co. has agreed to pay Transtrend Master interest on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the4-week
U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of these interest credits, daily funds do not include monies due to Transtrend Master on or with respect to futures, forward, or option contracts that have not been received. The Partnership Customer Agreement may generally be terminated upon notice by either party.d. | Selling Agreement: |
The Partnership has entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee at a flat annual rate equal to 0.75% per year of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 0.75% and dividing the result thereof by 12). For the period for July 1, 2020 to December 31, 2020, the ongoing selling agent fee for Class A Redeemable Unit holders was paid at a flat annual rate of 1.00% of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 1.00% and dividing the result thereof by 12). Prior to July 1, 2020, the ongoing selling agent fee was $15.00 each for futures transactions and up to an equivalent amount for swaps and $7.50 each per side for options transactions, with respect to Class A Redeemable Units. The ongoing selling agent fee for Class A Redeemable Unit holders prior to July 1, 2020 was reduced by applicable floor brokerage fees and did not exceed 2.00% of adjusted
month-end
net assets per year, calculated monthly. Class Z Redeemable Units are not subject to an ongoing selling agent fee. The Partnership may pay an ongoing selling agent fee to other properly licensed and/or registered selling agents who sell Class A Redeemable Units, and such additional selling agents may share all or a substantial portion of such fees with their properly registered or exempted financial advisors who have sold Class A Redeemable Units.e. | Harbor Selling Agreement: |
The Partnership has entered into an alternative investment placement agent agreement (the “Harbor Selling Agreement”), by and among the Partnership, the General Partner, Morgan Stanley Distribution Inc. (“MSDI”), and Harbor Investment Advisory, LLC, a Maryland limited liability company (“Harbor”),
49
Ceres Orion L.P.
Notes to Financial Statements
which supersedes and replaces the alternative investment selling agent agreement, dated January 19, 2018, between the Partnership, the General Partner and Harbor. Pursuant to the Harbor Selling Agreement, MSDI and Harbor have been appointed as a
non-exclusive
selling agent andsub-selling
agent, respectively, of the Partnership for the purpose of finding eligible investors for Redeemable Units through offerings that are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder and for Harbor to serve as an investment advisor to its customers investing in one or more of the partnerships party to the Harbor Selling Agreement; provided, that, included within such appointment, Harbor will provide certain services to certain holders of Redeemable Units of the Partnership, who had acquired such Redeemable Units prior to such holders becoming clients of Harbor. The Harbor Selling Agreement continues in effect until September 30, 2022 unless terminated in certain circumstances as set forth in the Harbor Selling Agreement, including by any party on thirty days’ prior written notice, after which the General Partner or the Partnership may, in its sole discretion, renew the Harbor Selling Agreement for additionalone-year
periods. Pursuant to the Harbor Selling Agreement, the Partnership pays Harbor a monthly ongoing selling agent fee at a flat annual rate equal to 0.75% per year of the adjusted net assets of Class A Redeemable Units (computed monthly by multiplying the adjusted net assets of the Class A Redeemable Units by 0.75% and dividing the result there of by 12). For the period from July 1, 2020 to December 31, 2020, the ongoing selling agent fee for Class A Redeemable Unit holders was paid at a flat annual rate of 1.00% of the adjusted net assets of Class A Redeemable Units. Prior to July 1, 2020, the Partnership paid Harbor an ongoing selling agent fee equal to $15.00 per round turn, swaps by up to an equivalent amount and options transactions by $7.50 each per side, with respect to Class A Redeemable Units held by Harbor clients. The ongoing selling agent fee for Class A Redeemable Unit holders prior to July 1, 2020 was reduced by applicable floor brokerage fees and did not exceed 2.00% of adjustedmonth-end
net assets per year, calculated monthly.The General Partner fee, management fees, incentive fees and professional fees of the Partnership are allocated proportionally to each Class based on the net asset value of the Class.
4. | Trading Activities: |
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Partnership’s Statements of Income and Expenses. The Partnership also invests certain of its assets through a “master/feeder” structure. The Partnership’s
pro-rata
share of the results of the Funds’ trading activities are shown in the Partnership’s Statements of Income and Expenses.The foreign exchange brokerage account agreements and/or futures brokerage account agreements with MS&Co. or JPMorgan, as applicable, give the Partnership and the Funds, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts in their respective Statements of Financial Condition. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in their respective Statements of Financial Condition, as the criteria under ASC,” have been met.
210-20,
“Balance Sheet
All of the commodity interests owned directly by the Partnership are held for trading purposes. All of the commodity interests owned by the Funds are held for trading purposes. The monthly average number of futures contracts traded directly by the Partnership during the years ended December 31, 2021 and 2020 was 50,930 and 69,326, respectively. The monthly average number of option contracts traded directly by the Partnership during the years ended December 31, 2021 and 2020 was 6,310 and 2,506, respectively.
Trading and transaction fees are based on the number of trades executed by the Advisors and the Partnership’s percentage ownership of each respective Fund.
All clearing fees paid to MS&Co. for direct trading are borne by the Partnership. In addition, clearing fees are borne by the Funds and are allocated to the Funds’ limited partners/members, including the Partnership.
50
Ceres Orion L.P.
Notes to Financial Statements
The following tables summarize the gross and net amounts recognized relating to assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting or similar arrangements as of December 31, 2021 and 2020, respectively.
December 31, 2021 | Gross Amounts Recognized | Gross Amounts Offset in the Statements of Financial Condition | Amounts Presented in the Statements of Financial Condition | Gross Amounts Not Offset in the Statements of Financial Condition | ||||||||||||||||||||||
Financial Instruments | Cash Collateral Received/ Pledged* | Net Amount | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Futures | $ | 40,087,611 | $ | (40,087,611 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Total assets | $ | 40,087,611 | $ | (40,087,611 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Liabilities | ||||||||||||||||||||||||||
Futures | $ | (41,488,254 | ) | $ | 40,087,611 | $ | (1,400,643 | ) | $ | 0 | $ | 1,400,643 | $ | 0 | ||||||||||||
Total liabilities | $ | (41,488,254 | ) | $ | 40,087,611 | $ | (1,400,643 | ) | $ | 0 | $ | 1,400,643 | $ | 0 | ||||||||||||
Net fair value | $ | 0 | * | |||||||||||||||||||||||
December 31, 2020 | Gross Amounts Recognized | Gross Amounts Offset in the Statements of Financial Condition | Amounts Presented in the Statements of Financial Condition | Gross Amounts Not Offset in the Statements of Financial Condition | ||||||||||||||||||||||
Financial Instruments | Cash Collateral Received/ Pledged* | Net Amount | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Futures | $ | 28,495,595 | $ | (22,261,995 | ) | $ | 6,233,600 | $ | 0 | $ | 0 | $ | 6,233,600 | |||||||||||||
Total assets | $ | 28,495,595 | $ | (22,261,995 | ) | $ | 6,233,600 | $ | 0 | $ | 0 | $ | 6,233,600 | |||||||||||||
Liabilities | ||||||||||||||||||||||||||
Futures | $ | (22,261,995 | ) | $ | 22,261,995 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Total liabilities | $ | (22,261,995 | ) | $ | 22,261,995 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Net fair value | $ | 6,233,600 | * | |||||||||||||||||||||||
* | In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’s non-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. In certain instances, MS&Co. may not post collateral and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee funds may be available in the event of a default. In some instances, the actual collateral received and/or pledged may be more than the amount shown due to overcollateralization. |
51
Ceres Orion L.P.
Notes to Financial Statements
The following tables indicate the gross fair values of derivative instruments of futures and option contracts, as applicable, held directly by the Partnership as separate assets and liabilities as of December 31, 2021 and 2020, respectively.
December 31, 2021 | ||||
Assets | ||||
Futures Contracts | ||||
Currencies | $ | 343,757 | ||
Energy | 34,992,511 | |||
Grains | 1,274,260 | |||
Indices | 1,506,900 | |||
Interest Rates U.S. | 139,705 | |||
Interest Rates Non-U.S. | 38,600 | |||
Livestock | 126,551 | |||
Metals | 965,861 | |||
Softs | 699,466 | |||
Total unrealized appreciation on open futures contracts | 40,087,611 | |||
Liabilities | ||||
Futures Contracts | ||||
Currencies | (430,036) | |||
Energy | (34,249,528) | |||
Grains | (1,454,896) | |||
Indices | (1,478,264) | |||
Interest Rates U.S. | (100,370) | |||
Interest Rates Non-U.S. | (806,769) | |||
Livestock | (62,498) | |||
Metals | (824,841) | |||
Softs | (2,081,052) | |||
Total unrealized depreciation on open futures contracts | (41,488,254) | |||
Net unrealized depreciation on open futures contracts | $ | (1,400,643) | * | |
Assets | ||||
Options Purchased | ||||
Energy | $ | 13,241,142 | ||
Total options purchased | $ | 13,241,142 | ** | |
Liabilities | ||||
Options Written | ||||
Energy | $ | (6,649,119) | ||
Total options written | $ | (6,649,119) | *** | |
* | This amount is in “Net unrealized depreciation on open futures contracts” in the Statements of Financial Condition. |
** | This amount is in “Options purchased, at fair value” in the Statements of Financial Condition. |
*** | This amount is in “Options written, at fair value” in the Statements of Financial Condition. |
52
Ceres Orion L.P.
Notes to Financial Statements
December 31, 2020 | ||||
Assets | ||||
Futures Contracts | ||||
Currencies | $ | 1,044,103 | ||
Energy | 13,319,139 | |||
Grains | 6,011,789 | |||
Indices | 1,759,777 | |||
Interest Rates U.S. | 103,022 | |||
Interest Rates Non-U.S. | 583,702 | |||
Livestock | 129,327 | |||
Metals | 2,995,699 | |||
Softs | 2,549,037 | |||
Total unrealized appreciation on open futures contracts | 28,495,595 | |||
Liabilities | ||||
Futures Contracts | ||||
Currencies | (100,354) | |||
Energy | (9,752,293) | |||
Grains | (6,858,706) | |||
Indices | (452,482) | |||
Interest Rates U.S. | (144,140) | |||
Interest Rates Non-U.S. | (197,520) | |||
Livestock | (231,190) | |||
Metals | (1,734,127) | |||
Softs | (2,791,183) | |||
Total unrealized depreciation on open futures contracts | (22,261,995) | |||
Net unrealized appreciation on open futures contracts | $ | 6,233,600 | * | |
Assets | ||||
Options Purchased | ||||
Energy | $ | 2,470,392 | ||
Total options purchased | $ | 2,470,392 | ** | |
Liabilities | ||||
Options Written | ||||
Energy | $ | (2,311,171) | ||
Total options written | $ | (2,311,171) | *** | |
* | This amount is in “Net unrealized appreciation on open futures contracts” in the Statements of Financial Condition. |
** | This amount is in “Options purchased, at fair value” in the Statements of Financial Condition. |
*** | This amount is in “Options written, at fair value” in the Statements of Financial Condition. |
53
Ceres Orion L.P.
Notes to Financial Statements
The following table indicates the trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the years ended December 31, 2021, 2020 and 2019, respectively.
Sector | 2021 | 2020 | 2019 | |||||||||
Currencies | $ | (4,221,879) | $ | 1,168,133 | $ | 386,159 | ||||||
Energy | 43,600,068 | 19,879,889 | 12,558,599 | |||||||||
Grains | 6,635,721 | (2,042,860) | 1,109,990 | |||||||||
Indices | 6,257,399 | (3,809,361) | (4,261,020) | |||||||||
Interest Rates U.S. | (882,416) | (554,219) | (785,406) | |||||||||
Interest Rates Non-U.S. | (11,805,817) | 13,942,651 | 5,214,486 | |||||||||
Livestock | 921,504 | (8,107,326) | 2,666,962 | |||||||||
Metals | (1,855,381) | 20,483,713 | 115,119 | |||||||||
Softs | 430,355 | (3,829,171) | 1,545,386 | |||||||||
Total | $ | 39,079,554 | **** | $ | 37,131,449 | **** | $ | 18,550,275 | ****�� | |||
**** | This amount is included in “Total trading results” in the Statements of Income and Expenses. |
5. | Fair Value Measurements: |
Partnership’s and the Funds’ Fair Value Measurements.
The fair value of exchange-traded futures, option and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of
non-exchange-traded
foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.The Partnership and the Funds consider prices for commodity futures, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills,
non-exchange-traded
forward, swap and certain option contracts for which market quotations are not readily available are priced by pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the years ended December 31, 2021 and 2020, the Partnership and the Funds did 0t hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3).54
Ceres Orion L.P.
Notes to Financial Statements
December 31, 2021 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Futures | $ | 40,087,611 | $ | 40,087,611 | $ | 0 | $ | 0 | ||||||||
Options purchased | 13,241,142 | 13,241,142 | 0 | 0 | ||||||||||||
Total assets | $ | 53,328,753 | $ | 53,328,753 | $ | 0 | $ | 0 | ||||||||
Liabilities | ||||||||||||||||
Futures | $ | 41,488,254 | $ | 41,488,254 | $ | 0 | $ | 0 | ||||||||
Options written | 6,649,119 | 6,649,119 | 0 | 0 | ||||||||||||
Total liabilities | $ | 48,137,373 | $ | 48,137,373 | $ | 0 | $ | 0 | ||||||||
December 31, 2020 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Futures | $ | 28,495,595 | $ | 28,495,595 | $ | 0 | $ | 0 | ||||||||
Options purchased | 2,470,392 | 2,470,392 | 0 | 0 | ||||||||||||
Total assets | $ | 30,965,987 | $ | 30,965,987 | $ | 0 | $ | 0 | ||||||||
Liabilities | ||||||||||||||||
Futures | $ | 22,261,995 | $ | 22,261,995 | $ | 0 | $ | 0 | ||||||||
Options written | 2,311,171 | 2,311,171 | 0 | 0 | ||||||||||||
Total liabilities | $ | 24,573,166 | $ | 24,573,166 | $ | 0 | $ | 0 | ||||||||
The Investment in the Funds measured using the net asset value per share practical expedient is not required to be included in the fair value hierarchy. Please refer to the Condensed Schedules of Investments as of December 31, 2021 and 2020, respectively.
6. | Investment in the Funds: |
On June 1, 2011, the Partnership allocated a portion of its assets to Transtrend Master, a limited liability company organized under the limited liability company laws of the State of Delaware. Transtrend Master permits accounts managed by Transtrend using the Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system, to invest together in one trading vehicle. Transtrend generally trades its Enhanced Risk Profile (US Dollar) using 1.5 times the leverage employed by the Standard Risk Profile. The General Partner is also the Trading Manager of Transtrend Master. Individual and pooled accounts managed by Transtrend, including the Partnership, are permitted to be members of Transtrend Master. The Trading Manager and Transtrend believe that trading through this structure promotes efficiency and economy in the trading process.
On April 1, 2019, the assets allocated to Northlander for trading were invested in NL Master, a limited liability company organized under the limited liability company laws of the State of Delaware. NL Master permits accounts managed by Northlander using the Northlander Commodity Program, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the Trading Manager of NL Master. Individual and pooled accounts currently managed by Northlander, including the Partnership, are permitted to be members of NL Master. The Trading Manager and Northlander believe that trading through this structure promotes efficiency and economy in the trading process.
On February 1, 2018, the assets allocated to FORT for trading were invested in FORT Contrarian Master, a limited liability company organized under the limited liability company laws of the State of Delaware. The Partnership fully redeemed its investment in FORT Contrarian Master on October 31, 2021.
On November 1, 2004, the assets allocated to Winton for trading were invested in Winton Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership fully redeemed its investment in Winton Master on September 30, 2020.
On August 1, 2014, the assets allocated to Willowbridge for trading were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership fully redeemed its investment in Willowbridge Master on January 31, 2019.
55
Ceres Orion L.P.
Notes to Financial Statements
The General Partner is not aware of any material changes to any of the trading programs discussed above or in Note 1, “Organization” during the year ended December 31, 2021.
The Funds’ and the Partnership’s trading of futures, forward, swap and option contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. The Funds and the Partnership engage in such trading through commodity brokerage accounts maintained with MS&Co.
Generally, a limited partner/member in the Funds withdraws all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, a limited partner/member may request a withdrawal as of the end of any day if such request is received by the General Partner/Trading Manager at least three days in advance of the proposed withdrawal day.
Management fees, ongoing selling agent fees, the General Partner fee and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Transtrend, which are charged at the Transtrend Master level. Clearing fees are borne by the Funds and allocated to the Funds’ limited partners/members, including the Partnership. Clearing fees are also borne by the Partnership directly. Professional fees are borne by the Funds and allocated to the Partnership and are also charged directly at the Partnership level.
At December 31, 2021, the Partnership owned approximately 100.0% of Transtrend Master and 74.0% of NL Master. At December 31, 2020, the Partnership owned approximately 100.0% of Transtrend Master, 100% of FORT Contrarian Master and 81.4% of NL Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to limited partners as a result of investment in the Funds are approximately the same as they would be if the Partnership traded directly and redemption rights are not affected.
Summarized information reflecting the total assets, liabilities and members’ capital of the Funds is shown in the following tables:
December 31, 2021 | ||||||||||||
Total Assets | Total Liabilities | Total Capital | ||||||||||
Transtrend Master | $ | 59,771,411 | $ | 3,191,408 | $ | 56,580,003 | ||||||
NL Master | 50,260,292 | 8,006,342 | 42,253,950 |
December 31, 2020 | ||||||||||||
Total Assets | Total Liabilities | Total Capital | ||||||||||
Transtrend Master | $ | 69,303,466 | $ | 2,670,947 | $ | 66,632,519 | ||||||
FORT Contrarian Master | 59,456,843 | 1,491,365 | 57,965,478 | |||||||||
NL Master | 14,423,589 | 85,616 | 14,337,973 |
56
Ceres Orion L.P.
Notes to Financial Statements
Summarized information reflecting the net investment income (loss), total trading results and net income (loss) of the Funds is shown in the following tables:
For the year ended December 31, 2021 | ||||||||||||
Net Investment Income (Loss) | Total Trading Results | Net Income (Loss) | ||||||||||
Transtrend Master | $ | (4,313,867 | ) | $ | 21,310,881 | $ | 16,997,014 | |||||
FORT Contrarian Master (a) | (128,082 | ) | (625,850 | ) | (753,932 | ) | ||||||
NL Master | (264,783 | ) | 29,103,122 | 28,838,339 |
For the year ended December 31, 2020 | ||||||||||||
Net Investment Income (Loss) | Total Trading Results | Net Income (Loss) | ||||||||||
Winton Master (b) | $ | 252,687 | $ | (40,463,923 | ) | $ | (40,211,236 | ) | ||||
Transtrend Master | (1,658,250 | ) | 6,380,277 | 4,722,027 | ||||||||
FORT Contrarian Master | 49,319 | (1,394,605 | ) | (1,345,286 | ) | |||||||
NL Master | (68,277 | ) | (377,694 | ) | (445,971 | ) |
(a) | From January 1, 2021 through October 31, 2021, the date FORT Contrarian Master terminated operations. |
(b) | Summarized information presented is for the twelve months ended December 31, 2020. The Partnership was invested in Winton Master from January 1, 2020 to September 30, 2020. |
Summarized information reflecting the Partnership’s investments in and the Partnership’s
pro-rata
share of the results of operations of the Funds are shown in the following tables:December 31, 2021 | For the twelve months ended December 31, 2021 | |||||||||||||||||||||||||||||||||||
% of | Expenses | Net | ||||||||||||||||||||||||||||||||||
Funds | Partners’ Capital | Fair Value | Income (Loss) | Clearing Fees | Professional Fees | Management Fees | Incentive Fee | Income (Loss) | Investment Objective | Redemptions Permitted | ||||||||||||||||||||||||||
Transtrend Master | 15.64 | % | $ | 56,580,003 | $ | 21,312,861 | $ | 452,588 | $ | 63,918 | $ | 562,192 | $ | 3,237,149 | $ | 16,997,014 | Commodity Portfolio | Monthly | ||||||||||||||||||
FORT Contrarian Master (a) | 0 | % | 0 | (614,480 | ) | 85,195 | 54,257 | 0 | 0 | (753,932 | ) | Commodity Portfolio | Monthly | |||||||||||||||||||||||
NL Master | 8.64 | % | 31,270,943 | 20,892,588 | 156,578 | 41,760 | 0 | 0 | 20,694,250 | Commodity Portfolio | Monthly | |||||||||||||||||||||||||
Total | $ | 87,850,946 | $ | 41,590,969 | $ | 694,361 | $ | 159,935 | $ | 562,192 | $ | 3,237,149 | $ | 36,937,332 | ||||||||||||||||||||||
December 31, 2020 | For the twelve months ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
% of | Expenses | Net | ||||||||||||||||||||||||||||||||||
Funds | Partners’ Capital | Fair Value | Income (Loss) | Clearing Fees | Professional Fees | Management Fees | Incentive Fee | Income (Loss) | Investment Objective | Redemptions Permitted | ||||||||||||||||||||||||||
Winton Master (b) | 0 | % | $ | 0 | $ | (13,122,466 | ) | $ | 70,218 | $ | 15,126 | $ | - | $ | - | $ | (13,207,810 | ) | Commodity Portfolio | Monthly | ||||||||||||||||
Transtrend Master | 18.55 | % | 66,632,519 | 6,621,032 | 712,228 | 66,424 | 781,842 | 338,512 | 4,722,026 | Commodity Portfolio | Monthly | |||||||||||||||||||||||||
FORT Contrarian Master | 16.14 | % | 57,968,789 | (908,166 | ) | 269,705 | 62,019 | - | - | (1,239,890 | ) | Commodity Portfolio | Monthly | |||||||||||||||||||||||
NL Master | 3.24 | % | 11,667,482 | (210,623 | ) | 58,778 | 50,448 | - | - | (319,849 | ) | Commodity Portfolio | Monthly | |||||||||||||||||||||||
Total | $ | 136,268,790 | $ | (7,620,223 | ) | $ | 1,110,929 | $ | 194,017 | $ | 781,842 | $ | 338,512 | $ | (10,045,523 | ) | ||||||||||||||||||||
(a) | From January 1, 2021 through October 31, 2021, the date the Partnership fully redeemed its investment in FORT Contrarian Master. |
(b) | From January 1, 2020 through September 30, 2020, the date the Partnership fully redeemed its investment in Winton Master. |
57
Ceres Orion L.P.
Notes to Financial Statements
7. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors who become limited partners on the first day of the month after their subscriptions are processed. Distributions are made on a
pro-rata
basis at the sole discretion of the General Partner. No distributions have been made to date. The General Partner does not intend to make any distributions of the Partnership’s profits. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value as of the end of each month on three business days’ notice to the General Partner. There is 0 fee charged to limited partners in connection with redemptions.8. | Financial Highlights: |
Financial highlights for the limited partner Classes as a whole for the years ended December 31, 2021, 2020 and 2019 were as follows:
2021 | 2020 | 2019 | ||||||||||||||||||||||||
Class A | Class Z | Class A | Class Z | Class A | Class Z | |||||||||||||||||||||
Per Redeemable Unit Performance (for a unit outstanding throughout the year):* | ||||||||||||||||||||||||||
Net realized and unrealized gains (losses) | $ | 677.85 | $ | 278.52 | $ | 201.05 | $ | 81.50 | $ | 243.15 | $ | 96.46 | ||||||||||||||
Net investment loss | (228.50) | (84.45) | (160.25) | (53.35) | (122.35) | (24.51) | ||||||||||||||||||||
Increase (decrease) for the year | 449.35 | 194.07 | 40.80 | 28.15 | 120.80 | 71.95 | ||||||||||||||||||||
Net asset value per Redeemable Unit, beginning of year | 2,769.71 | 1,134.16 | 2,728.91 | 1,106.01 | 2,608.11 | 1,034.06 | ||||||||||||||||||||
Net asset value per Redeemable Unit, end of year | $ | 3,219.06 | $ | 1,328.23 | $ | 2,769.71 | $ | 1,134.16 | $ | 2,728.91 | $ | 1,106.01 | ||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Class A | Class Z | Class A | Class Z | Class A | Class Z | |||||||||||||||||||
Ratios to Average Limited Partners’ Capital: | ||||||||||||||||||||||||
Net investment loss** | (7.5) | % | (6.7) | % | (6.0) | % | (4.9) | % | (4.5) | % | (2.3) | % | ||||||||||||
Operating expense | 3.7 | % | 3.0 | % | 4.6 | % | 3.5 | % | 5.8 | % | 3.6 | % | ||||||||||||
Incentive fees | 3.8 | % | 3.8 | % | 1.8 | % | 1.8 | % | 0.5 | % | 0.4 | % | ||||||||||||
Total expenses | 7.5 | % | 6.8 | % | 6.4 | % | 5.3 | % | 6.3 | % | 4.0 | % | ||||||||||||
Total return: | ||||||||||||||||||||||||
Total return before incentive fees | 20.4 | % | 21.3 | % | 3.2 | % | 4.3 | % | 5.2 | % | 7.4 | % | ||||||||||||
Incentive fees | (4.2) | % | (4.2) | % | (1.7) | % | (1.8) | % | (0.6) | % | (0.4) | % | ||||||||||||
Total return after incentive fees | 16.2 | % | 17.1 | % | 1.5 | % | 2.5 | % | 4.6 | % | 7.0 | % | ||||||||||||
* | Net investment loss per Redeemable Unit is calculated by dividing the interest income less total expenses by the average number of Redeemable Units outstanding during the period. The net realized and unrealized gains (losses) per Redeemable Unit is a balancing amount necessary to reconcile the change in net asset value per Redeemable Unit with the other per unit information. |
** | Interest income less total expenses. |
The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner Classes using the limited partners’ share of income, expenses and average partners’ capital of the Partnership and include the income and expenses allocated from the Funds.
58
Ceres Orion L.P.
Notes to Financial Statements
9. | Financial Instrument Risks: |
In the normal course of business, the Partnership and the Funds are parties to financial instruments with(“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those 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. The General Partner estimates that at any given time approximately 1.0% to 5.6% of the Partnership’s/Funds’ contracts are traded OTC.
off-balance-sheet
risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options, and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility orover-the-counter
Futures Contracts.
Forward Foreign Currency Contracts.
London Metal Exchange Forward Contracts.
59
Ceres Orion L.P.
Notes to Financial Statements
Options
marked-to-market
marked-to-market
As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds 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/Funds do not consider these contracts to be guarantees.
Futures-Style Options.
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds 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 and the Funds are exposed to market risk equal to the value of the futures and forward contracts held 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/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Partnership’s/Funds’ Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk as MS&Co. or an MS&Co. affiliate are counterparties or brokers with respect to the Partnership’s and the Funds’ assets. For certain OTC contracts traded by certain Funds, JPMorgan is the counterparty with respect to those assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.
The General Partner/Trading Manager monitors and attempts to mitigate the Partnership’s/Funds’ 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/Funds may be subject. These monitoring systems generally allow the General Partner/Trading Manager to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, exchange-cleared swaps, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.
60
Ceres Orion L.P.
Notes to Financial Statements
The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Funds’ business, these instruments may not be held to maturity.
The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
In the ordinary course of business, the Partnership/Funds enter into contracts and agreements that contain various representations and warranties and which provide general indemnifications. The Partnership’s/Funds’ maximum exposure under these arrangements cannot be determined, as this could include future claims that have not yet been made against the Partnership/Funds. The General Partner/Trading Manager considers the risk of any future obligation relating to these indemnifications to be remote.
Since its discovery in December 2019, a new strain of coronavirus, which causes the viral disease known as
COVID-19,
has spread from China to many other countries, including the United States. The outbreak has been declared a pandemic by the World Health Organization, and the U.S. Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak.Thedirectives and increased remote work protocols. If the pandemic continues to be prolonged or the actions of governments and central banks are unsuccessful, including actions to facilitate the comprehensive distribution of effective vaccines, the adverse impact on the global economy will deepen.
COVID-19
pandemic and related voluntary and government-imposed social and business restrictions has impacted global economic conditions and adversely affected various industries (including, but not limited to, transportation, hospitality and entertainment), resulting in volatility in the global financial markets, disruption in global supply chains, increased unemployment, and operational challenges such as the temporary and permanent closures of businesses,sheltering-in-place
Given the continuing development of this situation, it is not possible to accurately predict how the market disruptions caused by
COVID-19
will further impact the U.S. and other world economies or the value of the Partnership’s/Funds’ investments, or for how long the effects of such events will continue. Nevertheless, the novel coronavirus continues to present material uncertainty and risk with respect to the Partnership’s/Funds’ investments and operations.10. | Subsequent Events: |
The General Partner evaluates events that occur after the balance sheet date but before and up until financial statements are available to be issued. The General Partner has assessed the subsequent events through the date the financial statements were issued and has determined that, other than disclosed below, there were no subsequent events requiring adjustment to or disclosure in the financial statements.
Effective the close of business on January 31, 2022, Greenwave no longer acts as a commodity trading advisor to the Partnership. Effective on or about February 1, 2022, the Partnership reallocated the assets previously allocated to Greenwave to the other existing commodity trading advisors in the Partnership.
Effective February 25,2022, Etsuko Jennings resigned as a director of the General Partner.
61
Selected unaudited quarterly financial data for the years ended December 31, 2021 and 2020 are summarized below:
For the period from October 1, 2021 to December 31, 2021 | For the period from July 1, 2021 to September 30, 2021 | For the period from April 1, 2021 to June 30, 2021 | For the period from January 1, 2021 to March 31, 2021 | |||||||||||||
Total investment income | $ | 32,444 | $ | 27,027 | $ | 7,394 | $ | 28,780 | ||||||||
Total expenses | (4,661,030 | ) | (7,652,807 | ) | (7,464,447 | ) | (7,215,659 | ) | ||||||||
Total trading results | 6,458,240 | 18,588,368 | 30,492,277 | 25,111,628 | ||||||||||||
Net income (loss) | $ | 1,829,654 | $ | 10,962,588 | $ | 23,035,224 | $ | 17,924,749 | ||||||||
Increase (decrease) in Net Asset Value per Redeemable Unit of Class A | $ | 15.95 | $ | 95.05 | $ | 193.03 | $ | 145.32 | ||||||||
Increase (decrease) in Net Asset Value per Redeemable Unit of Class Z | $ | 9.10 | $ | 41.58 | $ | 81.62 | $ | 61.77 | ||||||||
For the period from October 1, 2020 to December 31, 2020 | For the period from July 1, 2020 to September 30, 2020 | For the period from April 1, 2020 to June 30, 2020 | For the period from January 1, 2020 to March 31, 2020 | |||||||||||||
Total investment income | $ | 54,742 | $ | 62,181 | $ | 82,454 | $ | 1,190,440 | ||||||||
Total expenses | (5,794,653 | ) | (6,351,487 | ) | (4,828,321 | ) | (9,302,712 | ) | ||||||||
Total trading results | 17,452,153 | 21,342,445 | (11,413,240 | ) | 1,251,725 | |||||||||||
Net income (loss) | $ | 11,712,242 | $ | 15,053,139 | $ | (16,159,107 | ) | $ | (6,860,547 | ) | ||||||
Increase (decrease) in Net Asset Value per Redeemable Unit of Class A | $ | 87.35 | $ | 96.38 | $ | (102.17 | ) | $ | (40.76 | ) | ||||||
Increase (decrease) in Net Asset Value per Redeemable Unit of Class Z | $ | 38.52 | $ | 42.03 | $ | (38.60 | ) | $ | (13.80 | ) | ||||||
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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
.Not applicable.
Item 9A.
Controls and Procedures
.The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules
13a-15(e)
and15d-15(e)
under the Exchange Act) as of December 31, 2021 and, based on that evaluation, the General Partner’s President and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.The Partnership’sis a process under the supervision of the General Partner’s President and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:
internal control over financial reporting
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
• | provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and |
• | provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
The report included in “Item 8.
Financial Statements and Supplementary Data
.” includes the General Partner’s report on internal control over financial reporting (“Management’s Report”).There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Item 9B.
Other Information
.Certain impacts to public health conditions particular to the coronavirus
(COVID-19)
outbreak that occurred subsequent to year end could impact the operations and financial performance of the Partnership’s investments. The extent of the impact to the financial performance of the Partnership’s investments will depend on future developments, including (i) the duration and spread of the outbreak, (ii) the restrictions and advisories, (iii) the effects on the financial markets, and (iv) the effects on the economy overall, all of which are highly uncertain and cannot be predicted. If the financial performance of the Partnership’s investments is impacted because of these factors for an extended period, the Partnership’s performance may be adversely affected.Effective January 31, 2022, the General Partner and the Partnership terminated the Management Agreement with Greenwave pursuant to which Greenwave managed the portion of the Partnership’s assets allocated to it. The General Partner terminated the Management Agreement because Greenwave is no longer trading on behalf of the Partnership.
Effective February 25, 2022, Etsuko Jennings resigned as a director of the General Partner.
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance
.The Partnership has no directors or executive officers and its affairs are managed by its General Partner. Investment decisions are made by the Advisors.
The directors and executive officers of the General Partner are Patrick T. Egan (President and Chairman of the Board of Directors of the General Partner), Steven Ross (Chief Financial Officer and Director), Matthew R. Graver (Director) and Etsuko Jennings (Director). Each director holds office until the earlier of his or her death, resignation or removal. Vacancies on the board of directors may be filled by either (i) the majority vote of the remaining directors or (ii) MSD Holdings, as the sole member of the General Partner. The officers of the General Partner are designated by the General Partner’s board of directors. Each officer will hold office until his or her successor is designated and qualified or until his or her death, resignation or removal.
Directors of the General Partner are responsible for overall corporate governance of the General Partner and meet periodically to consider strategic decisions regarding the General Partner’s activities. Under CFTC rules, each Director of the General Partner is deemed to be a principal of the General Partner and, as a result, is listed as such with the NFA. Patrick T. Egan and Steven Ross serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions.
Patrick T. Egan
Co-Chief
Investment Officer for Morgan Stanley Managed Futures from June 2009 through June 2011 and as Chief Risk Officer for Morgan Stanley Managed Futures from June 2011 through October 2014. Since October 2014, Mr. Egan has been responsible for management of theday-to-day
two-year
terms. Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.Steven Ross
Matthew R. Graver
64
Chief Operating Officer for Morgan Stanley AIP Fund of Hedge Funds, a business unit offering managed portfolios of hedge funds. Since November 2015, Mr. Graver has been listed as a principal and director of Morgan Stanley AIP Cayman GP Ltd., a commodity pool operator. From January 2005 to January 2008, Mr. Graver served as Executive Director of Morgan Stanley Investment Management and from August 2003 to January 2005, Mr. Graver served as Vice President of Morgan Stanley Investment Management. From August 2003 to January 2008, Mr. Graver’s primary responsibilities included serving as Head of Operational Due Diligence for Morgan Stanley AIP Fund of Hedge Funds in which role he oversaw due diligence into operational factors of alternative investment entities. From July 1997 to July 2003, Mr. Graver was employed by PricewaterhouseCoopers LLP, an international auditing and professional services firm, where he served as a senior audit manager and was responsible for managing independent audits of financial services firms. From June 1993 to June 1997, Mr. Graver was employed by PNC Bank, a bank offering consumer and corporate services, where he served as a mutual fund accounting manager and was responsible for managing an accounting team that performed daily accounting functions and valuation calculations for a group of mutual funds. From July 1989 through June 1993, Mr. Graver was employed by Coopers & Lybrand LLP, a predecessor accounting firm to PricewaterhouseCoopers LLP, where he was a senior audit associate and was responsible for performing audits of financial services firms. Mr. Graver earned his Bachelor of Science degree in Accounting in May 1989 from Pennsylvania State University and Masters of Business Administration from Villanova University in May 2002.
The Partnership has not adopted a code of ethics that applies to officers because it has no officers. In addition, the Partnership has not adopted any procedures by which investors may recommend nominees to the Partnership’s board of directors and has not established an audit committee because it has no board of directors.
65
Item 11.
Executive Compensation
.The Partnership has no directors or executive officers. As a limited partnership, the business of the Partnership is managed by the General Partner, which is responsible for administration of the business affairs of the Partnership. The Partnership pays the General Partner a monthly General Partner fee equal to an annual rate of 0.75% (paid monthly) of the Partnership’s
month-end
net assets.Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
.(a)
Security ownership of certain beneficial owners
. As of February 28, 2022, the Partnership knows of no person who beneficially owns more than five percent (5%) of the Redeemable Units outstanding.(b)
Security ownership of management
. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by the General Partner.The following table indicates securities owned by management as of December 31, 2021:
(1) Title of Class | (2) Name of Beneficial Owner | (3) Amount and Nature of Beneficial Ownership | (4) Percent of Class | |||||||
Class Z Redeemable Units | General Partner | 3,070.7533 | 46.9% |
(c)
Changes in control
. None.Item 13.
Certain Relationships and Related Transactions, and Director Independence
.(a)None.
Transactions with related persons.
(b)Not applicable.
Review, approval or ratification of transactions with related persons.
(c). MS&Co., Morgan Stanley Wealth Management and the General Partner could be considered promoters for purposes of Item 404(c) of Regulation
Promoters and certain control persons
S-K.
The nature and the amounts of compensation each promoter received or will receive, if any, from the Partnership are set forth under “Item 1.Business
.”, “Item 8.Financial Statements and
Supplementary Data
.” and “Item 11.Executive Compensation
.”Item 14.
Principal Accountant Fees and Services
.(1)
Audit Fees
. The aggregate fees billed for each of the last two fiscal years for professional services rendered by Ernst & Young LLP (“EY”) for the years ended December 31, 2021 and 2020 for the audit of the Partnership’s annual financial statements, review of financial statements included in the Partnership’s Forms 10-Q and 10-K and other services normally provided in connection with regulatory filings or engagements were:2021 $218,781 |
2020 $228,176 |
(2)
Audit-Related Fees
. None.(3)
Tax Fees
. The Partnership did not pay EY any amounts in 2021 and 2020 for professional services in connection with tax compliance, tax advice, and tax planning.(4)
All Other Fees
. None.(5) Not Applicable.
(6) Not Applicable.
66
PART IV
Item 15.
Exhibits and Financial Statement Schedules
.(1) Financial Statements:
Statements of Financial Condition at December 31, 2021 and 2020.
Condensed Schedules of Investments at December 31, 2021 and 2020.
Statements of Income and Expenses for the years ended December 31, 2021, 2020 and 2019.
Statements of Changes in Partners’ Capital for the years ended December 31, 2021, 2020 and 2019. Notes to Financial Statements.
(2) Exhibits:
3.1 | ||
3.2(a) | ||
(b) | ||
(c) | ||
(d) | ||
(e) | ||
(f) | ||
(g) | ||
(h) | ||
(i) | ||
(j) | ||
(k) | ||
(l) | ||
(m) |
67
4.1 | ||
10.1 | ||
10.2(a) | ||
(b) | ||
10.3(a) | ||
(b) | ||
10.4(a) | ||
(b) | ||
10.5(a) | ||
(b) | ||
10.6 | ||
10.7 | ||
10.8(a) | ||
(b) | ||
(c) | ||
10.9(a) | ||
(b) | ||
(c) | ||
10.10 | ||
10.11(a) |
68
(b) | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
11.1 | ||
11.2 | ||
11.3 | ||
11.4 | ||
11.5 | ||
11.6 | ||
11.7 | ||
11.8 | ||
11.9 | ||
11.10 | ||
11.11 | ||
11.12 | ||
11.13 | ||
11.14 | ||
11.15 | ||
12.1 |
69
12.2 | ||
12.3(a) | ||
(b) | ||
(c) | ||
99.1 | ||
99.2 | ||
99.3 |
The exhibits required to be filed by Item 601 of Regulations S-K are incorporated herein by reference. | ||
101.INS Inline XBRL Instance Document. | ||
101.SCH Inline XBRL Taxonomy Extension Schema Document. | ||
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. | ||
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||
101.DEF Inline XBRL Taxonomy Extension Definition Document. | ||
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CERES ORION L.P. | ||
By: | Ceres Managed Futures LLC (General Partner) | |
By: | /s/ Patrick T. Egan | |
Patrick T. Egan President and Director Date: March 24, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ Patrick T. Egan | /s/ Matthew R. Graver | /s/ Steven Ross | ||||||
Patrick T. Egan | Matthew R. Graver | Steven Ross | ||||||
President and Director | Director | Chief Financial Officer and Director | ||||||
Ceres Managed Futures LLC | Ceres Managed Futures LLC | (Principal Accounting Officer) | ||||||
Date: March 24, 2022 | Date: March 24, 2022 | Ceres Managed Futures LLC | ||||||
Date: March 24, 2022 |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Exchange Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Exchange Act.
Annual Report to limited partners
No proxy material has been sent to limited partners.
71