UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period endedJune 30, 2008
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number000-51282
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York | 56-2421596 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
c/o Citigroup Managed Futures LLC
731 Lexington Avenue — 25th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 559-2011
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer X | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined inrule 12b-2 of the Exchange Act).
Yes No X
As of July 31, 2008, 64,545.8874 Limited Partnership Redeemable Units were outstanding.
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
FORM 10-Q
INDEX
PART I - Financial Information: | Page Number | |||||
Item 1. | Financial Statements: | |||||
Statements of Financial Condition at June 30, 2008 and December 31, 2007 (unaudited) | 3 | |||||
Statements of Income and Expenses and Partners’ Capital for the three and six months ended June 30, 2008 and 2007 (unaudited) | 4 | |||||
Statements of Cash Flows for the three and six months ended June 30, 2008 and 2007 (unaudited) | 5 | |||||
Notes to Financial Statements, including the Financial Statements of CMF Graham Master Fund L.P. (unaudited) | 6 – 16 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 – 21 | ||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 22 | ||||
Item 4. | Controls and Procedures | 23 | ||||
PART II - Other Information | 24 – 26 |
2
PART I
Item 1. Financial Statements
Citigroup Fairfield Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
Citigroup Fairfield Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets: | ||||||||
Investment in Master, at fair value | $ | 69,678,181 | $ | 69,459,132 | ||||
Cash | 168,597 | 165,627 | ||||||
Distribution receivable | 78,514 | 136,665 | ||||||
Total assets | $ | 69,925,292 | $ | 69,761,424 | ||||
Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Accrued expenses: | ||||||||
Brokerage commissions | $ | 262,220 | $ | 261,605 | ||||
Management fees | 115,954 | 115,696 | ||||||
Administrative fees | 28,989 | 28,924 | ||||||
Other | 90,573 | 82,074 | ||||||
Redemptions payable | 3,215,977 | 1,316,737 | ||||||
Total liabilities | 3,713,713 | 1,805,036 | ||||||
Partners’ Capital: | ||||||||
General Partner, 724.0407 Unit equivalents outstanding in 2008 and 2007 | 727,979 | 636,359 | ||||||
Special Limited Partner, 614.6964 and 100.0000 Redeemable Units of Limited Partnership Interest outstanding in 2008 and 2007, respectively | 618,040 | 87,890 | ||||||
Limited Partners, 64,514.6516 and 76,495.9137 Redeemable Units of Limited Partnership Interest outstanding in 2008 and 2007, respectively | 64,865,560 | 67,232,139 | ||||||
Total partners’ capital | 66,211,579 | 67,956,388 | ||||||
Total liabilities and partners’ capital | $ | 69,925,292 | $ | 69,761,424 | ||||
See accompanying notes to financial statements.
3
Citigroup Fairfield Futures Fund L.P. II
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Income: | ||||||||||||||||
Net realized gains (losses) on closed positions allocated from Master | $ | 4,340,834 | $ | 12,081,172 | $ | 10,385,876 | $ | 8,645,391 | ||||||||
Change in net unrealized gains (losses) on open positions allocated from Master | 1,368,758 | 1,074,360 | 1,649,767 | (373,412 | ) | |||||||||||
Interest income allocated from Master | 186,291 | 570,998 | 482,704 | 1,169,882 | ||||||||||||
Expenses allocated from Master | (107,829 | ) | (76,828 | ) | (204,763 | ) | (131,609 | ) | ||||||||
Total income (loss) | 5,788,054 | 13,649,702 | 12,313,584 | 9,310,252 | ||||||||||||
Expenses: | ||||||||||||||||
Brokerage commissions | 759,631 | 731,390 | 1,571,612 | 1,401,206 | ||||||||||||
Management fees | 335,481 | 323,034 | 694,638 | 619,132 | ||||||||||||
Administrative fees | 83,871 | 80,758 | 173,660 | 154,782 | ||||||||||||
Other | 48,959 | 48,500 | 95,988 | 96,317 | ||||||||||||
Total expenses | 1,227,942 | 1,183,682 | 2,535,898 | 2,271,437 | ||||||||||||
Net income (loss) before allocation to Special Limited Partner | 4,560,112 | 12,466,020 | 9,777,686 | 7,038,815 | ||||||||||||
Allocation to Special Limited Partner | (517,496 | ) | — | (517,496 | ) | — | ||||||||||
Net income (loss) after allocation to Special Limited Partner | 4,042,616 | 12,466,020 | 9,260,190 | 7,038,815 | ||||||||||||
Additions — Limited Partners | 1,588,000 | 811,000 | 2,934,000 | 5,691,000 | ||||||||||||
Additions — Special Limited Partner | 517,496 | — | 517,496 | — | ||||||||||||
Redemptions — Limited Partners | (4,573,761 | ) | (3,369,581 | ) | (14,456,495 | ) | (7,578,135 | ) | ||||||||
Net increase (decrease) in Partners’ Capital | 1,574,351 | 9,907,439 | (1,744,809 | ) | 5,151,680 | |||||||||||
Partners’ Capital, beginning of period | 64,637,228 | 56,775,682 | 67,956,388 | 61,531,441 | ||||||||||||
Partners’ Capital, end of period | $ | 66,211,579 | $ | 66,683,121 | $ | 66,211,579 | $ | 66,683,121 | ||||||||
Net Asset Value per Unit (65,853.3887 and 75,397.1718 Units outstanding at June 30, 2008 and 2007, respectively) | $ | 1,005.44 | $ | 884.42 | $ | 1,005.44 | $ | 884.42 | ||||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent | $ | 59.14 | $ | 160.13 | $ | 126.54 | $ | 90.90 | ||||||||
See accompanying notes to financial statements.
4
Citigroup Fairfield Futures Fund L.P. II
Statements of Cash Flow
(Unaudited)
Statements of Cash Flow
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) after allocation to Special Limited Partner | $ | 4,042,616 | $ | 12,466,020 | $ | 9,260,190 | $ | 7,038,815 | ||||||||
Adjustments to reconcile net income (loss) after allocation to Special Limited Partner to net cash provided by (used in) operating activities: | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Purchase of investment in Master | (1,588,000 | ) | (811,000 | ) | (2,934,000 | ) | (5,691,000 | ) | ||||||||
Proceeds from sale of investment in Master | 11,128,924 | 5,224,709 | 15,086,686 | 15,886,546 | ||||||||||||
Net change in unrealized (appreciation) depreciation on investment in Master | (5,776,729 | ) | (13,649,702 | ) | (12,371,735 | ) | (9,310,252 | ) | ||||||||
(Increase) decrease in distribution receivable | (11,325 | ) | — | 58,151 | — | |||||||||||
Accrued expenses: | ||||||||||||||||
Increase (decrease) in brokerage commissions | (14,039 | ) | 34,663 | 615 | (3,085 | ) | ||||||||||
Increase (decrease) in management fees | (6,236 | ) | 15,334 | 258 | (1,433 | ) | ||||||||||
Increase (decrease) in administrative fees | (1,558 | ) | 3,833 | 65 | (359 | ) | ||||||||||
Increase (decrease) in other | 11,722 | 8,514 | 8,499 | 40,414 | ||||||||||||
Net cash provided by (used in) operating activities | 7,785,375 | 3,292,371 | 9,108,729 | 7,959,646 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from additions — Limited Partners | 1,588,000 | 811,000 | 2,934,000 | 5,691,000 | ||||||||||||
Allocation of Redeemable Units — Special Limited Partner | 517,496 | — | 517,496 | — | ||||||||||||
Payments for redemptions — Limited Partners | (9,881,752 | ) | (4,096,020 | ) | (12,557,255 | ) | (13,588,008 | ) | ||||||||
Net cash provided by (used in) financing activities | (7,776,256 | ) | (3,285,020 | ) | (9,105,759 | ) | (7,897,008 | ) | ||||||||
Net change in cash | 9,119 | 7,351 | 2,970 | 62,638 | ||||||||||||
Cash, at beginning of period | 159,478 | 140,611 | 165,627 | 85,324 | ||||||||||||
Cash, at end of period | $ | 168,597 | $ | 147,962 | $ | 168,597 | $ | 147,962 | ||||||||
Non-cash financing activities: | ||||||||||||||||
Change in redemptions payable | $ | (5,307,991 | ) | $ | — | $ | 1,899,240 | $ | — | |||||||
See accompanying notes to financial statements.
5
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
1. | General: |
Citigroup Fairfield Futures Fund L.P. II (the “Partnership”) is a limited partnership which was organized on December 18, 2003 under the partnership laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk.
During the initial offering period (January 12, 2004 through March 12, 2004), the Partnership sold 28,601 Redeemable Units of Limited Partnership Interest (“Redeemable Units”) and 285 Units of General Partnership Interest. The Partnership commenced trading on March 15, 2004.
Citigroup Managed Futures LLC, a Delaware Limited Liability Company, acts as the general partner (the “General Partner”) of the Partnership. The Partnership’s commodity broker is Citigroup Global Markets Inc. (“CGM”). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. (“CGMHI”), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc.
On June 1, 2006, the Partnership allocated substantially all of its capital to the CMF Graham Capital Master Fund L.P. (the “Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 74,569.3761 Units of the Master with cash of $75,688,021. The Master was formed in order to permit accounts managed then or in the future by Graham Capital Management L.P. (“Graham” or the “Advisor”) using the Multi-Trend Program at 125% Leverage, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of the Master. In addition, the Advisor is a Special Limited Partner of the Partnership. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The Master’s commodity broker is CGM. The General Partner and the Advisor believe that trading through this master-feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.
At June 30, 2008, the Partnership owned approximately 31.1% of the Master. At December 31, 2007, the Partnership owned approximately 32.5% of the Master. It is the Partnership’s intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Masters’ Statement of Financial Condition, Statements of Income and Expenses and Partner’s Capital, Schedules of Investments and Statements of Cash Flows are included herein.
The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at June 30, 2008 and December 31, 2007 and the results of its operations, changes in Partners’ Capital, and cash flows for the three and six months ended June 30, 2008 and 2007. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report onForm 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007.
Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.
6
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
The Master’s Statements of Financial Condition and Schedules of Investments as of June 30, 2008 and December 31, 2007 and Statements of Income and Expenses and Members’ Capital and Statements of Cash Flows for the three and six months ended June 30, 2008 and 2007 are presented below:
CMF Graham Capital Master Fund L.P.
Statement of Financial Condition
(Unaudited)
Statement of Financial Condition
(Unaudited)
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets: | ||||||||
Equity in commodity futures trading account: | ||||||||
Cash (restricted $37,413,888 and $24,672,137 in 2008 and 2007 respectively) | $ | 219,433,426 | $ | 215,782,212 | ||||
Net unrealized appreciation on open futures contracts | 3,202,792 | 278,888 | ||||||
Unrealized appreciation on open forward contracts | 13,425,242 | 6,792,116 | ||||||
236,061,460 | 222,853,216 | |||||||
Interest receivable | 252,840 | 424,676 | ||||||
Total assets | $ | 236,314,300 | $ | 223,277,892 | ||||
Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Unrealized depreciation on open forward contracts | $ | 11,655,023 | $ | 7,439,350 | ||||
Accrued expenses: | ||||||||
Professional fees | 20,568 | 24,122 | ||||||
Distribution payable | 252,840 | 424,676 | ||||||
Redemptions payable | — | 1,795,357 | ||||||
Total liabilities | 11,928,431 | 9,683,505 | ||||||
Partners’ Capital: | ||||||||
Limited Partners’ Capital, 164,846.3481 and 186,334.8221 Redeemable Units of Limited Partnership Interest outstanding in 2008 and 2007, respectively | 224,385,869 | 213,594,387 | ||||||
Total liabilities and partners’ capital | $ | 236,314,300 | $ | 223,277,892 | ||||
7
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
CMF Graham Capital Master Fund L.P.
Schedule of Investments
June 30, 2008
(Unaudited)
Schedule of Investments
June 30, 2008
(Unaudited)
% of Partners’ | ||||||||
Fair Value | Capital | |||||||
Futures Contracts Purchased | ||||||||
Energy | $ | 265,135 | 0.12 | % | ||||
Grains | 726,121 | 0.32 | ||||||
Indices | (3,962 | ) | (0.00 | )* | ||||
Interest Rates Non U.S. | 20,102 | 0.01 | ||||||
Metals | 53,280 | 0.02 | ||||||
Softs | 685,211 | 0.31 | ||||||
Total futures contracts purchased | 1,745,887 | 0.78 | ||||||
Futures Contracts Sold | ||||||||
Energy | 20,924 | 0.01 | ||||||
Indices | 1,824,489 | 0.81 | ||||||
Interest Rates Non-U.S. | 61,777 | 0.03 | ||||||
Interest Rates U.S. | (334,891 | ) | (0.15 | ) | ||||
Softs | (115,394 | ) | (0.05 | ) | ||||
Total futures contracts sold | 1,456,905 | 0.65 | ||||||
Unrealized Appreciation on Open Forward Contracts | ||||||||
Currencies | 12,307,591 | 5.48 | ||||||
Metals | 1,117,651 | 0.50 | ||||||
Total unrealized appreciation on open forward contracts | 13,425,242 | 5.98 | ||||||
Unrealized Depreciation on Open Forward Contracts | ||||||||
Currencies | (10,914,295 | ) | (4.86 | ) | ||||
Metals | (740,728 | ) | (0.33 | ) | ||||
Total unrealized depreciation on open forward contracts | (11,655,023 | ) | (5.19 | ) | ||||
Total fair value | $ | 4,973,011 | 2.22 | % | ||||
* | Due to rounding. |
8
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
CMF Graham Capital Master Fund L.P.
Schedule of Investments
December 31, 2007
(Unaudited)
Schedule of Investments
December 31, 2007
(Unaudited)
% of Partners’ | ||||||||
Fair Value | Capital | |||||||
Futures Contracts Purchased | ||||||||
Energy | $ | 184,162 | 0.09 | % | ||||
Grains | 219,977 | 0.10 | ||||||
Indices | 8,906 | 0.00 | * | |||||
Interest Rates U.S | (2,712 | ) | (0.00 | )* | ||||
Interest Rates Non-U.S | 98,371 | 0.05 | ||||||
Metals | 68,690 | 0.03 | ||||||
Softs | (18,009 | ) | (0.01 | ) | ||||
Total futures contracts purchased | 559,385 | 0.26 | ||||||
Futures Contracts Sold | ||||||||
Energy | (76,360 | ) | (0.04 | ) | ||||
Indices | 31,940 | 0.02 | ||||||
Interest Rates U.S | (67,681 | ) | (0.03 | ) | ||||
Interest Rates Non-U.S | (163,383 | ) | (0.08 | ) | ||||
Livestock | 11,482 | 0.01 | ||||||
Softs | (16,495 | ) | (0.01 | ) | ||||
Total futures contracts sold | (280,497 | ) | (0.13 | ) | ||||
Unrealized Appreciation on Open Forward Contracts | ||||||||
Currencies | 6,327,560 | 2.96 | ||||||
Metals | 464,556 | 0.22 | ||||||
Total unrealized appreciation on open forward contracts | 6,792,116 | 3.18 | ||||||
Unrealized Depreciation on Open Forward Contracts | ||||||||
Currencies | (6,976,160 | ) | (3.26 | ) | ||||
Metals | (463,190 | ) | (0.22 | ) | ||||
Total unrealized depreciation on open forward contracts | (7,439,350 | ) | (3.48 | ) | ||||
Total fair value | $ | (368,346 | ) | (0.17 | )% | |||
* | Due to rounding |
9
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
CMF Graham Capital Master Fund L.P.
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Income: | ||||||||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||||||||
Net realized gains (losses) on closed positions | $ | 13,986,004 | $ | 40,092,438 | $ | 32,596,301 | $ | 28,477,615 | ||||||||
Change in net unrealized appreciation (depreciation) on open positions | 4,433,123 | 3,422,488 | 5,341,357 | (2,047,087 | ) | |||||||||||
Gain (loss) from trading, net | 18,419,127 | 43,514,926 | 37,937,658 | 26,430,528 | ||||||||||||
Interest income | 601,098 | 1,899,227 | 1,515,145 | 3,998,898 | ||||||||||||
Total income (loss) | 19,020,225 | 45,414,153 | 39,452,803 | 30,429,426 | ||||||||||||
Expenses: | ||||||||||||||||
Brokerage commissions including clearing fees of $48,719, $69,490, $116,862 and $103,387, respectively | 339,401 | 245,540 | 629,674 | 426,229 | ||||||||||||
Professional fees | 8,437 | 9,785 | 16,874 | 20,040 | ||||||||||||
Total expenses | 347,838 | 255,325 | 646,548 | 446,269 | ||||||||||||
Net income (loss) | 18,672,387 | 45,158,828 | 38,806,255 | 29,983,157 | ||||||||||||
Additions – Limited Partners | 1,588,000 | 3,985,631 | 2,934,000 | 11,900,811 | ||||||||||||
Redemptions – Limited Partners | (20,803,608 | ) | (20,307,923 | ) | (29,433,628 | ) | (40,271,705 | ) | ||||||||
Distribution of interest income to feeder funds | (601,098 | ) | (1,899,227 | ) | (1,515,145 | ) | (3,998,898 | ) | ||||||||
Net increase (decrease) in Partners’ Capital | (1,144,319 | ) | 26,937,309 | 10,791,482 | (2,386,635 | ) | ||||||||||
Partners’ Capital, beginning of period | 225,530,188 | 197,349,572 | 213,594,387 | 226,673,516 | ||||||||||||
Partners’ Capital, end of period | $ | 224,385,869 | $ | 224,286,881 | $ | 224,385,869 | $ | 224,286,881 | ||||||||
Net Asset Value per Redeemable Unit of Limited Partnership Interest (164,846.3481 and 198,531.9370 Redeemable Units outstanding at June 30, 2008 and 2007, respectively) | $ | 1,361.18 | $ | 1,129.73 | $ | 1,361.18 | $ | 1,129.73 | ||||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest | $ | 112.99 | $ | 222.94 | $ | 223.53 | $ | 153.12 | ||||||||
10
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
CMF Graham Capital Master Fund L.P.
Statements of Cash Flows
(Unaudited)
Statements of Cash Flows
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 18,672,387 | $ | 45,158,828 | $ | 38,806,255 | $ | 29,983,157 | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
(Increase) decrease in restricted cash | (3,291,171 | ) | (14,874,512 | ) | (12,741,751 | ) | 9,574,622 | |||||||||
(Increase) decrease in net unrealized appreciation on open futures contracts | (3,202,792 | ) | (1,008,854 | ) | (2,923,904 | ) | 1,280,687 | |||||||||
(Increase) decrease in unrealized appreciation on open forward contracts | 3,974,714 | (7,982,151 | ) | (6,633,126 | ) | (6,955,245 | ) | |||||||||
(Increase) decrease in interest receivable | (46,511 | ) | 53,804 | 171,836 | 91,302 | |||||||||||
Increase (decrease) in net unrealized depreciation on open futures contracts | (1,819,674 | ) | — | — | — | |||||||||||
Increase (decrease) in unrealized depreciation on open forward contracts | (3,385,371 | ) | 5,568,518 | 4,215,673 | 7,721,645 | |||||||||||
Accrued expenses: | ||||||||||||||||
Increase (decrease) in professional fees | (1,491 | ) | 5,272 | (3,554 | ) | 14,077 | ||||||||||
Net cash provided by (used in) operating activities | 10,900,091 | 26,920,905 | 20,891,429 | 41,710,245 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from additions | 1,588,000 | 3,985,631 | 2,934,000 | 11,900,811 | ||||||||||||
Payments for redemptions | (20,803,608 | ) | (20,307,923 | ) | (31,228,985 | ) | (40,271,705 | ) | ||||||||
Distribution of interest income to feeder funds | (554,587 | ) | (1,953,031 | ) | (1,686,981 | ) | (4,090,200 | ) | ||||||||
Net cash provided by (used in) financing activities | (19,770,195 | ) | (18,275,323 | ) | (29,981,966 | ) | (32,461,094 | ) | ||||||||
Net change in unrestricted cash | (8,870,104 | ) | 8,645,582 | (9,090,537 | ) | 9,249,151 | ||||||||||
Unrestricted cash, at beginning of period | 190,889,642 | 170,298,829 | 191,110,075 | 169,695,260 | ||||||||||||
Unrestricted cash, at end of period | $ | 182,019,538 | $ | 178,944,411 | $ | 182,019,538 | $ | 178,944,411 | ||||||||
Non-cash financing activities: | ||||||||||||||||
Change in redemptions payable | $ | — | $ | — | $ | (1,795,357 | ) | $ | — | |||||||
Change in distributions payable | $ | 46,511 | $ | — | $ | (171,836 | ) | $ | — | |||||||
See accompanying notes to financial statements.
11
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
2. | Financial Highlights: |
Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and six months ended June 30, 2008 and 2007 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net realized and unrealized gains (losses) allocated from Master* | $ | 70.86 | $ | 158.64 | $ | 140.87 | $ | 87.15 | ||||||||
Interest income allocated from Master | 2.73 | 7.34 | 6.55 | 14.96 | ||||||||||||
Expenses** | (14.45 | ) | (5.85 | ) | (20.88 | ) | (11.21 | ) | ||||||||
Increase (decrease) for the period | 59.14 | 160.13 | 126.54 | 90.90 | ||||||||||||
Net Asset Value per Redeemable Unit, beginning of period | 946.30 | 724.29 | 878.90 | 793.52 | ||||||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 1,005.44 | $ | 884.42 | $ | 1,005.44 | $ | 884.42 | ||||||||
* Includes Partnership brokerage commissions and expenses allocated from Master. | ||||||||||||||||
** Excludes Partnership brokerage commissions and expenses allocated from Master. | ||||||||||||||||
Ratios to average net assets:*** | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net investment income (loss) before allocation to Special Limited Partner**** | (7.1 | )% | (4.0 | )% | (6.8 | )% | (3.7 | )% | ||||||||
Operating expenses | 8.2 | % | 7.7 | % | 8.2 | % | 7.5 | % | ||||||||
Allocation to Special Limited Partner | 0.8 | % | — | % | 0.8 | % | — | % | ||||||||
Total expenses and allocation to Special Limited Partner | 9.0 | % | 7.7 | % | 9.0 | % | 7.5 | % | ||||||||
Total return: | ||||||||||||||||
Total return before allocation to Special Limited Partner | 7.1 | % | 22.1 | % | 15.3 | % | 11.5 | % | ||||||||
Allocation to Special Limited Partner | (0.9 | )% | — | % | (0.9 | )% | — | % | ||||||||
Total return after allocation to Special Limited Partner | 6.2 | % | 22.1 | % | 14.4 | % | 11.5 | % | ||||||||
*** | Annualized (except for allocation to Special Limited Partner, if applicable). | |
**** | Interest income allocated from Master less total expenses. |
The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.
12
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
2. | Financial Highlights (continued): |
Financial Highlights of the Master:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net realized and unrealized gains (losses)* | $ | 109.41 | $ | 213.63 | $ | 214.98 | $ | 134.22 | ||||||||
Interest income | 3.63 | 9.36 | 8.64 | 19.00 | ||||||||||||
Expenses** | (0.05 | ) | (0.05 | ) | (0.09 | ) | (0.10 | ) | ||||||||
Increase (decrease) for the period | 112.99 | 222.94 | 223.53 | 153.12 | ||||||||||||
Distribution of interest income to feeder funds | (3.63 | ) | (9.36 | ) | (8.64 | ) | (19.00 | ) | ||||||||
Net Asset Value per Redeemable Unit, beginning of period | 1,251.82 | 916.15 | 1,146.29 | 995.61 | ||||||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 1,361.18 | $ | 1,129.73 | $ | 1,361.18 | $ | 1,129.73 | ||||||||
* Includes brokerage commissions. | ||||||||||||||||
** Excludes brokerage commissions. | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Ratios to average net assets:*** | ||||||||||||||||
Net investment income (loss) **** | 0.5 | % | 3.1 | % | 0.8 | % | 3.4 | % | ||||||||
Operating expenses | 0.6 | % | 0.5 | % | 0.6 | % | 0.4 | % | ||||||||
Total return | 9.0 | % | 24.3 | % | 19.5 | % | 15.4 | % | ||||||||
*** | Annualized. | |
**** | Interest income less total expenses. |
The above ratios may vary for individual investors based on the timing of capital transactions during the period.
3. | Trading Activities: |
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The results of the Partnership’s investment in the Master are shown in the Statements of Income and Expenses and Partners’ Capital.
The customer agreements between the Partnership and CGM and the Master and CGM give the Partnership and the Master, respectively, the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Master for the six months ended June 30, 2008 are held for trading purposes. The average fair value during the six months ended June 30, 2008 and the year ended December 31, 2007 were $3,882,981 and $4,235,297, respectively. The fair values of these commodity interests, including options thereon, if applicable at June 30, 2008 and December 31, 2007 were $4,973,011 and $(368,346), respectively. Fair values for exchange traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on other measures of fair value deemed appropriate by the General Partner.
13
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions.
4. | Fair Value Measurement: |
Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in note 2 of the Master’s notes to the annual financial statements as of December 31, 2007.
Fair Value Measurements. The Partnership adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership did not apply the deferral allowed by FASB Staff PositionsNo. FAS 157-2,Effective Date of FASB Statement No. 157,for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
The Partnership values investments in master partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. The Partnership did not directly hold any derivative instruments that are based on quoted prices in active markets for identical assets (Level 1) or unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Significant Other | Unobservable | ||||||||||||||
for Identical | Observable Inputs | Inputs | ||||||||||||||
6/30/2008 | Assets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Investment in Master | $ | 69,678,181 | $ | — | $ | 69,678,181 | $ | — | ||||||||
Total fair value | $ | 69,678,181 | $ | — | $ | 69,678,181 | $ | — | ||||||||
Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included in equity in commodity futures trading account. Any change in net unrealized gain or loss from the preceding period is reported in the Statements of Income and Expenses and Partner’s Capital.
Fair Value Measurements. The Master adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Master did not
14
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
apply the deferral allowed by FASB Staff PositionsNo. FAS 157-2,Effective Date of FASB Statement No. 157,for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
The Master considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The Master did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
6/30/2008 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Forwards | $ | 13,425,242 | $ | — | $ | 13,425,242 | $ | — | ||||||||
Futures | 3,202,792 | 3,202,792 | — | — | ||||||||||||
Total assets | 16,628,034 | 3,202,792 | 13,425,242 | — | ||||||||||||
Liabilities | ||||||||||||||||
Forwards | $ | 11,655,023 | $ | — | $ | 11,655,023 | $ | — | ||||||||
Total liabilities | 11,655,023 | — | 11,655,023 | — | ||||||||||||
Total fair value | $ | 4,973,011 | $ | 3,202,792 | $ | 1,770,219 | $ | — | ||||||||
5. | Financial Instrument Risks: |
In the normal course of its business, the Partnership through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial instruments traded by the Master 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 by the Master. The Partnership is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an
15
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
June 30, 2008
(Unaudited)
Notes to Financial Statements
June 30, 2008
(Unaudited)
exchange or clearing organization acts as a counterparty to the transactions. The Master’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership, through its investment in the Master, has credit risk and concentration risk because the sole counterparty or broker with respect to the Master’s assets is CGM.
As both a buyer and seller of options, the Partnership pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership does not consider these contracts to be guarantees as described in FIN 45.
The General Partner monitors and controls the Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Master is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.
16
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Liquidity and Capital Resources
The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master, distribution receivable and cash. The Master does not engage in sales of goods or services. 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 Master. While substantial losses could lead to a material decrease in liquidity, no such losses occurred in the second quarter of 2008.
The Partnership’s capital consists of capital contributions of the partners, as increased or decreased by income (loss) from its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
For the six months ended June 30, 2008, Partnership’s capital decreased 2.6% from $67,956,388 to $66,211,579. This decrease was attributable to the redemption of 15,136.3451 Redeemable Units of Limited Partnership Interest totaling $14,456,495 which was partially offset by the net income from operations of $9,260,190, coupled with additional sales of 3,155.0830 Redeemable Units of Limited Partnership Interest totaling $2,934,000, and 514.6964 Redeemable Units of Special Limited Partnership Interest totaling $517,496. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.
The Master’s capital consists of the capital contributions of the partners as increased or decreased by the realizedand/or unrealized gains or losses on commodity futures trading, expenses, interest income, redemptions of units and distribution of profits, if any.
For the six months ended June 30, 2008, the Master’s capital increased 5.1% from $213,594,387 to $224,385,869. This increase was attributable to net income from operations of $38,806,255, coupled with the addition of 2,388.8470 Redeemable Units of Limited Partnership Interest totaling $2,934,000, which was partially offset by the redemption of 23,877.3210 Redeemable Units of Limited Partnership Interest totaling $29,433,628, coupled with distribution of interest income to the feeder funds of $1,515,145. Future redemptions can impact the funds available for investments in commodity contract positions in subsequent periods.
Critical Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from these estimates.
Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in note 2 of the Master’s notes to the annual financial statements as of December 31, 2007.
Fair Value Measurements. The Partnership adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership did not apply the deferral allowed by FASB Staff PositionsNo. FAS 157-2,Effective Date of FASB Statement No. 157,for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
17
The Partnership values investments in master partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investments in the Master reflects its proportional interest in the Master. The Partnership did not directly hold any derivative instruments that are based on quoted prices in active markets for identical assets (Level 1) or unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
6/30/2008 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Investment in Master | $ | 69,678,181 | $ | — | $ | 69,678,181 | $ | — | ||||||||
Total fair value | $ | 69,678,181 | $ | — | $ | 69,678,181 | $ | — | ||||||||
Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included in equity in commodity futures trading account. Any change in net unrealized gain or loss from the preceding period is reported in the Statements of Income and Expenses and Partners’ Capital.
Fair Value Measurements. The Master adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Master did not apply the deferral allowed by FASB Staff PositionsNo. FAS 157-2,Effective Date of FASB Statement No. 157, for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
The Master considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The Master did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
18
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
6/30/2008 | Assets (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Forwards | $ | 13,425,242 | $ | — | $ | 13,425,242 | $ | — | ||||||||
Futures | 3,202,792 | 3,202,792 | — | — | ||||||||||||
Total assets | 16,628,034 | 3,202,792 | 13,425,242 | — | ||||||||||||
Liabilities | ||||||||||||||||
Forwards | $ | 11,655,023 | $ | — | $ | 11,655,023 | $ | — | ||||||||
Total liabilities | 11,655,023 | — | 11,655,023 | — | ||||||||||||
Total fair value | $ | 4,973,011 | $ | 3,202,792 | $ | 1,770,219 | $ | — | ||||||||
Income and Expenses Recognition. All of the income and expenses and unrealized and realized gains and losses from the commodity transactions of the Master are allocated pro rata among the investors at the time of such determination. The Master’s income and expense recognition is discussed in note 2 of the Master’s notes to the annual financial statements as of December 31, 2007.
Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for anagreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the Statements of Income and Expenses and Partners’ Capital.
Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.
In 2007, the Partnership adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Partnership adopted FIN 48 as of January 1, 2008 and the application of this standard did not impact the financial statements.
The following are the major tax jurisdictions for the Partnership and the earliest tax year subject to examination: United States – 2004.
Recent Accounting Pronouncements. On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined.
Results of Operations
During the second quarter of 2008, the Partnership’s Net Asset Value per Redeemable Unit increased 6.2% from $946.30 to $1,005.44 as compared to an increase of 22.1% in the same period of 2007. The Partnership
19
experienced a net trading gain before brokerage commissions and related fees allocated from the Master in the second quarter of 2008 of $5,709,592. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, grains,non-U.S. interest rates, indices, metals, and softs and were partially offset by losses in U.S. interest rates, and livestock. The Partnership experienced a net trading gain before brokerage commissions and related fees allocated from the Master in the second quarter of 2007 of $13,155,532. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, U.S. andnon-U.S. interest rates, livestock and indices and were partially offset by losses in grains, metals and softs.
The second quarter of 2008 presented a highly volatile trading environment as weakness in the credit market continued to weigh on the global economy. Several long-term trends continued as commodity prices reached record territories and inflation concerns troubled federal bankers worldwide. The Partnership was profitable in currencies, energy, grains, soft commodities, global fixed income, metals and stock indices while losses were seen in the U.S. fixed income.
In the currencies sector, gains were recorded in emerging market currencies although relatively smaller losses were recorded in the trading of currencies of developed countries as the U.S. Dollar recovered from the lows established in the first quarter of the year. Preliminary economic data suggested that the U.S. economy was not as bad as was previously perceived. In the energy sector, a long-term bullish trend in crude oil persisted as new record prices continued to be established. The Partnership recorded strong gains in the energy sector by capitalizing on the strong long-term trends across the petroleum complex. In the grains sector, fundamental supply constraints contributed to the record prices as the bullish trend continued. Corn and the soybean complex contributed to the gains. Gains were recorded in global fixed income markets as the international central banks grappled with inflationary pressures and fundamental economic weakness in some sectors. Minor gains were recorded in metals as gains in industrial metals were mostly offset by losses in precious metals. In the stock index futures, reversal of the bearish trend earlier in the quarter contributed to some losses, however, strong gains were recorded in June as the international equity markets went through a massive correction into the bear market territory. In soft commodities, gains in cocoa were offset largely by losses in coffee, cotton and sugar due to corrections in previously established trends.
U.S. fixed income sector recorded losses as the focus of the central bankers shifted from downward pressures to economy to a more hawkish stance towards inflation.
During the Partnership’s six months ended June 30, 2008, the Net Asset Value per Redeemable Unit increased 14.4% from $878.90 to $1,005.44 as compared to an increase of 1.5% in the same period of 2007. The Partnership experienced a net trading gain before brokerage commissions and related fees allocated from the Master in the second quarter of 2008 of $12,034,643. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, grains, U.S. andnon-U.S. interest rates, indices, livestock, metals and softs. The Partnership experienced a net trading gain before brokerage commissions and related fees allocated from the Master in the six months ended June 30, 2007 of $8,271,979. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, U.S. andnon-U.S. interest rates, livestock and indices and were partially offset by losses in energy, grains, metals and softs.
Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Master) depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership/Master expects to increase capital through operations.
Interest income on 80% of the Partnership’s daily average equity allocated to it by the Master, was earned at a30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master’s assets in cashand/or place all of the Master’s assets in90-day Treasury bills and pay the Partnership its allocated share of 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills. Interest income allocated from the Master for the three and six months ended June 30, 2008 decreased by $384,707 and
20
$687,178, respectively as compared to the corresponding periods in 2007. The decrease in interest income is primarily due to lower interest rates during the three and six months ended June 30, 2008 as compared to the corresponding periods in 2007.
Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Brokerage commissions for the three and six months ended June 30, 2008 increased by $28,241 and $170,406, respectively as compared to the corresponding periods in 2007. The increase in brokerage commissions is due to higher average adjusted net assets as compared to the corresponding periods in 2007.
Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and six months ended June 30, 2008 increased by $12,447 and $75,506, respectively as compared to the corresponding periods in 2007. The increase in management fees is due to higher average adjusted net assets as compared to the correspondings period in 2007.
Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. 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 and redemptions. Administrative fees for the three and six months ended June 30, 2008 increased by $3,113 and $18,878, respectively as compared to the corresponding periods in 2007. The increase in administrative fees is due to higher average adjusted net assets as compared to the corresponding periods in 2007.
Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. The profit share allocations earned for the three and six months ended June 30, 2008 were $517,496. There were no profit share allocations earned for the three and six months ended June 30, 2007.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Master’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master’s main line of business.
Market movements result in frequent changes in the fair market value of the Master’s open positions and, consequently, its earnings and cash flow. The Master’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Master’s open positions and the liquidity of the markets in which it trades.
The Master rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master’s past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master’s speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master’s losses in any market sector will be limited to Value at Risk or by the Master’s attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of anyone-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.
The following table indicates the trading Value at Risk associated with the Master’s open positions by market category as of June 30, 2008, and the highest, lowest and average values during the three months ended June 30, 2008. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of June 30, 2008, the Master’s total capital was $224,385,869. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report onForm 10-K for the year ended December 31, 2007.
June 30, 2008
(Unaudited)
(Unaudited)
Three Months Ended June 30, 2008 | ||||||||||||||||||||
% of Total | High | Low | Average | |||||||||||||||||
Market Sector | Value at Risk | Capital | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Currencies: | ||||||||||||||||||||
– OTC Contracts | $ | 19,837,251 | 8.84 | % | $ | 31,973,478 | $ | 18,266,120 | $ | 23,671,018 | ||||||||||
Energy | 1,857,150 | 0.83 | % | 3,930,500 | 835,225 | 2,163,498 | ||||||||||||||
Grains | 1,210,500 | 0.54 | % | 1,281,500 | 203,200 | 547,016 | ||||||||||||||
Interest Rates U.S | 290,550 | 0.13 | % | 638,450 | 31,860 | 274,967 | ||||||||||||||
Interest Rates Non-U.S | 1,544,641 | 0.69 | % | 3,159,901 | 546,990 | 1,836,321 | ||||||||||||||
Metals: | ||||||||||||||||||||
– Exchange Traded Contracts | 64,000 | 0.03 | % | 490,757 | 8,000 | 224,419 | ||||||||||||||
– OTC Contracts | 776,696 | 0.34 | % | 884,348 | 151,086 | 626,188 | ||||||||||||||
Softs | 551,391 | 0.25 | % | 609,596 | 37,571 | 440,683 | ||||||||||||||
Indices | 3,950,381 | 1.76 | % | 4,517,707 | 631,538 | 3,473,498 | ||||||||||||||
Total | $ | 30,082,560 | 13.41 | % | ||||||||||||||||
* | Average month end Values at Risk. |
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Item 4. | Controls and Procedures |
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined inRule 13a-15(e) and15d-15(e) under the Exchange Act) as of June 30, 2008 and, based on that evaluation, the CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.
The Partnership’sinternal control over financial reportingis a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. These controls include policies and procedures that:
• | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
• | provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended June 30, 2008 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
The following information supplements and amends our discussion set forth under Part I, Item 3 “Legal Proceedings” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2007, as updated by our Quarterly Report onForm 10-Q for the quarter ended March 31, 2008.
Enron
Over the first two quarters of 2008, CGM agreed to settle the following cases, brought by clients of a single law firm in connection with the purchase and holding of Enron securities, and naming Citigroup as a third-party defendant: (1) Ahlich v. Arthur Andersen, L.L.P.; (2) Delgado v. Fastow; (3) Pearson v. Fastow; (4) Rosen v. Fastow; (5) Bullock v. Arthur Andersen, L.L.P.; (6) Choucroun v. Arthur Andersen, L.L.P.; (7) Guy v. Arthur Andersen, L.L.P.; (8) Adams v. Arthur Andersen, L.L.P.; (9) Jose v. Arthur Andersen, L.L.P.and (10) Odam, et al., v. Enron Corp., et al. The amount paid to settle these actions was covered by existing Citigroup litigation reserves.
On May 23, 2008, CGM agreed to settle Silvercreek Management Inc., et al. v. Salomon Smith Barney, Inc., et al., and Silvercreek Management Inc. v. Citigroup Inc., et al., two actions brought by investors in Enron debt securities. The amount paid to settle this action was covered by existing Citigroup litigation reserves.
On July 9, 2008, CGM agreed to settle Public Utility District No. 1 of Snohomish County, Washington v. Citigroup, et al., an action brought by a utility in connection with alleged electricity overcharges by Enron. The amount paid to settle this action was covered by existing Citigroup litigation reserves.
IPO Civil Litigation
On March 26, 2008, the Southern District of New York denied in part and granted in part Defendants’ motions to dismiss the amended complaints in the IPO allocation focus cases.
Subprime Mortgage-Related Litigation
The CGM, among other defendants, filed a motion to dismiss the consolidated amended derivative complaint in the matterIn Re Citigroup Inc. Shareholder Derivative Litigation, pending in Delaware Chancery Court, on April 21, 2008.
On June 3, 2008, plaintiffs inIn Re American Home Mortgage Securities Litigation, pending in the Eastern District of New York, filed a consolidated amended class action complaint.
On April 11, 2008, plaintiffs inIn Re Countrywide Financial Corp. Securities Litigation, pending in the Central District of California, filed a consolidated amended class action complaint. Defendants, including the CGM, filed motions to dismiss on June 10, 2008.
Other Matters
On June 16, 2008, CGM, among other Citigroup related defendants, settled a previously disclosed investigation by the Securities and Exchange Commission arising from the economic and political turmoil in Argentina in the fourth quarter of 2001 and agreed to the entry of a Cease and Desist Order pursuant to Section 21C of the Securities Exchange Act which stated that the defendants violated certain books and records provisions of the Federal securities law by improperly accounting for several Argentina related developments which resulted in an overstatement of after-tax income by $311 million in that quarter. No fine or penalty was imposed and no restatement of prior financial statements was required by the SEC. The defendants consented to the issuance of the Order without admitting or denying the Commission’s findings.
Auction Rate Securities
Several individual and putative class action lawsuits have been filed against CGM related to its marketing, sale and underwriting of auction rate securities (“ARS”). These lawsuits allege, among other things, violations of the
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federal securities laws, federal investment adviser laws and state common law. Several of the putative class action lawsuits have been consolidated in the Southern District of New York under the captionIn Re Citigroup Auction Rate securities Litigation.
On August 7, 2008, CGM reached an agreement in principle with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies regarding marketing and sale of auction rate securities. Among other things, by November 5, 2008, CGM agreed to purchase at par ARS that are not auctioning from all Citigroup individual investors, small institutions and charities that purchased ARS from Citigroup prior to February 11, 2008. CGM also agreed to pay a civil penalty to the New York Attorney General in the amount of $50 million, and a civil penalty to the states in the amount of $50 million.
In addition, the CGM, along with other industry participants, has received subpoenasand/or requests for information from various self regulatory agencies and federal governmental authorities including the SEC, which has issued a formal order of investigation into whether various provisions of the federal securities laws have been violated in connection with the sale of ARS. In addition, the CGM is responding to subpoenas from various state agencies, including those in New York, Texas and Massachusetts.
On May 20, 2008, an investor in Falcon Two, filed a putative class action complaint against Falcon Two and several Citigroup related entities, including CGM, among others, in the Southern District of New York, in an action captionedFerguson Family Trust v. Falcon.
CGM was named as a defendant inStrategies Two LLC, et al., a case alleging violations of the federal securities laws and Delaware state law in connection with a tender offer for interests in Falcon Two. On June 17, 2008, the Court denied plaintiff’s application for a preliminary injunction.
Several civil litigations have been filed against the CGM and related individuals and entities alleging violations of the federal securities laws and Delaware state law in connection with investments in MAT Five LLC. The putative class action lawsuits have been consolidated in the Southern District of New York under the captionIn re MAT Five Securities Litigation. Similar related actions have been filed in California, Delaware and New York state court. The CGM removed the New York state court action to federal court and currently is responding to a motion for a preliminary injunction filed in the Delaware Chancery Court action seeking to enjoin a tender offer interest in MAT Five LLC.
Item 1A. | Risk Factors |
There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report onForm 10-K for the fiscal year ended December 31, 2007 and under Part II, Item 1A “Risk Factors” in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.
In June 2008, several bills were proposed in the U.S. Congress in response to record energy and agricultural prices. Some of the pending legislation, if enacted, could limit trading by speculators in futures markets. Other potentially adverse regulatory initiatives could develop suddenly and without notice. At this time Management is unable to determine the potential impact on the Partnership.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
For the three months ended June 30, 2008 there were additional sales of 1,655.7989 Redeemable Units of Limited Partnership Interest totaling $1,588,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under section 4(2) of the Securities Act of 1933, as amended and section 506 of Regulation D promulgated thereunder. These units were purchased by accredited investors as defined in Regulation D.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options and forwards contracts at the Master level.
The following chart sets forth the purchases of Redeemable Units by the Partnership.
(d) Maximum Number | ||||||||||||||||||||
(or Approximate | ||||||||||||||||||||
(c) Total Number | Dollar Value) of | |||||||||||||||||||
(b) Average | of Redeemable Units | Redeemable Units that | ||||||||||||||||||
(a) Total Number | Price Paid | Purchased as Part | May Yet Be | |||||||||||||||||
of Redeemable | per Redeemable | of Publicly Announced | Purchased Under the | |||||||||||||||||
Period | Units Purchased* | Unit* | Plans or Programs | Plans or Programs | ||||||||||||||||
April 1, 2008 – April 30, 2008 | 1,221.3062 | $ | 950.16 | N/A | N/A | |||||||||||||||
May 1, 2008 – May 31, 2008 | 202.4520 | $ | 974.79 | N/A | N/A | |||||||||||||||
June 1, 2008 – June 30, 2008 | 3,198.5768 | $ | 1,005.44 | N/A | N/A | |||||||||||||||
4,622.3350 | $ | 989.49 | N/A | N/A | ||||||||||||||||
* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day.
Item 3. | Defaults Upon Senior Securities – None. |
Item 4. | Submission of Matters to a Vote of Security Holders – None. |
Item 5. | Other Information – None. |
Item 6. | Exhibits |
The exhibits required to be filed by Item 601 ofRegulation S-K are incorporated herein by reference to the exhibit index of the Partnership’s Annual Report onForm 10-K for the period ended December 31, 2007.
Exhibit – 31.1 –Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director)
Exhibit – 31.2 –Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director)
Exhibit – 32.1 – Section 1350 Certification (Certification of President and Director)
Exhibit – 32.2 – Section 1350 Certification (Certification of Chief Financial Officer and Director)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
By: | Citigroup Managed Futures LLC | |||
(General Partner) | ||||
By: | /s/ Jerry Pascucci | |||
Jerry Pascucci President and Director |
Date: August 14, 2008
By: | /s/ Jennifer Magro | |||
Jennifer Magro Chief Financial Officer and Director |
Date: August 14, 2008