FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2006
Commission File Number 000-51282
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 | (I.R.S. Employer | |||||
incorporation or organization) | Identification No.) | |||||
c/o Citigroup Managed Futures LLC
731 Lexington Ave. — 25th Floor
New York, New York 10022
(Address and Zip Code of principal executive offices)
(212) 559-2011
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes No X
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 March 31, 2006 and December 31, 2005 (unaudited). | 3 | |||||||||
Condensed Schedules of Investments at March 31, 2006 and December 31, 2005 (unaudited). | 4 – 5 | |||||||||
Statements of Income and Expenses and Partners' Capital for the three months ended March 31, 2006 and 2005 (unaudited) | 6 | |||||||||
Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited). | 7 | |||||||||
Notes to Financial Statements (unaudited). | 8 – 12 | |||||||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 13 – 15 | ||||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 16 | ||||||||
Item 4. | Controls and Procedures. | 17 | ||||||||
PART II - Other Information | 18 | |||||||||
2
PART I
Item 1. Financial Statements
Citigroup Fairfield Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
March 31, 2006 | December 31, 2005 | |||||||||
Assets: | ||||||||||
Equity in commodity futures trading account: | ||||||||||
Cash (restricted $9,088,209 and $4,363,860 in 2006 and 2005, respectively) | $ | 73,076,339 | $ | 77,422,488 | ||||||
Net unrealized appreciation on open futures positions | 1,990,365 | — | ||||||||
Unrealized appreciation on open forward contracts | 2,169,302 | 3,298,568 | ||||||||
77,236,006 | 80,721,056 | |||||||||
Interest receivable | 78,690 | 30,485 | ||||||||
$ | 77,314,696 | $ | 80,751,541 | |||||||
Liabilities and Partners' Capital: | ||||||||||
Liabilities: | ||||||||||
Net unrealized depreciation on open futures positions | $ | — | $ | 78,814 | ||||||
Unrealized depreciation on open forward contracts | 2,032,102 | 2,216,527 | ||||||||
Accrued expenses: | ||||||||||
Commissions | 282,311 | 299,840 | ||||||||
Management fees | 124,845 | 132,652 | ||||||||
Administrative fees | 31,211 | 33,163 | ||||||||
Other | 93,261 | 59,157 | ||||||||
Due to CGM for offering costs | 152 | 10,451 | ||||||||
Redemptions payable | 1,917,039 | 2,474,663 | ||||||||
4,480,921 | 5,305,267 | |||||||||
Partners' Capital: | ||||||||||
General Partner, 724.0407 Unit equivalents outstanding in 2006 and 2005 | 591,404 | 577,858 | ||||||||
Special Limited Partner, 100.0000 Redeemable Units of Limited Partnership Interest Outstanding in 2006 and 2005 | 81,681 | 79,803 | ||||||||
Limited Partners, 88,344.7426 and 93,717.1815 Redeemable Units of Limited Partnership Interest outstanding in 2006 and 2005, respectively | 72,160,690 | 74,788,613 | ||||||||
72,833,775 | 75,446,274 | |||||||||
$ | 77,314,696 | $ | 80,751,541 | |||||||
See Accompanying Notes to Financial Statements.
3
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
March 31, 2006
(Unaudited)
Futures Contracts Purchased | Fair Value | % of Partners' Capital | ||||||||
Energy | $ | 10,020 | 0.01 | % | ||||||
Grains | (4,600 | ) | (0.00) | * | ||||||
Interest Rates Non-U.S. | (1,301 | ) | (0.00) | * | ||||||
Indices | 202,045 | 0.28 | ||||||||
Livestock | 20,450 | 0.03 | ||||||||
Metals | 18,090 | 0.02 | ||||||||
Softs | (448 | ) | (0.00) | * | ||||||
Total futures contracts purchased | 244,256 | 0.34 | ||||||||
Futures Contracts Sold | ||||||||||
Energy | (45,691 | ) | (0.06 | ) | ||||||
Grains | (14,836 | ) | (0.02 | ) | ||||||
Interest Rates Non-U.S. | 1,010,725 | 1.39 | ||||||||
Interest Rates U.S. | 740,728 | 1.02 | ||||||||
Softs | 55,183 | 0.07 | ||||||||
Total futures contracts sold | 1,746,109 | 2.40 | ||||||||
Unrealized Appreciation on Forward Contracts | ||||||||||
Currencies | 1,590,925 | 2.18 | ||||||||
Metals | 578,377 | 0.79 | ||||||||
Total unrealized appreciation on forward contracts | 2,169,302 | 2.97 | ||||||||
Unrealized Depreciation on Forward Contracts | ||||||||||
Currencies | (1,542,954 | ) | (2.12 | ) | ||||||
Metals | (489,148 | ) | (0.67 | ) | ||||||
Total unrealized depreciation on forward contracts | (2,032,102 | ) | (2.79 | ) | ||||||
Total Fair Value | $ | 2,127,565 | 2.92 | % | ||||||
Percentages are based on Partners' capital unless otherwise indicated
* Due to Rounding
See Accompanying Notes to Financial Statements.
4
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2005
(Unaudited)
Futures Contracts Purchased | Fair Value | % of Partners' Capital | ||||||||
Grains | $ | (1,063 | ) | (0.00) | %* | |||||
Interest Rates Non-U.S. | 90,201 | 0.12 | ||||||||
Interest Rates U.S. | (34,076 | ) | (0.05 | ) | ||||||
Indices | 25,032 | 0.03 | ||||||||
Livestock | (6,181 | ) | (0.01 | ) | ||||||
Metals | (8,050 | ) | (0.01 | ) | ||||||
Softs | 35,291 | 0.05 | ||||||||
Total futures contracts purchased | 101,154 | 0.13 | ||||||||
Futures Contracts Sold | ||||||||||
Energy | 14,530 | 0.02 | ||||||||
Grains | (26,835 | ) | (0.04 | ) | ||||||
Indices | 6,272 | 0.01 | ||||||||
Interest Rates Non-U.S. | 13,507 | 0.02 | ||||||||
Interest Rates U.S. | (94,103 | ) | (0.13 | ) | ||||||
Softs | (93,339 | ) | (0.12 | ) | ||||||
Total futures contracts sold | (179,968 | ) | (0.24 | ) | ||||||
Unrealized Appreciation on Forward Contracts | ||||||||||
Currencies | 1,104,499 | 1.46 | ||||||||
Metals | 2,194,069 | 2.91 | ||||||||
Total unrealized appreciation on forward contracts | 3,298,568 | 4.37 | ||||||||
Unrealized Depreciation on Forward Contracts | ||||||||||
Currencies | (749,945 | ) | (0.99 | ) | ||||||
Metals | (1,466,582 | ) | (1.94 | ) | ||||||
Total unrealized depreciation on forward contracts | (2,216,527 | ) | (2.93 | ) | ||||||
Total Fair Value | $ | 1,003,227 | 1.33 | % | ||||||
Percentages are based on Partners' capital unless otherwise indicated
* | Due to Rounding |
See Accompanying Notes to Financial Statements.
5
Citigroup Fairfield Futures Fund L.P. II
Statements of Income and Expenses and Partners' Capital
(Unaudited)
Three Months Ended March 31, | ||||||||||
2006 | 2005 | |||||||||
Income: | ||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||
Realized gains (losses) on closed positions | $ | 1,346,399 | $ | (3,172,846 | ) | |||||
Change in unrealized gains (losses) on open positions | 1,124,338 | (3,883,308 | ) | |||||||
2,470,737 | (7,056,154 | ) | ||||||||
Interest income | 648,202 | 377,785 | ||||||||
3,118,939 | (6,678,369 | ) | ||||||||
Expenses: | ||||||||||
Brokerage commissions including clearing fees of $24,664 and $13,997, respectively | 897,164 | 991,086 | ||||||||
Management fees | 375,307 | 401,584 | ||||||||
Administrative fees | 93,827 | 100,396 | ||||||||
Other | 34,173 | 36,255 | ||||||||
1,400,471 | 1,529,321 | |||||||||
Net income (loss) | 1,718,468 | (8,207,690 | ) | |||||||
Additions – Limited Partners | 2,636,000 | 9,040,000 | ||||||||
Redemptions – Limited Partners | (6,966,967 | ) | (2,740,947 | ) | ||||||
Net decrease in Partners' capital | (2,612,499 | ) | (1,908,637 | ) | ||||||
Partners' capital, beginning of period | 75,446,274 | 81,709,052 | ||||||||
Partners' capital, end of period | $ | 72,833,775 | $ | 79,800,415 | ||||||
Net asset value per Redeemable Unit (89,168.7833 and 96,955.5183 Redeemable Units outstanding at March 31, 2006 and 2005, respectively) | $ | 816.81 | $ | 822.72 | ||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent | $ | 18.78 | $ | (84.92 | ) | |||||
Redemption/Subscription value per Redeemable Unit | $ | 816.81 | $ | 823.10 | ||||||
See Accompanying Notes to Financial Statements.
6
Citigroup Fairfield Futures Fund L.P. II
Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||||
2006 | 2005 | |||||||||
Cash flows from operating activities: | ||||||||||
Net income (loss) | $ | 1,718,468 | $ | (8,207,690 | ) | |||||
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 | (4,724,349 | ) | 3,575,925 | |||||||
(Increase) decrease in net unrealized appreciation on open futures positions | (1,990,365 | ) | 1,408,251 | |||||||
(Increase) decrease in unrealized appreciation on open forward contracts | 1,129,266 | 2,467,066 | ||||||||
(Increase) decrease in interest receivable | (48,205 | ) | (37,242 | ) | ||||||
Increase (decrease) in net unrealized depreciation on open futures positions | (78,814 | ) | 546,252 | |||||||
Increase (decrease) in unrealized depreciation on open forward contracts | (184,425 | ) | (538,261 | ) | ||||||
Accrued expenses: | ||||||||||
Increase (decrease) in commissions | (17,529 | ) | (9,268 | ) | ||||||
Increase (decrease) in management fees | (7,807 | ) | (4,167 | ) | ||||||
Increase (decrease) in administrative fees | (1,952 | ) | (1,041 | ) | ||||||
Increase (decrease) in due to CGM | (10,299 | ) | (8,440 | ) | ||||||
Increase (decrease) in other | 34,104 | 35,802 | ||||||||
Net cash provided by (used in) operating activities | (4,181,907 | ) | (772,813 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Proceeds from additions – Limited Partners | 2,636,000 | 9,040,000 | ||||||||
Payments for redemptions – Limited Partners | (7,524,591 | ) | (3,499,425 | ) | ||||||
Net cash provided by (used in) Financing activities | (4,888,591 | ) | 5,540,575 | |||||||
Net change in Cash | (9,070,498 | ) | 4,767,762 | |||||||
Unrestricted cash, at beginning of period | 73,058,628 | 70,799,002 | ||||||||
Unrestricted cash, at end of period | $ | 63,988,130 | $ | 75,566,764 | ||||||
See Accompanying Notes to Financial Statements.
7
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2006
(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 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 acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Citigroup Global Markets Inc. ("CGM"), CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. As of March 31, 2006, all trading decisions for the Partnership are made by Graham Capital Management, L.P. (the "Advisor").
The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership's financial condition at March 31, 2006 and December 31, 2005 and the results of its operations and cash flows for the three months ended March 31, 2006 and 2005. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership's Annual Report for the year ended December 31, 2005.
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.
8
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2006
(Unaudited)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three months ended March 31, 2006 and 2005 were as follows:
Three Months Ended March 31, | ||||||||||
2006 | 2005 | |||||||||
Net realized and unrealized gains (losses)* | $ | 17.22 | $ | (84.22 | ) | |||||
Interest income | 6.96 | 3.94 | ||||||||
Expenses ** | (5.40 | ) | (4.64 | ) | ||||||
Increase (decrease) for the period | 18.78 | (84.92 | ) | |||||||
Net Asset Value per Redeemable Unit, beginning of period | 798.03 | 907.64 | ||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 816.81 | $ | 822.72 | ||||||
Redemption/subscription value per Redeemable Unit versus Net Asset value per Redeemable Unit | 0.00 | **** | 0.38 | |||||||
Redemption/subscription value per Redeemable Unit, end of period*** | $ | 816.81 | $ | 823.10 | ||||||
* | Includes brokerage commissions. |
** | Excludes brokerage commissions. |
*** | For the purpose of a redemption/subscription, any remaining accrued liability for reimbursement of offering costs will not reduce redemption/subscription net asset value. |
**** | Due to rounding. |
9
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2006
(Unaudited)
2. Financial Highlights (continued):
Three Months Ended March 31, | ||||||||||
2006 | 2005 | |||||||||
Ratio to average net assets:* | ||||||||||
Net investment loss before incentive fees** | (4.2 | )% | (5.8 | )% | ||||||
Operating expenses | 7.8 | % | 7.7 | % | ||||||
Incentive fees | — | % | — | % | ||||||
Total expenses | 7.8 | % | 7.7 | % | ||||||
Total return: | ||||||||||
Total return before incentive fees | 2.4 | % | (9.4 | )% | ||||||
Incentive fees | — | % | — | % | ||||||
Total return after incentive fees | 2.4 | % | (9.4) | % | ||||||
* | Annualized (other than incentive fees) |
** | Interest income less total expenses (exclusive of incentive fees) |
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.
10
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2006
(Unaudited)
3. Offering Costs:
Offering and organization costs of $75,000 relating to the issuance and marketing of the partnership's Redeemable Units offered were initially paid by CGM. These costs have been recorded as due to CGM in the statement of financial condition. These costs are being reimbursed to CGM by the Partnership in 24 equal monthly installments (together with interest at the prime rate quoted by the JP Morgan Chase & Co.).
As of March 31, 2006, $74,848 of these costs have been reimbursed to CGM by the Partnership.
In addition, the Partnership has recorded interest expense of $0 and $2,365 for March 31, 2006 and 2005, respectively which is included in other expenses.
The remaining deferred liability for these costs due to CGM of $152 (exclusive of interest charges) will not reduce Net Asset Value per Redeemable Unit for any purpose (other than financial reporting), including calculation of advisory and brokerage fees and the redemption/subscription value of Redeemable Units.
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 Statements of Income and Expenses and Partners' Capital and are discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The Customer Agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures positions.
All of the commodity interests owned by the Partnership are held for trading purposes. The average fair values of these interests during the three months ended March 31, 2006 and December 31, 2005, based on a monthly calculation, were $1,124,342 and $395,806, respectively. The fair values of these commodity interests, including options thereon, if applicable, at March 31, 2006 and December 31, 2005, were $2,127,565 and $1,003,227, 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 calculations approved by the General Partner.
5. Financial Instrument Risks:
In the normal course of its business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain 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.
11
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2006
(Unaudited)
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized as unrealized appreciation in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's assets is CGM.
The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of March 31, 2006. However, due to the nature of the Partnership's business, these instruments may not be held to maturity.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash, net unrealized appreciation (depreciation) on open futures and forward contracts and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a substantial decrease in liquidity, no such losses occurred in the first quarter of 2006.
The Partnership's capital consists of capital contributions, as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading and expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
For the three months ended March 31, 2006, Partnership capital decreased 3.5% from $75,446,274 to $72,833,775. This decrease was attributable to the redemption of 8,676.3073 Redeemable Units of Limited Partnership Interest totaling $6,966,967, which was partially offset by a net income from operations of $1,718,468 coupled with the addition of 3,303.8684 Redeemable Units totalling $2,636,000, Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statements of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on open positions are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the statements of financial condition. Realized gains (losses) and changes in unrealized values 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.
Results of Operations
During the Partnership's first quarter of 2006 the net asset value per Redeemable unit increased 2.4% from $798.03 to $816.81 as compared to a decrease of 9.4% in the first quarter of 2005. The Partnership experienced a net trading gain before brokerage commissions and related fees in the first quarter of 2006 of $2,470,737. Gains were primarily attributable to the trading of commodity futures in U.S. and non-U.S. interest rates, livestock, metals and indices partially offset by losses in currencies, energy, grains, and softs. The Partnership experienced a net trading loss before brokerage commissions and related fees in the first quarter of 2005 of $7,056,154. Losses were primarily attributable to the trading of commodity futures in currencies, energy, grains, U.S. and non-U.S. interest rates, livestock, metals and indices and were partially offset by gains in softs.
13
The main drivers of performance in the first quarter 2006 were trending markets in stock indices and interest rates that were conducive to the Advisor's trading program.
Global political instability, rising energy and the prices of industrial commodities combined with further increase from the U.S. Federal Reserve pushed U.S. and global interest rates higher throughout the quarter. The Partnership's Advisor profited with short positions in many of these markets.
Counterintuitive to traditional market reaction to higher interest rates, global stock markets advanced as corporate earnings reports for full year 2005 met or exceeded expectations and consumer spending remained high despite increased energy prices and interest rates. The Partnership's Advisor was properly positioned to take advantage of these trends. The results from energy trading was negative with profits made in natural gas offset by losses in crude oil trading.
Reducing gains for the partnership were losses in foreign currency and agricultural markets. The U.S. dollar remained in a trading pattern for most of the quarter with its' value versus both the Euro and yen rising and falling within a range that resulted in losses for those advisors whose trading systems tend to be longer term in nature. Trading results in grains and softs were inconsequential for the quarter.
Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily average equity maintained in cash was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Partnership's assets in cash and/or place all of the Partnership's assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills. Interest income for the three months ended March 31, 2006 increased by $270,417, as compared to the corresponding period in 2005. The increase in interest income is primarily due to higher interest rates during the three months ended March 31, 2006 as compared to the corresponding period in 2005.
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. Commissions and fees for the three months ended March 31, 2006 decreased by $93,922, as compared to the corresponding period in 2005. The decrease in brokerage commissions is due to lower month-end net assets during the three months ended March 31, 2006 as compared to the corresponding period in 2005.
Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three months ended March 31, 2006 decreased by $26,277 as compared to the three months March 31, 2005. The decrease in management fees is due to lower month-end net assets during the three March 31, 2006 as compared to the corresponding period in 2005.
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 net asset value as of the end of each month and are affected by trading performance and redemptions. Administrative fees for the three months ended March 31, 2006 decreased by $6,569 as compared to the corresponding period in 2005. The decrease in administrative fees is due to lower month-end net assets during the three months ended March 31, 2006 as compared to the corresponding period in 2005.
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Special Limited Partner profit share allocations (incentive fees) are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. There were no profit share allocations earned for the three months ended March 31, 2006 or 2005.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.
The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of March 31, 2006, and the highest, lowest and average values during the three months ended March 31, 2006. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of March 31, 2006, the Partnership's total capitalization was $72,833,775. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2005.
March 31, 2006
(Unaudited)
Three months ended March 31, 2006 | ||||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||||
Currencies | ||||||||||||||||||||||
– OTC | $ | 948,362 | 1.30 | % | $ | 2,175,558 | $ | 298,020 | $ | 1,041,070 | ||||||||||||
Energy | 132,400 | 0.18 | % | 843,025 | 51,425 | 113,242 | ||||||||||||||||
Grains | 24,035 | 0.03 | % | 80,250 | 6,300 | 21,074 | ||||||||||||||||
Indices | 3,380,356 | 4.64 | % | 5,410,046 | 1,585,403 | 2,749,204 | ||||||||||||||||
Interest Rates Non-U.S. | 2,239,716 | 3.08 | % | 2,239,716 | 145,145 | 1,044,307 | ||||||||||||||||
Interest Rates U.S. | 1,187,700 | 1.63 | % | 1,187,700 | 90,833 | 593,760 | ||||||||||||||||
Livestock | 21,400 | 0.03 | % | 21,400 | 5,600 | 7,133 | ||||||||||||||||
Metals | ||||||||||||||||||||||
– Exchange Traded Contracts | 29,750 | 0.04 | % | 126,000 | 3,000 | 25,083 | ||||||||||||||||
– OTC | 123,450 | 0.17 | % | 1,490,421 | 6,048 | 76,947 | ||||||||||||||||
Softs | 65,309 | 0.09 | % | 132,342 | 29,000 | 75,054 | ||||||||||||||||
Total | $ | 8,152,478 | 11.19 | % | ||||||||||||||||||
* | Average of month-end Values at Risk |
** | Due to rounding |
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Item 4. Controls and Procedures
The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) with respect to the Partnership as of the end of the period considered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls during the registrant's last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth under Part 1, Item 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the period ended December 31, 2005.
WorldCom, Inc.
In March 2006, the class action settlement in IN RE WORLDCOM, INC. SECURITIES LITIGATION became final, and the settlement amount was paid pursuant to the terms of the settlement agreement.
Research
On March 29, 2006, the court preliminarily approved Citigroup's settlement of IN RE SALOMON ANALYST AT&T LITIGATION. A final hearing on the settlement is scheduled for August 11, 2006.
IPO Antitrust Litigation
The underwriter defendants' motion in the Second Circuit to stay the issuance of the mandate remanding the cases to the district court pending the filing of a petition for writ of certiorari to the United States Supreme Court was granted on March 9, 2006, after the writ of certiorari was filed on March 8, 2006.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended March 31, 2006 there were additional sales of 3,303.8684 Redeemable Units of Limited Partnership totaling $2,636,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under section 4(2) of the Securities Act of 1933, as amended and section 506 of Regulation D promulgated thereunder.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options and forwards contracts.
The following chart sets forth the purchases of Redeemable Units by the Partnership.
Period | (a) Total Number of Shares (or Units) Purchased* | (b) Average Price Paid per Share (or Unit)** | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||
January 1, 2006 – January 31, 2006 | 3,797.6380 | $798.89 | N/A | N/A | ||||||||||||||
February 1, 2006 – February 28, 2006 | 2,531.6865 | $796.32 | N/A | N/A | ||||||||||||||
March 1, 2006 – March 31, 2006 | 2,346.9828 | $816.81 | N/A | N/A | ||||||||||||||
Total | 8,676.3073 | $804.01 | 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 |
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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 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the period ended December 31, 2005. |
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/ David J. Vogel | |||||||||
David J. Vogel, President and Director | ||||||||||
Date: | May 12, 2006 | |||||||||
By: | /s/ Daniel R. McAuliffe, Jr. | |||||||||
Daniel R. McAuliffe, Jr. Chief Financial Officer and Director | ||||||||||
Date: | May 12, 2006 | |||||||||
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