UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 2007
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
As of April 30, 2007, 77,162.8185 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 March 31, 2007 and December 31, 2006 (unaudited) | 3 | |||||
Statements of Income and Expenses and Partners’ Capital for the three months ended March 31, 2007 and 2006 (unaudited) | 4 | |||||
Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited) | 5 | |||||
Notes to Financial Statements, including the Financial Statements of CMF Graham Master Fund L.P. (unaudited) | 6 – 15 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 – 18 | ||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 19 | ||||
Item 4. | Controls and Procedures | 20 | ||||
PART II - Other Information | 21 | |||||
2
PART I
Item 1. Financial Statements
Citigroup Fairfield Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
March 31, 2007 | December 31, 2006 | |||||||||||
Assets: | ||||||||||||
Investment in Master, at fair value | $ | 58,294,445 | $ | 68,415,732 | ||||||||
Cash | 140,611 | 85,324 | ||||||||||
$ | 58,435,056 | $ | 68,501,056 | |||||||||
Liabilities and Partners’ Capital: | ||||||||||||
Liabilities: | ||||||||||||
Accrued expenses: | ||||||||||||
Brokerage commissions | 219,131 | 256,879 | ||||||||||
Management fees | 96,927 | 113,694 | ||||||||||
Administrative fees | 24,232 | 28,424 | ||||||||||
Other | 59,607 | 27,707 | ||||||||||
Redemptions payable | 1,259,477 | 6,542,911 | ||||||||||
1,659,374 | 6,969,615 | |||||||||||
Partners’ Capital: | ||||||||||||
General Partner, 724.0407 Unit equivalents outstanding in 2007 and 2006 | 524,415 | 574,541 | ||||||||||
Special Limited Partner, 100.0000 Redeemable Units of Limited Partnership Interest outstanding in 2007 and 2006 | 72,429 | 79,352 | ||||||||||
Limited Partners, 77,564.3702 and 76,718.2552 Redeemable Units of Limited Partnership Interest outstanding in 2007 and 2006, respectively | 56,178,838 | 60,877,548 | ||||||||||
56,775,682 | 61,531,441 | |||||||||||
$ | 58,435,056 | $ | 68,501,056 | |||||||||
See accompanying notes to financial statements.
3
Citigroup Fairfield Futures Fund L.P. II
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Three Months Ended March 31, | ||||||||||||
2007 | 2006 | |||||||||||
Income: | ||||||||||||
Realized losses on closed positions allocated from Master | $ | (3,435,782 | ) | $ | — | |||||||
Change in unrealized losses on open positions allocated from Master | (1,447,772 | ) | — | |||||||||
Interest income allocated from Master | 598,883 | — | ||||||||||
Expenses allocated from Master | (54,781 | ) | — | |||||||||
Net gains (losses) on trading of commodity futures: | ||||||||||||
Realized gains (losses) on closed positions | — | 1,346,399 | ||||||||||
Change in unrealized gains on open positions | — | 1,124,338 | ||||||||||
(4,339,452 | ) | 2,470,737 | ||||||||||
Interest income | — | 648,202 | ||||||||||
(4,339,452 | ) | 3,118,939 | ||||||||||
Expenses: | ||||||||||||
Brokerage commissions including clearing fees of $0 and $24,664, respectively | 669,813 | 897,164 | ||||||||||
Management fees | 296,098 | 375,307 | ||||||||||
Administrative fees | 74,024 | 93,827 | ||||||||||
Other | 47,818 | 34,173 | ||||||||||
1,087,753 | 1,400,471 | |||||||||||
Net income (loss) | (5,427,205 | ) | 1,718,468 | |||||||||
Additions – Limited Partners | 4,880,000 | 2,636,000 | ||||||||||
Redemptions – Limited Partners | (4,208,554 | ) | (6,966,967 | ) | ||||||||
Net decrease in Partners’ Capital | (4,755,759 | ) | (2,612,499 | ) | ||||||||
Partners’ Capital, beginning of period | 61,531,441 | 75,446,274 | ||||||||||
Partners’ Capital, end of period | $ | 56,775,682 | $ | 72,833,775 | ||||||||
Net Asset Value per Redeemable Unit (78,388.4109 and 89,168.7833 Redeemable Units outstanding at March 31, 2007 and 2006, respectively) | $ | 724.29 | $ | 816.81 | ||||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent | $ | (69.23 | ) | $ | 18.78 | |||||||
Redemption/Subscription value per Redeemable Unit | $ | 724.29 | $ | 816.81 | ||||||||
See accompanying notes to financial statements.
4
Citigroup Fairfield Futures Fund L.P. II
Statements of Cash Flow
(Unaudited)
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2007 | 2006 | |||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | (5,427,205 | ) | $ | 1,718,468 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Purchase of investment in Master | (4,880,000 | ) | — | |||||||||
Proceeds from sale of investment in Master | 10,661,835 | — | ||||||||||
Net unrealized (appreciation) depreciation on investment in Master | 4,339,452 | — | ||||||||||
(Increase) decrease in restricted cash | — | (4,724,349 | ) | |||||||||
(Increase) decrease in net unrealized appreciation on open futures positions | — | (1,990,365 | ) | |||||||||
(Increase) decrease in unrealized appreciation on open forward contracts | — | 1,129,266 | ||||||||||
(Increase) decrease in interest receivable | — | (48,205 | ) | |||||||||
Increase (decrease) in net unrealized depreciation on open futures positions | — | (78,814 | ) | |||||||||
Increase (decrease) in unrealized depreciation on open forward contracts | — | (184,425 | ) | |||||||||
Accrued expenses: | ||||||||||||
Increase (decrease) in brokerage commissions | (37,748 | ) | (17,529 | ) | ||||||||
Increase (decrease) in management fees | (16,767 | ) | (7,807 | ) | ||||||||
Increase (decrease) in administrative fees | (4,192 | ) | (1,952 | ) | ||||||||
Increase (decrease) in due to CGM | — | (10,299 | ) | |||||||||
Increase (decrease) in other | 31,900 | 34,104 | ||||||||||
Net cash provided by (used in) operating activities | 4,667,275 | (4,181,907 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from additions – Limited Partners | 4,880,000 | 2,636,000 | ||||||||||
Payments for redemptions – Limited Partners | (9,491,988 | ) | (7,524,591 | ) | ||||||||
Net cash provided by (used in) financing activities | (4,611,988 | ) | (4,888,591 | ) | ||||||||
Net change in cash | 55,287 | (9,070,498 | ) | |||||||||
Cash, at beginning of period | 85,324 | 73,058,628 | ||||||||||
Cash, at end of period | $ | 140,611 | $ | 63,988,130 | ||||||||
See accompanying notes to financial statements.
5
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(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, 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 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 by Graham Capital Management L.P. (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. 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 in vestors as a result of the investment in the Master are approximately the same and redemption rights are not affected.
As of March 31, 2007, the Partnership owned approximately 29.4% of the Master. As of December 31, 2006, the Partnership owned approximately 30.1% 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, Condensed 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 presentation of the Partnership’s financial condition at March 31, 2007 and December 31, 2006 and the results of its operations and cash flows for the three months ended March 31, 2007 and 2006. 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 on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2006.
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.
Certain prior periods have been reclassified to conform to current period presentation.
6
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
CMF Graham Capital Master Fund L.P.
Statement of Financial Condition
(Unaudited)
March 31, 2007 | December 31, 2006 | ||||||||||
Assets: | |||||||||||
Equity in commodity futures trading account: | |||||||||||
Cash (restricted $25,610,547 and $50,059,681 in 2007 and 2006, respectively) | $ | 195,909,376 | $ | 219,754,941 | |||||||
Net unrealized appreciation on open futures positions | 1,388,659 | 3,678,200 | |||||||||
Unrealized appreciation on open forward contracts | 4,785,628 | 5,812,534 | |||||||||
202,083,663 | 229,245,675 | ||||||||||
Interest receivable | 698,842 | 736,340 | |||||||||
$ | 202,782,505 | $ | 229,982,015 | ||||||||
Liabilities and Partners’ Capital: | |||||||||||
Liabilities: | |||||||||||
Unrealized depreciation on open forward contracts | $ | 4,708,608 | $ | 2,555,481 | |||||||
Accrued expenses: | |||||||||||
Professional fees | 25,483 | 16,678 | |||||||||
Distribution payable | 698,842 | 736,340 | |||||||||
5,432,933 | 3,308,499 | ||||||||||
Partners’ Capital: | |||||||||||
Limited Partners’ Capital, 215,411.7489 and 227,674.0725 Redeemable Units of Limited Partnership outstanding | 197,349,572 | 226,673,516 | |||||||||
$ | 202,782,505 | $ | 229,982,015 | ||||||||
7
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
March 31, 2007
(Unaudited)
CMF Graham Capital Master Fund L.P.
Condensed Schedule of Investments
March 31, 2007
(Unaudited)
Fair Value | % of Partners’ Capital | |||||||||||
Futures Contracts Purchased | ||||||||||||
Grains | $ | (26,351 | ) | (0.01 | )% | |||||||
Indices | 31,090 | 0.02 | ||||||||||
Interest Rates U.S. | (75,657 | ) | (0.04 | ) | ||||||||
Interest Rates Non-U.S. | (13,701 | ) | (0.01 | ) | ||||||||
Metals | (3,510 | ) | (0.00 | )* | ||||||||
Softs | 117,566 | 0.06 | ||||||||||
Total futures contracts purchased | 29,437 | 0.02 | ||||||||||
Futures Contracts Sold | ||||||||||||
Energy | (554,525 | ) | (0.28 | ) | ||||||||
Grains | 31,925 | 0.01 | ||||||||||
Indices | 42,066 | 0.02 | ||||||||||
Interest Rates U.S. | 759 | 0.00 | * | |||||||||
Interest Rates Non-U.S. | 1,782,752 | 0.90 | ||||||||||
Softs | 56,245 | 0.03 | ||||||||||
Total futures contracts sold | 1,359,222 | 0.68 | ||||||||||
Unrealized Appreciation on Forward Contracts | ||||||||||||
Currencies | 4,574,838 | 2.32 | ||||||||||
Metals | 210,790 | 0.11 | ||||||||||
Total unrealized appreciation on forward contracts | 4,785,628 | 2.43 | ||||||||||
Unrealized Depreciation on Forward Contracts | ||||||||||||
Currencies | (4,116,823 | ) | (2.09 | ) | ||||||||
Metals | (591,785 | ) | (0.30 | ) | ||||||||
Total unrealized depreciation on forward contracts | (4,708,608 | ) | (2.39 | ) | ||||||||
Total fair value | $ | 1,465,679 | 0.74 | % | ||||||||
Percentages are based on Partners’ Capital of the Master unless otherwise indicated.
* Due to rounding.
8
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
March 31, 2007
(Unaudited)
CMF Graham Capital Master Fund L.P.
Condensed Schedule of Investments
December 31, 2006
(unaudited)
Fair Value | % of Partners’ Capital | |||||||||||
Futures Contracts Purchased | ||||||||||||
Grains | $ | 34,445 | 0.02 | % | ||||||||
Indices | 1,926,352 | 0.85 | ||||||||||
Interest Rates U.S. | (722,446 | ) | (0.32 | ) | ||||||||
Interest Rates Non-U.S. | (372,521 | ) | (0.16 | ) | ||||||||
Metals | 8,100 | 0.00 | * | |||||||||
Softs | 91,256 | 0.04 | ||||||||||
Total futures contracts purchased | 965,186 | 0.43 | ||||||||||
Futures Contracts Sold | ||||||||||||
Energy | 584,478 | 0.26 | ||||||||||
Indices | (368,680 | ) | (0.16 | ) | ||||||||
Interest Rates U.S. | 9,990 | 0.00 | * | |||||||||
Interest Rates Non-U.S. | 2,686,771 | 1.19 | ||||||||||
Softs | (199,545 | ) | (0.09 | ) | ||||||||
Total futures contracts sold | 2,713,014 | 1.20 | ||||||||||
Unrealized Appreciation on Forward Contracts | ||||||||||||
Currencies | 5,782,021 | 2.55 | ||||||||||
Metals | 30,513 | 0.01 | ||||||||||
Total unrealized appreciation on forward contracts | 5,812,534 | 2.56 | ||||||||||
Unrealized Depreciation on Forward Contracts | ||||||||||||
Currencies | (2,422,725 | ) | (1.07 | ) | ||||||||
Metals | (132,756 | ) | (0.06 | ) | ||||||||
Total unrealized depreciation on forward contracts | (2,555,481 | ) | (1.13 | ) | ||||||||
Total fair value | $ | 6,935,253 | 3.06 | % | ||||||||
Percentages are based on Partners’ Capital unless otherwise indicated
* Due to rounding
9
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
CMF Graham Capital Master Fund L.P.
Statements of Income and Expenses and Partners’ Capital
(Unaudited)
Three Months Ended March 31, | ||||||
2007 | ||||||
Income: | ||||||
Net losses on trading of commodity interests: | ||||||
Realized losses on closed positions | $ | (11,614,823 | ) | |||
Change in unrealized losses on open positions | (5,469,575 | ) | ||||
(17,084,398 | ) | |||||
Interest income | 2,099,671 | |||||
(14,984,727 | ) | |||||
Expenses: | ||||||
Brokerage commissions including clearing fees of $60,897 | 180,689 | |||||
Professional fees | 10,255 | |||||
190,944 | ||||||
Net loss | (15,175,671 | ) | ||||
Additions – Limited Partners | 7,915,180 | |||||
Redemptions − Limited Partners | (19,963,782 | ) | ||||
Distribution of interest income to feeders funds | (2,099,671 | ) | ||||
Net decrease in Partners’ Capital | (29,323,944 | ) | ||||
Partners’ Capital, beginning of period | 226,673,516 | |||||
Partners’ Capital, end of period | $ | 197,349,572 | ||||
Net Asset Value per Redeemable Unit (215,411.7489 Redeemable Units outstanding at March 31, 2007) | $ | 916.15 | ||||
Net loss per Redeemable Unit of Limited Partnership Interest | $ | (69.82 | ) | |||
10
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
CMF Graham Capital Master Fund L.P.
Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||
2007 | ||||||
Cash flows from operating activities: | ||||||
Net loss | $ | (15,175,671 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||
Changes in operating assets and liabilities: | ||||||
(Increase) decrease in restricted cash | 24,449,134 | |||||
(Increase) decrease in net unrealized appreciation on open futures positions | 2,289,541 | |||||
(Increase) decrease in unrealized appreciation on open forward contracts | 1,026,906 | |||||
(Increase) decrease in interest receivable | 37,498 | |||||
Increase (decrease) in unrealized depreciation on open forward contracts | 2,153,127 | |||||
Accrued expenses: | ||||||
Increase (decrease) in professional fees | 8,805 | |||||
Net cash provided by (used in) operating activities | 14,789,340 | |||||
Cash flows from financing activities: | ||||||
Proceeds from additions – Limited Partners | 7,915,180 | |||||
Payments for redemptions − Limited Partners | (19,963,782 | ) | ||||
Distribution of interest income to feeder funds | (2,137,169 | ) | ||||
Net cash provided by (used in) financing activities | (14,185,771 | ) | ||||
Net change in unrestricted cash | 603,569 | |||||
Unrestricted cash, at beginning of period | 169,695,260 | |||||
Unrestricted cash, at end of period | $ | 170,298,829 | ||||
11
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit for the three months ended March 31, 2007 and 2006 were as follows:
Three Months Ended March 31, | ||||||||||||
2007 | 2006 | |||||||||||
Net realized and unrealized gains (losses)* | $ | (71.49 | ) | $ | 17.22 | |||||||
Interest income | 7.62 | 6.96 | ||||||||||
Expenses** | (5.36 | ) | (5.40 | ) | ||||||||
Increase (decrease) for the period | (69.23 | ) | 18.78 | |||||||||
Net Asset Value per Redeemable Unit, beginning of period | 793.52 | 798.03 | ||||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 724.29 | $ | 816.81 | ||||||||
Redemption/Subscription value per Redeemable Unit versus Net Asset Value per Redeemable Unit | — | 0.00 | **** | |||||||||
Redemption/Subscription value per Redeemable Unit, end of period*** | $ | 724.29 | $ | 816.81 | ||||||||
* | Includes Partnership brokerage commissions and expenses allocated from the Master. |
** | Excludes Partnership brokerage commissions and expenses allocated from the Master. |
*** | For the purpose of a Redemption/Subscription, any remaining accrued liability for reimbursement of offering costs will not reduce Redemption/Subscription value per Redeemable Unit. |
**** | Due to rounding |
Ratios to average net assets:***** | ||||||||||||
Net investment loss before incentive fees****** | (3.5 | )% | (4.2 | )% | ||||||||
Operating expenses | 7.8 | % | 7.8 | % | ||||||||
Total return | (8.7 | )% | 2.4 | % | ||||||||
***** | Annualized |
****** | 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
March 31, 2007
(Unaudited)
2. Financial Highlights (continued):
Financial Highlights of the Master:
Three Months Ended March 31, | ||||||
2007 | ||||||
Net realized and unrealized losses* | $ | (79.41 | ) | |||
Interest income | 9.64 | |||||
Expenses** | (0.05 | ) | ||||
Decrease for the period | (69.82 | ) | ||||
Distributions | (9.64 | ) | ||||
Net Asset Value per Unit, beginning of period | 995.61 | |||||
Net Asset Value per Unit, end of period | $ | 916.15 | ||||
*Includes brokerage commissions | ||||||
**Excludes brokerage commissions | ||||||
Ratios to average net assets:*** | ||||||
Net investment gain **** | 3.7 | % | ||||
Operating expenses | 0.4 | % | ||||
Total return | (7.0 | )% | ||||
*** | Annualized |
**** | Interest income less total expenses |
The above ratios may vary for individual investors based on the timing of capital transactions during the period.
13
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
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 and are discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The respective 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 previously owned by the Partnership were held for trading purposes. The average fair values of these interests during the three and twelve months ended March 31, 2007 and December 31, 2006, based on a monthly calculation, were $0 and $504,239, respectively. All of the commodity interests owned by the Master for the three months ended March 31, 2007 are held for trading purposes. The average fair value during the three and twelve months ended March 31, 2007 and December 31, 2006 were $(2,645,681) and $1,197,907, respectively. The fair values of these commodity interests, including options thereon, if applicable at March 31, 2007 and December 31, 2006 were $1,465,679 and $6,935,253, 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 bas ed on other measures of fair value deemed appropriate by the General Partner.
4. Financial Instrument Risks:
In the normal course of its business, the Partnership either directly or 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 be tween 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 Partnership/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.
14
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
March 31, 2007
(Unaudited)
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/Master’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, 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.
The General Partner monitors and controls the Partnership’s/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 Partnership/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 March 31, 2007. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only assets are its investment in the Master, and cash. The Master does not engage in the sale 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 substantial decrease in liquidity, no such losses occurred in the first quarter of 2007.
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 three months ended March 31, 2007, Partnership’s capital decreased 7.7% from $61,531,441 to $56,775,682. This decrease was attributable to the redemption of 5,623.2218 Redeemable Units of Limited Partnership Interest totaling $4,208,554, coupled with a net loss from operations of $5,427,205 which was partially offset by the addition of 6,469.3368 Redeemable Units of Limited Partnership Interest totaling $4,880,000. 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 realized and/or unrealized gains or losses on commodity futures trading, expenses, interest income, redemptions of units and distribution of profits, if any.
For the three months ended March 31, 2007, the Master’s capital decreased 12.9% from $226,673,516 to $197,349,572. This decrease was attributable to the redemption of 10,194.5019 Redeemable Units of Limited Partnership Interest totaling $19,963,782, coupled with a net loss from operations of $15,175,671 which was partially offset by the addition of 8,353.1933 Redeemable Units of Limited Partnership Interest totaling $7,915,180 and distribution of interest totaling $2,099,671 to the limited partners of the Master. Future redemptions can impact the funds available for investments in commodity contract positions in subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 held by the Master (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.
The value of the Partnership’s investment in the Master reflects the Partnership’s proportional interest in the Partnership Capital of the Master. 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.
Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency
16
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 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.
On July 13, 2006, the FASB released 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 has adopted FIN 48 and Management has determined that the application of this standard will not impact the financial statements.
Results of Operations
During the Partnership’s first quarter of 2007, the Net Asset Value per Redeemable Unit decreased 8.7% from $793.52 to $724.29 as compared to an increase of 2.4% in the first quarter of 2006. The Partnership experienced a net trading loss (comprised of realized losses on closed positions allocated from the Master and change in unrealized gains (losses) on open positions and investment in Master) before brokerage commissions and related fees in the first quarter of 2007 of $4,339,452. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy, U.S. and Non-U.S. interest rates, metals and indices and were partially offset by gains in grains and softs. 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 a nd indices and were partially offset by losses in currencies, energy, grains and softs.
The first quarter of 2007 presented a challenging trading environment to the trading Advisor due to several short-term price reversals triggered by a precipitous decline in the world equity markets towards the end of February. The price reversals caused a sharp increase in the short-term correlation among several sectors thereby eliminating the diversification benefits. The fund registered losses in currencies, energy, metals, fixed income and stock indices while it posted modest gains in agricultural products.
Currency markets were dominated by short-term reversals for the quarter as mixed global and regional economic data caused the markets to move erratically. Some of the biggest losses in currencies were posted in trading Euro, New Zealand Dollar and Swiss Francs as the trends were not favorable to the fund’s positions. Fixed income markets exhibited significant volatility whilst remaining largely directionless, resulting in losses for the sector. In the energy markets, losses were accumulated due to the unanticipated price movement across the petroleum complex as strong fundamental supply storage data were overshadowed by geopolitical concerns and unpredictable weather conditions. Positions in base and precious metals were not profitable as the markets presented a difficult trading environment.
Modest gains were registered in soft commodities, especially sugar, cotton and cocoa. Cocoa prices rallied as the International Cocoa Organization forecasted a twenty percent decrease in crops from the Ivory Coast, the world’s biggest producer, resulting in trading gains.
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 a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average
17
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master’s assets in cash and/or place all of the Master’s assets in 90-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 months ended March 31, 2007 decreased by $49,319, as compared to the unallocated amount earned directly in the corresponding period in 2006. The decrease in interest income is primarily due to lower average net assets during the three months ended March 31, 2007 as compared to the corresponding period in 2006.
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, 2007 decreased by $227,351 as compared to the corresponding period in 2006. The decrease in brokerage commissions is due to lower average net assets during the three months ended March 31, 2007 as compared to the corresponding periods in 2006.
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 months ended March 31, 2007 decreased by $79,209 as compared to the corresponding period in 2006. The decrease in management fees is due to lower average net assets during the three months ended March 31, 2007 as compared to the corresponding period in 2006.
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 months ended March 31, 2007 decreased by $19,803 as compared to the corresponding period in 2006. The decrease in administrative fees is due to lower average net assets during the three months ended March 31, 2007 as compared to the corresponding period in 2006.
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. There were no profit share allocations earned for the three months ended March 31, 2007 or 2006.
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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 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 Master’s open positions by market category as of March 31, 2007, and the highest, lowest and average values during the three months ended March 31, 2007. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of March 31, 2007, the Master’s total capitalization was $197,349,572. 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, 2006.
March 31, 2007
(Unaudited)
Three months ended March 31, 2007 | ||||||||||||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average * Value at Risk | |||||||||||||||||||||||||
Currencies: | ||||||||||||||||||||||||||||||
–OTC Contracts | $ | 18,556,736 | 9.40 | % | $ | 18,556,736 | $ | 8,295,566 | $ | 13,099,089 | ||||||||||||||||||||
Energy | 500,400 | 0.25 | % | 2,141,650 | 349,600 | 913,467 | ||||||||||||||||||||||||
Grains | 51,150 | 0.03 | % | 378,672 | 43,144 | 162,326 | ||||||||||||||||||||||||
Interest Rates U.S. | 153,075 | 0.08 | % | 1,005,000 | 41,852 | 344,692 | ||||||||||||||||||||||||
Interest Rates Non-U.S. | 2,623,610 | 1.33 | % | 6,419,914 | 1,580,561 | 3,845,886 | ||||||||||||||||||||||||
Metals: | ||||||||||||||||||||||||||||||
–Exchange Traded Contracts | 54,000 | 0.03 | % | 134,000 | 2,000 | 48,000 | ||||||||||||||||||||||||
–OTC Contracts | 107,397 | 0.05 | % | 1,024,186 | 88,407 | 235,940 | ||||||||||||||||||||||||
Softs | 192,702 | 0.10 | % | 487,616 | 116,194 | 158,234 | ||||||||||||||||||||||||
Indices | 507,388 | 0.26 | % | 15,267,220 | 382,837 | 4,094,234 | ||||||||||||||||||||||||
Total | $ | 22,746,458 | 11.53 | % | ||||||||||||||||||||||||||
* | Average month end Values at Risk. |
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Item 4. Controls and Procedures
The General Partner, with the participation of the General Partner’s Chief Executive Officer and 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 U.S. Securities Exchange Act, as amended) with respect to the Partnership as of the end of the period covered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. There was no change in the Partnership’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material changes supplementing or amending the discussion of legal proceedings set forth under Part I, Item 3 ‘‘Legal Proceedings’’ in our Annual Report on Form 10-K for the fiscal year ended December 31, 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, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended March 31, 2007 there were additional sales of 6,469.3368 Redeemable Units of Limited Partnership totaling $4,880,000. 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 Redeemable Units Purchased* | (b) Average Price Paid per Redeemable Unit* | (c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||
January 1, 2007 – January 31, 2007 | 1,286.9620 | $784.25 | N/A | N/A | |||||||||||||||||
February 1, 2007 – February 28, 2007 | 2,597.3474 | $746.83 | N/A | N/A | |||||||||||||||||
March 1, 2007 – March 31, 2007 | 1,738.9124 | $724.29 | N/A | N/A | |||||||||||||||||
5,623.2218 | $751.79 | 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 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, 2006. |
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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: | May 24, 2007 | |||||
By: | /s/ Jennifer Magro | |||||
Jennifer Magro Chief Financial Officer and Director | ||||||
Date: | May 24, 2007 | |||||