UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended: June 30, 2007
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51651
WORLD MONITOR TRUST III – SERIES J
(Exact name of registrant as specified in its charter)
| Delaware | 20-2446281 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 900 King Street, Suite 100, Rye Brook, New York | 10573 | |
| (Address of principal executive offices) | (Zip Code) | |
(914) 307-7000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 (ad defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
WORLD MONITOR TRUST III – SERIES J
INDEX TO QUARTERLY REPORT ON FORM 10Q
JUNE 30, 2007
WORLD MONITOR TRUST III – SERIES J
INDEX TO QUARTERLY REPORT ON FORM 10Q
(CONTINUED)
JUNE 30, 2007
PART I – FINANCIAL INFORMATION
WORLD MONITOR TRUST III – SERIES J
FINANCIAL STATEMENTS
June 30, 2007
WORLD MONITOR TRUST III – SERIES J
STATEMENTS OF FINANCIAL CONDITION
June 30, 2007 (Unaudited) and December 31, 2006
June 30, 2007 | December 31, 2006 | |||||
ASSETS | ||||||
Equity in broker trading accounts | ||||||
Cash | $ | 45,445,057 | $ | 3,233,624 | ||
Unrealized gain on open futures contracts | 1,214,809 | 0 | ||||
Deposits with brokers | 46,659,866 | 3,233,624 | ||||
Cash and cash equivalents | 1,125,914 | 0 | ||||
Unrealized gain on open forward currency contracts | 1,090,878 | 0 | ||||
Interest receivable | 171,252 | 2,032 | ||||
Accounts receivable - net | 110,000 | 15,622 | ||||
Investment in WMT III Series G/J Trading Vehicle LLC | 26,437,206 | 23,263,074 | ||||
Investment in WMT III Series H/J Trading Vehicle LLC | 0 | 22,215,588 | ||||
Investment in WMT III Series I/J Trading Vehicle LLC | 0 | 23,990,192 | ||||
Subscription receivable | 106,883 | 0 | ||||
Redemption receivable | 873,445 | 0 | ||||
Total assets | $ | 76,575,444 | $ | 72,720,132 | ||
LIABILITIES | ||||||
Accrued expenses | $ | 142,728 | $ | 122,485 | ||
Service fees and sales commission payable | 0 | 39 | ||||
Precharge commission commodities | 2,054 | 0 | ||||
Trading manager management fee | 0 | 7 | ||||
Trading advisor management fee | 163,170 | 0 | ||||
Trading advisor incentive fee | 274,752 | 0 | ||||
Offering costs payable | 0 | 7 | ||||
Redemptions payable | 1,828,633 | 2,419,722 | ||||
Subscriptions received in advance | 1,046,477 | 2,949,731 | ||||
Total liabilities | 3,457,814 | 5,491,991 | ||||
UNITHOLDERS’ CAPITAL | ||||||
Class I Units: | ||||||
Unitholders’ 661,720.0357 and 644,120.0996 units outstanding at June 30, 2007 and December 31, 2006, respectively | 67,626,400 | 63,250,863 | ||||
Managing Owners Interests 7,461.8706 and 7,198.7106 units outstanding at June 30, 2007 and December 31, 2006, respectively | 762,588 | 706,894 | ||||
Class II Units: | ||||||
Unitholders’ 46,061.1345 and 33,473.1003 units outstanding at June 30, 2007 and December 31, 2006, respectively | 4,681,233 | 3,237,331 | ||||
Managing Owners Interests 466.4809 and 341.7559 units outstanding at June 30, 2007 and December 31, 2006, respectively | 47,409 | 33,053 | ||||
Total unitholders’ capital | 73,117,630 | 67,228,141 | ||||
Total liabilities and unitholders’ capital | $ | 76,575,444 | $ | 72,720,132 | ||
NET ASSET VALUE PER UNIT | ||||||
Class I | $ | 102.20 | $ | 98.20 | ||
Class II | $ | 101.63 | $ | 96.71 | ||
See accompanying notes.
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WORLD MONITOR TRUST III – SERIES J
CONDENSED SCHEDULES OF INVESTMENTS
June 30, 2007 (Unaudited) and December 31, 2006
| June 30, 2007 | December 31, 2006 | ||||||||||||
| Net Unrealized Gain (Loss) as a % of Net Asset Value | Net Unrealized Gain (Loss) | Net Unrealized Gain (Loss) as a % of Net Asset Value | Net Unrealized Gain (Loss) | ||||||||||
Futures Contracts | |||||||||||||
Long futures contracts | |||||||||||||
Commodities | 0.52 | % | $ | 380,275 | 0.00 | % | $ | 0 | |||||
Currency | 0.17 | % | 126,144 | 0.00 | % | 0 | |||||||
Energy | 0.15 | % | 110,571 | 0.00 | % | 0 | |||||||
Stock indices | (0.15 | )% | (109,013 | ) | 0.00 | % | 0 | ||||||
Total long futures contracts | 0.69 | % | 507,977 | 0.00 | % | 0 | |||||||
Short futures contracts | |||||||||||||
Currency | 0.42 | % | 305,775 | 0.00 | % | 0 | |||||||
Energy | 0.23 | % | 164,720 | 0.00 | % | 0 | |||||||
Interest rates | 0.32 | % | 236,337 | 0.00 | % | 0 | |||||||
Total short futures contracts | 0.97 | % | 706,832 | 0.00 | % | 0 | |||||||
Total futures contracts | 1.66 | % | $ | 1,214,809 | 0.00 | % | $ | 0 | |||||
Forward Contracts | |||||||||||||
Long forward currency contracts | 1.87 | % | $ | 1,371,454 | 0.00 | % | $ | 0 | |||||
Short forward currency contracts | (0.38 | )% | (280,576 | ) | 0.00 | % | 0 | ||||||
Total forward currency contracts | 1.49 | % | $ | 1,090,878 | 0.00 | % | $ | 0 | |||||
See accompanying notes.
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WORLD MONITOR TRUST III – SERIES J
STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2007 and 2006
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2007 | 2006 | 2007 | 2006 | ||||||||||||
NET INCOME ALLOCATED FROM TRADING VEHICLES | |||||||||||||||
REVENUES | |||||||||||||||
Realized | $ | 5,264,415 | $ | 5,212,308 | $ | 2,081,805 | $ | 3,549,404 | |||||||
Change in unrealized | 1,210,483 | (1,701,882 | ) | (1,128,898 | ) | 345,613 | |||||||||
Interest income | 427,024 | 537,635 | 1,228,956 | 950,915 | |||||||||||
Total revenues | 6,901,922 | 4,048,061 | 2,181,863 | 4,845,932 | |||||||||||
EXPENSES | |||||||||||||||
Brokerage commissions | 52,781 | 76,562 | 143,590 | 148,978 | |||||||||||
Advisor management fees | 248,594 | 331,424 | 677,963 | 589,678 | |||||||||||
Advisor incentive fees | 662,771 | 308,731 | 662,771 | 465,972 | |||||||||||
Operating expenses | 122,085 | 50,186 | 155,230 | 104,099 | |||||||||||
Total expenses | 1,086,231 | 766,903 | 1,639,554 | 1,308,727 | |||||||||||
NET INCOME ALLOCATED FROM TRADING VEHICLES | 5,815,691 | 3,281,158 | 542,309 | 3,537,205 | |||||||||||
NET INCOME (LOSS) FROM SERIES OPERATIONS: | |||||||||||||||
REVENUES | |||||||||||||||
Realized | 1,823,857 | 0 | 1,823,857 | 0 | |||||||||||
Change in unrealized | 2,305,687 | 0 | 2,305,687 | 0 | |||||||||||
Interest income | 373,786 | 40,980 | 395,185 | 63,296 | |||||||||||
Total revenues | 4,503,330 | 40,980 | 4,524,729 | 63,296 | |||||||||||
EXPENSES | |||||||||||||||
Brokerage commissions | 44,259 | 0 | 44,259 | 0 | |||||||||||
Advisor management fee | 163,170 | 0 | 163,170 | 0 | |||||||||||
Advisor incentive fee | 274,752 | 0 | 274,752 | 0 | |||||||||||
Management fee | 86,766 | 64,618 | 174,737 | 115,470 | |||||||||||
Service fee - Class I Units | 325,661 | 256,202 | 657,514 | 459,609 | |||||||||||
Sales commission | 173,532 | 129,236 | 349,474 | 230,940 | |||||||||||
Operating expenses | 93,532 | 65,636 | 176,381 | 126,581 | |||||||||||
Total expenses | 1,161,672 | 515,692 | 1,840,287 | 932,600 | |||||||||||
NET INCOME (LOSS) FROM SERIES OPERATIONS | 3,341,658 | (474,712 | ) | 2,684,442 | (869,304 | ) | |||||||||
NET INCOME | $ | 9,157,349 | $ | 2,806,446 | $ | 3,226,751 | $ | 2,667,901 | |||||||
NET INCOME (LOSS) PER WEIGHTED AVERAGE UNITHOLDER AND MANAGING OWNER UNIT | |||||||||||||||
Net income (loss) per weighted average Unitholder and Managing Owner Unit | |||||||||||||||
Class I | $ | 12.46 | $ | 5.78 | $ | 4.36 | $ | 6.11 | |||||||
Class II | $ | 12.73 | $ | (2.73 | ) | $ | 6.04 | $ | (2.73 | ) | |||||
Weighted average number of Units outstanding - Class I | 688,068 | 488,522 | 680,845 | 439,821 | |||||||||||
Weighted average number of Units outstanding - Class II | 45,737 | 6,692 | 43,085 | 6,692 | |||||||||||
See accompanying notes.
-4-
WORLD MONITOR TRUST III – SERIES J
STATEMENTS OF CHANGES IN UNITHOLDERS’ CAPITAL
For the Six Months Ended June 30, 2007 and 2006
(Unaudited)
| Class I | Class II | ||||||||||||||||||||||||||||||||
| Unitholders | Managing Owner | Unitholders | Interests | Total | |||||||||||||||||||||||||||||
| Units | Amount | Units | Amount | Units | Amount | Units | Amount | Units | Amount | ||||||||||||||||||||||||
Six months ended June 30, 2007 | |||||||||||||||||||||||||||||||||
Unitholders’ capital at December 31, 2006 | 644,120.0996 | $ | 63,250,863 | 7,198.7106 | $ | 706,894 | 33,473.1003 | $ | 3,237,331 | 341.7559 | $ | 33,053 | 685,133.6664 | $ | 67,228,141 | ||||||||||||||||||
Net income | 0.0000 | 2,933,905 | 0.0000 | 32,485 | 0.0000 | 257,895 | 0.0000 | 2,466 | 0.0000 | 3,226,751 | |||||||||||||||||||||||
Additions | 104,135.5295 | 9,893,523 | 263.1600 | 25,000 | 16,063.9822 | 1,523,873 | 124.7250 | 12,000 | 120,587.3967 | 11,454,396 | |||||||||||||||||||||||
Redemptions | (86,535.5934 | ) | (8,289,303 | ) | 0.0000 | 0 | (3,475.9480 | ) | (327,618 | ) | 0.0000 | 0 | (90,011.5414 | ) | (8,616,921 | ) | |||||||||||||||||
Offering costs | 0.0000 | (162,588 | ) | 0.0000 | (1,791 | ) | 0.0000 | (10,248 | ) | 0.0000 | (110 | ) | 0.0000 | (174,737 | ) | ||||||||||||||||||
Unitholders’ capital at June 30, 2007 | 661,720.0357 | $ | 67,626,400 | 7,461.8706 | $ | 762,588 | 46,061.1345 | $ | 4,681,233 | 466.4809 | $ | 47,409 | 715,709.5217 | $ | 73,117,630 | ||||||||||||||||||
Six months ended June 30, 2006 | |||||||||||||||||||||||||||||||||
Unitholders’ capital at December 31, 2005 | 307,154.4306 | $ | 29,910,054 | 3,090.0000 | $ | 300,898 | 0.0000 | $ | 0 | 0.0000 | $ | 0 | 310,244.4306 | $ | 30,210,952 | ||||||||||||||||||
Net income (loss) | 0.0000 | 2,659,149 | 0.0000 | 27,012 | 0.0000 | (18,078 | ) | 0.0000 | (182 | ) | 0.0000 | 2,667,901 | |||||||||||||||||||||
Additions | 223,606.2872 | 22,112,975 | 2,267.7185 | 224,178 | 11,418.3853 | 1,162,200 | 111.3997 | 11,344 | 237,403.7907 | 23,510,697 | |||||||||||||||||||||||
Redemptions | (2,452.5257 | ) | (246,236 | ) | 0.0000 | 0 | 0.0000 | 0 | 0.0000 | 0 | (2,452.5257 | ) | (246,236 | ) | |||||||||||||||||||
Exchanges | (644.2860 | ) | (62,328 | ) | 0.0000 | 0 | 0.0000 | 0 | 0.0000 | 0 | (644.2860 | ) | (62,328 | ) | |||||||||||||||||||
Offering costs | 0.0000 | (115,272 | ) | 0.0000 | (1,167 | ) | 0.0000 | (564 | ) | 0.0000 | (5 | ) | 0.0000 | (117,008 | ) | ||||||||||||||||||
Unitholders’ capital at June 30, 2006 | 527,663.9061 | $ | 54,258,342 | 5,357.7185 | $ | 550,921 | 11,418.3853 | $ | 1,143,558 | 111.3997 | $ | 11,157 | 544,551.4096 | $ | 55,963,978 | ||||||||||||||||||
See accompanying notes.
-5-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
| Note 1. | ORGANIZATION |
| A. | General Description of the Trust |
World Monitor Trust III (the “Trust”) is a business trust organized under the laws of Delaware on September 28, 2004. The Trust consists of four separate and distinct series (“Series”): Series G, H, I and J. Series G, H, I and J commenced trading operations on December 1, 2005, and each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Amended and Restated Declaration of Trust and Trust Agreement. Effective March 31, 2007, Series H and Series I were no longer offered and on April 30, 2007 Series H and Series I were dissolved. The assets of each Series are segregated from those of the other Series, separately valued and independently managed. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts and may, from time to time, engage in cash and spot transactions.
Each Series is initially divided into two classes: Class I Units and Class II Units. The Class I and Class II Units are identical except for the applicable service fee charged to each Class.
Effective December 1, 2005, Series J allocated its net assets equally to WMT III Series G/J Trading Vehicle LLC (whose sole members are Series G and Series J) (the “Company”), WMT III Series H/J Trading Vehicle LLC (whose sole members were Series H, Series J and Futures Strategic Trust) and WMT III Series I/J Trading Vehicle LLC (whose sole members were Series I and Series J) (collectively, the “Trading Vehicles”) and received a Voting Membership Interest in each Trading Vehicle. The Trading Vehicles were each formed to function as an aggregate trading vehicle. Preferred Investment Solutions Corp. (“Preferred” or the “Managing Owner”) is the Managing Owner of all Series and Futures Strategic Trust, and has been delegated administrative authority over the operations of the Trading Vehicles. The Trading Vehicles were established for the speculative trading of futures contracts, options on futures contracts and forward currency contracts. On April 30, 2007, WMT III Series H/J Trading Vehicle LLC and WMT III Series I/J Trading Vehicle LLC (collectively, the “Terminated Trading Vehicles”) liquidated and ceased trading operations, leaving the Company as the only remaining trading vehicle investment for Series J. The financial statements of the Trading Vehicles, including the condensed schedules of investments, are included in Sections II, III and IV of these financial statements and should be used in conjunction with Series J’s financial statements.
Effective May 1, 2007, Series J re-allocated assets previously held in the Terminated Trading Vehicles to managed accounts in the name of Series J. The assets that Series J allocated to WMT III Series I/J Trading Vehicle LLC were re-allocated to a managed account to be managed by Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program. The assets that Series J allocated to WMT III Series H/J Trading Vehicle LLC were re-allocated to a managed account managed by Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program.
-6-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 1. | ORGANIZATION (CONTINUED) |
| B. | Regulation |
As a registrant with the Securities and Exchange Commission, the Trust and each Series are subject to the regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a commodity pool, the Trust and each Series are subject to the regulations of the Commodity Futures Trading Commission, an agency of the United States (U.S.) government which regulates most aspects of the commodity futures industry; rules of the National Futures Association, an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Trust through the Trading Vehicle executes transactions.
| C. | The Offering |
Up to $37,500,000 Series G, Class I; $12,500,000 Series G, Class II; $37,500,000 Series H, Class I; $12,500,000 Series H, Class II; $18,750,000 Series I, Class I; $6,250,000 Series I, Class II; $281,250,000 Series J, Class I; and $93,750,000 Series J, Class II of Units are or have been offered (totaling $500,000,000) (“Subscription Maximum”). Interests are being offered to investors who meet certain established suitability standards, with a minimum initial subscription of $5,000 (and for Series J, $2,000 for certain Benefit Plan Investors (including IRAs)), although the minimum purchase for any single Series is $500.
Initially, the Units for each Series were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Interest. The Subscription Minimum of $30,000,000 for Series J was reached during the Initial Offering Period permitting all Series G, H, I and J to commence trading operations. Series J completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443, which was fully allocated to the Trading Vehicles. Until the subscription maximum for Series G and Series J is reached or a Series termination occurs, Series G and Series J’s Units will continue to be offered on a monthly basis at the then current net asset value per Unit.
| D. | Exchanges, Redemptions and Termination |
Units owned in one series of the Trust may be exchanged, without any charge, for Units of the other Series on a monthly basis for as long as Units in those Series are being offered to the public. Exchanges are made at the applicable Series’ then current net asset value per Unit as of the close of business on the last day of the month in which the exchange request is effected. The exchange of Units is treated as redemption of Units in one Series (with the related tax consequences) and the simultaneous purchase of Units in the other Series. Future redemptions and exchanges will impact the amount of funds available for investment in the Company and managed accounts traded by Eagle and Ortus in subsequent periods. Following Series H and Series I’s liquidations on April 30, 2007, Series J unitholders are no longer able to effect exchanges from Series J into either Series H or Series I.
Redemptions are permitted on a monthly basis. Class I Units redeemed prior to the first anniversary of their purchase will be subject to a redemption charge of up to 2% of the net asset value per Unit at which they were redeemed. Redemption fees are paid to the Selling Agent, Kenmar Securities, Inc., an affiliate of the Managing Owner. There is no redemption charge associated with the Class II Units.
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WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 1. | ORGANIZATION (CONTINUED) |
| D. | Exchanges, Redemptions and Termination (Continued) |
In the event that the net asset value of a Series, after adjustments for distributions, contributions and redemptions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. In addition, in the event that the net asset value of the Allocated Assets, after adjustments for distributions, contributions and redemptions, for the managed accounts traded by either Ortus or Eagle declines by 40% or more since the commencement of trading activities or the first day of a fiscal year, that managed account will automatically terminate.
| E. | Foreign Currency Transactions |
Series J’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statements of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently.
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. | Basis of Accounting |
The statement of financial condition as of June 30, 2007, the statements of operations for the three months and six months ended June 30, 2007 and 2006, and the statements of changes in unitholders’ capital for the six months ended June 30, 2007 and 2006, are unaudited. In the opinion of the Managing Owner, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of World Monitor Trust III – Series J as of June 30, 2007 and the results of its operations for the three months and six months ended June 30, 2007 and 2006. The operating results for the interim periods may not be indicative of the results expected for the full year.
The financial statements of Series J are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
-8-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
Commodity futures and forward transactions are reflected in the accompanying statements of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) is reflected in the statement of financial condition in accordance with Financial Accounting Standards Board Interpretation No. 39 – “Offsetting of Amounts Related to Certain Contracts.” The market value of each contract is based upon the closing quotation on the exchange, clearing firm or bank on, or through, which the contract is traded. Any change in net unrealized gain or loss during the current period is reported in the statement of operations. Realized gains and losses on commodity transactions are recognized in the period in which the contracts are closed. Brokerage commissions paid directly to brokers are reflected as “brokerage commissions” in the statement of operations, include exchange and other trading fees, and are charged to expense when contracts are opened.
The weighted average number of Units outstanding was computed for purposes of disclosing net income (loss) per weighted average Unit. The weighted average Units are equal to the number of Units outstanding at period end, adjusted proportionately for Units subscribed and redeemed based on their respective time outstanding during such period.
Series J has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 102, “Statement of Cash Flows – Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.”
Consistent with standard business practices in the normal course of business, Series J has provided general indemnifications to the Managing Owner, and others when they act, in good faith, in the best interests of Series J. Series J is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that merits of the position. The provisions of FIN 48 were effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Preferred as Managing Owner of Series J evaluated the impact of adopting FIN 48 on Series J’s financial statements. In Preferred’s opinion, FIN 48 had no material impact on Series J, as Series J’s tax position is based on established tax precedence for the tax treatment of investment partnerships as flow through tax entities.
-9-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Managing Owner is currently evaluating the impact of adopting SFAS No. 157 on Series J’s financial statements. At this time, the impact to Series J’s financial statements has not been determined.
Cash represents amounts deposited with clearing brokers, a portion of which are restricted for purposes of meeting margin requirements, which typically range from 0% to 35% of the notional amounts of the derivatives traded. Series J receives interest at prevailing rates on all cash balances held by the clearing brokers.
| B. | Income Taxes |
Series J is treated as a partnership for Federal income tax purposes. As such, Series J is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the individual Unitholders including the Managing Owner. Series J may be subject to other state and local taxes in jurisdictions in which it operates.
| C. | Investments in Trading Vehicles |
The investments in the Trading Vehicles are reported in Series J’s statement of financial condition at fair value. Fair value ordinarily is the value determined for the Trading Vehicle in accordance with the Trading Vehicle’s valuation policies and reported at the time of Series J’s valuation by the management of the Trading Vehicle. Generally, the fair value of Series J’s investment in a Trading Vehicle represents the amount that Series J could reasonably expect to receive from the Trading Vehicle if Series J’s investment were redeemed at the time of valuation, based on information available at the time the valuation was made and that Series J believes to be reliable. Series J records its proportionate share of each item of income and expense from the investments in the Trading Vehicles in the statement of operations. As of June 30, 2007, the Company represents the only remaining trading vehicle investment for Series J. The accounting policies, including valuation policies, of the Trading Vehicles are contained in the notes to the Trading Vehicles’ financial statements included in Sections II, III and IV of these financial statements.
| D. | Profit and Loss Allocations and Distributions |
Income and expenses (excluding the service fee) are allocated pro rata to the Class I Units and Class II Units monthly based on the units outstanding during the month. Class I Units are charged with the service fee applicable to such units. Distributions (other than redemptions of units) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the unitholders. The Managing Owner has not and does not presently intend to make any distributions.
-10-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| E. | Offering Costs |
Initial offering costs (exclusive of the initial selling fee), totaling $1,450,801 were advanced by the Managing Owner. Of the $1,450,801 advanced by the Managing Owner, Series J’s maximum re-imbursement is $1,380,739 of which $472,809 was paid by Series J to the Managing Owner through June 30, 2007, leaving $907,929 payable by Series J to the Managing Owner subject to a maximum re-imbursement of 0.50% per annum and other restrictions as disclosed in the Trust Agreement.
Such initial offering expenses will be reimbursed by each Series, without interest, in 36 monthly payments during each of the first 36 months of the continuous offering period. The amount of initial offering costs that each Series will reimburse the Managing Owner is equal to each Series percentage of total Trust net asset value at the beginning of each month. In no event shall the Managing Owner be entitled to reimbursement for such expenses in an aggregate amount in excess of 2.5% of the aggregate amount of all subscriptions accepted by the Trust during the Initial Offering Period and the first 36 months of the continuous offering period.
Additional ongoing offering costs totaling $985,810 have been advanced by the Managing Owner through June 30, 2007. Of the $985,810 advanced by the Managing Owner, Series J’s maximum re-imbursement is $932,146 of which $0 has been paid by Series J to the Managing Owner through June 30, 2007, leaving $932,146 payable by Series J to the Managing Owner subject to a maximum re-imbursement of 0.50% per annum and other restrictions as disclosed in the Trust Agreement.
The Managing Owner also will pay all offering expenses incurred after the Initial Offering Period (“ongoing offering costs”). Such expenses will be allocated among the Series as the Managing Owner determines to be fair and equitable and, each Series will reimburse the Managing Owner, without interest, in up to 36 monthly payments during each of the first 36 months following the month in which such expenses were paid by the Managing Owner. In no event shall the amount of any payment in any month for reimbursement of initial and ongoing offering costs exceed 0.50% per annum of the Net Asset Value of the Trust as of the beginning of such month.
The amount of monthly reimbursement due to the Managing Owner is charged directly to unitholders’ capital. During the six months ended June 30, 2007 and 2006, Series J’s calculated offering costs reimbursement exceeded 0.50% per annum of the Net Asset Value of Series J. Series J was only liable for the amount up to the 0.50% per annum limitation.
The Series will only be liable for payment of initial and ongoing offering costs on a monthly basis. If a Series terminates prior to completion of payment of such amounts to the Managing Owner, the Managing Owner will not be entitled to any additional payments, and the Series will have no further obligation to the Managing Owner. The amount of monthly reimbursement due to the Managing Owner is charged directly to unitholders’ capital.
-11-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 3. | RELATED PARTIES |
Series J reimburses the Managing Owner for services it performs for Series J, which include, but are not limited to: management, accounting, registrar, transfer and assignment functions, investor communications, printing, and other administrative services.
The expenses incurred by Series J for services performed by the Managing Owner for Series J were:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Management | $ | 86,766 | $ | 64,618 | $ | 174,737 | $ | 115,470 | ||||
General and administrative | 28,973 | 23,701 | 68,372 | 23,701 | ||||||||
| $ | 115,739 | $ | 88,319 | $ | 243,109 | $ | 139,171 | |||||
Expenses payable to the Managing Owner and its affiliates as of June 30, 2007 and December 31, 2006 were $28,973 and $20,686, respectively. Such amounts are included in Accrued expenses on the statements of financial condition.
| Note 4. | MANAGING OWNER |
The Managing Owner of the Trust is Preferred Investment Solutions Corp., which conducts and manages the business of the Trust. The Declaration of Trust and Trust Agreement requires the Managing Owner and or its affiliates to maintain a capital account equal to 1% of the total capital accounts of the Series (subject to an initial $25,000 minimum per Series). The Managing Owner is paid a monthly management fee of 1/12 of 0.5% (0.5% annually) of Series J’s net asset value at the beginning of the month.
| Note 5. | SERVICE FEES AND SALES COMMISSIONS |
Series J pays a service fee with respect to Class I Units, monthly in arrears, equal to 1/12 of 2% (2% per annum) of the Net Asset Value per unit of the outstanding Class I Units as of the beginning of the month. The service fee is paid directly by the Registrant to the Selling Agent, Kenmar Securities, Inc., an affiliate of the Managing Owner. The Selling Agent is responsible for paying all commissions owing to the correspondent selling agents, who are entitled to receive from the Selling Agent an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased. Commencing with the 13th month after the purchase of a Class I Unit, the correspondent selling agent receives an ongoing monthly commission equal to 1/12th of 2% (2% per annum) of the Net Asset Value per Class I Unit as of the beginning of each month of the Class I Units sold by them.
Class II unitholders are not assessed service fees.
Series J will also pay Kenmar Securities, Inc. a monthly sales commission equal to 1/12th of 1% (1% annually) of the Net Asset Value of the outstanding units as of the beginning of each month.
-12-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 6. | TRUSTEE |
The trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The trustee has delegated to the Managing Owner the power and authority to manage the business and affairs of the Trust and has only nominal duties and liabilities with respect to the Trust.
| Note 7. | OPERATING EXPENSES |
Operating expenses of the Trust are paid for by the Trust.
| Note 8. | INVESTMENTS IN TRADING VEHICLES |
Effective December 1, 2005, Series J invested a substantial portion of its assets in the Trading Vehicles. Following the Terminated Trading Vehicles’ liquidations on April 30, 2007, Series J’s investment in the Company became its only remaining trading vehicle investment. Series J’s investment in the Company represents approximately 92.99% of the net asset value of the Company at June 30, 2007. Series J’s investments in the Company, WMT III Series H/J Trading Vehicle LLC and WMT III Series I/J Trading Vehicle LLC represent approximately 91.80%, 76.38% and 98.92% of the net asset value of each Trading Vehicle at December 31, 2006, respectively. The investments in the Trading Vehicles are subject to the Organization Agreements of the Trading Vehicles.
Summarized information for these investments is as follows:
| Net Asset Value December 31, 2006 | Investments | Income (loss) | Redemptions | Net Asset Value June 30, 2007 | |||||||||||||
WMT III Series G/J | $ | 23,263,074 | $ | 3,322,852 | $ | 3,138,024 | $ | (3,286,744 | ) | $ | 26,437,206 | ||||||
WMT III Series H/J | 22,215,588 | 3,322,456 | (184,299 | ) | (25,353,745 | ) | 0 | ||||||||||
WMT III Series I/J | 23,990,192 | 3,322,456 | (2,411,416 | ) | (24,901,232 | ) | 0 | ||||||||||
Total | $ | 69,468,854 | $ | 9,967,764 | $ | 542,309 | $ | (53,541,721 | ) | $ | 26,437,206 | ||||||
-13-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 8. | INVESTMENTS IN TRADING VEHICLES (CONTINUED) |
Series J’s proportionate share of the income and expenses of the Trading Vehicles for the six months ended June 30, 2007 and 2006 is as follows:
| June 30, 2007 | ||||||||||||||||
| WMT III Series G/J Trading Vehicle LLC | WMT III Series H/J Trading Vehicle LLC | WMT III Series I/J Trading Vehicle LLC | Total | |||||||||||||
Realized trading gains (losses) | $ | 3,636,584 | $ | 272,436 | $ | (1,827,215 | ) | $ | 2,081,805 | |||||||
Change in unrealized trading gains (losses) | 28,340 | (497,525 | ) | (659,713 | ) | (1,128,898 | ) | |||||||||
Brokerage commissions | (56,746 | ) | (23,143 | ) | (63,701 | ) | (143,590 | ) | ||||||||
Interest income | 531,288 | 339,975 | 357,693 | 1,228,956 | ||||||||||||
Advisor management fee | (304,508 | ) | (217,947 | ) | (155,508 | ) | (677,963 | ) | ||||||||
Advisor incentive fee | (662,771 | ) | 0 | 0 | (662,771 | ) | ||||||||||
Operating expenses | (34,163 | ) | (58,095 | ) | (62,972 | ) | (155,230 | ) | ||||||||
Total | $ | 3,138,024 | $ | (184,299 | ) | $ | (2,411,416 | ) | $ | 542,309 | ||||||
| June 30, 2006 | ||||||||||||||||
| WMT III Series G/J Trading Vehicle LLC | WMT III Series H/J Trading Vehicle LLC | WMT III Series I/J Trading Vehicle LLC | Total | |||||||||||||
Realized trading gains | $ | 1,149,677 | $ | 1,677,226 | $ | 722,501 | $ | 3,549,404 | ||||||||
Change in unrealized trading gains (losses) | (43,911 | ) | (80,177 | ) | 469,701 | 345,613 | ||||||||||
Interest income | 309,936 | 332,709 | 308,270 | 950,915 | ||||||||||||
Brokerage commissions | (63,320 | ) | (30,735 | ) | (54,923 | ) | (148,978 | ) | ||||||||
Advisor management fee | (193,761 | ) | (239,837 | ) | (156,080 | ) | (589,678 | ) | ||||||||
Advisor incentive fee | (106,937 | ) | (225,472 | ) | (133,563 | ) | (465,972 | ) | ||||||||
Operating expenses | (35,008 | ) | (33,743 | ) | (35,348 | ) | (104,099 | ) | ||||||||
Total | $ | 1,016,676 | $ | 1,399,971 | $ | 1,120,558 | $ | 3,537,205 | ||||||||
Series J may make additional contributions to, or redemptions from, the Trading Vehicles on a monthly basis.
| Note 9. | MARKET AND CREDIT RISK |
Series J’s investments in the Trading Vehicles and managed accounts traded by Eagle and Ortus are subject to the market and credit risks of the futures contracts, options on futures contracts, forward currency contracts and other financial instruments held or sold short by them. Series J bears the risk of loss only to the extent of the market value of its investment and, in certain specific circumstances, distributions and redemptions received.
Series J has cash on deposit with financial institutions. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protection afforded such deposits.
-14-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 9. | MARKET AND CREDIT RISK (CONTINUED) |
The Managing Owner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Unitholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.
Effective May 1, 2007, Series J became exposed to various types of risks associated with the derivative instruments and related markets in which it directly invests through its managed accounts traded by Eagle and Ortus. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series J’s investment activities (credit risk).
Market Risk
Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series J’s net assets being traded, significantly exceeds Series J’s future cash requirements since Series J intends to close out its open positions prior to settlement. As a result, Series J is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series J considers the fair value of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series J’s commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series J enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contracts at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series J to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments Series J holds and the liquidity and inherent volatility of the markets in which Series J trades.
Credit Risk
When entering into futures or forward contracts, Series J is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions, entered into by Series J as Series J’s interbank market maker, is the sole counterparty. Series J has entered into a master netting agreement with its interbank market maker and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the statement of financial condition. The amount at risk associated with counterparty non-performance of all of Series J’s contracts is the net unrealized gain included in the statement of financial condition; however, counterparty non-performance on only certain of Series J’s contracts may result in greater loss than non-performance on all of Series J’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series J.
-15-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 9. | MARKET AND CREDIT RISK (CONTINUED) |
Credit Risk (Continued)
The Managing Owner attempts to minimize both credit and market risks by requiring Series J and its commodity trading advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.
Series J’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate as belonging to Series J all assets of Series J relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At June 30, 2007, such segregated assets totaled $43,159,988. Part 30.7 of the CFTC regulations also requires Series J’s futures commission merchant to secure assets of Series J related to foreign futures trading, which totaled $1,142,660 at June 30, 2007. There are no segregation requirements for assets related to forward trading.
As of June 30, 2007, all of Series J’s open futures contracts mature within five months.
-16-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 10. | FINANCIAL HIGHLIGHTS |
The following information presents per unit operating performance data and other supplemental financial data for the three months and six months ended June 30, 2007. This information has been derived from information presented in the financial statements.
| Class I | Class II | |||||||||||||||
| Three months ended June 30, 2007 | Six months ended June 30, 2007 | Three months ended June 30, 2007 | Six months ended June 30, 2007 | |||||||||||||
Per Unit Performance | ||||||||||||||||
(for a unit outstanding throughout the entire period) | ||||||||||||||||
Net asset value per unit at beginning of period | $ | 90.01 | $ | 98.20 | $ | 89.20 | $ | 96.71 | ||||||||
Income from operations:(3) | ||||||||||||||||
Net realized and change in unrealized gain(1) | 14.31 | 6.86 | 14.09 | 6.88 | ||||||||||||
Interest income (1) | 1.09 | 2.24 | 1.07 | 2.24 | ||||||||||||
Expenses (1) | (3.09 | ) | (4.86 | ) | (2.61 | ) | (3.96 | ) | ||||||||
Total income from operations | 12.31 | 4.24 | 12.55 | 5.16 | ||||||||||||
Offering costs(1) | (0.12 | ) | (0.24 | ) | (0.12 | ) | (0.24 | ) | ||||||||
Net increase for the period | 12.19 | 4.00 | 12.43 | 4.92 | ||||||||||||
Net asset value per unit at end of period | $ | 102.20 | $ | 102.20 | $ | 101.63 | $ | 101.63 | ||||||||
Total Return(5) | ||||||||||||||||
Total return before incentive fee | 14.88 | % | 5.42 | % | 15.29 | % | 6.54 | % | ||||||||
Incentive fee | (1.34 | )% | (1.35 | )% | (1.36 | )% | (1.45 | )% | ||||||||
Total return after incentive fee | 13.54 | % | 4.07 | % | 13.93 | % | 5.09 | % | ||||||||
Supplemental Data | ||||||||||||||||
Ratios to average net asset value:(3) | ||||||||||||||||
Net investment loss before incentive fee(2), (4) | (3.04 | )% | (2.78 | )% | (1.03 | )% | (0.73 | )% | ||||||||
Incentive fee(5) | (1.34 | )% | (1.35 | )% | (1.36 | )% | (1.45 | )% | ||||||||
Net investment loss after incentive fee | (4.38 | )% | (4.13 | )% | (2.39 | )% | (2.18 | )% | ||||||||
Interest income(4) | 4.58 | % | 4.70 | % | 4.53 | % | 4.74 | % | ||||||||
Incentive fees (5) | 1.34 | % | 1.35 | % | 1.36 | % | 1.45 | % | ||||||||
Other expenses(4) | 7.62 | % | 7.48 | % | 5.56 | % | 5.47 | % | ||||||||
Total expenses | 8.96 | % | 8.83 | % | 6.92 | % | 6.92 | % | ||||||||
Total returns are calculated based on the change in value of a unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.
(1) | Interest income per unit, expenses per unit and offering costs per unit are calculated by dividing interest income, expenses and offering costs applicable to each class by the weighted average number of units of each class outstanding during the period. Net realized and change in unrealized gain is a balancing amount necessary to reconcile the change in net asset value per unit of each class with the other per unit information. |
(2) | Represents interest income less total expenses (exclusive of incentive fees). |
(3) | Includes Series J’s proportionate share of income and expenses from the Trading Vehicles. |
(4) | Annualized. |
(5) | Not annualized. |
-17-
WORLD MONITOR TRUST III – SERIES J
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 10. | FINANCIAL HIGHLIGHTS (CONTINUED) |
The following information presents per unit operating performance data and other supplemental financial data for the three months and six months ended June 30, 2006. This information has been derived from information presented in the financial statements.
| Class I | Class II | |||||||||||
| Three months ended June 30, 2006 | Six months ended June 30, 2006 | May 1, 2006 (commencement) to June 30, 2006 | ||||||||||
Per Unit Performance (for a unit outstanding throughout the entire period) | ||||||||||||
Net asset value per unit at beginning of period | $ | 96.74 | $ | 97.38 | $ | 100.00 | ||||||
Income from operations:(3) | ||||||||||||
Net realized and change in unrealized gain (loss)(1) | 7.67 | 8.51 | (0.90 | ) | ||||||||
Interest income(1) | 1.17 | 2.29 | 1.19 | |||||||||
Expenses(1) | (2.62 | ) | (5.10 | ) | (0.05 | ) | ||||||
Total income from operations | 6.22 | 5.70 | 0.24 | |||||||||
Offering costs(1) | (0.13 | ) | (0.25 | ) | (0.09 | ) | ||||||
Net increase for the period | 6.09 | 5.45 | 0.15 | |||||||||
Net asset value per unit at end of period | $ | 102.83 | $ | 102.83 | $ | 100.15 | ||||||
Total Return(5) | ||||||||||||
Total return before incentive fee | 6.92 | % | 6.66 | % | (0.73 | )% | ||||||
Incentive fee | (0.63 | )% | (1.07 | )% | 0.88 | % | ||||||
Total return after incentive fee | 6.29 | % | 5.59 | % | 0.15 | % | ||||||
Supplemental Data | ||||||||||||
Ratios to average net asset value:(3) | ||||||||||||
Net investment income (loss) before incentive fee(2), (4) | (3.18 | )% | (3.46 | )% | 1.54 | % | ||||||
Incentive fee(5) | (0.63 | )% | (1.07 | )% | 0.88 | % | ||||||
Net investment income (loss) after incentive fee | (3.81 | )% | (4.53 | )% | 2.42 | % | ||||||
Interest income(4) | 4.56 | % | 4.57 | % | 7.10 | % | ||||||
Incentive fees(5) | 0.63 | % | 1.07 | % | (0.88 | )% | ||||||
Other expenses(4) | 7.74 | % | 8.03 | % | 5.56 | % | ||||||
Total expenses | 8.37 | % | 9.10 | % | 4.68 | % | ||||||
Total returns are calculated based on the change in value of a unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.
(1) | Interest income per unit, expenses per unit and offering costs per unit are calculated by dividing interest income, expenses and offering costs applicable to each class by the weighted average number of units of each class outstanding during the period. Net realized and change in unrealized gain (loss) is a balancing amount necessary to reconcile the change in net asset value per unit of each class with the other per unit information. |
(2) | Represents interest income less total expenses (exclusive of incentive fees). |
(3) | Includes Series J’s proportionate share of income and expenses from the Trading Vehicles. |
(4) | Annualized. |
(5) | Not annualized. |
-18-
SECTION II
WMT III SERIES G/J TRADING VEHICLE LLC
FINANCIAL STATEMENTS
June 30, 2007
WMT III SERIES G/J TRADING VEHICLE LLC
STATEMENTS OF FINANCIAL CONDITION
June 30, 2007 (Unaudited) and December 31, 2006
June 30, 2007 | December 31, 2006 | |||||
ASSETS | ||||||
Cash in commodity trading accounts | $ | 28,237,073 | $ | 24,478,301 | ||
Net unrealized gain on open futures contracts | 445,743 | 525,372 | ||||
Net unrealized gain on open forward currency contracts | 473,957 | 325,380 | ||||
Interest receivable | 100,009 | 99,446 | ||||
Total assets | $ | 29,256,782 | $ | 25,428,499 | ||
LIABILITIES | ||||||
Accrued expenses | $ | 44,784 | $ | 32,134 | ||
Commissions payable | 3,783 | 3,576 | ||||
Advisor fee payable | 60,986 | 53,106 | ||||
Incentive fee payable | 717,154 | 0 | ||||
Total liabilities | 826,707 | 88,816 | ||||
MEMBERS’ CAPITAL (Net Asset Value) | ||||||
Member G - Class I | 1,152,596 | 908,532 | ||||
Member G - Class II | 840,273 | 1,168,077 | ||||
Member J - Class I | 24,787,731 | 22,158,018 | ||||
Member J - Class II | 1,649,475 | 1,105,056 | ||||
Total members’ capital (Net Asset Value) | 28,430,075 | 25,339,683 | ||||
Total liabilities and members’ capital | $ | 29,256,782 | $ | 25,428,499 | ||
See accompanying notes.
-21-
WMT III SERIES G/J TRADING VEHICLE LLC
CONDENSED SCHEDULES OF INVESTMENTS
June 30, 2007 (Unaudited) and December 31, 2006
| June 30, 2007 | December 31, 2006 | |||||||||||||
Futures and Forward Contracts | Net Unrealized Gain (Loss) as a % of Net Asset Value | Net Unrealized Gain (Loss) | Net Unrealized Gain (Loss) as a % of Net Asset Value | Net Unrealized Gain (Loss) | ||||||||||
Long futures contracts | ||||||||||||||
Commodities | (0.07 | )% | $ | (19,800 | ) | 0.05 | % | $ | 11,825 | |||||
Energy | 0.04 | % | 11,297 | 0.00 | % | 0 | ||||||||
Interest rates | 0.00 | % | 0 | (0.25 | )% | (64,318 | ) | |||||||
Metals | (0.28 | )% | (80,745 | ) | (0.07 | )% | (16,513 | ) | ||||||
Stock indices | 0.21 | % | 59,859 | 0.78 | % | 198,600 | ||||||||
Other | 0.01 | % | 2,489 | 0.03 | % | 8,813 | ||||||||
Total long futures contracts | (0.09 | )% | (26,900 | ) | 0.54 | % | 138,407 | |||||||
Short futures contracts | ||||||||||||||
Commodities | 0.01 | % | 2,893 | 0.01 | % | 3,290 | ||||||||
Energy | 0.11 | % | 32,180 | 0.31 | % | 78,298 | ||||||||
Interest rates | 1.59 | % | 451,104 | 1.38 | % | 347,838 | ||||||||
Metals | (0.02 | )% | (4,560 | ) | 0.05 | % | 12,850 | |||||||
Stock indices | (0.00 | )% | (380 | ) | (0.17 | )% | (42,545 | ) | ||||||
Other | (0.03 | )% | (8,594 | ) | (0.05 | )% | (12,766 | ) | ||||||
Total short futures contracts | 1.66 | % | 472,643 | 1.53 | % | 386,965 | ||||||||
Total futures contracts | 1.57 | % | $ | 445,743 | 2.07 | % | $ | 525,372 | ||||||
Long forward currency contracts | 4.96 | % | $ | 1,409,914 | 1.32 | % | $ | 333,447 | ||||||
Short forward currency contracts | (3.29 | )% | (935,957 | ) | (0.03 | )% | (8,067 | ) | ||||||
Total forward currency contracts | 1.67 | % | $ | 473,957 | 1.29 | % | $ | 325,380 | ||||||
See accompanying notes.
-22-
WMT III SERIES G/J TRADING VEHICLE LLC
STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2007 and 2006
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||
REVENUES | ||||||||||||||
Realized | $ | 5,643,491 | $ | 817,754 | $ | 3,908,840 | $ | 1,180,187 | ||||||
Change in unrealized | 819,908 | (506,570 | ) | 68,948 | (46,235 | ) | ||||||||
Interest income | 285,815 | 182,698 | 578,928 | 324,188 | ||||||||||
Total revenues | 6,749,214 | 493,882 | 4,556,716 | 1,458,140 | ||||||||||
EXPENSES | ||||||||||||||
Brokerage commissions | 40,156 | 34,408 | 61,727 | 66,097 | ||||||||||
Advisor management fees | 176,414 | 111,547 | 331,748 | 202,656 | ||||||||||
Advisor incentive fees | 717,154 | 33,046 | 717,154 | 107,871 | ||||||||||
Operating expenses | 24,703 | 17,750 | 37,196 | 36,561 | ||||||||||
Total expenses | 958,427 | 196,751 | 1,147,825 | 413,185 | ||||||||||
NET INCOME | $ | 5,790,787 | $ | 297,131 | $ | 3,408,891 | $ | 1,044,955 | ||||||
See accompanying notes.
-23-
WMT III SERIES G/J TRADING VEHICLE LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)
For the Six Months Ended June 30, 2007 and 2006
(Unaudited)
| Members’ Capital | ||||||||||||||||||||
| Member G - Class I | Member G - Class II | Member J - Class I | Member J - Class II | Total | ||||||||||||||||
Six months ended June 30, 2007 | ||||||||||||||||||||
Balance at December 31, 2006 | $ | 908,532 | $ | 1,168,077 | $ | 22,158,018 | $ | 1,105,056 | $ | 25,339,683 | ||||||||||
Net income | 134,460 | 136,407 | 2,942,784 | 195,240 | 3,408,891 | |||||||||||||||
Additions | 160,000 | 69,500 | 2,882,228 | 440,624 | 3,552,352 | |||||||||||||||
Redemptions | (50,396 | ) | (533,711 | ) | (3,195,299 | ) | (91,445 | ) | (3,870,851 | ) | ||||||||||
Balance at June 30, 2007 | $ | 1,152,596 | $ | 840,273 | $ | 24,787,731 | $ | 1,649,475 | $ | 28,430,075 | ||||||||||
Six months ended June 30, 2006 | ||||||||||||||||||||
Balance at December 31, 2005 | $ | 509,406 | $ | 0 | $ | 10,034,305 | $ | 0 | $ | 10,543,711 | ||||||||||
Net income | 28,277 | 0 | 1,016,678 | 0 | 1,044,955 | |||||||||||||||
Additions | 886,275 | 0 | 7,145,577 | 0 | 8,031,852 | |||||||||||||||
Redemptions | (16,573 | ) | 0 | (354,135 | ) | 0 | (370,708 | ) | ||||||||||||
Balance at June 30, 2006 | $ | 1,407,385 | $ | 0 | $ | 17,842,425 | $ | 0 | $ | 19,249,810 | ||||||||||
See accompanying notes.
-24-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
| Note 1. | ORGANIZATION |
| A. | General Description of the Trading Vehicle |
WMT III Series G/J Trading Vehicle LLC (the “Trading Vehicle”) is a limited liability company organized under the laws of Delaware on March 10, 2005 which will terminate on December 31, 2054 unless terminated sooner under the provisions of the Organization Agreement. The Trading Vehicle commenced trading operations on December 1, 2005. The Trading Vehicle was formed to engage in the speculative trading of a diversified portfolio of futures contracts, options on futures contracts and forward currency contracts. Preferred Investment Solutions Corp. (“Preferred” or “Managing Owner”) is the Managing Owner of the Trading Vehicle. The Trading Vehicle currently consists of four members: World Monitor Trust III – Series G, Class I (“Member G-Class I”), World Monitor Trust III – Series G, Class II (“Member G-Class II”), World Monitor Trust III – Series J, Class I (“Member J-Class I”) and World Monitor Trust III – Series J, Class II (“Member J-Class II”) (collectively, the “Members”). Preferred is also the Managing Owner of each of the Members. Upon making the initial capital contribution, each Member received Voting Membership Interests.
The Trading Vehicle is a Member managed limited liability company that is not registered in any capacity with, or subject directly to regulation by the Commodity Futures Trading Commission or the United States Securities and Exchange Commission.
| B. | The Trading Advisor |
The Trading Vehicle entered into an advisory agreement with Graham Capital Management, L.P. (the “Trading Advisor”) to make the trading decisions for the Trading Vehicle. The Trading Advisor manages approximately 100% of the assets of the Trading Vehicle pursuant to its Global Diversified at 150% Leverage program.
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. | Basis of Accounting |
The statement of financial condition, including the condensed schedule of investments, as of June 30, 2007, the statements of operations for the three months and six months ended June 30, 2007 and 2006 and the statements of changes in members’ capital (net asset value) for the six months ended June 30, 2007 and 2006, are unaudited. In the opinion of the Managing Owner, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of WMT III Series G/J Trading Vehicle LLC as of June 30, 2007 and the results of its operations for the three months and six months ended June 30, 2007 and 2006. The operating results for the interim periods may not be indicative of the results expected for the full year.
The financial statements of the Trading Vehicle are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
-25-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
Commodity futures and forward transactions are reflected in the accompanying statements of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) is reflected in the financial statements in accordance with Financial Accounting Standards Board Interpretation No. 39 – “Offsetting of Amounts Related to Certain Contracts.” The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The fair value of forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot price. Any change in net unrealized gain or loss during the current period is reported in the statement of operations. Realized gains and losses on commodity transactions are recognized in the period in which the contracts are closed.
Brokerage commissions include other trading fees and are charged to expense when contracts are opened.
The Trading Vehicle has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 102, “Statement of Cash Flows – Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.”
Consistent with standard business practices in the normal course of business, the Trading Vehicle has provided general indemnifications to its Trading Advisor and others when they act, in good faith, in the best interests of the Trading Vehicle. The Trading Vehicle is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Trading Vehicle recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Preferred as Managing Owner of the Trading Vehicle evaluated the impact of adopting FIN 48 on the Trading Vehicle’s financial statements. In Preferred’s opinion, the adoption of FIN 48 had no material impact on the Trading Vehicle, as the Trading Vehicle’s tax position is based on established tax precedence for the tax treatment of investment partnerships as flow through tax entities.
-26-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. Preferred as Managing Owner of the Trading Vehicle is currently evaluating the impact of adopting SFAS No. 157 on its financial statements. At this time, the impact to the Trading Vehicle’s financial statements has not been determined.
| B. | Income Taxes |
The Trading Vehicle is treated as a partnership for Federal income tax purposes. As such, the Trading Vehicle is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Trading Vehicle may be subject to other state and local taxes in jurisdictions in which it operates.
| C. | Capital Accounts |
The Trading Vehicle accounts for additions, allocations of net gain (loss) and redemptions on a per member capital account basis.
The Trading Vehicle allocates profits and losses to its Members monthly on a pro rata basis based on each Member’s pro rata capital in the Trading Vehicle during the month. Distributions (other than redemptions of capital) may be made at the sole discretion of the Members on a pro rata basis in accordance with the Members’ respective capital balances. The Trading Vehicle has not and does not presently intend to make any distributions.
| B. | Foreign Currency Transactions |
The Trading Vehicle’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statements of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently.
| Note 3. | MANAGEMENT AND INCENTIVE FEES |
The Trading Vehicle pays the Trading Advisor a monthly management fee equal to 1/12 of 2.5% (2.5% annually) of the Trading Vehicle’s allocated assets determined as of the close of business on the last day of each month. For purposes of determining the management fee, any distributions, redemptions or reallocation of assets made as of the last day of each month shall be added back to the assets and there shall be no reduction for (i) the management fees calculated or (ii) any accrued but unpaid incentive fees due the Trading Advisor.
-27-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 3. | MANAGEMENT AND INCENTIVE FEES (CONTINUED) |
Additionally, the Trading Vehicle pays the Trading Advisor an incentive fee of 20% (the “Incentive Fee”) of “New High Net Trading Profits” (as defined in the Advisory Agreement). The incentive fee accrues monthly and is paid quarterly. For the six months ended June 30, 2007 and 2006, the Trading Advisor earned incentive fees of $ 717,154 and $ 107,871, respectively.
| Note 4. | OPERATING EXPENSES |
Operating expenses of the Trading Vehicle are paid for by the Trading Vehicle.
| Note 5. | DEPOSITS WITH BROKER |
The Trading Vehicle deposits funds with UBS Securities LLC to act as broker subject to Commodity Futures Trading Commission regulations and various exchange and broker requirements. The Trading Vehicle also deposits collateral with UBS AG for margin against over-the-counter forward and foreign exchange deals. Margin requirements are satisfied by the deposit of cash with such brokers. The Trading Vehicle earns interest income at competitive rates on assets deposited with the broker.
| Note 6. | SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS |
Additional investments in the Trading Vehicle can be made at any time subject to the terms of the Organization Agreement.
The Trading Vehicle is not required to make distributions, but could do so at the discretion of the Members. A Member can request and receive redemption of capital at any time, subject to the terms in the Organization Agreement.
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS |
The Trading Vehicle is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Trading Vehicle’s investment activities (credit risk).
-28-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED) |
| A. | Market Risk |
Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Trading Vehicle’s net assets being traded, significantly exceeds the Trading Vehicle’s future cash requirements since the Trading Vehicle intends to close out its open positions prior to settlement. As a result, the Trading Vehicle is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Trading Vehicle considers the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Trading Vehicle’s commitments to purchase commodities is limited to the gross or face amount of the contract held. However, when the Trading Vehicle enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Trading Vehicle to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Trading Vehicle holds and the liquidity and inherent volatility of the markets in which the Trading Vehicle trades.
| B. | Credit Risk |
When entering into futures and forward contracts, the Trading Vehicle is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, a clearinghouse is backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is a concentration risk on forward transactions entered into by the Trading Vehicle as UBS AG is the sole counterparty. The Trading Vehicle has entered into a master netting agreement dated November 29, 2005 with UBS AG and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition.
The amount at risk associated with counterparty non-performance of all of the Trading Vehicle’s contracts is the net unrealized gain included in the statements of financial condition; however, counterparty non-performance on only certain of the Trading Vehicle’s contracts may result in greater loss than non-performance on all of the Trading Vehicle’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Trading Vehicle.
-29-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED) |
| B. | Credit Risk (continued) |
The Managing Owner attempts to minimize both credit and market risks by requiring the Trading Vehicle and its Trading Advisor to abide by various trading limitations and policies. Preferred monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, pursuant to the Advisory Agreement among the Trading Vehicle, Preferred and the Trading Advisor, the Trading Vehicle shall automatically terminate the Advisory Agreement, if the net asset value allocated to the Trading Advisor declines as of the end of any business day by at least 40% from the value at the beginning of any calendar year or since the effective date of the Advisory Agreement. The decline in net asset value is after giving effect for distributions, subscriptions and redemptions.
The Trading Vehicle’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate as belonging to the Trading Vehicle all assets of the Trading Vehicle relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At June 30, 2007 and December 31, 2006, such segregated assets totaled $21,642,353 and $22,129,652, respectively. Part 30.7 of the CFTC regulations also requires the Trading Vehicle’s futures commission merchant to secure assets of the Trading Vehicle related to foreign futures trading which totaled $5,442,099 and $2,497,027 at June 30, 2007 and December 31, 2006, respectively. There are no segregation requirements for assets related to forward trading.
As of June 30, 2007, all open futures and forward contracts mature within eighteen months.
-30-
WMT III SERIES G/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| Note 8. | FINANCIAL HIGHLIGHTS |
The following information presents the financial highlights of the Trading Vehicle for the three months and six months ended June 30, 2007 and 2006. This information has been derived from information presented in the financial statements.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Total return(1) | ||||||||||||
Total return before incentive fee | 27.21 | % | 2.44 | % | 15.88 | % | 8.27 | % | ||||
Incentive fee | (3.14 | )% | (0.26 | )% | (2.87 | )% | (0.79 | )% | ||||
Total return after incentive fee | 24.07 | % | 2.18 | % | 13.01 | % | 7.48 | % | ||||
Ratios to average net asset value: | ||||||||||||
Expenses prior to incentive fee(2) | 3.64 | % | 3.81 | % | 3.32 | % | 4.00 | % | ||||
Incentive fee(1) | 2.70 | % | 0.19 | % | 2.76 | % | 0.71 | % | ||||
Total expenses and incentive fee | 6.34 | % | 4.00 | % | 6.08 | % | 4.71 | % | ||||
Net investment income (loss)(2), (3) | 0.67 | % | (0.32 | )% | 1.14 | % | (1.17 | )% | ||||
Total returns and ratios to average net asset value are calculated for Members’ capital taken as a whole. An individual Member’s total return and ratios may vary from the above return and ratios based on the timing of additions and redemptions.
(1) | Not annualized. |
(2) | Annualized. |
(3) | Represents interest income less total expenses (exclusive of incentive fee). |
-31-
SECTION III
WMT III SERIES H/J TRADING VEHICLE LLC
FINAL ANNUAL REPORT
As of April 30, 2007 (Date of Liquidation) and December 31, 2006
And for the Periods from January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
WMT III SERIES H/J TRADING VEHICLE LLC
STATEMENTS OF FINANCIAL CONDITION
April 30, 2007 (Date of Liquidation) and December 31, 2006
April 30, 2007 | December 31, 2006 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 6,867 | $ | 0 | ||
Cash in commodity trading accounts | 24,557,766 | 28,463,857 | ||||
Net unrealized gain on open futures contracts | 0 | 622,289 | ||||
Interest receivable | 0 | 114,572 | ||||
Total assets | $ | 24,564,633 | $ | 29,200,718 | ||
LIABILITIES | ||||||
Accrued expenses | $ | 75,138 | $ | 32,141 | ||
Commissions payable | 0 | 8,336 | ||||
Redemptions payable | 24,219,558 | 0 | ||||
Advisor fee payable | 269,937 | 73,255 | ||||
Total liabilities | 24,564,633 | 113,732 | ||||
MEMBERS’ CAPITAL (Net Asset Value) | ||||||
Member H - Class I | 0 | 1,140,902 | ||||
Member H - Class II | 0 | 444,359 | ||||
Member J - Class I | 0 | 21,153,067 | ||||
Member J - Class II | 0 | 1,062,521 | ||||
Member - Futures Strategic Trust | 0 | 5,286,137 | ||||
Total members’ capital (Net Asset Value) | 0 | 29,086,986 | ||||
Total liabilities and members’ capital | $ | 24,564,633 | $ | 29,200,718 | ||
See accompanying notes.
-34-
WMT III SERIES H/J TRADING VEHICLE LLC
CONDENSED SCHEDULES OF INVESTMENTS
April 30, 2007 (Date of Liquidation) and December 31, 2006
| April 30, 2007 | December 31, 2006 | ||||||||||||
| Net Unrealized Gain(Loss) | Net Unrealized Gain(Loss) as a % of Net Asset Value* | Net Unrealized Gain(Loss) | Net Unrealized Gain(Loss) as a % of Net Asset Value | ||||||||||
Long futures contracts: | |||||||||||||
Commodities | $ | 0 | 0.00 | % | $ | 4,903 | 0.02 | % | |||||
Currencies | 0 | 0.00 | % | (455,693 | ) | (1.57 | )% | ||||||
Energy | 0 | 0.00 | % | (18,370 | ) | (0.06 | )% | ||||||
Interest rates | 0 | 0.00 | % | (202,599 | ) | (0.70 | )% | ||||||
Metals | 0 | 0.00 | % | (76,930 | ) | (0.26 | )% | ||||||
Stock indices | 0 | 0.00 | % | 20,644 | 0.07 | % | |||||||
Total long futures contracts | 0 | 0.00 | % | (728,045 | ) | (2.50 | )% | ||||||
Short futures contracts: | |||||||||||||
Currencies | 0 | 0.00 | % | (2,139 | ) | (0.01 | )% | ||||||
Interest rates | 0 | 0.00 | % | 1,461,530 | 5.02 | % | |||||||
Metals | 0 | 0.00 | % | 42,750 | 0.15 | % | |||||||
Stock indices | 0 | 0.00 | % | (151,807 | ) | (0.52 | )% | ||||||
Total short futures contracts | 0 | 0.00 | % | 1,350,334 | 4.64 | % | |||||||
Total futures contracts | $ | 0 | 0.00 | % | $ | 622,289 | 2.14 | % | |||||
| * | Prior to liquidating redemptions. |
See accompanying notes.
-35-
WMT III SERIES H/J TRADING VEHICLE LLC
STATEMENTS OF OPERATIONS
For the Period January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
| Period January 1, 2007 to April 30, 2007 | Year Ended December 31, 2006 | |||||||
REVENUES | ||||||||
Realized | $ | 308,078 | $ | (2,317,174 | ) | |||
Change in unrealized | (622,289 | ) | 950,808 | |||||
Interest income | 419,797 | 926,433 | ||||||
Total revenues (loss) | 105,586 | (439,933 | ) | |||||
EXPENSES | ||||||||
Brokerage commissions | 29,545 | 81,082 | ||||||
Advisor incentive fee | 0 | 237,915 | ||||||
Advisor management fee | 269,937 | 638,927 | ||||||
Operating expenses | 63,839 | 57,341 | ||||||
Total expenses | 363,321 | 1,015,265 | ||||||
NET LOSS | $ | (257,735 | ) | $ | (1,455,198 | ) | ||
See accompanying notes.
-36-
WMT III SERIES H/J TRADING VEHICLE LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)
For the Period January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
| Members’ Capital | ||||||||||||||||||||||||
| Member H - Class I | Member H - Class II | Member J - Class I | Member J - Class II | Futures Strategic Trust | Total | |||||||||||||||||||
Balance at December 31, 2005 | $ | 515,430 | $ | 0 | $ | 10,152,980 | $ | 0 | $ | 0 | $ | 10,668,410 | ||||||||||||
Additions | 1,154,252 | 528,000 | 13,133,733 | 1,177,042 | 5,372,605 | 21,365,632 | ||||||||||||||||||
Redemptions | (422,422 | ) | (9,587 | ) | (1,009,312 | ) | (10,526 | ) | (40,011 | ) | (1,491,858 | ) | ||||||||||||
Net loss | (106,358 | ) | (74,054 | ) | (1,124,334 | ) | (103,995 | ) | (46,457 | ) | (1,455,198 | ) | ||||||||||||
Balance at December 31, 2006 | 1,140,902 | 444,359 | 21,153,067 | 1,062,521 | 5,286,137 | 29,086,986 | ||||||||||||||||||
Additions | 0 | 0 | 2,881,832 | 440,624 | 0 | 3,322,456 | ||||||||||||||||||
Redemptions | (109,663 | ) | (2,193 | ) | (1,610,471 | ) | (54,999 | ) | (5,226,072 | ) | (7,003,398 | ) | ||||||||||||
Net loss for the period January 1, 2007 to April 30, 2007 | (9,425 | ) | (3,946 | ) | (173,276 | ) | (11,023 | ) | (60,065 | ) | (257,735 | ) | ||||||||||||
Members capital before liquidating redemptions | 1,021,814 | 438,220 | 22,251,152 | 1,437,123 | 0 | 25,148,309 | ||||||||||||||||||
Liquidating redemptions | (1,021,814 | ) | (438,220 | ) | (22,251,152 | ) | (1,437,123 | ) | 0 | (25,148,309 | ) | |||||||||||||
Members’ capital at April 30, 2007 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
See accompanying notes.
-37-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS
| Note 1. | ORGANIZATION |
| A. | General Description of the Trading Vehicle |
WMT III Series H/J Trading Vehicle LLC (the “Trading Vehicle”) was a limited liability company organized under the laws of Delaware on March 10, 2005, which terminated on April 30, 2007 under the provisions of the Trading Vehicle’s Organization Agreement. The Trading Vehicle commenced trading operations on December 1, 2005. The Trading Vehicle was formed to engage in the speculative trading of a diversified portfolio of futures contracts and options on futures contracts. Preferred Investment Solutions Corp. (“Preferred” or the “Managing Owner”) was the Managing Owner of the Trading Vehicle. The Trading Vehicle consisted of five members: World Monitor Trust III – Series H, Class I (“Member H-Class I”), World Monitor Trust III – Series H, Class II (“Member H-Class II”), World Monitor Trust III – Series J, Class I (“Member J-Class I”), World Monitor Trust III – Series J, Class II (“Member J-Class II”) and Futures Strategic Trust (collectively, the “Members”). Preferred was also the Managing Owner of each of the Members. Upon making the initial capital contribution, each Member received Voting Membership Interests.
The Trading Vehicle was a member-managed limited liability company that was not registered in any capacity with, or subject directly to regulation by, the Commodity Futures Trading Commission (“CFTC”) or the United States Securities and Exchange Commission.
| B. | The Trading Advisor |
The Trading Vehicle entered into an advisory agreement with Bridgewater Associates, Inc. (the “Trading Advisor”) to make the trading decisions for the Trading Vehicle. The Trading Advisor managed the assets in the Trading Vehicle pursuant to its Aggressive Pure Alpha Futures Only – A, No Benchmark program.
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. | Basis of Accounting |
The financial statements of the Trading Vehicle are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
-38-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
Commodity futures transactions are reflected in the accompanying statement of financial condition on the trade date. Net unrealized gain or loss on open contracts (difference between contract trade price and market price) is reflected in the financial statements in accordance with Financial Accounting Standards Board Interpretation No. 39 – “Offsetting of Amounts Related to Certain Contracts.” The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. Any change in net unrealized gain or loss during the current period is reported in the statement of operations. Realized gains and losses on commodity transactions are recognized in the period in which the contracts are closed.
Brokerage commissions include other trading fees and are charged to expense when contracts are opened.
The Trading Vehicle has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 102, “Statement of Cash Flows – Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.”
Consistent with standard business practices in the normal course of business, the Trading Vehicle provided general indemnifications to its Trading Advisor and others when they act, in good faith, in the best interests of the Trading Vehicle. The Trading Vehicle is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Trading Vehicle recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.
-39-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
Preferred as Managing Owner of the Trading Vehicle has evaluated the impact of adopting FIN 48 on the Trading Vehicle’s financial statements. In Preferred’s opinion, the adoption of FIN 48 has no material impact on the Trading Vehicle, as the Trading Vehicle’s tax position is based on established tax precedence for the tax treatment of investment partnerships as flow through tax entities.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after the Trading Vehicle’s liquidation. Given this, Preferred, as Managing Owner of the Trading Vehicle, has concluded that SFAS No. 157 has no impact on the Trading Vehicle’s financial statements.
| B. | Income Taxes |
The Trading Vehicle is treated as a partnership for Federal income tax purposes. As such, the Trading Vehicle is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Trading Vehicle may be subject to other state and local taxes in jurisdictions in which it operates.
| C. | Capital Accounts |
The Trading Vehicle accounted for additions, allocations of net gain (loss) and redemptions on a per member capital account basis.
The Trading Vehicle allocated profits and losses to its Members monthly on a pro rata basis based on each Member’s pro rata capital in the Trading Vehicle during the month. Distributions (other than redemptions of capital) were made at the sole discretion of the Members on a pro rata basis in accordance with the Members’ respective capital balances. The Trading Vehicle had not made any distributions prior to termination.
| D. | Foreign Currency Transactions |
The Trading Vehicle’s functional currency was the U.S. dollar; however, it transacted business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar have been translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently.
-40-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 3. | MANAGEMENT AND INCENTIVE FEES |
The Trading Vehicle paid the Trading Advisor a monthly management fee equal to 1/12 of 3.0% (3.0% annually) of the Trading Vehicle’s allocated assets determined as of the close of business on the last day of each month. For purposes of determining the management fee, any distributions, redemptions or reallocation of assets made as of the last day of each month were added back to the assets and there was no reduction for (i) the management fees calculated or (ii) any accrued but unpaid incentive fees due the Trading Advisor.
Additionally, the Trading Vehicle paid the Trading Advisor an incentive fee of 20% (the “Incentive Fee”) of “New High Net Trading Profits” (as defined in the Advisory Agreement). The incentive fee accrued monthly and was paid quarterly. For the period January 1, 2007 to April 30, 2007 (Date of Liquidation) and for the year ended December 31, 2006, the Trading Advisor earned incentive fees of $0 and $237,915, respectively.
| Note 4. | OPERATING EXPENSES |
Operating expenses of the Trading Vehicle were paid for by the Trading Vehicle.
| Note 5. | DEPOSITS WITH BROKER |
The Trading Vehicle deposited funds with UBS Securities LLC to act as broker subject to CFTC regulations and various exchange and broker requirements. Margin requirements were satisfied by the deposit of cash with such broker. The Trading Vehicle earned interest income on assets deposited with the broker at competitive rates.
| Note 6. | ADDITIONS, DISTRIBUTIONS AND REDEMPTIONS |
The Trading Vehicle was not required to make distributions, but was permitted to do so at the discretion of the Members. A Member could request and receive redemption of capital at any time, subject to the terms in the Organization Agreement.
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS |
The Trading Vehicle was exposed to various types of risks associated with the derivative instruments and related markets in which it invested. These risks included, but were not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Trading Vehicle’s investment activities (credit risk).
-41-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED) |
| A. | Market Risk |
Trading in futures contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Trading Vehicle’s net assets being traded, significantly exceeded the Trading Vehicle’s future cash requirements since the Trading Vehicle closed out its open positions prior to settlement. As a result, the Trading Vehicle was generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Trading Vehicles considered the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Trading Vehicle’s commitments to purchase commodities was limited to the gross or face amount of the contract held. However, when the Trading Vehicle entered into a contractual commitment to sell commodities, it was obligated to make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposed the Trading Vehicle to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Trading Vehicle held and the liquidity and inherent volatility of the markets in which the Trading Vehicle traded.
| B. | Credit Risk |
When entering into futures contracts, the Trading Vehicle was exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, a clearinghouse is backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. The amount at risk associated with counterparty non-performance of all of the Trading Vehicle’s contracts was the net unrealized gain included in the statement of financial condition; however, counterparty non-performance on only certain of the Trading Vehicle’s contracts might have resulted in a greater loss than non-performance on all of the Trading Vehicle’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse can meet its obligations to the Trading Vehicle.
-42-
WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED) |
| B. | Credit Risk (Continued) |
The Managing Owner attempted to minimize both credit and market risks by requiring the Trading Vehicle and its Trading Advisor to abide by various trading limitations and policies. Preferred monitored compliance with these trading limitations and policies, which included, but was not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, pursuant to the Advisory Agreement among the Trading Vehicle, Preferred and the Trading Advisor, the Trading Vehicle would have automatically terminated the Advisory Agreement, if the net asset value allocated to the Trading Advisor declined as of the end of any business day by at least 40% from the value at the beginning of any calendar year or since the effective date of the Advisory Agreement. The decline in net asset value was after giving effect for distributions, subscriptions and redemptions.
The Trading Vehicle’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Trading Vehicle all assets of the Trading Vehicle relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At April 30, 2007 (date of liquidation) and December 31, 2006, such segregated assets totaled $19,495,157 and $23,649,869, respectively. Part 30.7 of the CFTC regulations also requires the Trading Vehicle’s futures commission merchant to secure assets of the Trading Vehicle related to foreign futures trading which totaled $(124) and $136,650 at April 30, 2007 (date of liquidation) and December 31, 2006, respectively.
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WMT III SERIES H/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 8. | FINANCIAL HIGHLIGHTS |
The following information presents the financial highlights of the Trading Vehicle for the period January 1, 2007 to April 30, 2007 (Date of Liquidation) and for the year ended December 31, 2006. This information has been derived from information presented in the financial statements.
Period January 1, 2007 (Date of Liquidation) | Year Ended December 31, 2006 | |||||
Total Return(1) | ||||||
Total return before incentive fee | (0.83 | )% | (1.41 | )% | ||
Incentive fee | 0.00 | % | (1.16 | )% | ||
Total return after incentive fee | (0.83 | )% | (2.57 | )% | ||
Ratios to average net asset value: | ||||||
Expenses prior to incentive fee(2) | 3.97 | % | 3.80 | % | ||
Incentive fee(1) | 0.00 | % | 1.17 | % | ||
Total expenses and incentive fee | 3.97 | % | 4.97 | % | ||
Net investment gain(2),(3) | 0.62 | % | 0.73 | % | ||
Total returns and ratios to average net asset value are calculated for Members’ capital taken as a whole. An individual Member’s total return and ratios may vary from the above return and ratios based on the timing of additions and redemptions.
| (1) | Not annualized |
| (2) | Annualized |
(3) | Represents interest income less total expenses (exclusive of incentive fee). |
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SECTION IV
WMT III SERIES I/J TRADING VEHICLE LLC
FINAL ANNUAL REPORT
As of April 30, 2007 (Date of Liquidation) and December 31, 2006
And for the Periods from January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
WMT III SERIES I/J TRADING VEHICLE LLC
STATEMENTS OF FINANCIAL CONDITION
April 30, 2007 (Date of Liquidation) and December 31, 2006
April 30, 2007 | December 31, 2006 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 7,830 | $ | 0 | ||
Cash in commodity trading accounts | 22,072,902 | 22,775,701 | ||||
Net unrealized gain on open futures contracts | 923,605 | 1,593,108 | ||||
Interest receivable | 85,232 | 88,932 | ||||
Total assets | $ | 23,089,569 | $ | 24,457,741 | ||
LIABILITIES | ||||||
Accrued expenses | $ | 76,078 | $ | 31,981 | ||
Commissions payable | 0 | 4,045 | ||||
Advisor incentive fee payable | 0 | 129,513 | ||||
Advisor management fee payable | 77,601 | 40,845 | ||||
Redemptions payable | 22,935,890 | 0 | ||||
Total liabilities | 23,089,569 | 206,384 | ||||
MEMBERS’ CAPITAL | ||||||
Member I - Class I | 0 | 261,165 | ||||
Member J - Class I | 0 | 22,894,320 | ||||
Member J - Class II | 0 | 1,095,872 | ||||
Total members’ capital (Net Asset Value) | 0 | 24,251,357 | ||||
Total liabilities and members’ capital | $ | 23,089,569 | $ | 24,457,741 | ||
See accompanying notes.
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WMT III SERIES I/J TRADING VEHICLE LLC
CONDENSED SCHEDULES OF INVESTMENTS
April 30, 2007 (Date of Liquidation) and December 31, 2006
| April 30, 2007 | December 31, 2006 | ||||||||||||
| Net Unrealized Gain | Net Unrealized Gain as a % of Net Asset | Net Unrealized Gain (Loss) | Net Unrealized Gain (Loss) as a % of Net Asset Value | ||||||||||
Long futures contracts: | |||||||||||||
Currencies | $ | 0 | 0.00 | % | $ | (361,213 | ) | (1.49 | )% | ||||
Metals | 913,445 | 3.88 | % | 97,782 | 0.40 | % | |||||||
Stock indices | 0 | 0.00 | % | 582,995 | 2.41 | % | |||||||
Total long futures contracts | 913,445 | 3.88 | % | 319,564 | 1.32 | % | |||||||
Short futures contracts: | |||||||||||||
Currencies | 0 | 0.00 | % | 335,930 | 1.38 | % | |||||||
Energy | 0 | 0.00 | % | 310,563 | 1.28 | % | |||||||
Interest rates | 0 | 0.00 | % | 926,304 | 3.82 | % | |||||||
Metals | 10,160 | 0.04 | % | (299,253 | ) | (1.23 | )% | ||||||
Total short futures contracts | 10,160 | 0.04 | % | 1,273,544 | 5.25 | % | |||||||
Total futures contracts | $ | 923,605 | 3.92 | % | $ | 1,593,108 | 6.57 | % | |||||
| * | Prior to liquidating redemptions. |
See accompanying notes.
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WMT III SERIES I/J TRADING VEHICLE LLC
STATEMENTS OF OPERATIONS
For the Period January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
| Period January 1, 2007 to April 30, 2007 | Year Ended December 31, 2006 | ||||||
REVENUES | |||||||
Realized | $ | (1,852,663 | ) | $ | 414,806 | ||
Change in unrealized | (669,503 | ) | 1,691,544 | ||||
Interest income | 362,757 | 842,504 | |||||
Total revenues (loss) | (2,159,409 | ) | 2,948,854 | ||||
EXPENSES | |||||||
Brokerage commissions | 64,599 | 167,270 | |||||
Advisor incentive fee | 0 | 267,294 | |||||
Advisor management fee | 157,708 | 394,633 | |||||
Operating expenses | 63,839 | 57,482 | |||||
Total expenses | 286,146 | 886,679 | |||||
NET INCOME (LOSS) | $ | (2,445,555 | ) | $ | 2,062,175 | ||
See accompanying notes.
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WMT III SERIES I/J TRADING VEHICLE LLC
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)
For the Period January 1, 2007 to April 30, 2007 (Date of Liquidation) and
For the Year Ended December 31, 2006
| Members’ Capital | ||||||||||||||||
| Member I - Class I | Member J - Class I | Member J - Class II | Total | |||||||||||||
Balance at December 31, 2005 | $ | 509,108 | $ | 10,028,449 | $ | 0 | $ | 10,537,557 | ||||||||
Additions | 209,705 | 13,009,055 | 1,098,424 | 14,317,184 | ||||||||||||
Redemptions | (475,143 | ) | (2,134,871 | ) | (55,545 | ) | (2,665,559 | ) | ||||||||
Net income | 17,495 | 1,991,687 | 52,993 | 2,062,175 | ||||||||||||
Balance at December 31, 2006 | 261,165 | 22,894,320 | 1,095,872 | 24,251,357 | ||||||||||||
Additions | 100,000 | 2,881,832 | 440,624 | 3,422,456 | ||||||||||||
Redemptions | (9,592 | ) | (1,610,471 | ) | (54,999 | ) | (1,675,062 | ) | ||||||||
Net loss for the period January 1, 2007 to April 30, 2007 | (34,139 | ) | (2,274,324 | ) | (137,092 | ) | (2,445,555 | ) | ||||||||
Members’ capital before liquidating redemptions | 317,434 | 21,891,357 | 1,344,405 | 23,553,196 | ||||||||||||
Liquidating redemptions | (317,434 | ) | (21,891,357 | ) | (1,344,405 | ) | (23,553,196 | ) | ||||||||
Balance at April 30, 2007 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
See accompanying notes.
-50-
WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS
| Note 1. | ORGANIZATION |
| A. | General Description of the Trading Vehicle |
WMT III Series I/J Trading Vehicle LLC (the “Trading Vehicle”) was a limited liability company organized under the laws of Delaware on March 10, 2005, which terminated on April 30, 2007 under the provisions of the Trading Vehicle’s Organization Agreement. The Trading Vehicle commenced trading operations on December 1, 2005. The Trading Vehicle was formed to engage in the speculative trading of a diversified portfolio of futures contracts and options on futures contracts. Preferred Investment Solutions Corp. (“Preferred” or the “Managing Owner”) was the Managing Owner of the Trading Vehicle. The Trading Vehicle consisted of three members: World Monitor Trust III – Series I, Class I (“Member I”), World Monitor Trust III – Series J, Class I (“Member J-Class I”) and World Monitor Trust III – Series J, Class II (“Member J-Class II) (collectively, the “Members”). Preferred was also the Managing Owner of each of the Members. Upon making the initial capital contribution, each Member received Voting Membership Interests.
The Trading Vehicle was a member-managed limited liability company that was not registered in any capacity with, or subject directly to regulation by, the Commodity Futures Trading Commission (“CFTC”) or the United States Securities and Exchange Commission.
| B. | The Trading Advisor |
The Trading Vehicle entered into an advisory agreement with Eagle Trading Systems Inc. (the “Trading Advisor”) to make the trading decisions for the Trading Vehicle. The Trading Advisor managed the assets in the Trading Vehicle pursuant to its Momentum program.
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. | Basis of Accounting |
The financial statements of the Trading Vehicle are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Commodity futures transactions are reflected in the accompanying statement of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) is reflected in the financial statements in accordance with Financial Accounting Standards Board Interpretation No. 39 – “Offsetting of Amounts Related to Certain Contracts.” The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. Any change in net unrealized gain or loss during the current period is reported in the statement of operations. Realized gains and losses on commodity transactions are recognized in the period in which the contracts are closed.
Brokerage commissions include other trading fees and are charged to expense when contracts are opened.
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WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| A. | Basis of Accounting (Continued) |
The Trading Vehicle has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 102, “Statement of Cash Flows – Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.”
Consistent with standard business practices in the normal course of business, the Trading Vehicle provided general indemnifications to its Trading Advisor and others when they act, in good faith, in the best interests of the Trading Vehicle. The Trading Vehicle is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Trading Vehicle recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Preferred as Managing Owner of the Trading Vehicle has evaluated the impact of adopting FIN 48 on the Trading Vehicle’s financial statements. In Preferred’s opinion, the adoption of FIN 48 has no material impact on the Trading Vehicle, as the Trading Vehicle’s tax position is based on established tax precedence for the tax treatment of investment partnerships as flow through tax entities.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after the Trading Vehicle’s liquidation. Given this, Preferred, as Managing Owner of the Trading Vehicle, has concluded that SFAS No. 157 has no impact on the Trading Vehicle’s financial statements.
-52-
WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| B. | Income Taxes |
The Trading Vehicle is treated as a partnership for Federal income tax purposes. As such, the Trading Vehicle is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Trading Vehicle may be subject to other state and local taxes in jurisdictions in which it operates.
| C. | Capital Accounts |
The Trading Vehicle accounted for additions, allocations of net gain (loss) and redemptions on a per member capital account basis.
The Trading Vehicle allocated profits and losses to its Members monthly on a pro rata basis based on each Member’s pro rata capital in the Trading Vehicle during the month. Distributions (other than redemptions of capital) could have been made at the sole discretion of the Members on a pro rata basis in accordance with the Members’ respective capital balances. The Trading Vehicle had not made any distributions prior to termination.
| D. | Foreign Currency Transactions |
The Trading Vehicle’s functional currency was the U.S. dollar; however, it transacted business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently.
| Note 3. | MANAGEMENT AND INCENTIVE FEES |
The Trading Vehicle paid the Trading Advisor a monthly management fee equal to 1/12 of 2.0% (2.0% annually) of the Trading Vehicle’s allocated assets determined as of the close of business on the last day of each month. For purposes of determining the management fee, any distributions, redemptions or reallocation of assets made as of the last day of each month were added back to the assets and there was no reduction for (i) the management fees calculated or (ii) any accrued but unpaid incentive fees due the Trading Advisor.
Additionally, the Trading Vehicle paid the Trading Advisor an incentive fee of 20% (the “Incentive Fee”) of “New High Net Trading Profits” (as defined in the Advisory Agreement). The incentive fee accrued monthly and was paid quarterly. The Trading Advisor earned incentive fees of $0 and $267,294 for the period January 1, 2007 to April 30, 2007 (Date of Liquidation) and for the year ended December 31, 2006, respectively.
| Note 4. | OPERATING EXPENSES |
Operating expenses of the Trading Vehicle were paid for by the Trading Vehicle.
-53-
WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 5. | DEPOSITS WITH BROKER |
The Trading Vehicle deposited funds with UBS Securities LLC to act as broker subject to CFTC regulations and various exchange and broker requirements. Margin requirements were satisfied by the deposit of cash with such broker. The Trading Vehicle earned interest income on assets deposited with the broker at competitive rates.
| Note 6. | ADDITIONS, DISTRIBUTIONS AND REDEMPTIONS |
The Trading Vehicle was not required to make distributions, but was permitted to do so at the discretion of the Members. A Member could have requested and received redemption of capital at any time, subject to the terms in the Organization Agreement.
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS |
The Trading Vehicle was exposed to various types of risks associated with the derivative instruments and related markets in which it invested. These risks included, but were not limiteded to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Trading Vehicle’s investment activities (credit risk).
| A. | Market Risk |
Trading in futures contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Trading Vehicle’s net assets being traded, significantly exceeds the Trading Vehicle’s future cash requirements since the Trading Vehicle intends to close out its open positions prior to settlement. As a result, the Trading Vehicle was generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Trading Vehicle considered the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Trading Vehicle’s commitments to purchase commodities is limited to the gross or face amount of the contract held. However, when the Trading Vehicle enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Trading Vehicle to unlimited risk.
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Trading Vehicle held and the liquidity and inherent volatility of the markets in which the Trading Vehicle traded.
-54-
WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 7. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED) |
| B. | Credit Risk |
When entering into futures contracts, the Trading Vehicle was exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, a clearinghouse is backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. The amount at risk associated with counterparty non-performance of all of the Trading Vehicle’s contracts was the net unrealized gain included in the statement of financial condition; however, counterparty non-performance on only certain of the Trading Vehicle’s contracts might have resulted in greater loss than non-performance on all of the Trading Vehicle’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse would have met it’s obligations to the Trading Vehicle.
The Managing Owner attempted to minimize both credit and market risks by requiring the Trading Vehicle and its Trading Advisor to abide by various trading limitations and policies. Preferred monitored compliance with these trading limitations and policies, which included, but were not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, pursuant to the Advisory Agreement among the Trading Vehicle, Preferred and the Trading Advisor, the Trading Vehicle shall automatically terminate the Advisory Agreement, if the net asset value allocated to the Trading Advisor declined as of the end of any business day by at least 40% from the value at the beginning of any calendar year or since the effective date of the Advisory Agreement. The decline in net asset value was after giving effect for distributions, subscriptions and redemptions.
The Trading Vehicle’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Trading Vehicle all assets of the Trading Vehicle relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At April 30, 2007 (date of liquidation) and December 31, 2006, such segregated assets totaled $17,200,304 and $19,166,403, respectively. Part 30.7 of the CFTC regulations also requires the Trading Vehicle’s futures commission merchant to secure assets of the Trading Vehicle related to foreign futures trading which totaled $1,670,429 and $1,732,473 at April 30, 2007 (date of liquidation) and December 31, 2006, respectively.
As of April 30, 2007 (date of liquidation), all open futures contracts mature in June 2007.
-55-
WMT III SERIES I/J TRADING VEHICLE LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
| Note 8. | FINANCIAL HIGHLIGHTS |
The following information presents the financial highlights of the Trading Vehicle for the period January 1, 2007 to April 30, 2007 (Date of Liquidation) and for the year ended December 31, 2006. This information has been derived from information presented in the financial statements.
Period January 1, 2007 to April 30, 2007 (Date of Liquidation) | Year Ended 2006 | |||||
Total Return(1) | ||||||
Total return before incentive fee | (9.56 | )% | 9.49 | % | ||
Incentive fee | 0.00 | % | (1.41 | )% | ||
Total return after incentive fee | (9.56 | )% | 8.08 | % | ||
Ratios to average net asset value: | ||||||
Expenses prior to incentive fee(2) | 3.60 | % | 3.27 | % | ||
Incentive fee(1) | 0.00 | % | 1.41 | % | ||
Total expenses and incentive fee | 3.60 | % | 4.68 | % | ||
Net investment gain (2) (3) | 0.96 | % | 1.18 | % | ||
Total returns and ratios to average net asset value are calculated for Members’ capital taken as a whole. An individual Member’s total return and ratios may vary from the above return and ratios based on the timing of additions and redemptions.
(1) | Not annualized. |
(2) | Annualized. |
(3) | Represents interest income less total expenses (exclusive of incentive fee). |
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This report on Form 10Q (the “Report”) for the quarter ending June 30, 2007 (“Second Quarter 2007”) includes forward-looking statements that reflect the current expectations of Preferred Investment Solutions Corp. (“Preferred” or the “Managing Owner”), the managing owner of World Monitor Trust III – Series J (“Registrant”), about the future results, performance, prospects and opportunities of Registrant. The Managing Owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “should,” “estimate” or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause Registrant’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the Managing Owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Introduction
General
World Monitor Trust III (the “Trust”) was formed as a Delaware Statutory Trust on September 28, 2004, with separate series (each, a “Series”) of units of beneficial interest (“Units” or “Interests”). Its term will expire on December 31, 2054 (unless terminated earlier in certain circumstances). The trustee of the Trust is Wilmington Trust Company. The Trust’s fiscal year for book and tax purposes ends on December 31.
The Trust’s Units were initially offered in four (4) separate and distinct Series: Series G, Series H, Series I and Series J (“Registrant”). The Trust may issue additional Series of Units in the future. Each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). Each Series offers Units in two classes (each, a “Class”) – Class I and Class II. Class I Units pay a service fee. Class II Units may only be offered to investors who are represented by approved correspondent selling agents who are directly compensated by the investor for services rendered in connection with an investment in the Trust (such arrangements commonly referred to as “wrap-accounts”).
Series G, H, I and J commenced trading operations on December 1, 2005.
Units in are offered as of the beginning of each month, and Units will continue to be offered in each Series until the maximum amount of each Series’ Units which are registered are sold. The Managing Owner may suspend or terminate the offering of Units of any Series at any time or extend the offering by registering additional Units. The Managing Owner terminated the offering of Units of Series H and Series I effective March 31, 2007 and dissolved Series H and Series I effective close of business on April 30, 2007.
Effective December 1, 2005, Registrant contributed its net assets to WMT III Series G/J Trading Vehicle LLC (“G/J Trading Vehicle”), WMT III Series H/J Trading Vehicle LLC (“H/J Trading Vehicle”) and WMT III Series I/J Trading Vehicle LLC (“I/J Trading Vehicle” and, together with the G/J Trading Vehicle and the H/J Trading Vehicle, the “Trading Vehicles”), Delaware limited liability companies, and received a voting membership interest in each Trading Vehicle. The Trading Vehicles were formed to function as aggregate trading vehicles for its members. Registrant and Series G are the sole members of G/J Trading Vehicle. Registrant, Series H and Futures Strategic Trust were the sole members of H/J Trading Vehicle. Registrant and Series I were the sole members of I/J Trading Vehicle. Preferred is the Managing Owner of Registrant and each Series and has been delegated administrative authority over the operations of the Trading Vehicles. The Trading Vehicles engage in the speculative trading of futures and forward contracts. All references herein to Registrant’s relationship with the Trading Advisors (as defined below) shall, unless the context states otherwise, refer to Registrant’s relationship with the Trading Advisors through the
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Trading Vehicles. The financial statements of the Trading Vehicles, including the condensed schedule of investments, are included in Section II, III and IV of the financial statements and should be used in conjunction with Registrant’s financial statements.
Effective May 1, 2007, Registrant withdrew as a member of the H/J Trading Vehicle and the I/J Trading Vehicle and re-allocated assets to managed accounts in the name of Registrant (“Managed Accounts”). The assets that Registrant allocated to the I/J Trading Vehicle were re-allocated to a managed account to be managed by Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program. The assets that Registrant allocated to the H/J Trading Vehicle were re-allocated to a managed account managed by Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program. The H/J Trading Vehicle and I/J Trading Vehicle were dissolved effective as of April 30, 2007.
Managing Owner and its Affiliates
The Managing Owner and or its affiliates have agreed to purchase and maintain an interest in Registrant in an amount not less than 1% of the Net Asset Value of such Series or $25,000, whichever is greater.
The Offering
Up to $37,500,000 Series G, Class I; $12,500,000 Series G, Class II; $281,250,000 Series J, Class I; and $93,750,000 Series J, Class II of Units are being offered (“Subscription Maximum”). The offering of Units of Series H, Class I (up to $37,500,000), Series H, Class II ($12,500,000), Series I, Class I ($18,750,000) and Series I, Class II ($6,250,000) were terminated effective March 31, 2007.
Interests in Series G and Series J are currently being offered to investors who meet certain established suitability standards, with a minimum initial subscription of $5,000 (and for Registrant, $2,000 for certain “benefit plan investors” (including IRAs)), although the minimum purchase for any single Series is $500. Limited Units and General Units are sometimes referred to as “Units”.
Initially, the Limited Units for each Series were offered for a period ending December 1, 2005 (“Initial Offering Period”) at $100 per Interest. The Subscription Minimum of $30,000,000 for Series J was reached during the Initial Offering Period permitting all Series to commence trading operations. Registrant completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443, which was fully allocated to the Trading Vehicles. Until the subscription maximum for Series G and Series J is reached or the offering of a Series’ Units is terminated, each such Series’ Units will continue to be offered on a monthly basis at the then current Net Asset Value per Unit.
The Trading Advisors
Each Trading Vehicle has its own independent commodity trading advisor that makes such Trading Vehicle’s trading decisions. Each of G/J Trading Vehicle, H/J Trading Vehicle and I/J Trading Vehicle entered into advisory agreements with Graham Capital Management, LP (“Graham”), Bridgewater Associates, Inc. (“Bridgewater”) and Eagle, respectively (the “Trading Advisors”), to make the trading decisions for each Trading Vehicle. Graham trades 100% of the assets of G/J Trading Vehicle pursuant to Graham’s Global Diversified at 150% Leverage program, which is a technical, systematic, global macro program. Bridgewater traded 100% of the assets of H/J Trading Vehicle pursuant to Bridgewater’s Aggressive Pure Alpha Futures Only – A No Benchmark program, which is a fundamental, systematic, global macro program. Eagle traded 100% of the assets of I/J Trading Vehicle pursuant to Eagle’s Momentum Program, which is a technical, systematic, global macro program. The advisory agreements may be terminated for various reasons, including at the discretion of the Trading Vehicles. The Trading Vehicles have allocated 100% of the proceeds from the initial and continuous offering of the Registrant to the Trading Advisors.
G/J Trading Vehicle pays Graham a monthly management fee equal to 1/12 of 2.5% (2.5% annually) of such Trading Vehicle’s Net Asset Value. H/J Trading Vehicle paid Bridgewater a monthly management fee equal to 1/12 of 3.0% (3.0% annually) of such Trading Vehicle’s Net Asset Value. I/J Trading Vehicle paid Eagle a monthly management fee equal to 1/12 of 2.0% (2.0% annually) of such Trading Vehicle’s
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Net Asset Value. Each Trading Vehicle also pays the Trading Advisor an incentive fee of 20% of New High Net Trading Profits (as defined in the applicable Advisory Agreement) generated by such Trading Vehicle. Incentive fees will accrue monthly and be paid quarterly in arrears.
Pursuant to the changes discussed above, effective May 1, 2007, Eagle and Ortus serve as Trading Advisors for the Managed Accounts in the name of Registrant. Registrant pays Ortus a monthly management fee equal to 1/12 of 2.0% (2.0% annually) of the assets allocated to Ortus for trading and an incentive fee of 20% of the New High Net Profits achieved by Ortus with respect to the assets allocated to it. Registrant pays Eagle a monthly management fee equal to 1/12 of 2.0% (2.0% annually) of the assets allocated to Eagle for trading and an incentive fee of 20% of the New High Net Profits achieved by Eagle with respect to the assets allocated to it.
Competition
The Managing Owner and its affiliates have formed, and may continue to form, various entities to engage in the speculative trading of futures, forward and options contracts which have certain of the same investment policies as the Registrant.
Registrant is an open-end fund, which solicits the sale of additional Limited Interests on a monthly basis until the maximum amount of Limited Interests being offered by Registrant have been sold. As such, Registrant may compete with other entities, whether or not formed by the Managing Owner, to attract new participants. In addition, to the extent that the Trading Advisor recommends similar or identical trades to Registrant and other accounts that it manages, Registrant may compete with those accounts for the execution of the same or similar trades, as well as with other market participants.
Employees
Registrant has no employees. Management and administrative services for Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3, 4, 5 and 6 to Registrant’s financial statements included in its annual report for the year ended December 31, 2006 (“Registrant’s 2006 Annual Report”), which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2006.
Critical Accounting Policies
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance. Applying these policies requires the Managing Owner to make judgments, estimates and assumptions in connection with the preparation of Registrant’s financial statements. Actual results may differ from the estimates used.
The Managing Owner has evaluated Registrant’s financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For a further discussion of Registrant’s significant accounting policies, see Note 2 to Registrant’s financial statements for the year ended December 31, 2006, which is filed as an exhibit to Registrant’s annual report on Form 10K for the fiscal year ended December 31, 2006.
The valuation of Registrant’s investments that are not traded on a United States or internationally recognized futures exchange is a critical accounting policy. The market values of futures (exchange traded) contracts is verified by Registrant’s administrator, which obtains valuation data from third party data providers such as Bloomberg and Reuters and compares those prices with Registrant’s clearing broker. The market value of currency swap and forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices quoted as of 3 PM on the last business day of the reporting period. All values assigned by the administrator and confirmed by the Managing Owner are final and conclusive as to all of Registrant’s unitholders.
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As such, if actual results vary from estimates used, they are not anticipated to have a material impact on the financial statements and related disclosures.
Registrant records all investments at fair value in its financial statements, with changes in fair value reported as a component of Trading Profits (Losses) in the Statements of Operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that Registrant recognize in its financial statements, the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Managing Owner evaluated the impact of adopting FIN 48 on Registrant’s financial statements. In the Managing Owner’s opinion, the adoption of FIN 48 had no material impact on Registrant, as Registrant’s tax position is based on established tax precedence for the tax treatment of investment partnerships as flow through tax entities.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Managing Owner is currently evaluating the impact of adopting SFAS No. 157 on the Registrant’s financial statements. At this time, the impact to the Registrant’s financial statements has not been determined.
Liquidity and Capital Resources
Registrant commenced operations on December 1, 2005 with gross proceeds of $31,024,443 allocated to commodities trading. Additional contributions raised through the continuous offering of limited interests (“Limited Interests”) and general interests (“General Interests” and, together with the Limited Interests, “Interests”) of beneficial ownership in Registrant for the period from December 1, 2005 (commencement of operations) to June 30, 2007 resulted in additional gross proceeds to Registrant of $89,365,863.
Interests in Registrant may be redeemed on a monthly basis, but are subject to a redemption fee if transacted within one year of the effective date of purchase. Redemptions of Limited Interests for Second Quarter 2007, Year-To-Date 2007 and for the period from December 1, 2005 (commencement of operations) to June 30, 2007 were $5,191,883, $8,616,921 and $18,259,168 respectively. Redemptions of Limited Interests for Second Quarter 2006, Year-To-Date 2006 and for the period from December 1, 2005 (commencement of operations) to June 30, 2006 were $129,840, $246,236 and $246,236, respectively.
Redemptions of General Interests for Second Quarter 2007, Year-To-Date 2007 and for the period from December 1, 2005 (commencement of operations) to June 30, 2007 were $0, $0 and $1,000, respectively. Redemptions of General Interests for Second Quarter 2006, Year-To-Date 2006 and for the period from December 1, 2005 (commencement of operations) to June 30, 2006 were $0, $0 and $0, respectively.
Future redemptions will impact the amount of funds available for investment in commodity contracts in subsequent periods.
Interests owned in any Series of the Trust may be exchanged, without any charge, for Interests of one or more other Series of the Trust on a monthly basis for as long as Limited Interests in those Series are being offered to the public. As such, Limited Interests in Registrant may be exchanged for Limited Interests in Series G, and Limited Interests in Series G may be exchanged for Limited Interests in
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Registrant. However, because Units in Series H and Series I are no longer being offered to the public, Limited Interests in Registrant may not be exchanged for Limited Interests in Series H or Series I, nor may Limited Interests in Series H or Series I be exchanged for Limited Interests in Registrant. Future redemptions will impact the amount of funds available for investment in commodity contracts in subsequent periods.
At June 30, 2007, 100% of Registrant’s net assets were allocated to commodities trading through its investments in the G/J Trading Vehicle and the managed accounts. A significant portion of Registrant’s net assets was held in cash, which was used as margin for trading in commodities. In as much as the sole business of Registrant is to trade in commodities, Registrant continues to own such liquid assets to be used as margin. The clearing broker credits Registrant (either directly or through the Trading Vehicle) with interest income earned on accounts maintained with the clearing broker during each month.
The commodities contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent Registrant (either directly or through the Trading Vehicle) from promptly liquidating its commodity futures positions.
Since Registrant’s business is to trade futures and forward contracts (through its investment in the Trading Vehicles and Managed Accounts), its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond Registrant’s experience to date and could ultimately lead to a loss of all of substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Registrant, the G/J Trading Vehicle and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 9 to the financial statements for a further discussion on the credit and market risks associated with Registrant’s futures and forward contracts.
Registrant does not have, nor does it expect to have, any capital assets.
Market Overview
Following is a market overview for Second Quarter 2007 and Second Quarter 2006:
Second Quarter 2007
In the US, generally tame inflation readings in the second quarter appeared to lessen the pressure on the US Federal Reserve (“Fed”) and the most recent Federal Open Market Committee (“FOMC”) statement pointed to relatively balanced risks. The Fed Chairman, Ben Bernanke, former chairman Alan Greenspan and others have issued statements that the subprime situation, while clearly a concern, should not prove to be a major contagion.
Inflation news was encouraging, with Core Consumer Prices rising well within the Fed’s comfort zone. The headline Producer Price Index’s (“PPI”) rise was slightly worrisome, but the more-closely-watched Core PPI’s rise was more benign. Industrial Production was flat overall while Capacity Utilization dipped slightly. Retail sales jumped in May, with the largest gain in sixteen months. Gasoline, auto supplies, building supplies and clothing led the charge as consumers still appeared mostly undaunted. Leading
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indicators increased slightly in May, suggesting the economy is weathering the housing and gasoline price storm. On the manufacturing side, the Philly Fed Index saw its highest reading in two years.
Overall, the employment picture in the second quarter continued to look quite healthy. Nonfarm payrolls rose in May while the unemployment rate is forecast to remain unchanged. Average hourly earnings rose slightly.
Housing persists as the US economy’s primary risk. During the second quarter, signs of slight improvements seen in May were absent in June. For the first five months of the year, both housing permits and housing starts were off more than 25%. The South, considered the engine of growth for the housing sector, provided the weakest performance during the second quarter. The Home Builders Confidence Index fell to a sixteen-year low in June. Existing home sales also fell slightly and existing home inventories rose. Prices in the ten largest US cities are declining at the fastest pace in sixteen years.
Predictions for third quarter Gross Domestic Product (“GDP”), a measure of economic growth, are seen higher. The International Monetary Fund issued a report stating that the US economy remained close to the 2% annualized GDP “stall speed.” However, while the inflation picture might dictate against a Fed rate cut, this economic growth scenario is seen by many to counter a rate hike.
Foreign interest rate yields have been rising across the board. The European Union (“EU”), Great Britain, Switzerland and New Zealand all raised rates in the second quarter. The Reserve Bank of Australia remained unchanged, but its statements were seen as hawkish. Many market participants view the Bank of Japan to remain on hold after its recent first quarter increase.
Currencies:The US dollar saw a record low against the euro during the second quarter. Rising European interest rates encouraged demand for the euro. EU economic data for the most part continue to indicate solid growth and a modest inflation threat. Central bank diversification into the euro was also a positive factor. The British pound sterling also rose against the dollar during the quarter. Inflation concerns, capacity constraints and elevated housing prices have led the Bank of England to maintain a hawkish tone, including a second quarter rate hike and expectations of more to come during the third quarter. The country’s new prime minister, Gordon Brown, was quickly tested by a series of terror attacks, but the pound showed little reaction.
During the quarter, the Japanese yen was pressured by the US dollar and also on a carry trade basis against the Australian and New Zealand dollars. Japanese economic data has been moderate, with little hint of inflation. The Peoples Bank of China continues to drain liquidity and increase interest rates gradually. It has made mild concessions to the US, but is moving slowly regarding reform. The Chinese yuan had its strongest quarter since the dollar link was eliminated in 2005. The Australian dollar continues to be firm, and recent upward GDP revisions have rekindled inflation fears. New Zealand raised rates to 8.00% in May, citing consumer inflation. The Canadian dollar reached a thirty-year high against the US Dollar in the second quarter.
Energies:After trading between $60 and $65 for much of the second quarter, crude broke out to the upside in June, topping $70 for the first time in nine months. Concerns surrounding product availability, refinery utilization, geopolitical factors including Venezuelan nationalization, Nigerian unrest, Iran’s nuclear program and Hamas aggression, along with a terror threat in the UK, all served to push prices higher. In addition, refinery utilization at the end of June stood well under the seasonal norm.
Heating oil mirrored crude’s June breakout and ended the quarter over 5% higher. Distillate inventories are now substantially below last season’s levels. A series of refinery outages that have been slow to get back on line have placed supplies at dangerously low levels, particularly with the peak hurricane season not yet reached. Distillate fuel demand is up almost 4% from 2006 levels. Reformulated gasoline prices rose over 10% during the quarter overall and prices at the pump peaked in late May. Consumer resistance seemed limited during the second quarter.
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Trading patterns were volatile and natural gas prices fell over 16% during the second quarter as supply built and the weather held extremely benign.
Grains:Corn prices were extremely volatile during the quarter. The June USDA Supply and Demand Report caused prices to increase, only to drop on the heels of a bullish Planted Acreage Report, which inferred that more acres of corn would be planted in the season ahead than in any other period since the mid 1940’s, when the US attempted to feed post-war Europe. Wheat prices reached their highest prices in more than a decade during the last trading session of the second quarter. This strength came as a result of a continually tightening global demand, which has been exacerbated by the worst drought seen in Australia in more than 100 years. The USDA Planted Acreage Report showed that as a result of higher prices, more than a 5% increase in wheat had been sown this season, consistent with the Intentions Report. From the Intentions Report, and the data gleaned from the estimates of other crops, it is apparent that corn acreage was increased at the expense of beans and cotton and that wheat plantings were consistent. Soybean prices were volatile during the quarter, rocked by the Planted Acreage Report that revealed that soybean acreage had been reduced by approximately 15%. Cotton prices climbed steadily during the quarter due to a tightening supply/demand scenario. The Report also revealed that cotton acreage would be cut by 27% from the previous season.
Indices:US stocks ended the quarter higher overall, but off their highs late reached during the quarter. Strength in foreign equities, hectic M&A activity, forecast earnings and solid global growth lent support. The recent spike to 5.32% in the benchmark 10-Year note could prove to be a high for an extended period and many market participants feel that the latest FOMC minutes suggest that the Fed will remain on hold for an extended period. The summer season is upon the market, M&A activity appears to have slowed somewhat and the markets continue to watch the subprime sector with caution.
In Europe, it was a good quarter for the three largest indices, the German DAX, French CAC and UK FTSE, and for the region in general. All three major industries scored seven-year highs during the second quarter while closing somewhat below those levels. Even the specter of higher interest rates from the European Central Bank and the Bank of England failed to meaningfully diminish enthusiasm, but the weaker US markets and the terror issue in the UK did weigh on market psychology during the final days of June as the euro bourses turned in a mixed June performance.
Asian equity indices also scored second quarter gains and, like Europe, attracted significant foreign capital flows. The Shanghai market was particularly volatile during the quarter but had a clear upside bias as it ended June. Japan was aided by decent economic data as well as low inflation and the prospect of no imminent rate hike from the Bank of Japan. The Hang Seng finished higher and the Australian All Ordinaries were able to withstand hawkish comments from the Reserve Bank of Australia and soar to record levels.
Interest Rates:June proved a volatile month for US treasuries, on the back of substantial risk aversion mentality. They became the asset of choice as subprime issues, including the Bear Stearns/Merrill Lynch situation took center stage. However, generally tame inflation readings appeared to lessen pressure on the Fed and the most recent FOMC statement pointed to relatively balanced risks.
Sharply higher foreign rates were a factor in rising yields, but that lessened to some degree in the final weeks of the quarter. The EU, UK and Switzerland all hiked rates in the second quarter. The Reserve Bank of Australia sounded hawkish as the quarter ended. The Bank of Japan remained unchanged, after raising rates in the first quarter. Yields on the 10-year German Bund hit a new high during the quarter.
Metals:Volatile copper prices closed well over their first quarter close. A series of labor problems in Chile, Peru, Mexico and Canada were particularly supportive in the final half of June. LME spreads remain in backwardation, indicating supply tightness. Refined consumption continues to grow faster than production. Aluminum prices were quiet during the quarter. In contrast, nickel prices were quite volatile, plunging over 20% in June alone, after being one of the top performers of the Dow Jones/AIG Index. Warehouse stocks are still low, but they have been steadily rising and stainless steel demand has decreased somewhat. Zinc prices continue to fall, down over 20% for the year to date, despite overall strong global demand. Lead prices were higher in the second quarter on tight inventories and strong
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demand. China, the world’s largest lead producer, imposed a 10% tax on overseas sales. Tin prices finished the quarter slightly off their mid-March eighteen-year high. Gold prices were defensive during most of the second quarter, down slightly overall. Heavy selling from European central banks was a particular negative. Volatility was a watchword for silver during the quarter as funds moved in and out of the metal with most of the activity on the sell side during the final half of June as indicated in CFTC data. Platinum finished up slightly overall for the quarter. Global industrial demand has been solid, with strong jewelry demand and an increase in autocatalytic usage spurred by a growing diesel market. Palladium also ended the quarter slightly higher. South African labor concerns lent support to prices.
Softs:An increased sugar supply from Brazil was the latest bearish report for the commodity. Last year’s high prices, which encouraged increased production, are now taking their toll on prices. Coffee prices also fell during the second quarter, due to similarly rising inventories and favorable Brazilian weather. Cocoa prices rose to a four-year high after an attack on the prime minister of the Ivory Coast, pointing out how severe the country’s unrest is and restoring the “war premium” that had temporarily been lost in the cocoa market. Live cattle prices fell slightly during the second quarter and are down slightly year to date. Lower corn prices were noted in May and June, after cattle ranchers suffered with high feed prices for much of the year. An easing in the hype surrounding ethanol helped push corn prices lower. Cattle is now in peak-demand barbeque season and exports continue to be strong. Inventories are ample but show some evidence of decline. Live hog prices were volatile in the second quarter and ended the first half of the year down over 5% overall.
Second Quarter 2006
News from the Federal Reserve (“Fed”) and its new chairman, Ben Bernanke, dominated the markets in the second quarter of 2006. Chairman Bernanke appears fully committed to fighting inflation and has quickly eliminated speculation that he might take a softer stance than his predecessor. The Fed continued to raise rates throughout the quarter. The Fed minutes have repeatedly stated that the Federal Open Market Committee’s (“FOMC”) actions will be data dependent and to this point that means the rate hike cycle is likely to continue at least for one addition meeting. As global liquidity and geopolitical concerns arose during the second quarter, U.S. Treasury yields found safe haven support.
Inflation and housing were again the major factors within the U.S. economic landscape. As gasoline prices continued to rise, inflation data drew particular attention. The housing market was somewhat mixed and the outlook remains uncertain. Despite these factors, final first quarter Gross Domestic Product (“GDP”) was revised upwards to 5.3% from the original 4.6%. However, the impact of a weaker housing sector and high gasoline and energy prices may be starting to take a toll, as the preliminary GDP for the second quarter was lower than expected at 2.5%.
The Eurozone continued to experience economic improvement in the second quarter. However, like the U.S., the third quarter may present a somewhat less buoyant picture. The euro turned in a strong quarter benefiting from central bank currency diversification. Interest rates were a primary focus as the European Central Bank (“ECB”) hiked rates by 25 basis points to 2.75% at its June meeting with further increases anticipated later in the year. An ongoing pattern of improved economic data was noted, particularly from Germany. In the U.K., the Bank of England (“BOE”) made no rate changes; economic data was fairly decent but showed some strain as the third quarter began.
In Japan, speculation that the Bank of Japan (“BOJ”) would finally end its “zero interest rate” policy proved correct as they imposed a 0.25% rate during the first week of July. Japan was at the forefront of the short-lived liquidity crisis, which instigated a sell-off in global assets during the second quarter, and their equity market fell approximately 9%. Other Asian equity markets saw a similar fate with Korea, Hong Kong and Shanghai also experiencing weakness. Despite the temporary disruption, overall economic data from Japan, and the region in general, showed an improved tone. China’s growth continues to be strong, as second quarter GDP rose to a 10 year high of 11.2%. The Bank of China raised interest rates in April in an attempt to harness growth and its inflationary implications. Further rate hikes are expected.
The Canadian economy has been moving at a brisk pace all year and the Bank of Canada has steadily raised rates. However, the statement at the conclusion of its most recent meeting suggests that a pause
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may be on the horizon. The Canadian dollar strengthened in the second quarter of 2006 and Canada’s economic fortunes seem bright.
Currencies:Interest rates were the primary drivers of the currency sector in the second quarter of 2006. The U.S. dollar suffered against the euro as the ECB appears to be at the beginning of its rate hike cycle and the Fed appears to be close to the end. Additionally, a continued pattern of improving economic data in the Eurozone was noted throughout the quarter, particularly from Germany, the leading driver of the region’s growth. The euro also benefited from central bank currency diversification away from the U.S. dollar as the global reserve currency, as Russia, China, Sweden, and the United Arab Emirates were prominent in this trend, which is expected to continue. Despite this pressure, the U.S. dollar attracted flight to safety support in mid June when the Korean missile crisis emerged.
In Japan, the focus was also on interest rates, as market participants attempted to discern when the BOJ would end its long standing “zero interest rate” policy. The BOJ drained liquidity throughout the quarter in preparation for this eventuality. The Japanese economy continues to improve, as highlighted by one of the most watched economic indicators, the Tankan Report, which was released at the end of June and the second quarter saw the definitive conclusion of the nation’s deflationary era. The yen was pressured a bit in late June by the scandal surrounding BOJ Governor Fukui.
The Chinese yuan traded at 7.999 to the U.S. dollar in late June compared to 8.017 at the end of the first quarter and has gained slightly over 1% since its 2.1% revaluation in July 2005. Recent comments from Bank of China officials have hinted at a potentially faster pace, but the markets have lent little credence to this statement.
Energies:The energy sector was volatile in the second quarter of 2006. Crude ended the quarter around $74 per barrel, up approximately 8.5% from the end of the previous quarter. Geopolitical uncertainty regarding Iran, North Korea and Nigeria were supportive of crude. Additional support is coming from increased demand from China and India. The price at the pump for unleaded gasoline remains high, but demand continued to display a relatively inelastic pattern. The only component of the sector that fell was natural gas. With plenty of supply, moderate temperatures and a slow start to the hurricane season, prices of natural gas continued their downward slide.
Grains:The sector was mixed for the quarter. On the production side of the equation, weather played the single largest role in corn prices for the second quarter. On a week-by-week basis, as chances for seasonally beneficial precipitation ebbed and flowed, corn prices moved higher and lower respectively. The start of the period found the corn market firmly ensconced in an uptrend that began at the end of calendar year 2005, but prices fell off sharply in June after the release of a U.S. Department of Agriculture (“USDA”) Supply/Demand Report that raised questions about the demand for corn. The decline in corn prices, along with many other commodity markets, may have had its roots in a consumption-restricting announcement made by the Chinese government. The statement made was that internal growth needed to be slowed, in light of a too-rapidly expanding economy. The graphic profile of the wheat market is almost identical as that seen in corn. For most of the second quarter, soybean prices moved sideways. Due to China’s dependence on Brazilian soybean imports, the tightening credit situation in China will likely not have as great a bearing on U.S. soybean prices.
Indices:By and large, global equity indices were lower in the second quarter of 2006 versus the first quarter of 2006. For most of the quarter, U.S. stocks suffered from the uncertainty surrounding the interest rate environment and from fears that the U.S. economy was slowing, mainly due to higher energy prices and a softer housing sector. The S&P 500 ended the quarter down 1.9% and the NASDAQ ended the quarter down 7.2%. Going forward U.S. equities are likely to remain highly sensitive to any events that might alter the outlook for the Fed, particularly inflation related data.
European markets had been strong for most of the year prior to the sell-off in May. Foreign money flows into Europe slowed significantly in May and were still at a somewhat reduced level in June. The German DAX ended the quarter down 4.8%, the French CAC 40 was down 4.9% and the British FTSE was down 2.2%.
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Asian markets were very volatile, particularly in May and June, as a liquidity crunch was experienced in Japan and in various other sectors around the region. Indications of higher interest rates in Japan, Korea and China in coming months provided a negative tone, but the flow of economic data took on a positive tone and bodes well for the rest of the year. Japan’s Nikkei was down 9.1% for the quarter and Korea’s Kospi was down 4.7%. Australia’s All Ordinaries closed out the quarter down approximately 1%, but the strength in resource issues aided this market and the outlook for Australia is positive.
Interest Rates:U.S. Treasuries were in a rally mode for much of May and June as the markets evaluated the new Fed under Ben Bernanke. The FOMC appeared to be taking on a more aggressively anti-inflationary tone as the quarter progressed, with the Chairman and numerous Fed Governors focusing on the threat of inflation. After closing out the first quarter at 4.85%, the yield on the 10-year Treasury Note moved over 5.26% in mid June on the market view that that the Fed would continue to raise rates through the August meeting and possibly beyond. The softer tone of the statement accompanying the 25 basis point rate hike at the end of June caught the markets by surprise. While still recognizing the risk of inflation, the Fed gave greater credence to the potential for some economic slowing, and appeared to put into question the prospect of a further rate hike in August. As June concluded, the yield on the 10-year Treasury Note stood at 5.145%.
Outside of the U.S., the ECB raised rates 25 basis points in June to 2.75%. Statements by ECB President Jean Claude Trichet regarding inflation were mixed throughout the quarter, but were leaning towards the tightening side as June ended and additional ECB rate hikes are expected later this summer. Trichet has emphasized that inflation will remain elevated and that there is a risk of a surge in consumer prices. European data, particularly from Germany remains buoyant. The 10-year German Bund was yielding 4.07% at the end of June while the 30-year stood at 4.31%.
In the first week of July, the BOJ officially ended its “zero interest rate” policy by imposing a 0.25% rate, finally putting an end to the speculation that was rampant throughout the second quarter. Other Asian banks, including the Bank of Korea, raised rates in June and there are growing indications that the Bank of China will embark on a tightening bias to temper the expected 10% plus GDP growth and its inflationary potential. The Bank of Canada raised rates another 25 basis points but the accompanying statement hinted at a pause. The Reserve Bank of Australia held rates at 5.75% but there is speculation of an increase.
Metals:Gold had been in an upside surge for the entire year until things finally came to an end, at least temporarily, in late May. Global liquidity tightness, particularly in the Far East, which impacted other commodities as well as the equity and fixed income markets, served as a clear negative for gold and essentially put an end to the rally. Geopolitical concerns surrounding Iran, Iraq and Korea have been supportive for gold and are likely to aid the bull case in coming weeks. In addition, reserve asset diversification is likely to persist. Russia, China and Sweden, along with the United Arab Emirates and other petro-nations were active in that regard during the second quarter. Petrodollars have been flowing into gold for much of the year, although that slowed somewhat in June. Silver followed a similar pattern to gold, retaining its dependent relationship with the yellow metal.
The entire base metal complex was very volatile during the second quarter. Copper ended the quarter up 37% from the previous quarter, as labor and production problems in Mexico, Chile and Zambia added to the bullish scenario. With China forecast to see 10% plus GDP growth in 2006, the demand side of the equation still looks strong, as it does for most of Asia as well as the U.S. and Europe. Mines still lack the ability to significantly ramp up production, giving copper a solid fundamental base. After surging nearly 17% in May, zinc lost 15% in June but it is still up more than 75% for the year. Fundamentally, zinc presents the strongest picture among all the base metals as it faces a significant production deficit. Nickel rallied strongly for the quarter as well. While its fundamentals have improved, as stainless steel demand increased, the recent highs are vastly ahead of reasonable value.
Softs:The sector was mixed for the second quarter, with several markets experiencing significant sell-offs in May. Sugar had been extremely firm in the first quarter through mid second quarter, before undergoing a correction in May. Following a weak performance in May, which saw sugar decline over 11%, prices rebounded in June. However, the outlook is uncertain, as the weather in Brazil’s sugar
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producing areas has been crop friendly after a period of dry conditions. Coffee prices also fell in May, losing 10%. Brazilian weather has been excellent, which weighed on sentiment throughout the second quarter. The harvest has been moving at a brisk pace and at 35% complete for the season, is ahead of schedule. The second quarter saw cocoa prices trend higher. The Ivory Coast was the focus after the disarmament process broke down yet again. Cattle scored gains in May and June as the USDA announced an agreement with Japan to restart U.S. beef exports to that nation. Hogs also put in a strong June, as Far Eastern demand remained brisk.
Sector Performance
Due to the nature of Registrant’s trading activities, a period-to-period comparison of its trading results is not meaningful. However, a discussion of Registrant’s trading results for the major sectors in which Registrant traded for Second Quarter 2007 and Second Quarter 2006 are presented below.
Second Quarter 2007
Currencies: (+) Gains were made in: Australian dollar versus U.S. dollar, euro and Japanese yen; Brazilian real; British pound; Canadian dollar versus euro, British pound and Japanese yen; Columbian peso; Czech Koruna; Dollar Index; euro versus Swedish krone; Hungarian forint; Iceland krona; Indian rupee; Indonesian rupiah; Israeli shekel; Japanese yen versus U.S. dollar, euro and Swiss franc; New Zealand dollar; Singapore dollar; and Turkish lira. Losses were made in: Argentine peso; British pound versus euro, Japanese yen and Swiss franc; Canadian dollar versus U.S. dollar and Swiss franc; Chilean peso; euro versus U.S. dollar, Polish zloty and Swiss franc; Korean won; Mexican peso; Swiss franc; Taiwan dollar; Norwegian krone; Polish zloty; Russian ruble; South African rand; Swedish krona.
Energies: (-) Losses were experienced in crude oil, gasoline and heating oil. Gains were made in brent crude and natural gas.
Grains: (-) Losses were experienced through positions in corn and soybean meal. Gains were made in soybeans and wheat.
Indices: (+) Gains were experienced in the CAC 40, DJ Stoxx 50, Dow Jones Industrial Average, FTSE 100, Nasdaq, Nikkei, OMX, S&P 500, Taiwan index, and the Tokyo stock indices. Losses were made in All Ordinaries, DAX, Hang Seng, IBEX 35, Russell 2000, S&P MIB 30 Index, and the S&P TSE 60 indices.
Interest Rates: (+) Gains were experienced in Australian Bond, Australian Bank Bills, Euribor, Eurodollars, Euroswiss, Euroyen, German 2-year Bonds, German Bobl, German Bund, Japanese Government Bonds, London Gilt, Short Sterling, U.S. Treasury Notes and Bonds. Losses were made in Canadian Bonds and Bankers Acceptances.
Meats: (+) Gains were made in live cattle.
Metals: (+) Gains were made in copper positions. Losses were experienced in gold, aluminum, and zinc.
Softs: (-) Losses were experienced in coffee and cocoa. Gains were made in sugar.
Second Quarter 2006
Currencies: (-) Losses on short positions in the euro and the Australian dollar, and long and short positions in the Mexican peso and the Swiss franc offset gains from long British pound, Japanese yen and Canadian dollar positions, resulting in a net loss for the second quarter of 2006.
Energies: (+) Long positions in heating oil and short positions in natural gas resulted in a gain for the second quarter of 2006.
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Grains: (-) The sector was down for the second quarter of 2006, with a majority of the losses from long and short positions in soybeans and wheat, and short positions in soybean meal.
Indices: (+):Gains on long Hang Seng and Taiwan Index positions, and short S&P 500 and Tokyo Index positions were the primary contributors to the profits for the quarter.
Interest Rates: (+) The interest rate sector was positive for the second quarter of 2006. Short positions in the 10-year Australian Bond, German Bund, Eurodollar, British Gilt, Short Sterling and U.S. Treasury Notes and Bonds led to the sector’s profits for the quarter.
Metals: (+) The sector generated net profits for the second quarter of 2006 with gains in long gold, aluminum, nickel, and zinc positions.
Softs: (-) The sector was negative for the second quarter of 2006 primarily due to long positions in sugar and short cocoa, live cattle and live hog positions.
Results of Operations
The Class I net asset value (“Net Asset Value”) per Interest as of June 30, 2007 was $102.20 an increase of 4.07% from the December 31, 2006 Net Asset Value per Interest of $98.20 and an increase of 13.54% from the March 31, 2007 Net Asset Value per Interest of $90.01. The Class I Net Asset Value per Interest as of June 30, 2006 was $102.83, an increase of 5.59% from the December 31, 2005 Net Asset Value per Interest of $97.38 and an increase of 6.29% from the March 31, 2006 Net Asset Value per Interest of $96.74. Past performance is not necessarily indicative of future results.
The Class II Net Asset Value per Interest as of June 30, 2007 was 101.63, an increase of 5.09% from the December 31, 2006 Net Asset Value per Interest of $96.71 and an increase of 13.93% from the March 31, 2007 Net Asset Value per Interest of $89.20. The Class II Net Asset Value per Interest as of June 30, 2006 was $100.15, an increase of 0.15% from the May 1, 2006 (date of issue) Net Asset Value per Interest of $100.00. Past performance is not necessarily indicative of future results.
Registrant’s trading gains before commissions and related fees during Second Quarter 2007 and Year-To-Date 2007 were approximately $10,604,000 and $5,082,000, respectively. Registrant’s trading gains before commissions and related fees during Second Quarter 2006 and Year-To-Date 2006 were approximately $3,510,000 and $3,895,000, respectively.
Registrant’s average net assets increased during Second Quarter 2007 and Year-To-Date 2007 in comparison to Second Quarter 2006 and Year-To-Date 2006 primarily due to additions and positive trading performance.
Interest income is earned on the Registrant’s accounts maintained with the clearing broker at competitive interest rates and on the Registrant’s pro-rata share of the Registrant’s investments in the Trading Vehicles. Therefore, interest income varies monthly according to interest rates, trading performance and redemptions. Interest income during Second Quarter 2007 and Year-To-Date 2007 was approximately $801,000 and $1,624,000, respectively, an increase of approximately $222,000 and $610,000, respectively, as compared to Second Quarter 2006 and Year-To-Date 2006, primarily due increased average net asset value. Interest income during Second Quarter 2006 and Year-To-Date 2006 was approximately $579,000 and $1,014,000, respectively.
Commissions are calculated on Registrant’s Net Asset Value at the end of each month and therefore, vary according to monthly trading performance and redemptions. Other transaction fees consist of National Futures Association fees, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the Trading Advisors execute, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions and other transaction fees during the Second Quarter 2007 and Year-To-Date 2007 were approximately $97,000 and $188,000, respectively, an increase of approximately $20,000 and $39,000, respectively, as compared to Second Quarter 2006 and Year-To-Date 2006, primarily due to increased average net asset
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value. Commissions and other transaction fees during Second Quarter 2006 and Year-To-Date 2006 were approximately $77,000 and $149,000, respectively.
Management fees are calculated on the net asset value of Registrant’s investment in the Trading Vehicle and the managed accounts at the end of each month, and therefore, are affected by monthly trading performance, contributions and redemptions. Management fees to the Trading Advisors during Second Quarter 2007 and Year-To-Date 2007 were approximately $412,000 and $841,000 respectively, an increase of approximately $81,000 and $251,000, respectively, as compared to Second Quarter 2006 and Year-To-Date 2006, primarily due to increased average net asset value.Management fees to the Trading Advisor during Second Quarter 2006 and Year-To-Date 2006 were approximately $331,000 and $590,000, respectively.
Registrant pays the Managing Owner a management fee calculated on Registrant’s net asset value at the beginning of each month, and therefore, such fee is affected by monthly trading performance, contributions and redemptions. Management fees to the Managing Owner during Second Quarter 2007 and Year-To-Date 2007 were approximately $87,000 and $175,000, respectively, an increase of approximately $22,000 and $60,000, respectively, as compared to Second Quarter 2006 and Year-To-Date 2006, primarily due to increased average net asset value.Management fees to the Managing Owner during Second Quarter 2006 and Year-To-Date 2006 were approximately $65,000 and $115,000, respectively.
Incentive fees are based on the “New High Net Trading Profits” (as defined in the Advisory Agreement) generated by the Trading Advisors, are accrued monthly and are ultimately determined as of the close of business on the last business day of any calendar quarter. Incentive fees during Second Quarter 2007 and Year-To-Date 2007 were approximately $938,000 and $938,000, respectively. Incentive fees during Second Quarter 2006 and Year-To-Date 2006 were approximately $309,000 and $466,000, respectively.
Registrant pays a service fee (“Service Fee”) with respect to Class I units, monthly, equal to 1/12 of 2% (2% per annum) of the Net Asset Value per unit of the outstanding Class I units as of the beginning of each month. The Service Fee is paid directly by Registrant to the selling agent, Kenmar Securities Inc. (“Selling Agent”), an affiliate of the Managing Owner. The Selling Agent is responsible for paying all commissions owing to the correspondent selling agents, who are entitled to receive from the Selling Agent an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I unit sold by them, payable on the date such Class I units are purchased and, commencing with the 13th month after the purchase of a Class I unit, an ongoing monthly commission equal to 1/12th of 2% (2% per annum) of the net asset value per Unit as of the beginning of the month of the Class I units sold by them. All unitholders will also pay the Selling Agent a monthly sales commission (“Sales Commission”) equal to 1/12 of 1% (1% annually) of the net asset value of the outstanding Units as of the beginning of each month. Service Fees and Sales Commissions during the Second Quarter 2007 were approximately $326,000 and $174,000, respectively, and Year-To-Date 2007 were approximately $658,000 and $349,000, respectively, an increase as compared to Second Quarter 2006 and Year-To-Date 2006 due primarily to increased average net asset value. Service Fees and Sales Commissions during Second Quarter 2006 were approximately $256,000 and $129,000, respectively, and Year-To-Date 2006 were approximately, $460,000 and $231,000, respectively.
Operating expenses include accounting, audit, tax and legal fees as well as printing and postage costs related to reports sent to Limited Owners. For the Second Quarter 2007 and Year-To-Date 2007, operating expenses were approximately $216,000 and $332,000, respectively, an increase of approximately $100,000 and $101,000, respectively, as compared to Second Quarter 2006 and Year-To-Date 2006 due primarily to increased average net asset value. Operating expenses during Second Quarter 2006 and Year-To-Date 2006 were approximately $116,000 and $231,000, respectively.
Offering costs are advanced by the Managing Owner and subject to reimbursement by Registrant, subject to certain limitations. For a further discussion of these payments, see Registrant’s financial statements for the fiscal year ended December 31, 2006, which is filed as an exhibit to Registrant’s annual report on Form 10K for the fiscal year ended December 31, 2006. Offering costs reimbursed by Registrant to the Managing Owner for the Second Quarter 2007 and Year-To-Date 2007 were approximately $87,000 and $175,000, respectively, an increase of approximately $22,000 and $58,000, respectively, as compared to the
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amount reimbursed by Registrant to the Managing Owner in the Second Quarter 2006 and Year-To-Date 2006 due primarily to increased average net asset value. Offering Costs during Second Quarter 2006 and Year-To-Date 2006 were approximately $65,000 and $117,000, respectively.
Inflation
Inflation has had no material impact on the operations or on the financial condition of Registrant from inception through June 30, 2007.
Off-Balance Sheet Arrangements and Contractual Obligations
As of June 30, 2007, Registrant had not utilized special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers, such as our accountants, undertake in performing services which are in the best interests of Registrant. While Registrant’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on Registrant’s financial position.
Registrant’s contractual obligations are with the Managing Owner, Eagle, Ortus and the commodity broker for each Managed Account. With respect to Registrant’s investment in the Trading Vehicles, Registrant’s contractual obligations are with the Trading Vehicles, the Trading Advisor to each Trading Vehicle, and each Trading Vehicle’s commodity broker. Management fees payable by the Registrant to the Trading Advisors (including the Trading Advisor to each Trading Vehicle) and the Managing Owner are calculated as a fixed percentage of Registrant’s Net Asset Value. Incentive fees payable by each Trading Vehicle to its respective Trading Advisor is at a fixed rate, calculated as a percentage of such Trading Vehicle’s “New High Net Trading Profits”. In addition, incentive fees payable by the Registrant to Eagle and Ortus are at a fixed rate, calculated as a percentage of each Managed Account’s “New High Net Trading Profits”. As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and “New High Net Trading Profits” are not known until a future date. Commissions payable to the Registrant’s commodity broker and each Trading Vehicle’s commodity broker are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. For a further discussion of Registrant’s contractual obligations, see Notes 1, 3 and 4 to Registrant’s financial statements for the year ended December 31, 2006, which is filed as an exhibit to Registrant’s annual report on Form 10K for the fiscal year ended December 31, 2006.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Introduction
Past Results Not Necessarily Indicative of Future Performance
Registrant is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and substantially all of Registrant’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 Registrant’s main line of business.
Market movements result in frequent changes in the fair market value of Registrant’s open positions and, consequently, in its earnings and cash flow. Registrant’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 Registrant’s open positions and the liquidity of the markets in which it trades.
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Registrant 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 futures market scenario will affect performance, and Registrant’s past performance is not necessarily indicative of its future results.
“Value at Risk” is a measure of the maximum amount which Registrant could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of Registrant’s speculative trading and the recurrence in the markets traded by Registrant of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or Registrant’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 quantification included in this section should not be considered to constitute any assurance or representation that Registrant’s losses in any market sector will be limited to Value at Risk or by Registrant’s attempts to manage its market risk.
Standard of Materiality
Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of Registrant’s market sensitive instruments.
Quantifying Registrant’s Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding Registrant’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. as amended (the “Exchange Act”)).
Registrant’s risk exposure in the various market sectors traded by the Trading Advisor is quantified below in terms of Value at Risk. Due to Registrant’s mark-to-market accounting, any loss in the fair value of Registrant’s open positions is directly reflected in Registrant’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by Registrant 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. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. 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.
In the case of market sensitive instruments that are not exchange-traded (almost exclusively currencies in the case of Registrant), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
In quantifying Registrant’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that Registrant’s positions are rarely, if ever, 100% positively correlated have not been reflected.
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Registrant’s Trading Value at Risk in Different Market Sectors
The following table presents the trading value at risk associated with Registrant’s open positions by market sector at June 30, 2007 and December 31, 2006. All open position trading risk exposures of Registrant have been included in calculating the figure set forth below. At June 30, 2007 and December 31, 2006, Registrant had total capitalizations of approximately $73 million and $70 million, respectively.
| June 30, 2007 | December 31, 2006 | |||||||||||
Market Sector | Value at Risk | % of Total Capitalization | Value at Risk | % of Total Capitalization | ||||||||
Interest rates | $ | 3,753,027 | 5.25 | % | $ | 4,155,508 | 5.92 | % | ||||
Currencies | $ | 2,185,667 | 3.06 | % | $ | 2,303,369 | 3.28 | % | ||||
Commodities | $ | 1,314,119 | 1.84 | % | $ | 1,572,743 | 2.24 | % | ||||
Stock indices | $ | 562,839 | 0.79 | % | $ | 3,547,046 | 5.05 | % | ||||
Total | $ | 7,815,652 | 10.94 | % | $ | 11,578,666 | 16.50 | % | ||||
The following table presents the average trading value at risk of Registrant’s open positions by market sector for Second Quarter 2007 and Year-To-Date 2007 based upon Registrant’s total average capitalization of approximately $68 million and $68 million, respectively.
| Second Quarter 2007 | Year-To-Date 2007 | |||||||||||
Market Sector | Value at Risk | % of Total Capitalization | Value at Risk | % of Total Capitalization | ||||||||
Interest rates | $ | 3,191,290 | 4.69 | % | $ | 3,522,983 | 5.19 | % | ||||
Currencies | $ | 3,322,847 | 4.89 | % | $ | 2,995,111 | 4.42 | % | ||||
Commodities | $ | 870,515 | 1.28 | % | $ | 1,236,790 | 1.82 | % | ||||
Stock indices | $ | 1,023,077 | 1.50 | % | $ | 1,788,149 | 2.64 | % | ||||
Total | $ | 8,407,729 | 12.37 | % | $ | 9,543,033 | 14.07 | % | ||||
Material Limitations on Value at Risk as an Assessment of Market Risk
The notional value of the market sector instruments held by Registrant is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 10% of the face value) as well as many times the total capitalization of Registrant. The magnitude of Registrant’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions, although unusual, but historically recurring from time to time, could cause Registrant to incur severe losses over a short period of time. The foregoing Value at Risk table, as well as the past performance of Registrant give no indication of this “risk of ruin.”
Non-Trading Risk
Registrant has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding Registrant’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how Registrant manages its primary market risk exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Registrant’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner and the Trading Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of Registrant’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets the emergence of
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dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of Registrant. There can be no assurance that Registrant’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in Registrant.
Based on average trading value at risk during the Second Quarter 2007, Series J experienced a decrease in its value at risk, relative to capitalization levels, as compared with the value at risk at December 31, 2006. The decrease was a portfolio-wide occurrence. The value at risk in the stock index sector declined the most. The greatest contributors to the reduced exposure were the Dow Jones Industrial Average, the Hang Seng, The S&P 500, The Dow Jones Eurostoxx, the Russell 2000, the Nikkei and the Taiwan Stock Indices. The value at risk in currencies declined due to reduced exposure in the Australian dollar, British pound, euro and Japanese yen. The decline in the value at risk in interest rates was primarily attributable to a reduction in the German Schatz and Bobl, and the Euroswiss. The value at risk in commodities declined primarily due to reduced exposure in cotton, zinc, natural gas and crude oil.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Managing Owner and the Trading Advisors, severally, attempt to manage the risk of Registrant’s open positions is essentially the same in all market categories traded.
The Trading Advisor attempts to minimize market risk exposure by applying its own risk management trading policies that include the diversification of trading assets into various market sectors. Additionally, the Trading Advisor has an oversight committee broadly responsible for evaluating and overseeing the Trading Advisor’s trading policies. The oversight committee meets periodically to discuss and analyze issues such as liquidity, position size, capacity, performance cycles, and new product and market strategies.
The Managing Owner attempts to minimize market risk exposure by requiring the Trading Advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies which include, but are not limited to, limiting the amount of margin or premium required for any one commodity or all commodities combined and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, the Managing Owner shall automatically terminate the Trading Advisor if the Net Asset Value of the Registrant declines by 40% during any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that the Registrant will liquidate its positions, and eventually dissolve, if Registrant experiences a decline in the net asset value of 50% in any year or since the commencement of trading activities. In each case, the decline in Net Asset Value is after giving effect for distributions and redemptions. The Managing Owner may impose additional restrictions (through modifications of such trading limitations and policies) upon the trading activities of the Trading Advisors as it, in good faith, deems to be in the best interest of Registrant.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
At June 30, 2007, the Registrant’s primary exposure to non-trading market risk resulted from foreign currency balances held in the Euro, British pound, Japanese yen, Australian dollars and Canadian dollar. As discussed above, these balances, as well as any risk they represent, are immaterial.
| Item 4. | Controls and Procedures |
As of the end of the period covered by this Report, the Managing Owner carried out an evaluation, under the supervision and with the participation of certain officers of the Managing Owner, including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration (who, in these capacities, function as the Co-Chief Executive Officers and Principal Financial/Accounting Officer, respectively, of Registrant), of the design and operation of Registrant’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities and Exchange Act of
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1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration concluded that Registrant’s disclosure controls and procedures are effective.
In designing and evaluating Registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), the Managing Owner recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, as Registrant’s are designed to do, and the Managing Owner necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Registrant believes that its disclosure controls and procedures provide such reasonable assurance.
There have not been any changes in Registrant’s internal controls over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during the fiscal quarter to which this Report relates that have materially affected, or are reasonably likely to materially affect, Registrant’s internal controls over financial reporting.
| Item 1. | Legal Proceedings |
There are no legal proceedings pending by or against Registrant or the Managing Owner, or to which Registrant or Managing Owner was a party during the period covered by this Report.
| Item 1.A. | Risk Factors |
There have been no changes from risk factors as previously disclosed in Registrant’s Form 10-K for the fiscal year ended December 31, 2006.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
| 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: |
| 31.1 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
| 31.2 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
WORLD MONITOR TRUST III – SERIES J
By: Preferred Investment Solutions Corp., its managing owner
| By: | /s/ Kenneth A. Shewer | Date: August 14, 2007 | ||
| Name: | Kenneth A. Shewer | |||
| Title: | Co-Chief Executive Officer | |||
| (Principal Executive Officer) | ||||
| By: | /s/ David K. Spohr | Date: August 14, 2007 | ||
| Name: | David K. Spohr | |||
| Title: | Senior Vice President and Director of Fund Administration (Principal Financial/Accounting Officer) | |||
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