Washington, D.C. 20549
Indicate by check mark whether the registrant (1) 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The accompanying unaudited financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Nestor Partners’ (the “Partnership” or “Registrant”) financial condition at June 30, 2008 (unaudited) and December 31, 2007 and the results of its operations for the three and six months ended June 30, 2008 and 2007 (unaudited). These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes included in the Partnership's annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007. The December 31, 2007 information has been derived from the audited financial statements as of December 31, 2007.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. A portion of such expenses are paid to an affiliate of Millburn Ridgefield Corporation (the “General Partner”), The Millburn Corporation (“TMC”), for providing accounting services to the Partnership. The Partnership incurred administrative expenses of $104,011 and $206,815 during the three and six months ended June 30, 2008, respectively, of which $83,207 and $136,638 relates to legal and accounting services provided to the Partnership by TMC. The General Partner pays all administrative expenses in excess of 0.25 of 1% per annum of the Partnership's average month-end net assets.
Interests sold through Selling Agents engaged by the General Partner are generally subject to a redemption charge up to 2.5% for redemptions made prior to the end of the twelfth month following their sale. All redemption charges will be paid to the General Partner. There were no charges due to the General Partner at June 30, 2008.
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 Partnership recognize in its financial statements, the impact of a tax position, and 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 partners’ capital. Millburn Ridgefield Corporation as General Partner of the Partnership has evaluated the impact of adopting FIN 48 on the Partnership’s financial statements. The Partnership is treated as a limited partnership for federal and state income tax reporting purposes and therefore the limited partners are responsible for the payment of taxes. Accordingly, FIN 48 did not have an impact on the Partnership.
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 Partnership adopted this pronouncement January 1, 2008. The three levels of the fair value hierarchy under SFAS No. 157 are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
In determining fair value, the Partnership separates its investments into two categories: cash instruments and derivative contracts.
Cash Instruments. The Partnership’s cash instruments are generally classified within level 1 of the fair value hierarchy because they are typically valued using quoted market prices. The types of instruments valued based on quoted market prices in active markets include U.S. government obligations and a short-term U.S. government money market fund. The General Partner of the Partnership does not adjust the quoted price for such instruments, even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.
Derivative Contracts. Derivative contracts can be exchange-traded or over-the-counter (OTC). Exchange-traded futures contracts are valued based on quoted closing settlement prices and typically fall within level 1 of the fair value hierarchy.
OTC derivatives, or forward currency contracts, are valued based on pricing models that consider the current market prices (“Spot Prices”) plus the time value of money (“Forward Points”) and contractual prices of the underlying financial instruments. The Forward Points from the quotation service providers are generally in periods of one month, two months, three months and six months forward while the contractual forward delivery dates for the foreign forward currency contracts traded by the Partnership may be in between these periods. The General Partner’s policy is to calculate the Forward Points for each contract being valued by determining the number of days from the date the forward currency contract is being valued to its maturity date and then using straight-line interpolation to calculate the valuation of Forward Points for the applicable forward currency contract. Model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within level 2 of the fair value hierarchy.
The following table sets forth by level within the fair value hierarchy:
Financial Assets at Fair Value as of June 30, 2008 | | | |
| | | | | | | | |
| | | Level 1 | | Level 2 | | Total | |
| U.S. Treasury Notes | | $ | 157,868,019 | | $ | 0 | | $ | 157,868,019 | |
Short–Term Money Market Fund | | | 8,040,271 | | | 0 | | | 8,040,271 | |
| Exchange–Traded | | | | | | | | | | |
| Futures Contracts | | | 5,077,559 | | | 0 | | | 5,077,559 | |
| Over–the–Counter | | | | | | | | | | |
| Forward Currency Contracts | | | 0 | | | 1,793,889 | | | 1,793,889 | |
| Total assets at fair value | | $ | 170,985,849 | | $ | 1,793,889 | | $ | 172,779,738 | |
Recently Issued Pronouncements
In March 2008, FASB No. 161 (FAS 161), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (FAS 133), was issued and is effective for fiscal years beginning after November 15, 2008. FAS 161 amends and expands the disclosure requirements of FAS 133 in order to provide financial statement users an understanding of a company’s use of derivative instruments, how derivative instruments are accounted for under FAS 133 and related interpretations and how these instruments affect a company’s financial position, performance, and cash flows. FAS 161 requires companies to disclose information detailing the objectives and strategies for using derivative instruments, the level of derivative activity entered into by the company, and any credit risk-related contingent features of the agreements. Management is currently evaluating the adoption of FAS 161 on the Partnership’s financial statement disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Item 1, "Financial Statements". The information contained therein is essential to, and should be read in connection with, the following analysis.
OPERATIONAL OVERVIEW
Due to the nature of the Partnership's business, its results of operations depend on the General Partner's ability to recognize and capitalize on trends and other profit opportunities in different sectors of the global capital and commodity markets. The General Partner's trading methods are confidential, so that substantially the only information that can be furnished regarding the Partnership's results of operations is contained in the performance record of its trading. Unlike operating businesses, general economic or seasonal conditions do not directly affect the profit potential of the Partnership, and its past performance is not necessarily indicative of future results. The General Partner believes, however, that there are certain market conditions, for example, markets with strong price trends, in which the Partnership has a better likelihood of being profitable than in others.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership raises additional capital only through the sale of Interests. Partnership capital may also be increased by trading profits, if any. The Partnership does not engage in borrowing. Interests may be offered for sale as of the beginning of each month.
The Partnership trades futures and forward contracts on interest rates, commodities, currencies, metals, energies, livestock and stock indices. Due to the nature of the Partnership's business, substantially all its assets are represented by cash and United States government obligations, while the Partnership maintains its market exposure through open futures and forward contract positions.
The Partnership's assets are generally held as cash, cash equivalents or U.S. Government obligations which are used to margin or collateralize the Partnership's futures and forward positions and are withdrawn, as necessary, to pay redemptions and expenses. Other than potential market-imposed limitations on liquidity, due, for example, to daily price fluctuation limits, which are inherent in the Partnership's futures and forward trading, the Partnership's assets are highly liquid and are expected to remain so.
There have been no material changes with respect to the Partnership's critical accounting policies, off-balance sheet arrangements or disclosure of contractual obligations as reported in the Partnership's Annual Report on Form 10-K for fiscal year 2007.
PROFIT SHARE
The following table indicates the total profit share earned and accrued during the three and six months ended June 30, 2008 and 2007. Profit share earned (from Limited Partners’ redemptions) is credited to the New Profit memo account as defined in the Partnership’s Partnership Agreement.
| | | Three months ended: | |
| | | Jun 30, 2008 | | | |
| | | | | | |
| Profit share earned | | $ | 69,174 | | $ | 131,620 | |
| Reversal of profit share (1) | | | (1,365,865 | ) | | (303,255 | ) |
| Profit share accrued (2) | | | 3,048,662 | | | 4,307,329 | |
| Total profit share | | $ | 1,751,971 | | $ | 4,135,694 | |
| | | | | | | | |
| | | | | | | | |
| | | | Six months ended: | |
| | | | Jun 30, 2008 | | | | |
| | | | | | | | |
| Profit share earned | | $ | 89,437 | | $ | 144,091 | |
| Profit share accrued (2) | | | 3,048,663 | | | 4,307,329 | |
| Total profit share | | $ | 3,138,100 | | $ | 4,451,420 | |
| | | | | | | | |
| (1) At April 1 | | | | | | | |
| | | | | | | |
RESULTS OF OPERATIONS
During its operations for the three and six months ending June 30, 2008, the Partnership experienced no meaningful periods of illiquidity in any of the numerous markets traded by the General Partner.
Due to the nature of the Partnership’s trading, the results of operations for the interim period presented should not be considered indicative of the results that may be expected for the entire year.
| Periods ended June 30, 2008 | |
| | | | | | |
Month Ending: | | | | | |
| | | | | | |
| June 30, 2008 | | $ | 172,404,499 | | | | |
| March 31, 2008 | | | 161,779,900 | | | | |
| December 31, 2007 | | | 152,036,264 | | | | |
| | | | | | | | |
| | | | Three Months | | | Six Months | |
| Change in Partners' Capital | | $ | 10,624,599 | | $ | 20,368,235 | |
| Percent Change | | | 6.57 | % | | 13.40 | % |
THREE MONTHS ENDED JUNE 30, 2008
The increase in the Partnership’s net assets of $10,624,599 was attributable to net income (before profit share) of $14,335,769 and contributions of $2,717,060, which was partially offset by withdrawals of $6,428,230.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the three months ended June 30, 2008 decreased $18,443 relative to the corresponding period in 2007. While the average net assets of the Partnership increased during the three month period, the decrease in brokerage fees was due primarily to a decrease in the average net assets of the limited partners during the three months ended June 30, 2008, relative to the corresponding period in 2007.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the three months ended June 30, 2008 increased $1,920 relative to the corresponding period in 2007. The increased was due mainly to an increase in the Partnership's average net assets during the three months ended June 30, 2008, relative to the corresponding period in 2007.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the three months ended June 30, 2008 decreased $554,240 relative to the corresponding period in 2007. This decrease was due mainly to a significant decrease in short-term Treasury yields during the three months ended June 30, 2008, relative to the corresponding period in 2007.
During the three months ended June 30, 2008, the Partnership experienced net realized and unrealized gains of $14,102,982 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $938,006, administrative expenses of $104,011, custody fees of $7,561 and an accrued profit share allocation to the General Partner of $1,751,971 were incurred. Interest income of $1,282,365 offset the Partnership's expenses resulting in a net gain after profit share to General Partner of $12,583,798 analysis of the trading gain (loss) by sector is as follows:
Sector | | % Gain/ Loss | |
| Currencies | | | 2.69 | % |
| Energies | | | 4.86 | % |
| Grains | | | 1.54 | % |
| Interest Rates | | | -1.29 | % |
| Livestock | | | -0.43 | % |
| Metals | | | 1.21 | % |
| Softs | | | -0.25 | % |
| Stock Indices | | | 0.95 | % |
Trading Gain/(Loss) | | | 9.28 | % |
SIX MONTHS ENDED JUNE 30, 2008
The increase in the Partnership’s net assets of $20,368,235 was attributable to net income (before profit share) of $25,768,484 and contributions of $6,529,144, which was partially offset by withdrawals of $11,929,393.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the six months ended June 30, 2008 increased $43,736 relative to the corresponding period in 2007. The increase was due primarily to an increase in the average net assets of the special limited partners during the six months ended June 30, 2008, relative to the corresponding period in 2007.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the six months ended June 30, 2008 increased $12,539 relative to the corresponding period in 2007. The increased was due mainly to an increase in the Partnership's average net assets during the six months ended June 30, 2008, relative to the corresponding period in 2007.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the six months ended June 30, 2008 decreased $725,224 relative to the corresponding period in 2007. This decrease was due mainly to a significant decrease in short-term Treasury yields during the six months ended June 30, 2008, relative to the corresponding period in 2007.
During the six months ended June 30, 2008, the Partnership experienced net realized and unrealized gains of $24,975,355 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $1,857,224, administrative expenses of $206,815, custody fees of $13,505 and an accrued profit share allocation to the General Partner of $3,138,100 were incurred. Interest income of $2,870,673 offset the Partnership's expenses resulting in a net gain after profit share to General Partner of $22,630,384 analysis of the trading gain (loss) by sector is as follows:
Sector | | % Gain/ Loss | |
| Currencies | | | 5.07 | % |
| Energies | | | 5.65 | % |
| Grains | | | 3.12 | % |
| Interest Rates | | | 0.27 | % |
| Livestock | | | 0.44 | % |
| Metals | | | 1.55 | % |
| Softs | | | -0.39 | % |
| Stock Indices | | | 0.93 | % |
Trading Gain/(Loss) | | | 16.64 | % |
| Period ended March 31, 2008 | |
| | | | |
Month Ending: | | Total Partners' Capital | |
| | | | |
| March 31, 2008 | | $ | 161,779,900 | |
| December 31, 2007 | | | 152,036,264 | |
| | | Three Months | |
| Change in Partners' Capital | | $ | 9,743,636 | |
| Percent Change | | | 6.41 | % |
THREE MONTHS ENDED MARCH 31, 2008
The increase in the Partnership’s net assets of $9,743,636 was attributable to net income (before profit share) of $11,432,715 and contributions of $3,812,084, which was partially offset by withdrawals of $5,501,163.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the three months ended March 31, 2008 increased $62,179 relative to the corresponding period in 2007.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the three months ended March 31, 2008 increased $10,619 relative to the corresponding period in 2007. The increased was due mainly to an increase in the Partnership's average net assets during the three months ended March 31, 2008, relative to the corresponding period in 2007.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the three months ended March 31, 2008 decreased $170,984 relative to the corresponding period in 2007. This decrease was due mainly to a decrease in short-term Treasury yields during the three months ended March 31, 2008, relative to the corresponding period in 2007.
During the three months ended March 31, 2008, the Partnership experienced net realized and unrealized gains of $10,872,373 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $919,218, administrative expenses of $102,804, custody fees of $5,944 and an accrued profit share allocation to the General Partner of $1,386,129 were incurred. Interest income of $1,588,308 offset the Partnership's expenses resulting in a net gain after profit share to General Partner of $10,046,586. An analysis of the trading gain (loss) by sector is as follows:
Sector | | % Gain/ (Loss) | |
| | | | |
| Currencies | | | 2.21 | % |
| Energies | | | 0.59 | % |
| Grains | | | 1.45 | % |
| Interest Rates | | | 1.56 | % |
| Livestock | | | 0.85 | % |
| Metals | | | 0.27 | % |
| Softs | | | -0.14 | % |
| Stock Indices | | | -0.06 | % |
| Total | | | 6.73 | % |
MANAGEMENT DISCUSSION - 2008
MANAGEMENT DISCUSSION - 2008
Three months ended June 30, 2008
For the three-month period ended June 30, 2008, the Partnership's Limited Partners and Special Limited Partners had positive returns, net of all fees, of 6.84% and 9.01%, respectively. Energy trading accounted for a large portion of the gain, and significant profits were registered from currency, metals, equity, and grain trading as well. Meanwhile, trading of interest rate futures, and to a lesser extent, livestock and soft commodities futures were unprofitable.
Energy prices continued their upward thrust with crude oil hitting successive new all-time highs throughout the second quarter. Strong demand, including fundamental, investment and speculative components, along with low inventories, periodic supply disruptions, and geopolitical uncertainties underpinned energy price surges. Consequently, long positions in crude oil, gasoline, heating oil, kerosene, London gas oil, and natural gas were profitable. Near quarter-end, the high volatility in the energy markets resulted in further significant reductions in energy positions.
In currency trading, the dollar was under pressure due to the ongoing financial and economic turmoil triggered by the housing and mortgage crises and subsequent credit crunch. The easier Federal Reserve monetary policy that has ensued also weighed on the U.S. currency. Therefore, short dollar positions against a number of higher yield currencies including the Aussie and Singapore dollars, Brazilian real and Mexican peso, and Eastern European currencies were profitable. A long dollar trade versus the Korean won also produced a gain. On the other hand, short dollar positions against the New Zealand dollar and Chilean peso were unprofitable, as was a long dollar position against the South African rand. In non-dollar cross rate trading, short euro positions relative to the Eastern European currencies and a long Aussie dollar/short Canadian dollar trade were profitable.
Equity markets declined rather broadly during the quarter and short positions in European and U.S. equity indices generated profits. Meanwhile, long positions in South African, Hong Kong and Chinese indices resulted in losses.
Industrial metals prices were mixed. Short positions in zinc, nickel and lead, and long positions in tin, copper and aluminum were profitable. Long positions in precious metals had no appreciable effect on performance this quarter.
In grains, long positions in the soybean complex and corn were profitable, and more than offset the modest loss from trading wheat.
As the quarter began, the portfolio was positioned for a continuation of the lower interest rate trend. However, as inflation concerns spread even though economic activity remained questionable, market participants came to believe that monetary easing was at an end. Hence during April and May losses were sustained on long positions in U.S., European, and Japanese short, medium, and long term interest rate instruments. In response numerous positions were reduced and/or reversed. In June, interest rate trading was profitable largely due to short futures positions but still ended up with a loss for the quarter.
In soft commodities, the losses from trading sugar and cotton outweighed the gains from long cocoa and coffee trades. Short positions in livestock were unprofitable as the market expected herd liquidation due to high feed prices to abate and on positive export news.
Three months ended March 31, 2008
For the three-month period ended March 31, 2008, the Partnership's Limited Partners and Special Limited Partners had positive returns, net of all fees, of 5.60% and 7.69%, respectively. Trading of dollar currency positions, and interest rate, grain, energy, metal and livestock futures were profitable. On the other hand, fractional losses were sustained from trading of cross currency positions, and stock index and soft commodity futures.
As the credit crisis spread and deepened, imperiling growth and employment prospects worldwide, central banks in the developed countries made more money available against a broader range of collateral for longer periods to a wider group of financial firms than ever before. In the U.S., increasing evidence of stress in the economy prompted the Federal Reserve to announce dramatic cuts in the federal funds and discount rates, providing much-needed liquidity and also facilitating a sale of embattled Bear Stearns to J.P. Morgan Chase.
In this environment, the U.S. dollar was under persistent pressure, falling to an all-time low against the euro and multi-year lows against a number of currencies including the yen, Swiss franc, Brazilian real and Columbian peso. As a result, short dollar positions were broadly profitable. Meanwhile, non-dollar cross rate trading was fractionally unprofitable.
As interest rates eased in a number of countries, long positions in U.S., Canadian and Japanese long-term and short-term interest rate futures were profitable, and outweighed losses on short positions in Australian interest rate futures. A long position in short-term euro rate futures was unprofitable as the ECB continued to resist calls for rate reductions due to inflation worries.
Agricultural markets, which have had a legendary run-up with several markets setting all-time records, were quite profitable, even though there was a significant sell-off in March. Grain prices have been underpinned by strong demand from the developing world that is experiencing an economic boom and by tight supplies. The USDA projects U.S. wheat inventories as the lowest for the end of the marketing year since 1948, and global wheat stockpiles headed for a 30-year low. Also, demand for corn and oilseeds was boosted by increased use of ethanol and diesel from vegetable oils. Indeed, some governments are restricting or taxing exports to retain domestic supplies. Consequently, long positions in wheat, corn, and the soybean complex were profitable. Further, short positions in livestock were profitable as high feed prices motivated producer selling.
Energy prices were firm and crude oil prices reached record levels due to strong global demand and tight supplies. The weakening U.S. dollar also buttressed energy and other commodity prices. Long positions in crude and London gas oil led to energy sector profits.
Precious metals prices advanced as the dollar fell, particularly early in the quarter and profits on long positions in gold, silver and platinum outweighed losses from trading of industrial metals.
High volatility and lack of well defined persistent trends kept equity futures positions reduced during the quarter, and gains and losses for individual equity futures netted to a marginal loss for the sector.
| Periods ended June 30, 2007 | |
| | | | |
| | | Total | |
| | | Partners' | |
Month Ending: | | Capital | |
| | | | |
| June 30, 2007 | | $ | 170,516,023 | |
| March 31, 2007 | | | 144,509,415 | |
| December 31, 2006 | | | 147,701,841 | |
| | | Three Months | | Six Months | |
| Change in Partners' Capital | | $ | 26,006,608 | | $ | 22,814,182 | |
| Percent Change | | | 18.00 | % | | 15.45 | % |
THREE MONTHS ENDED JUNE 30, 2007
The increase in the Partnership’s net assets of $26,006,608 was attributable to net income (before profit share) of $31,312,013 and contributions of $128,679, which was partially offset by withdrawals of $5,434,084.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the three months ended June 30, 2007 decreased $215,292 relative to the corresponding period in 2006.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the three months ended June 30, 2007 decreased $15,861 relative to the corresponding period in 2006. The decrease was due mainly to a decrease in the Partnership's average net assets during the three months ended June 30, 2007, relative to the corresponding period in 2006.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the three months ended June 30, 2007 decreased $270,567 relative to the corresponding period in 2006. This decrease was due mainly to a decrease in average net assets during the period, which was partially offset by an increase in short-term Treasury yields.
During the three months ended June 30, 2007, the Partnership experienced net realized and unrealized gains of $30,539,057 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $956,449, administrative expenses of $102,091, custody fees of $5,109 and accrued profit share to General Partner of $4,135,694 were incurred. Interest income of $1,836,605 offset the Partnership's expenses resulting in a net gain after profit share to General Partner of $27,176,319. An analysis of the trading gain (loss) by sector is as follows:
| | | % Gain/ | |
Sector | | (Loss) | |
| Currencies | | | 7.72 | % |
| Energies | | | 0.26 | % |
| Grains | | | -0.08 | % |
| Interest Rates | | | 6.69 | % |
| Livestock | | | 0.00 | % |
| Metals | | | 0.11 | % |
| Softs | | | 0.38 | % |
| Stock Indices | | | 6.45 | % |
Trading Gain/(Loss) | | | 21.53 | % |
SIX MONTHS ENDED JUNE 30, 2007
The increase in the Partnership’s net assets of $22,814,182 was attributable to net income (before profit share) of $34,327,460 and contributions of $1,056,686, which was partially offset by withdrawals of $12,569,964.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the six months ended June 30, 2007 decreased $519,548 relative to the corresponding period in 2006.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the six months ended June 30, 2007 decreased $40,988 relative to the corresponding period in 2006. The decrease was due mainly to a decrease in the Partnership's average net assets during the six months ended June 30, 2007, relative to the corresponding period in 2006.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the six months ended June 30, 2007 decreased $358,836 relative to the corresponding period in 2006. This decrease was due mainly to a decrease in average net assets during the period, which was partially offset by an increase in short-term Treasury yields.
During the six months ended June 30, 2007, the Partnership experienced net realized and unrealized gains of $32,750,198 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $1,813,488, administrative expenses of $194,276, custody fees of $10,871 and accrued profit share to General Partner of $4,451,420 were incurred. Interest income of $3,595,897 offset the Partnership's expenses resulting in a net gain after profit share to General Partner of $29,876,040. An analysis of the trading gain (loss) by sector is as follows:
| | | % Gain/ | |
Sector | | (Loss) | |
| Currencies | | | 9.31 | % |
| Energies | | | -1.24 | % |
| Grains | | | -0.25 | % |
| Interest Rates | | | 7.72 | % |
| Livestock | | | -0.12 | % |
| Metals | | | 0.87 | % |
| Softs | | | 0.63 | % |
| Stock Indices | | | 6.43 | % |
Trading Gain/(Loss) | | | 23.35 | % |
MANAGEMENT DISCUSSION - 2007
Three months ended June 30, 2007
For the three-month period ended June 30, 2007, the Partnership's Limited Partners and Special Limited Partners had positive returns, net of all fees, of 17.34% and 21.65%, respectively. Significant profits were registered from trading of interest rate and stock index futures and currency forwards. Trading of non-financial markets did not have a material impact on the quarterly return.
Robust worldwide economic growth, abundant worldwide liquidity, and corporate buyouts and buybacks supported global equity markets. Consequently, long positions in European, Asian, U.S., Australian, Canadian and South African equity futures were profitable.
Global interest rates moved higher throughout the quarter. Strong growth, inflation concerns, reserve diversification away from government securities by sovereign wealth funds, and tighter monetary policies—for example, in China, India, Europe, and the United Kingdom—contributed to upward pressure on interest rates. Short positions in European, Australian, Canadian and U.S. interest rates futures were profitable.
In the currency sector, the so-called carry trade, where high yielding currencies are purchased and low yielding currencies are sold produced gains. Also, strong international economic growth relative to weakening U.S. growth contributed to a dollar decline, bringing good returns on short dollar positions.
Energy prices were volatile reflecting geopolitical uncertainties involving Iran, Nigeria and Saudi Arabia and ongoing refinery worries. Therefore, the Partnership was lightly positioned and results were marginally profitable during the period.
Metal trading was flat, as gains from a long lead position offset losses elsewhere in the sector.
Finally, trading of grains was fractionally unprofitable, while soft commodities trading was fractionally profitable, due to a short sugar trade.
Three months ended March 31, 2007
For the three-month period ended March 31, 2007, the Partnership's Limited Partners and Special Limited Partners had positive returns, net of all fees, of 1.47% and 2.52%, respectively. Trading of interest rate, currency and metals futures was profitable, and to a lesser extent soft commodity futures. On the other hand, losses were sustained in trading energy, grain, stock indices and livestock futures. Prices were quite volatile during the period, and the Partnership posted gains in January and March, but suffered a loss in February.
Profits from currency trading derived primarily from shorting the U.S. dollar against currencies with higher interest rates, such as the Brazilian real, the Indian rupee, and the Turkish lira. Long British sterling positions against the low yielding Swiss and Swedish currencies, and a short euro trade versus the Hungarian forint were also profitable.
Market interest rates rose during the quarter as Central Banks worldwide, including England, Japan, China, India, the ECB, Norway and Switzerland, used official interest rate increases and quantitative measures to tighten monetary policy. Consequently, solid profits were generated by short positions in British, German, Australian, and Swiss notes and bonds, and from a short position in British short rates. With inflation still virtually nonexistent in Japan, a long position in Japanese government bonds was also profitable.
Continuing strong worldwide demand for base metals pushed prices higher, producing profits on long nickel, lead and tin positions. Nickel prices were also boosted by labor unrest at Canadian mines that produce a significant amount of the world's supply at a time when inventories are at multi-year lows. On the other hand, a long zinc trade was unprofitable.
Stock markets worldwide were highly volatile throughout the January-March period. The Partnership maintained long positions in its U.S., European, Asian, and South African stock indices, and there was a marginal loss for the quarter. Strong worldwide growth, attractive corporate profits, and heavy and high profile merger and acquisition activity underpinned equity index prices. However, there were significant, albeit short-lived, stock sell-offs late in February and again late in March. The first occurred when reports, which were later denied, surfaced that Chinese officials were considering new taxes on capital gains and new restrictions on the use of borrowed funds for stock investing. The second happened due to protectionism concerns when the U.S. Commerce Department imposed tariffs on Chinese glossy paper.
Energy prices were extremely volatile during the quarter. For example, crude prices briefly fell below $50 per barrel in January before recovering to end the month near $58 per barrel. Thereafter, crude vacillated in a range between $56 and $63 per barrel. On balance, short positions across the energy complex resulted in losses.
Trading in grains, soft commodities and livestock in the aggregate produced minimal profit/loss impact during the quarter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the occurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.
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 the Partnership's market sensitive instruments.
Quantifying the Partnership's Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Partnership'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 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Partnership's risk exposure in the various market sectors traded by the General Partner is quantified below in terms of Value at Risk. Due to the Partnership's mark-to-market accounting, any loss in the fair value of the Partnership's open positions is directly reflected in the Partnership'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 for equivalent or similar futures positions have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one-day losses in the fair value of any given contract incurred during the time period over which historical price fluctuations are researched for purposes of establishing margin levels. 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.
The fair value of the Partnership's futures and forward positions does not have any optionality component. However, the General Partner may also trade commodity options on behalf of the Partnership. The Value at Risk associated with options would be reflected in the margin requirement attributable to the instrument underlying each option.
In quantifying the Partnership'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 the Partnership's positions are rarely, if ever, 100% positively correlated have not been reflected.
In the case of contracts denominated in foreign currencies, the Value at Risk figures include foreign margin amounts converted into U.S. Dollars.
ITEM 4. CONTROLS AND PROCEDURES
The following table indicates the average, highest and lowest amounts of trading Value at Risk associated with the Partnership's open positions by market category for each quarter-end during the period ended June 30, 2008. During the six months ended June 30, 2008, the Partnership's average total capitalization was approximately $164,611,000.
Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts for the six months ended June 30, 2008. Average capitalization is the average of the Partnership's capitalization at the end of each of the six months ended June 30, 2008. Dollar amounts represent millions of dollars.
ITEM 4. CONTROLS AND PROCEDURES
Millburn Ridgefield Corporation, the General Partner of the Partnership, with the participation of the General Partner's Co-Chief Executive Officers and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period covered by this quarterly report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. There were no significant changes in the General Partner's internal controls with respect to the Partnership or in other factors applicable to the Partnership that could materially affect these controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Pursuant to the Partnership's Declaration of Partnership and Partnership Agreement, the Partnership may sell Limited Partnership Interests ("Interests") at the beginning of each calendar month. On April 1, 2008, May 1, 2008 and June 1, 2008, the Partnership sold Interests to existing and new limited partners in the amount of $359,960, $2,225,000 and $127,500, respectively. On April 1, 2008 and May 1, 2008, the Partnership sold Interests to an existing special limited partner in the amount of $2,959 and $1,641, respectively. There were no underwriting discounts or commissions in connection with the sales of the Interests described above.
(c) Pursuant to the Partnership's Declaration of Partnership and Partnership Agreement, investors may redeem their Interests at the end of each calendar month at the then current month-end Net Asset Value. The redemption of Interests has no impact on the value of Interests that remain outstanding, and Interests are not reissued once redeemed.
The following table summarizes Interests redeemed during the three months ended June 30, 2008:
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits -
The following exhibits are incorporated by reference from the exhibit of the same number and description filed with the Partnership's Registration Statement (file #000-50725) filed on April 29, 2005 on Form 10 under the Securities Act of 1934 and declared effective June 28, 2005.
10.01 Acknowledgement of Separate Risk Disclosure Statements and Customer Agreement between Merrill Lynch Futures Inc. and Nestor Partners
10.03 Futures and Options Agreement for Institutional Customers between Deutsche Morgan Grenfell Inc. and Nestor Partners
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
