UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 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 No. 0-17446
DEAN WITTER DIVERSIFIED FUTURES FUND II
L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3490286
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 Fl., New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
.
(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
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition March 31, 2000
(Unaudited) and December 31, 1999 2
Statements of Operations for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 2000 and 1999
(Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19-31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2000 1999
$ $
(Unaudited)
ASSETS
Equity in futures interests trading accounts:
Cash 7,653,168 8,042,490
Net unrealized gain on open contracts 667,702 293,674
Total Trading Equity 8,320,870 8,336,164
Interest receivable (DWR) 31,375 29,570
Total Assets 8,352,245 8,365,734
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 451,569 291,006
Accrued management fee (DWFCM) 20,881 20,914
Total Liabilities 472,450 311,920
Partners' Capital
Limited Partners (2,875.870 and
3,046.638 Units, respectively) 7,604,783 7,787,964
General Partner (104 Units) 275,012 265,850
Total Partners' Capital 7,879,795 8,053,814
Total Liabilities and Partners' Capital 8,352,245 8,365,734
NET ASSET VALUE PER UNIT 2,644.34 2,556.25
<FN>
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Quarters Ended March 31,
2000
1999
$ $
REVENUES
Trading profit (loss):
Realized 19,031 (594,590)
Net change in unrealized 374,028 93,977
Total Trading Results 393,059 (500,613)
Interest Income (DWR) 87,305 89,289
Total Revenues 480,364 (411,324)
EXPENSES
Brokerage commissions (DWR) 131,933 149,931
Management fees (DWFCM) 60,992 75,808
Transaction fees and costs 9,889 11,868
Incentive fees (DWFCM)
- - (7,040)
Total Expenses 202,814 230,567
NET INCOME (LOSS) 277,550 (641,891)
NET INCOME (LOSS) ALLOCATION
Limited Partners 268,388 (624,061)
General Partner
9,162 (17,830)
NET INCOME (LOSS) PER UNIT
Limited Partners 88.09 (171.44)
General Partner 88.09 (171.44)
<FN>
The accompanying notes are an integral part
of these financial statements.
-
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 2000 and 1999
(Unaudited)
Units of
Partnership Limited General
Interest Partners Partner Total
Partners' Capital,
December 31, 1998
3,744.082 $10,281,223 $293,743$10,574,966
Net Loss
- - (624,061) (17,830)
(641,891)
Redemptions
(186.932) (495,934) - (495,934)
Partners' Capital,
March 31, 1999
3,557.150 $ 9,161,228 $275,913 $ 9,437,141
Partners' Capital,
December 31, 1999
3,150.638 $ 7,787,964 $265,850$ 8,053,814
Net Income
- - 268,388 9,162 277,
550
Redemptions
(170.768) (451,569) - (451,569)
Partners' Capital,
March 31, 2000
2,979.870 $ 7,604,783 $275,012 $ 7,879,795
<FN>
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarters Ended March 31,
2000
1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 277,550 (641,891)
Noncash item included in net income (loss)
Net change in unrealized (374,028) (93,977)
(Increase) decrease in operating assets:
Interest receivable (DWR) (1,805) 1,753
Due from DWR - (14,624)
Decrease in operating liabilities:
Accrued management fee (DWFCM) (33) (5,551)
Accrued incentive fee (DWFCM) - (3,871)
Net cash used for operating activities (98,316)
(758,161)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in redemptions payable 160,563 256,229
Redemptions of Units
(451,569) (495,934)
Net cash used for financing activities (291,006)
(239,705)
Net decrease in cash (389,322) (997,866)
Balance at beginning of period 8,042,490 10,606,680
Balance at end of period 7,653,168 9,608,814
<FN>
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation of the results
of operations and financial condition of Dean Witter Diversified
Futures Fund II L.P. (the "Partnership"). The financial
statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 1999 Annual
Report on Form 10-K.
1. Organization
Dean Witter Diversified Futures Fund II L.P. is a Delaware
limited partnership organized to engage primarily in the
speculative trading of commodity futures and forward contracts,
physical commodities, and other commodity interests
(collectively, "futures interests").
The general partner for the Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds Inc. ("DWR") and an unaffiliated clearing
commodity broker, Carr Futures Inc. ("Carr"), provides clearing
and execution services. The trading manager is Dean Witter
Futures & Currency Management Inc. ("DWFCM" or the
"Trading
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Manager"). Demeter, DWR and DWFCM are wholly-owned subsidiaries
of Morgan Stanley Dean Witter & Co.
2. Related Party Transactions
The Partnership's cash is on deposit with DWR and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on current 13-week U.S.
Treasury bills. The Partnership pays brokerage commissions to
DWR. Management fees and incentive fees (if any) incurred by the
Partnership are paid to DWFCM.
3. Financial Instruments
The Partnership trades commodity futures and forward contracts,
physical commodities, and other commodity interests. Futures and
forwards represent contracts for delayed delivery of an
instrument at a specified date and price. Risk arises from
changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the
contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest
rate volatility.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
Activities" effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133," which defers the required
implementation of SFAS No. 133 until fiscal years beginning after
June 15, 2000. However, the Partnership had previously elected
to adopt the provisions of SFAS No. 133 beginning with the fiscal
year ended December 31, 1998. SFAS No. 133 supersedes SFAS No.
119 and No. 105, which required the disclosure of average
aggregate fair values and contract/notional values, respectively,
of derivative financial instruments for an entity which carries
its assets at fair value. The application of SFAS No. 133 does
not have a significant effect on the Partnership's financial
statements.
The net unrealized gain on open contracts are reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled $667,702 and
$293,674 at March 31, 2000 and December 1999, respectively.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Of the $667,702 net unrealized gain on open contracts at March
31, 2000, $586,932 related to exchange-traded futures contracts
and $80,770 related to off-exchange-traded forward currency
contracts.
Of the $293,674 net unrealized gain on open contracts at December
31, 1999, $262,869 related to exchange-traded futures contracts
and $30,805 related to off-exchange-traded forward currency
contracts.
Exchange-traded futures contracts held by the Partnership at
March 31, 2000 and December 31, 1999 mature through June 2000 and
September 2000, respectively. Off-exchange-traded forward
currency contracts held by the Partnership at March 31, 2000 and
December 31, 1999 mature through July 2000 and March 2000,
respectively.
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership's statements of financial condition.
The Partnership also has credit risk because DWR and Carr act as
the futures commission merchants or the counterparties, with
respect to most of the Partnership's assets. Exchange-traded
futures contracts are marked to market on a daily basis,
with
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for the Partnership's
exchange-traded futures contracts, are required, pursuant to
regulations of the Commodity Futures Trading Commission ("CFTC"),
to segregate from their own assets, and for the sole benefit of
their commodity customers, all funds held by them with respect to
exchange-traded futures contracts, including an amount equal to
the net unrealized gain on all open futures contracts, which
funds, in the aggregate, totaled $8,240,100 and $8,305,359 at
March 31, 2000 and December 31, 1999, respectively. With respect
to the Partnership's off-exchange-traded forward currency
contracts, there are no daily settlements of variations in value
nor is there any requirement that an amount equal to the net
unrealized gain on open forward contracts be segregated. With
respect to those off-exchange-traded forward currency contracts,
the Partnership is at risk to the ability of Carr, the sole
counterparty on all of such contracts, to perform. The
Partnership has a netting agreement with Carr. This agreement,
which seeks to reduce both the Partnership's and Carr's exposure
on off-exchange-traded forward currency contracts, should
materially decrease the Partnership's credit risk in the event of
Carr's bankruptcy or insolvency. Carr's parent, Credit Agricole
Indosuez, has guaranteed to the Partnership payment of the
net
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
liquidating value of the transactions in the Partnership's
account with Carr (including foreign currency contracts).
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and Carr as clearing broker in separate futures
trading accounts established for the Trading Manager, which
assets are used as margin to engage in trading. The assets are
held in either non-interest bearing bank accounts or in
securities and instruments permitted by the CFTC for investment
of customer segregated or secured funds. The Partnership's
assets held by the commodity brokers may be used as margin solely
for the Partnership's trading. Since the Partnership's sole
purpose is to trade in futures and forwards, it is expected that
the Partnership will continue to own such liquid assets for
margin purposes.
The Partnership's investment in futures and forwards may, from
time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currency. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investments in futures
interests in subsequent periods. It is not possible to estimate
the amount and therefore, the impact of future redemptions of
Units.
Results of Operations
General. The Partnership's results depend on its Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
futures and forwards markets. The following presents a
summary
of the Partnership's operations for the three months ended March
31, 2000 and 1999 and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Manager trades in various markets at different
times and that prior activity in a particular market does not
mean that such market will be actively traded by the Trading
Manager or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of its Trading Manager's trading
activities on behalf of the Partnership as a whole and how the
Partnership has performed in the past.
For the Quarter Ended March 31, 2000
For the quarter ended March 31, 2000, the Partnership recorded
total trading revenues, including interest income, of $480,364
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 5.2% were recorded in the
energy markets primarily during February from long positions in
crude oil futures as prices rose to nine-year highs. This price
increase was due to a combination of cold weather, declining
inventories and increasing demand, as well as concerns about
future output levels from the world's leading producer countries.
Despite a dramatic move lower in the price of crude oil during
March, the Partnership profited from long positions liquidated
early in the month. In the currency markets, gains of
approximately 2.4% were recorded primarily during January from
short positions in the Swedish krona, the euro and the Swiss
franc as the value of these European currencies weakened relative
to the U.S. dollar, hurt by skepticism about Europe's economic
outlook and lack of support from European officials. During
March, gains were recorded from short euro positions as
expectations for continued interest rate hikes from the European
Central Bank diminished. These gains were partially offset by
losses of approximately 1.4% recorded in the metals markets
primarily from long positions in base metal futures as the
previous upward price trend reversed sharply lower during
February in response to interest rate hikes across the globe.
Additional losses were recorded from short gold futures positions
as prices spiked sharply higher early in February following an
announcement by a major producer that it was suspending gold
hedging activities. Newly established long gold futures
positions resulted in additional losses as gold prices fell later
in February from weakness in the Australian dollar and gold sales
by the Dutch central bank. In the global stock index futures
markets, losses of approximately 1.3% were recorded throughout a
majority of the quarter from long positions in S&P 500 Index
futures as domestic stock prices declined due to volatility in
the technology sector and as economic data raised fears that the
Federal Reserve will be forced to take aggressive action to slow
the economy. In the global interest rate futures markets, losses
of approximately 1.2% were incurred primarily during February
from long positions in Japanese government bond futures as prices
decreased in response to the yen's weakness, a higher Nikkei
average and the perception in Japan that, despite a zero interest
rate policy, 10-year interest rates are too low. In soft
commodities, losses of approximately 0.8% were recorded primarily
during March from long cocoa futures positions as cocoa prices
dropped against the backdrop of world overproduction. Total
expenses for the three months ended March 31, 2000 were $202,814,
resulting in net income of $277,550. The value of a Unit
increased from $2,556.25 at December 31, 1999 to $2,644.34 at
March 31, 2000.
For the Quarter Ended March 31, 1999
For the quarter ended March 31, 1999, the Partnership recorded
total trading losses net of interest income of $411,324 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.0% were recorded in the
currency markets throughout a majority of the quarter largely
from long Australian dollar positions as its value dropped
significantly relative to the U.S. dollar on speculation
regarding potential currency devaluations in the Asian region.
Losses recorded from short British pound positions in March
offset profits recorded in February as its value strengthened
versus the U.S. dollar as the market scaled back the chances of a
British interest rate cut following an announcement of a budget
that was more generous than expected. In the global interest
rate futures markets, losses of
approximately 3.8% were experienced throughout a majority of the
quarter primarily from short Japanese government bond futures
positions as prices increased amid growing speculation that the
Bank of Japan may underwrite Japanese government bonds. Fears
that a rise in Japanese bond yields would lead many Japanese
money managers to repatriate assets from foreign investments to
yen-denominated debt also pushed prices higher. Additional
losses were recorded during February and March from short German
government bond futures positions as prices increased on reports
that Germany's industrial production showed a sharp increase,
creating hopes that Europe's biggest economy could be
strengthening. In the metals markets, losses of approximately
0.8% were experienced during March mainly from long silver
futures positions as prices retreated after Berkshire Hathaway's
annual report failed to provide any new information on the
company's silver positions. In soft commodities, losses of
approximately 0.6% were recorded during March mostly from short
positions in coffee futures as prices in this market surged late
in the month as options-related buying triggered waves of buy-
stops at several key resistance levels, attracting fund short-
covering. In the global stock index futures markets, losses of
approximately 0.1% were experienced during February from long S&P
500 Index futures positions as domestic equity prices moved lower
on concerns that the Federal Reserve may raise interest rates in
an effort to control inflation. These losses were partially
offset by gains of approximately 2.3% recorded in the energy
markets during March mainly from long positions in crude and
heating oil futures as prices moved significantly higher which
was largely attributed to the news that both OPEC and non-OPEC
countries had reached an agreement to cut total output by
approximately two million barrels a day beginning April 1, 1999.
In the agricultural markets, gains of approximately 0.7% were
recorded during January and February primarily from short futures
positions in soybeans and soybean products as prices declined to
23-year lows in reaction to a healthy South American crop
outlook, weak world demand and fears that Brazil will flood the
market in an effort to support their ailing economy. Total
expenses for the three months ended March 31, 1999 were $230,567,
resulting in a net loss of $641,891. The value of a Unit
decreased from $2,824.45 at December 31, 1998 to $2,653.01 at
March 31, 1999.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the euro). During a three-year transition
period, the sovereign currencies will continue to exist but only
as a fixed denomination of the euro. Conversion to the euro
prevents the Trading Manager from trading those sovereign
currencies and thereby limits its ability to take advantage of
potential market opportunities that might otherwise have existed
had separate currencies been available to trade. This could
adversely affect the performance results of the Partnership.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative trading
purposes only and, as a result, all or substantially all of the
Partnership's assets are at risk of trading loss. Unlike an
operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
The futures interests traded by the Partnership involve varying
degrees of market risk. Market risk is often dependent upon
changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities.
Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership's Trading Value at Risk
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 of 1933 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 accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of
the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures interests are settled daily through variation
margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include equity and commodity prices, interest rates,
foreign exchange rates, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the Partner-
ship's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Manager in their daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following tables indicate the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of March 31, 2000 and 1999.
As of March 31, 2000 and 1999, the Partnership's total
capitalization was approximately $8 million and $9 million,
respectively.
Primary Market March 31, 2000 March 31, 1999
Risk Category Value at Risk Value at Risk
Currency (1.63)% (1.94)%
Commodity (1.99) (1.12)
Interest Rate (1.55) (0.80)
Equity (1.16) (0.74)
Aggregate Value at Risk (3.27)% (2.31)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and ot the sum of the VaR of the
individual Market Categories listed above. Aggregate VaR will be
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
positions at March 31, 2000 and 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business is the speculative trading of futures interests, the
composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR, as a percentage of total
Net Assets for the four quarterly reporting periods from April 1,
1999 through March 31, 2000.
Primary Market Risk Category High Low Average
Currency (1.94)% (1.63)% (1.81)%
Commodity (1.99) (0.93) (1.37)
Interest Rate (1.93) (0.80) (1.29)
Equity (1.16) (0.17) (0.64)
Aggregate Value at Risk (3.27)% (2.31) (2.78)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, gives
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
VaR results reflect past trading positions while future risk
depends on future positions;
VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at March 31, 2000 and for the end of the four
quarterly reporting periods from April 1, 1999 through March 31,
2000. Since VaR is based on historical data, VaR should not be
viewed as predictive of the Partnership's future financial
performance or its ability to manage or monitor risk. There can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. The Partnership also
maintains a substantial portion (approximately 81%) of its
available assets in cash at DWR. A decline in short-term
interest rates will result in a decline in the
Partnership's cash
management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market
sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership 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
Securities Exchange Act.
The Partnership's primary market risk exposures as well as the
strategies used and to be used by Demeter and the Trading Manager
for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership's risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of 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 the
Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of March 31, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency - The most significant exposure in the Partnership at
March 31, 2000 was in the currency complex. The Partnership's
currency exposure is to exchange rate fluctuations, primarily
fluctuations that disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes as well as political and general economic conditions
influence these fluctuations. The Partnership trades in a large
number of currencies, including cross-rates i.e., positions
between two currencies other than the U.S. dollar. For the first
quarter of 2000, the Partnership's foreign exchange exposure was
in the euro currency crosses and outright US dollar positions.
Outright positions consist of the U.S. dollar vs. other
currencies. The currency trading VaR figure includes foreign
margin amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk inherent to the
dollar-based Partnership in expressing VaR in a functional
currency other than dollars.
Commodity
Metals - The Partnership's metals market exposure in the first
quarter of 2000 was to fluctuations in the prices of base metals,
as well as exposure in the gold market. A significant amount of
exposure was evident in the base metals as the Partnership held
sizeable positions in aluminum and copper as determined by the
parameters of the proprietary system.
The Partnership aims to equally weight market exposure in the
metals as much as possible, however base metals, during periods
of volatility, will affect performance more dramatically than the
precious metals markets. Demeter anticipates that base metals
will remain the primary metals market exposure of the
Partnership.
Energy - On March 31, 2000, the Partnership's energy exposure was
in natural gas futures contracts. Price movement in this market
results from supply/demand data, weather patterns, and other
economic fundamentals. A position in natural gas will impact the
portfolio as it is a significant portion of the portfolio.
Soft Commodities and Agriculturals - The Partnership had moderate
exposure in the markets that comprise these sectors. Most of the
exposure was in the corn and coffee markets. Supply and demand
inequalities, severe weather disruptions and market expectations
affect price movements in these markets.
Interest Rates - Significant exposure at March 31, 2000 was also
experienced in the interest rate sector. Exposure was spread
across the U.S., Swiss, Australian, and euro-zone interest rate
sectors. Interest rate movements directly affect the price of
the sovereign bond positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially
impact the Partnership's profitability. The Partnership's
primary interest rate exposure is generally to interest rate
fluctuations in the G-7 countries and Australia. The G-7
countries consist of the U.S., Britain, Canada, Germany, France,
Italy and Japan. Demeter anticipates that G-7 and Australian
interest rates will remain the primary interest rate exposure of
the Partnership for the foreseeable future. The changes in
interest rates which have the most effect on the Partnership are
changes in long-term and medium-term instruments. Consequently,
even a material change in short-term rates would have little
effect on the Partnership, were the medium to long term rates to
remain steady.
Equity. The Partnership's equity exposure on March 31, 2000 to
price risk in the S&P 500 futures index was noteworthy. The
stock index futures traded by the Partnership are by law limited
to futures on broadly based indices. Demeter anticipates little,
if any, trading in non G-7 stock indices. The Partnership is
primarily exposed to the risk of adverse price trends or static
markets in the U.S. and Japanese indices. (Static markets would
not cause major market changes but would make it difficult for
the Partnership to avoid being "whipsawed" into numerous small
losses.)
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of March 31, 2000:
Foreign Currency Balances - The Partnership's foreign currency
balances are in Japanese yen, British pounds, euros, Swiss francs
and Australian dollars. The Partnership controls the non-trading
risk of these balances by regularly converting these balances
back into dollars upon liquidation of the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership's
assets
among different market sectors and trading approaches, and
monitoring the performance of the Trading Manager daily. In
addition, the Trading Manager establishes diversification
guidelines, often set in terms of the maximum margin to be
committed to positions in any one market sector or market-sensitive
instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash. Cash is the only Partnership investment
directed by Demeter, rather than the Trading Manager.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 3, 2000, the plaintiffs in the New York action filed an
appeal of the order dismissing the consolidated complaint.
(Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-K for the year ended December 31, 1999 for
a more detailed discussion.)
Item 5. OTHER INFORMATION
Effective January 31, 2000, Mark J. Hawley resigned as Chairman
of the Board and a Director of Demeter and DWFCM and Robert E.
Murray replaced him as Chairman of the Board of Demeter and
DWFCM.
Demeter has determined, commencing in May 2000, to transfer the
Partnership's futures and options clearing from Carr to Morgan
Stanley & Co. Incorporated ("MS & Co."), an affiliate of Demeter,
while trades on the London Metal Exchange will be cleared by
Morgan Stanley & Co. International Limited ("MSIL"), also an
affiliate of Demeter. In addition, MS & Co. and MSIL, rather
than Carr, will act as the counterparty on all of the
Partnership's foreign currency forward trades. Dean Witter
Reynolds Inc. will continue to act as the non-clearing commodity
broker for the Partnership.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.03 Amended and Restated Customer Agreement dated as of
December 1, 1997, between the Partnership and Dean Witter
Reynolds Inc. is filed herewith.
10.04 Customer Agreement dated as of December 1, 1997,
between the Partnership, Carr Futures, Inc., and Dean Witter
Reynolds Inc. is filed herewith.
10.05 International Foreign Exchange Master Agreement dated
as of August 1, 1997, between the Partnership and Carr
Futures, Inc. is filed herewith.
(B) Reports on Form 8-K. - None.
SIGNATURE
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.
Dean Witter Diversified Futures
Fund II L.P. (Registrant)
By: Demeter Management Corporation
(General Partner)
May 12, 2000 By: /s/ Lewis A. Raibley, III
Lewis A. Raibley, III
Director and Chief Financial
Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.