2000
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Prudential-Bache Annual
Capital Return Futures Report
Fund 2, L.P.
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
March 2001
Letter to Limited Partners
1
PricewaterhouseCoopers LLP (LOGO)
1177 Avenue of the Americas
New York, NY 10036
Telephone 212 596 8000
Facsimile 212 596 8910
Report of Independent Accountants
To the General Partner and
Limited Partners of
Prudential-Bache Capital Return Futures Fund 2, L.P.
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in partners' capital present
fairly, in all material respects, the financial position of Prudential-Bache
Capital Return Futures Fund 2, L.P. at December 31, 2000 and 1999, and the
results of its operations for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the General Partner; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by the General
Partner, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
January 26, 2001
2
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------
2000 1999
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ASSETS
Cash $ 2,989,531 $ 4,573,677
U.S. Treasury bills, at amortized cost 9,890,040 14,715,473
Net unrealized gain on open futures and options contracts 1,179,039 582,280
Net unrealized gain on open forward contracts 265,456 --
Net premiums (received) paid on options (7,506) 83,238
----------- -----------
Total assets $14,316,560 $19,954,668
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 473,514 $ 935,402
Due to affiliates 74,303 40,762
Accrued expenses payable 57,254 60,689
Management fees payable 24,772 34,924
Net unrealized loss on open forward contracts -- 59,834
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Total liabilities 629,843 1,131,611
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Commitments
Partners' capital
Limited partners (60,808 and 81,738 units outstanding) 13,549,677 18,634,742
General partner (615 and 826 units outstanding) 137,040 188,315
----------- -----------
Total partners' capital 13,686,717 18,823,057
----------- -----------
Total liabilities and partners' capital $14,316,560 $19,954,668
----------- -----------
----------- -----------
Net asset value per limited and general partnership unit ('Units') $ 222.83 $ 227.98
----------- -----------
----------- -----------
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The accompanying notes are an integral part of these statements.
3
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------------------
2000 1999 1998
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REVENUES
Net realized gain (loss) on commodity
transactions $ (623,699) $ 800,974 $ 669,325
Change in net unrealized gain/loss on open
commodity positions 922,049 (73,845) (1,001,790)
Interest from U.S. Treasury bills 640,450 763,868 986,548
--------------- --------------- ---------------
938,800 1,490,997 654,083
--------------- --------------- ---------------
EXPENSES
Commissions 1,201,445 1,766,009 2,208,844
Management fees 315,641 467,596 831,579
Incentive fees -- 180,115 27,241
General and administrative 134,148 154,909 150,768
--------------- --------------- ---------------
1,651,234 2,568,629 3,218,432
--------------- --------------- ---------------
Net loss $ (712,434) $(1,077,632) $(2,564,349)
--------------- --------------- ---------------
--------------- --------------- ---------------
ALLOCATION OF NET LOSS
Limited partners $ (705,313) $(1,066,852) $(2,538,726)
--------------- --------------- ---------------
--------------- --------------- ---------------
General partner $ (7,121) $ (10,780) $ (25,623)
--------------- --------------- ---------------
--------------- --------------- ---------------
NET LOSS PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net loss per weighted average
limited and general partnership unit $ (9.95) $ (11.57) $ (22.84)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average number of limited and
general partnership units outstanding 71,580 93,100 112,273
--------------- --------------- ---------------
--------------- --------------- ---------------
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
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Partners' capital--December 31, 1997 120,339 $30,934,928 $ 312,636 $31,247,564
Net loss (2,538,726) (25,623) (2,564,349)
Redemptions (20,350) (4,604,928) (46,669) (4,651,597)
-------- ----------- ----------- -----------
Partners' capital--December 31, 1998 99,989 23,791,274 240,344 24,031,618
Net loss (1,066,852) (10,780) (1,077,632)
Redemptions (17,425) (4,089,680) (41,249) (4,130,929)
-------- ----------- ----------- -----------
Partners' capital--December 31, 1999 82,564 18,634,742 188,315 18,823,057
Net loss (705,313) (7,121) (712,434)
Redemptions (21,141) (4,379,752) (44,154) (4,423,906)
-------- ----------- ----------- -----------
Partners' capital--December 31, 2000 61,423 $13,549,677 $ 137,040 $13,686,717
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
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The accompanying notes are an integral part of these statements.
4
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential-Bache Capital Return Futures Fund 2, L.P. (the 'Partnership') is a
Delaware limited partnership formed on June 8, 1989 which will terminate on
December 31, 2009 unless terminated sooner under the provisions of its Amended
and Restated Agreement of Limited Partnership (the 'Partnership Agreement'). On
October 6, 1989, the Partnership completed its offering having raised
$101,010,000 from the sale of 1,000,000 units of limited partnership interest
and 10,100 units of general partnership interest (collectively, 'Units') and
commenced operations. The Partnership was formed to engage in the speculative
trading of commodity futures, forward and options contracts. Physical
commodities may also be traded from time to time. The general partner of the
Partnership is Prudential Securities Futures Management Inc. (the 'General
Partner'), a wholly owned subsidiary of Prudential Securities Incorporated
('PSI') which, in turn, is a wholly owned subsidiary of Prudential Securities
Group Inc. PSI was the principal underwriter of the Units and is the commodity
broker. The General Partner is required to maintain at least a 1% interest in
the Partnership as long as it is acting as the Partnership's general partner.
The General Partner generally maintains not less than 75% of the
Partnership's net asset value ('NAV') in interest-bearing U.S. Government
obligations (primarily U.S. Treasury bills), a significant portion of which is
utilized for margin purposes for the Partnership's commodity trading activities.
The remaining 25% of NAV is held in cash in the Partnership's commodity trading
accounts.
All trading decisions for the Partnership are currently being made by Welton
Investment Corporation ('Welton'), Eclipse Capital Management, Inc. ('Eclipse'),
Appleton Capital Management (formerly known as Gaiacorp Ireland Limited)
('Appleton') and Trendlogic Associates, Inc. ('Trendlogic'), independent
commodity trading managers (collectively, the 'Trading Managers'). Effective
September 1, 1998, all assets previously managed by John W. Henry & Company,
Inc. (the 'Reallocated Assets') were reallocated to Welton, Eclipse and to two
trading managers new to the Partnership--Appleton and Trendlogic--so that each
Trading Manager began managing approximately 27% of the Partnership's assets,
except for Trendlogic, which began managing approximately 19%. The Trading
Managers receive monthly management fees on their portion of the Reallocated
Assets equal to a 2% annual rate as compared to the 4% annual rate paid to John
W. Henry & Company, Inc. The Trading Managers earn a quarterly incentive fee
equal to 20% of New High Net Trading Profits (as defined in the Advisory
Agreement among the Partnership, the General Partner and each respective Trading
Manager) on the Reallocated Assets, except for Trendlogic whose quarterly
incentive fee rate is 17.5%. John W. Henry & Company, Inc. received quarterly
incentive fees at a 15% rate. The General Partner retains the authority to
override trading instructions that violate the Partnership's trading policies.
B. Summary of Significant Accounting Policies
Basis of accounting
The financial statements of the Partnership are prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the General Partner
to make estimates and assumptions that affect the reported amounts of
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value of futures and forward contracts is
reflected as net unrealized gain or loss. Options transactions are reflected in
the statements of financial condition at market value which is inclusive of the
net unrealized gain or loss. 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.
5
To the extent practicable, the Partnership invests a significant portion of
its NAV in U.S. Treasury bills which are often used to fulfill margin
requirements. U.S. Treasury bills are carried at amortized cost, which
approximates market value. Interest on these obligations accrues for the benefit
of the Partnership.
The weighted average number of limited and general partnership units
outstanding was computed for purposes of disclosing net income (loss) per
weighted average limited and general partnership unit. The weighted average
limited and general partnership units are equal to the number of Units
outstanding at year end, adjusted proportionately for Units redeemed based on
their respective time outstanding during such year.
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standards No. 102, 'Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.'
Income taxes
The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from the Partnership's operations
are passed directly to the individual partners. The Partnership may be subject
to other state and local taxes in jurisdictions in which it operates.
Profit and loss allocations, distributions and redemptions
Net income or loss for tax purposes shall generally be allocated first to
partners who redeem Units to the extent the redeemed amount is greater than or
less than those partners' tax capital accounts at the beginning of the year. Net
income or loss remaining after these allocations are allocated to each partner
in proportion to such partner's tax capital account at year-end. Net income or
loss for financial reporting purposes is allocated quarterly to all partners on
a pro rata basis based on each partner's number of Units outstanding during the
quarter.
Distributions (other than on redemptions of Units) are made at the sole
discretion of the General Partner on a pro rata basis in accordance with the
respective capital accounts of the partners. No distributions have been made
since inception.
The Partnership Agreement provides that a partner may redeem its Units as of
the last business day of any calendar quarter at the then current net asset
value per Unit.
New Accounting Guidance
In June 2000, the Financial Accounting Standards Board ('FASB') issued
Statement No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which
became effective for the Partnership on July 1, 2000. SFAS 138 amends the
accounting and reporting standards of FASB Statement No. 133 for certain
derivative instruments and certain hedging activities. SAFS 138 has not had a
material effect on the carrying value of assets and liabilities within the
financial statements.
C. Costs, Fees and Expenses
Commissions
The General Partner, on behalf of the Partnership, entered into an agreement
with PSI to act as commodity broker for the Partnership. Effective August 1,
1998, the Partnership pays PSI commissions at a flat rate of .6666% per month
(8% annually) of the Partnership's NAV as of the first day of each month. Prior
to August 1998, the Partnership paid commissions at a flat rate of .7083% per
month (8.5% annually).
Management and incentive fees
The Partnership pays Eclipse, Appleton, and Trendlogic monthly management
fees equal to 1/6 of 1% (2% annually) of the portion of the Partnership's NAV
allocated to each of these Trading Managers as of the end of each month. The
Partnership pays Welton monthly management fees ranging from 1/6 of 1% (2%
annually) to 1/3 of 1% (4% annually) of its allocated portion of the
Partnership's NAV as of the end of each month.
In addition, the Partnership pays Eclipse and Appleton a quarterly incentive
fee equal to 20%, Trendlogic 17.5% and Welton 15% to 20% of the 'New High Net
Trading Profits' (as defined in each Advisory Agreement among the Partnership,
the General Partner and each Trading Manager).
6
See Note A for further information concerning changes in Trading Managers
which has resulted in changes to management fees and incentive fees since the
changes took effect on September 1, 1998.
General and administrative expenses
In addition to the costs, fees and expenses previously discussed, the
Partnership reimburses the General Partner and its affiliates for actual
Partnership operating expenses payable by, or allocable to, the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The Partnership also pays amounts directly to unrelated
parties for certain operating expenses.
D. Related Parties
The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: brokerage services; accounting and
financial management; registrar, transfer and assignment functions; investor
communications, printing and other administrative services.
The costs incurred for the three years ended December 31, 2000 were:
2000 1999 1998
---------- ---------- ----------
Commissions $1,201,445 $1,766,009 $2,208,844
General and administrative 70,441 68,070 69,689
---------- ---------- ----------
$1,271,886 $1,834,079 $2,278,533
---------- ---------- ----------
---------- ---------- ----------
The Partnership's assets are maintained either in trading or cash accounts
with PSI, or for margin purposes, with the various exchanges on which the
Partnership is permitted to trade.
The Partnership, acting through its Trading Managers, executes
over-the-counter, spot, forward and/or option foreign exchange transactions with
PSI. PSI then engages in back-to-back trading with an affiliate,
Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on
such transactions. PBGM keeps its prices on foreign currency competitive with
other interbank currency trading desks. All over-the-counter currency
transactions are conducted between PSI and the Partnership pursuant to a line of
credit. PSI may require that collateral be posted against the marked-to-market
positions of the Partnership.
E. Income Taxes
The following is a reconciliation of net loss for financial reporting
purposes to net loss for tax reporting purposes for the three years ended
December 31, 2000:
2000 1999 1998
--------- ----------- -----------
Net loss for financial reporting purposes $(712,434) $(1,077,632) $(2,564,349)
Change in unrealized gain/loss on nonregulated
commodity positions 220,221 (336,198) 153,409
--------- ----------- -----------
Tax basis net loss $(492,213) $(1,413,830) $(2,410,940)
--------- ----------- -----------
--------- ----------- -----------
The differences between the tax and book bases of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments.
F. Derivative Instruments and Associated Risks
The Partnership is exposed to various types of risk 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 Partnership's investment activities (credit
risk).
Market risk
Trading in futures and forward (including foreign exchange transactions)
contracts 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 Partnership's net
assets being traded, significantly exceeds the Partnership's future cash
requirements since the Partnership intends to close out its open positions prior
to settlement. As a result, the Partnership is generally subject only to the
7
risk of loss arising from the change in the value of the contracts. As such, the
Partnership considers the 'fair value' of its futures and forward contracts to
be the net unrealized gain or loss on the contracts. The market risk associated
with the Partnership's commitments to purchase commodities is limited to the
gross or face amount of the contracts held. However, when the Partnership 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. Since the repurchase price to which a commodity can
rise is unlimited, entering into commitments to sell commodities exposes the
Partnership to unlimited risk.
Trading in options involves the payment or receipt of a premium and the
corresponding right or obligation, as the case may be, to either purchase or
sell the underlying commodity for a specified price during a limited period of
time. Purchasing options involves the risk that the underlying commodity does
not change price as expected, so that the option expires worthless and the
premium is lost. On the other hand, selling options involves unlimited risk
because the Partnership is exposed to the potentially unlimited price movement
in the underlying commodity.
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 effects
among the derivative instruments the Partnership holds and the liquidity and
inherent volatility of the markets in which the Partnership trades.
Credit risk
When entering into futures, forward and options contracts, the Partnership is
exposed to credit risk that the counterparty to the contract will not meet its
obligations. The counterparty for futures and options contracts traded in the
United States and on most foreign futures and options exchanges is the
clearinghouse associated with such exchanges. In general, clearinghouses are
backed by their corporate members who are required to share any financial burden
resulting from the nonperformance 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, the sole counterparty to the Partnership's forward transactions is PSI,
the Partnership's commodity broker. The Partnership has entered into a master
netting agreement with PSI and, as a result, 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 nonperformance of all
of the Partnership's contracts is the net unrealized gain (plus premiums paid on
options) included in the statements of financial condition. There can be no
assurance that any counterparty, clearing member or clearinghouse will meet its
obligations to the Partnership.
The General Partner attempts to minimize both credit and market risks by
requiring the Partnership and its Trading Managers to abide by various trading
limitations and policies. The General Partner 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 each Advisory Agreement among the Partnership, the
General Partner and each Trading Manager, the General Partner shall
automatically terminate a Trading Manager if the NAV allocated to the Trading
Manager declines by 33 1/3% since the commencement of its trading activities or
from the value at the beginning of any year (except for Welton for which
automatic termination relates only to a decline from the commencement of trading
activities). Futhermore, the Amended and Restated Agreement of Limited
Partnership provides that the Partnership will liquidate its positions, and
eventually dissolve, if the Partnership experiences a decline in the NAV to less
than 50% of the value at commencement of trading activities. In each case, the
decline in NAV is after giving effect for distributions and redemptions. The
General Partner may impose additional restrictions (through modifications of
trading limitations and policies) upon the trading activities of the Trading
Managers as it, in good faith, deems to be in the best interests of the
Partnership.
PSI, when acting as the Partnership's futures commission merchant in
accepting orders for the purchase or sale of domestic futures and options
contracts, is required by Commodity Futures Trading Commission ('CFTC')
regulations to separately account for and segregate as belonging to the
Partnership all assets of the Partnership relating to domestic futures and
options trading and is not to commingle such assets with other assets of PSI. At
December 31, 2000, such segregated assets totalled $10,442,041. Part 30.7 of the
CFTC regulations also requires PSI to secure assets of the Partnership related
to foreign futures and options
8
trading which totalled $3,609,063 at December 31, 2000. There are no segregation
requirements for assets related to forward trading.
As of December 31, 2000, the Partnership's open futures, forward and options
contracts mature within nine months.
At December 31, 2000 and 1999, the fair value of open futures, forward and
options contracts was:
2000 1999
------------------------- -----------------------
Assets Liabilities Assets Liabilities
---------- ----------- -------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 342,034 $ -- $ 78,005 $ --
Stock indices 9,940 -- 75,245 5,420
Currencies 524,721 4,640 76,089 30,830
Commodities 77,160 25,700 52,327 24,170
Foreign exchanges
Interest rates 259,017 493 116,588 1,038
Stock indices 46,489 -- 81,199 1,899
Commodities 9,819 62,840 168,686 26,889
Forward Contracts:
Currencies 436,854 171,398 14,912 74,746
Options Contracts:
Domestic exchanges
Interest rates -- 1,219 -- --
Stock indices -- -- 95,700 --
Currencies -- 1,875 -- --
Commodities -- 880 13,050 1,125
---------- ----------- -------- -----------
$1,706,034 $ 269,045 $771,801 $ 166,117
---------- ----------- -------- -----------
---------- ----------- -------- -----------
9
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I hereby affirm that, to the best of my knowledge and belief, the information
contained herein relating to Prudential-Bache Capital Return Futures Fund 2,
L.P. is accurate and complete.
PRUDENTIAL SECURITIES FUTURES
MANAGEMENT INC.
(General Partner)
by: Barbara J. Brooks
Chief Financial Officer
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10
PRUDENTIAL-BACHE CAPITAL RETURN FUTURES FUND 2, L.P.
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced trading operations on October 6, 1989 with gross
proceeds of $101,010,000. After accounting for organizational and offering
costs, the Partnership's net proceeds were $99,010,000.
At December 31, 2000, 100% of the Partnership's total net assets was
allocated to commodities trading. A significant portion of the net asset value
was held in U.S. Treasury bills (which represented approximately 70% of the net
asset value prior to redemptions payable) and cash, which are used as margin for
the Partnership's trading in commodities. Inasmuch as the sole business of the
Partnership is to trade in commodities, the Partnership continues to own such
liquid assets to be used as margin.
The percentage that U.S. Treasury bills bears to the total net assets varies
each day, and from month to month, as the market values of commodity interests
change. The balance of the net assets is held in cash. All interest earned on
the Partnership's interest-bearing funds is paid to the Partnership.
The commodities contracts are 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 the Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
contracts, 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). The Partnership'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 the Partnership's speculative trading as well as the
development of drastic market occurrences could result in monthly losses
considerably beyond the Partnership's experience to date and could ultimately
lead to a loss of all or substantially all of investors' capital. The General
Partner attempts to minimize these risks by requiring the Partnership and its
Trading Managers 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 F to the financial statements for a
further discussion on the credit and market risks associated with the
Partnership's futures, forward and options contracts.
Redemptions by limited partners and the General Partner for the year ended
December 31, 2000 were $4,379,752 and $44,154, respectively. Redemptions by
limited partners and the General Partner recorded from the commencement of
operations, October 6, 1989, through December 31, 2000 totalled $131,391,548 and
$1,873,102, respectively. Future redemptions will impact the amount of funds
available for investment in commodity contracts in subsequent periods.
The Partnership does not have, nor does it expect to have, any capital
assets.
Results of Operations
The net asset value per Unit as of December 31, 2000 was $222.83, a decrease
of 2.26% from the December 31, 1999 net asset value per Unit of $227.98, which
was a decrease of 5.14% from the December 31, 1998 net asset value per Unit of
$240.34. The MAR (Managed Account Reports) Fund/Pool Index, which tracks the
performance of approximately 300 futures funds, returned gains of 9.41% and
1.48%, respectively. Past performance is not necessarily indicative of future
results.
11
The Partnership had gross trading gains/(losses) of $298,000, $727,000 and
$(332,000) for the years ended December 31, 2000, 1999 and 1998, respectively.
Due to the nature of the Partnership's trading activities, a year to year
comparison of its trading results is not meaningful. However, a detailed
discussion of the Partnership's current year trading results is presented below.
The Partnership's unfavorable performance in 2000 was attributed to losses in
the stock indices, metal, currency and interest rate sectors. Gains were
recognized in the energy sector.
Extreme volatility in world financial markets during the first half of 2000
led to lack of trending opportunities and resulted in losses for positions in
stock indices. During the second half of the year, equity markets experienced
continued volatility, but markets trended downward as global economies began to
show signs of slowing down. Most major indices ended the year lower incurring
losses for long positions.
Short metal positions incurred losses for the Partnership throughout most of
the year as strong demand and fears of inflation drove prices higher. In
addition, the high cost of energy, which is used in the production of base
metals, caused a decrease in metal supply driving prices higher and incurring
losses for short positions.
The euro began 2000 lower versus the U.S. dollar, Japanese yen and British
pound before rallying slightly in June as a result of solid European economic
data and sentiment that the currency was undervalued. Despite a brief rally
after intervention by the European Central Bank and other G-7 central banks to
boost the failing euro in September, the euro settled back down more than $0.02
below its intervention peaks. The euro reversed its downtrend during the fourth
quarter as it rose against the U.S. dollar and Japanese yen resulting in gains
for long positions. Gains in the euro were not sufficient to overcome losses in
other currency positions. The Japanese yen rallied sharply, gaining on the U.S.
dollar and most other currencies in the final months of Japan's fiscal year
(which ended March 31st). This was attributed to positive sentiment regarding
Japan's economy. In May, the yen rose slightly against the U.S. dollar supported
by expectations of a possible change in the Bank of Japan's (BOJ) zero-interest
rate policy and continued to rise when the BOJ increased short-term interest
rates in August incurring losses for short positions. Political and economic
uncertainty in Japan during the fourth quarter caused the yen to fall against
the U.S. dollar and short Japanese yen positions resulted in gains. Fourth
quarter gains were not sufficient to offset losses incurred during the second
and third quarters of the year. The Swiss franc spent most of the first three
quarters drifting lower against the U.S. dollar, tracking the euro's trend and
incurring losses for long positions. The Swiss franc, Australian dollar, and
Canadian dollar were among other currencies that rose against the U.S. dollar in
the fourth quarter due to a weakening U.S. economy incurring losses in short
positions.
Global bond markets began 2000 on a strong note. The U.S. Federal Reserve,
European Central Bank, Bank of England, Reserve Bank of Australia, and Bank of
Canada increased interest rates in early February. These rate increases shared
motivation of strong economic growth and concerns about inflation. Despite rate
hikes and news of robust worldwide economic growth, global bond markets
continued to rally partially due to investors seeking refuge from volatile
equity markets. Short U.S., Japanese and euro bond positions resulted in losses
during the first three quarters of the year. Negative equity performance
throughout the fourth quarter and mounting fears of a global economic slowdown
contributed to a bond market rally towards year end as investors continued their
flight to quality from the stock market. Prices of long- and short-term interest
rate instruments rose, but gains from long U.S., Japanese and euro bond
positions during the last quarter were not sufficient to offset losses incurred
during the rest of the year.
Energy prices climbed throughout January and February and into the first week
of March. Prices of crude oil futures rose above $33 a barrel, the highest level
for a front-month (the most liquid) contract since the Gulf War in 1991. The
energy sector reached a high early in March just prior to OPEC's agreement to
increase production sufficiently to stabilize prices. Political pressure by the
United States, along with a desire among OPEC members to maintain crude oil
prices in the range of $22-$28 per barrel, prompted the cartel to announce a
production increase and crude oil prices reversed downward. Increased demand and
low supplies caused oil prices to surge once again during the second quarter
resulting in gains for long energy positions. Energy markets ended a year long
uptrend with natural gas surging to an all time high in December as low supplies
were strained by unusually cold temperatures in the U.S. Long positions in
heating oil, crude oil and natural gas resulted in gains.
Interest income is earned on the Partnership's investments in U.S. Treasury
bills and varies monthly according to interest rates as well as the effect of
trading performance and redemptions on the level of
12
interest-bearing funds. Interest income from U.S. Treasury bills decreased by
$123,000 during 2000 compared to 1999 and decreased $223,000 during 1999 as
compared to 1998 principally due to fewer funds being invested in U.S. Treasury
bills as a result of redemptions and weak trading performance during most of
2000 and 1999. The decline in interest income in 2000 versus 1999 was partially
offset by higher overall interest rates in 2000.
Commissions paid to PSI are calculated on the Partnership's net asset value
on the first day of each month and, therefore, vary monthly according to trading
performance and redemptions. Commissions decreased by approximately $565,000
during 2000 as compared to 1999 and decreased by $443,000 during 1999 as
compared to 1998 principally due to the effect of weak trading performance
during most of 2000 and 1999 and redemptions on the monthly net asset values.
Additionally, the August 1998 reduction in the commission rate from 8.5% to 8%
resulted in a decrease in commissions from 1998 levels.
All trading decisions are currently being made by Welton, Eclipse, Trendlogic
and Appleton. Management fees are calculated on the portion of the Partnership's
net asset value allocated to each Trading Manager as of the end of each month
and, therefore, are affected by trading performance and redemptions. Management
fees decreased by $152,000 during 2000 as compared to 1999, and decreased by
$364,000 during 1999 as compared to 1998 due to fluctuations in monthly net
asset values as described in the discussion on commissions above. The decline in
management fees from 1998 levels were also caused by a reduction in the
management fee rate from a 4% annual rate to a 2% annual rate on the portion of
net assets that were reallocated from John W. Henry & Company, Inc. to the
current Trading Managers effective September 1, 1998.
Incentive fees are based on the 'New High Net Trading Profits' generated by
each Trading Manager, as defined in each Advisory Agreement among the
Partnership, the General Partner and each Trading Manager. Despite overall
Partnership trading losses during 1999 and 1998, Eclipse generated sufficient
trading profits during 1999 to earn incentive fees of $180,000 and during 1998,
Welton and Trendlogic earned incentive fees of $22,000 and $5,000, respectively.
No incentive fees were incurred by the Partnership during 2000.
General and administrative expenses decreased by $21,000 during 2000 as
compared to 1999, but remained relatively constant during the two years ended
December 31, 1999. These expenses include reimbursements of costs incurred by
the General Partner on behalf of the Partnership, in addition to accounting,
audit, tax and legal fees as well as printing and postage costs related to
reports sent to limited partners.
New Accounting Guidance
In June 2000, FASB issued Statement No. 138, Accouting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of FASB Statement No.
133 ('SFAS 138'), which became effective for the Partnership on July 1, 2000.
SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133
for certain derivative instruments and certain hedging activities. SFAS 138 has
not had a material effect on the carrying value of assets and liabilities within
the financial statements.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Partnership from inception through December 31, 2000.
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OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 2000 was $78.
The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
Prudential-Bache Capital Return Futures Fund 2, L.P.
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
14
Peck Slip Station PRESORTED
P.O. Box 2016 STANDARD
New York, NY 10272 U.S. POSTAGE
PAID
Automatic Mail
PBCR2/171781