Item 1. Business
Seneca Global Fund, L.P. (“Fund”) is a Delaware limited partnership, formed on March 23, 2007. Using professional trading advisors, the Fund engages in the speculative trading of futures contracts, forward currency contracts and other financial instruments traded in the United States (“U.S.”) and internationally. The Fund does not currently use swaps or options as part of its trading strategy, but may employ them in the future.
The Fund uses multiple trading advisors to engage in the speculative trading of futures contracts, forward currency contracts and other financial instruments. Each trading advisor uses a proprietary, systematic trading system that deploys multiple trading strategies utilizing derivatives that seeks to identify and exploit directional moves in market behavior to a broad and diversified range of global market sectors including equity indices, currencies, interest rate instruments, energy, metals and agricultural commodities.
The Fund issues units of limited partner interests (“Units”) in four Series: Series A, Series B, Series C and Series I, which represent units of fractional undivided beneficial interest in and ownership of the Fund. The Fund began investment operations of its Series I, B and A Units on September 1, 2008, November 1, 2008 and December 1, 2008, respectively. Series C Units began investment operations on September 1, 2012. Series C Units will be issued in exchange for Series A, B and I Units in certain circumstances (described below).
At December 31, 2013, the aggregate capitalization of the Fund was $33,559,701, which consists of Series A Units of $11,687,076, Series B Units of $7,060,706, Series C Units of $2,526,789, Series I Units of $11,490,470 and General Partner Units of $794,660. At December 31, 2013, the net asset value per unit of the Series A, B, C and I Units were $71.08, $81.62, $91.11 and $95.67, respectively, and the net asset value per unit of the General Partner Units was $106.51.
The Fund maintains its margin deposits and reserves in cash, U.S. Treasury securities, U.S. and foreign government sponsored enterprise notes, registered U.S. money market funds, commercial paper, corporate notes and certificates of deposit in accordance with Commodity Futures Trading Commission (“CFTC”) rules. All interest income earned by the Fund accrues to the benefit of the Fund.
The Fund’s business constitutes only one segment for financial reporting purposes. The Fund does not engage in material operations in foreign countries, although it does trade in foreign forward currency contracts and on international futures markets, nor is a material portion of its funds derived from foreign customers.
General Partner
Under the Fourth Amended and Restated Limited Partnership Agreement (“Partnership Agreement”), management of all aspects of the Fund’s business and administration is carried out exclusively by its general partner, Steben & Company, Inc. (“General Partner”), a Maryland corporation organized in February 1989. The General Partner is registered with the CFTC as a commodity pool operator and introducing broker, and is also registered with the U.S. Securities and Exchange Commission (“SEC”) as an investment adviser and a broker dealer. The General Partner is a member of the National Futures Association (“NFA”) and the Financial Industry Regulatory Authority (“FINRA”).
The General Partner manages all aspects of the Fund’s business, including selecting the Fund’s trading advisors; allocating the Fund’s assets among them; possibly investing a portion of the Fund’s assets in other investment pools; selecting the Fund’s futures broker(s), accountants and attorneys; computing the Fund’s net assets; reporting to limited partners; directing the investment of Fund excess margin monies in interest-bearing instruments and/or cash; and processing subscriptions and redemptions. The General Partner maintains office facilities for and furnishes administrative and clerical services to the Fund. There have been no material administrative, civil or criminal actions within the past five years against the General Partner or its principals, and no such actions currently are pending.
All organizational and initial offering costs were borne by the General Partner on behalf of the Fund without reimbursement. Please see the table under “Description of Current Charges” regarding compensation paid to the General Partner.
Trading Advisors
As of February 28, 2014, the trading advisors of the Fund and the allocation of the Fund’s trading level are reflected as follows:
These allocations are subject to change at the General Partner’s sole discretion.
Blackwater Capital Management, LLC, Estlander & Partners, Ltd., Quantitative Investment Management, LLC and Winton Capital Management Ltd. (collectively, “Trading Advisors”) offer discretionary advisory services to institutional and high net worth investors in the speculative trading of multiple asset classes including, without limitation, futures, forwards, swaps, options and other derivative contracts, commonly referred to as “futures.”
An objective of the Fund’s multi-manager approach is to reduce the Fund’s volatility without sacrificing overall rates of return. The General Partner may, from time to time, adjust the amount of assets allocated to a Trading Advisor, add new trading advisors, terminate Trading Advisors or replace Trading Advisors without prior notice to investors. Trading Advisors are selected by the General Partner based on their performance histories and other factors.
The General Partner may cause a trading advisor to trade its allocated Fund assets at a trading level of approximately 0.9 - 1.5 times the trading level normally used by the trading advisor employing its own trading program. Thus, the Fund could experience greater or less volatility and greater or less brokerage commission expenses relative to a client who invests at the normal trading level of the trading programs depending on the amount of leverage used.
Selling Agents
The General Partner acts as a selling agent for the Fund. The General Partner has and intends to continue to appoint certain other broker-dealers registered under the Securities Exchange Act of 1934, as amended (“1934 Act”), and members of FINRA, to act as additional selling agents with respect to Series A, B and I Units. Selling agents are selected to assist in the making of offers and sales of Series A, B and I Units. The selling agents are not required to purchase any Series A, B and I Units, or sell any specific number or dollar amount of Series A, B and I Units, instead use their best efforts to sell such Units. Where the General Partner acts as the selling agent it retains the selling agent fee.
Futures Brokers and Forward Currency Counterparty
The Fund’s futures trading is currently conducted with Newedge USA, LLC (“NUSA”) and J.P. Morgan Securities LLC (“JPMS”). NUSA is a subsidiary of Newedge Group, SA. Newedge Group was formed on January 2, 2008 as a joint venture by Société Générale and Calyon to combine the brokerage activities previously carried by their respective subsidiaries which comprised the Fimat Group and the Calyon Financial Group of affiliated entities. Newedge Group, which is owned 50% each by Calyon and Société Générale, is a société anonyme governed by French law. Newedge UK Finance Limited (NEUK), the Fund’s forward currency counterparty, is a wholly-owned subsidiary of Newedge Group, incorporated in England and Wales, and regulated by the Financial Services Authority for the conduct of business in the UK. JPMS is an indirect, wholly-owned subsidiary of JPMorgan Chase & Co., one of the largest bank holding companies in the U.S.
Cash Managers
The Fund has engaged J.P. Morgan Investment Management (“JPMIM”) and Principal Global Investors, LLC (“PGI” and, together with JPMIM, the “Cash Managers”) to provide cash management services to the Fund. The Cash Managers manage the Fund’s cash and excess margin through investments in fixed income instruments, pursuant to investment parameters established by the General Partner. The Fund’s objective in retaining the Cash Managers is to enhance the return on its assets not required to be held by the Fund’s futures brokers in support of the Fund’s trading.
Description of Current Charges
Charges
Amount
Trading Advisor
Management Fees
Each series of Units incurs monthly trading advisor management fees, payable in arrears, to the Trading Advisors (based on the assets under management), equal to:
■ Blackwater Capital, LLC: 1/12th of 1.0%
■ Estlander & Partners, Ltd: 1/12th of 1.0%
■ Quantitative Investment Management, LLC does not charge a management fee
■ Winton Capital Management, Ltd.: 1/12th of 1.50%
Trading Advisor
Incentive Fees
Each series of Units incurs quarterly trading advisor incentive fees, payable in arrears to the Trading Advisors, for any “Net New Trading Profits” generated on the portion of the Fund the respective Trading Advisor manages, equal to:
■ Blackwater Capital, LLC: 20%
■ Estlander & Partners, Ltd: 20%
■ Quantitative Investment Management, LLC: 30%
■ Winton Capital Management, Ltd.: 20%
Net New Trading Profits are calculated based on formulas defined in each Trading Advisor’s trading agreement. In determining Net New Trading Profits, any trading losses generated by the respective Trading Advisor for the Fund in prior periods are carried forward, so that the incentive fee is assessed only if and to the extent the profits generated by the Trading Advisor for the period exceed any losses from prior periods. The loss carry-forward is proportionally reduced if and to the extent the Fund reduces the amount of assets allocated to the Trading Advisor.
Brokerage
Commissions and
Trading Expenses
The Fund incurs brokerage commissions and trading expenses on U.S. futures exchanges at the approximate rate of $2 to $13, with an average of $4 per “round-turn” futures transaction (includes NFA, execution, clearing and exchange fees). Brokerage commissions and trading expenses may be higher for trades executed on certain foreign exchanges.
Cash Manager Fees
Each class of Units incurs a monthly cash manager fee, payable in arrears to the Cash Managers, equal to approximately 1/12th of 0.13% of the investments in securities and certificates of deposit.
Organizational and
Initial Offering Costs
All organizational and initial offering costs were borne by the General Partner on behalf of the Fund without reimbursement.
General Partner Fee
Each series of Units, other than General Partner Units, incurs a monthly General Partner fee, equal to 1/12th of 1.5% of the Fund’s month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears. The General Partner fee is paid to the General Partner to compensate it for its services to the Fund as general partner and commodity pool operator.
Administrative
Expenses
Each series of Units reimburses the General Partner for actual monthly administrative expenses to various third-party service providers, including the General Partner, up to 1/12th of 0.95% of the Fund’s month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable quarterly in arrears. Actual ongoing offering costs in excess of this limitation are absorbed by the General Partner.
The administrative expenses include all actual accounting, audit, legal, administrative, offering and other back office expenses related to the administration of the Fund and all associated costs incurred by the Fund.
Charges
Amount
Offering Expenses
Each series of Units, other than Series C and General Partner Units, reimburses the General Partner for actual ongoing offering expenses, up to 1/12th of 0.75% of the Fund’s month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable monthly in arrears. Actual ongoing offering costs in excess of this limitation are absorbed by the General Partner.
If the Fund terminates prior to completion of payment to the General Partner for the unreimbursed offering expenses incurred through the date of such termination, the General Partner will not be entitled to any additional payments, and the Fund will have no further obligation to the General Partner for reimbursement of offering expenses.
Selling Agent Fees
Series A Units incur a monthly selling agent fee equal to 1/12th of 2% of the outstanding Series A Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and subject to the Fee Limit (as defined below). The General Partner, in turn, pays the selling agents an upfront fee of 2% of the aggregate subscription amount for the sale of Series A Units. Beginning in the 13th month, the General Partner then pays the selling agents a monthly selling agent fee in arrears equal to 1/12th of 2% of the outstanding Series A Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and subject to the Fee Limit.
If the selling agent fees are not paid to the selling agents, or where the General Partner acts as the selling agent, such portions of the selling agent fees are retained by the General Partner.
Series B, C and I Units do not incur selling agent fees.
Broker Dealer
Servicing Fee
Series A Units incur a monthly broker dealer servicing fee equal to 1/12th of 0.15% of the outstanding Series A Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears, subject to the Fee Limit.
Series B Units that are not held by broker dealers who act as custodian for the benefit of limited partners incur a monthly broker dealer servicing fee equal to 1/12th of 0.6% of the outstanding Series B Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears, subject to the Fee Limit. Where the General Partner acts as the selling agent, it retains these fees.
Series C and I Units, and those Series B Units that incur a broker dealer custodial fee (as described below), do not incur a broker dealer servicing fee.
Broker Dealer
Custodial Fee
Series B Units that are held by broker dealers who act as custodian for Series B Units for the benefit of the limited partners incur a monthly broker dealer custodial fee equal to 1/12th of 0.6% of the outstanding Series B Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears, subject to the Fee Limit.
Series A, C and I Units, and Series B Units that incur a broker dealer servicing fee (as described above), do not incur a broker dealer custodial fee.
In no event will a limited partner holding Series B Units incur both a broker dealer servicing fee and a broker dealer custodial fee. Where the General Partner acts as the selling agent, it retains these fees.
Charges
Amount
Fee Limit
The Fee Limit is the total amount of selling agent commissions, broker dealer servicing fees paid to selling agents, payments for wholesalers, payments for sales conferences, and other offering expenses that are items of compensation to FINRA members (but excluding, among other items, the production and printing of prospectuses and associated envelopes, folders and printed pieces provided with the prospectuses, as well as various legal and regulatory fees), paid by particular Series A, B or I Units when they equal 10% of the original purchase price paid by holders of those particular Units.
Each investor who owns Series A, B or I Units will continue to incur selling agent commissions, offering expenses and the broker dealer servicing fee, depending upon which expenses are applicable to the particular Series of Units, until the aggregate of such expenses reaches the Fee Limit.
Investors in the Fund will not incur expenses subject to the Fee Limit calculation in excess of the Fee Limit. Series C Units will be issued in exchange for an investor’s Series A, B or I Units to any limited partner who owns Series A, B or I Units when the General Partner determines that the Fee Limit has been reached as of the end of any month, or it anticipates that the Fee Limit will be reached during the following month. As a result, it is possible for a limited partner to have its Series A, B or I Units exchanged for Series C Units prior to reaching the Fee Limit. If a limited partner’s Series A, B or I Units are exchanged for Series C Units prior to reaching the Fee Limit, the General Partner will not seek additional fees from such limited partner.
Redemption Fee
Series A Units redeemed prior to the first anniversary of the subscription date will be subject to a redemption fee equal to the product of (i) 2% of the subscription price for such Series A Units on the subscription date, divided by 52 (ii) multiplied by the number of weeks remaining before the first anniversary of the subscription date. Limited partners will not be required to pay any redemption fees if such limited partners are subject to a mandatory redemption of their Units within the first year of purchase.
No other series of Units will incur the redemption fee.
Extraordinary Fees
and Expenses
The Fund will pay all extraordinary fees and expenses incurred by the Fund, if any, as determined by the General Partner. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses will also include material expenses which are not currently anticipated obligations of the Fund or of managed futures funds in general. Routine operational, administrative and other ordinary expenses will not be deemed to be extraordinary expenses.
Market Sectors
The Fund trades speculatively, through the allocation of its assets to the Trading Advisors, in U.S. and international futures markets, and may trade or hold futures, forwards, swaps or options. Specifically, the Fund trades futures on interest rate instruments, equity indices, energy, currencies, metals and agricultural commodities. The Fund also trades forward currency contracts and may trade options, swaps and other forwards other than currencies in the future.
Market Types
The Fund trades on a variety of U.S. and international futures exchanges. As in the case of its market sector allocations, the Fund’s commitments to different types of markets - U.S. and non-U.S., regulated and non-regulated - differ substantially from time to time, as well as over time, and may change at any time if a trading advisor, with the approval of the General Partner, determines such change to be in the best interests of the Fund.
Conflicts of Interest
The General Partner and its principals have organized and are involved in other business ventures, and may have incentives to favor certain of these ventures over the Fund. The Fund will not share in the risks or rewards of such other ventures. However, such other ventures will compete for the General Partner’s and its principals’ time and attention which might create other conflicts of interest. The Partnership Agreement does not require the General Partner to devote any particular amount of time to the Fund.
The General Partner or any of its affiliates or any person connected with it may invest in, directly or indirectly, or manage or advise other investment funds or accounts which invest in assets which may also be purchased or sold by the Fund. Neither the General Partner nor any of its affiliates nor any person connected with it is under any obligation to offer investment opportunities of which any of them becomes aware to the Fund or to account to the Fund in respect of (or share with the Fund or inform the Fund of) any such transaction or any benefit received by any of them from any such transaction, but will allocate such opportunities on an equitable basis between the Fund and other clients.
Incentive Fee to the Trading Advisors
The Trading Advisors are entitled to an incentive fee, therefore the Trading Advisors may have an incentive to cause the Fund to make riskier or more speculative investments than it otherwise would.
Personal Trading
The Trading Advisors, the futures brokers, the General Partner and the principals and affiliates thereof may trade commodity interests for their own account. In such trading, positions might be taken which are opposite those of the Fund, or that compete with the Fund’s trades.
Trades by Trading Advisors and their Principals
The Trading Advisors and their principals may trade for their own accounts in addition to directing trading for client accounts. Therefore, the Trading Advisors and their principals may be deemed to have a conflict of interest concerning the sequence in which orders for transactions will be transmitted for execution. Additionally, a potential conflict may occur when a trading advisor and its principals, as a result of a neutral allocation system, testing a new trading system, trading their own proprietary account(s) more aggressively, or any other actions that would not constitute a violation of fiduciary duties, take positions in their own proprietary account(s) which are opposite, or ahead of, the position(s) taken for a client. Proprietary accounts, in trading a new or experimental system, may enter the same markets earlier than (either days before or on the same day) client accounts traded at the same or other futures commission merchants. Since the principals of the Trading Advisors trade futures and foreign exchange for their own accounts, there is potentially a conflict of interest between these principals and the Trading Advisors’ clients when allocating prices on trades that are executed by a futures commission merchant at multiple prices. In such instances, a trading advisor may use a non-preferential method to fill an allocation. The clients of the Trading Advisors will not be permitted to inspect the personal trading records of the Trading Advisors, NUSA, JPMS or their respective principals, or the written policies relating to such trading. Client records are not available for inspection due to their confidential nature.
Effects of Speculative Position Limits
The CFTC and domestic exchanges have established speculative position limits on the maximum net long or net short futures position which any person, or group of persons, or group of persons acting in concert, may hold or control in particular futures contracts or options on futures traded on U.S. commodity exchanges. All commodity accounts owned or controlled by a trading advisor and its principals are combined for speculative position limits. Because speculative position limits allow a trading advisor and its principals to control only a limited number of contracts in any one commodity, the trading advisor and its principals are potentially subject to a conflict among the interests of all accounts the trading advisor and its principals control which are competing for shares of that limited number of contracts. There exists a conflict between the trading advisor’s interest in maintaining a smaller position in an individual client’s account in order to also provide positions in the specific commodity to other accounts under management and the personal accounts of the trading advisor and its principals. The General Partner does not believe, however, that the position limits are likely to impair the trading advisors’ trading for the Fund, although it is possible the issue could arise in the future.
To the extent that position limits restrict the total number of commodity positions which may be held by the Fund and those other accounts, the Trading Advisors will allocate the orders equitably between the Fund and such other accounts. Similarly, where orders for the same commodity given on behalf of both the Fund and other accounts managed by the Trading Advisors cannot be executed in full, the Trading Advisors will equitably allocate between the Fund and such other accounts that portion of the total quantity able to be executed.
Other Activities of the Principals of the Trading Advisors
Certain principals of the Trading Advisors are currently engaged, and expect in the future to be engaged, in other activities, some of which may involve other business activities in the futures industry. In addition, each principal of the Trading Advisors may be engaged in trading for his own personal account. The principals will have a conflict of interest between their obligations to devote all of their attention to client accounts and their interests in engaging in other activities. However, the principals of the Trading Advisors intend to devote substantial attention to the operation and activities of the Trading Advisors consistent with the division of responsibilities among them as is described herein.
Operation of Other Commodity Pools
The General Partner currently operates two other commodity pools and might have an incentive to favor those pools over the Fund.
Fiduciary Responsibility of the General Partner
The General Partner has a fiduciary duty to the Fund to exercise good faith and fairness in all dealings affecting the Fund. If a limited partner believes this duty has been violated, he/she may seek legal relief under applicable law, for himself/herself and other similarly situated partners, or on behalf of the Fund. However, it may be difficult for limited partners to obtain relief because of the changing nature of the law in this area, the vagueness of standards defining required conduct and the broad discretion given the General Partner in the Partnership Agreement and the exculpatory provisions therein.
Selling Agents
The receipt by the selling agents and their registered representatives of continued sales commissions and/or servicing fees for Units remaining in the Fund may give them an incentive to advise the limited partners to remain investors in the Fund. These payments cease to the extent the limited partners withdraw from the Fund.
The General Partner Serving as Selling Agent
The General Partner also serves as a selling agent for the Fund. As a result, the fees and other compensation received by the General Partner as selling agent have not been independently negotiated.
Futures Brokers
The futures brokers effect transactions for customers (including public and private commodity pools), including the Fund, who may compete with the Fund’s transactions including with respect to priorities or order entry. Since the identities of the purchaser and seller are not disclosed until after the trade, it is possible that the futures brokers could effect transactions for the Fund in which the other parties to the transactions are the futures brokers’ officers, directors, employees, customers or affiliates. Such persons might also compete with the Fund in making purchases or sales of commodities without knowing that the Fund is also bidding on such commodities. Since orders are filled in the order in which they are received by a particular floor broker, transactions for any of such persons might be executed when similar trades for the Fund are not executed or are executed at less favorable prices. However, in entering orders for the Fund and other customer accounts, including with respect to priorities of order entry and allocations of executed trades, CFTC regulations prohibit a futures commission merchant from utilizing its knowledge of one customer’s trades for its own or its other customer’s benefit.
Regulations
The Fund has registered its offering of Units with the SEC pursuant to the U.S. Securities Act of 1933, as amended (“1933 Act”), and is registered under the 1934 Act. As such, the Fund is subject to the regulations of the SEC and the reporting requirements of the 1933 Act and 1934 Act. As a commodity pool, the Fund is subject to the regulations of the CFTC, an agency of the U.S. Government which regulates most aspects of the commodity futures industry; rules of the NFA, an industry self-regulatory organization; and the requirements of commodity exchanges where the Fund executes transactions. Additionally, the Fund is subject to the requirements of futures commission merchants, futures brokers and Interbank market makers through which the Fund trades.
Under the Commodity Exchange Act (“CEAct”), commodity exchanges and commodity futures trading are subject to regulation by the CFTC. The NFA, a registered futures association under the CEAct, is the only non-exchange self-regulatory organization for commodity industry professionals. The CFTC has delegated to the NFA responsibility for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers and their respective associated persons and floor brokers. The CEAct requires commodity pool operators, commodity trading advisors and futures brokers or futures commission merchants such as the Fund’s futures brokers to be registered and to comply with various reporting and recordkeeping requirements. The General Partner and the Fund’s futures brokers are members of the NFA. The CFTC may suspend a commodity pool operator’s or trading advisor’s registration if it finds that its trading practices tend to disrupt orderly market conditions, or as the result of violations of the CEAct or rules and regulations promulgated thereunder. In the event the General Partner’s registration as a commodity pool operator were terminated or suspended, the General Partner would be unable to continue to manage the business of the Fund. Should the General Partner’s registration be suspended, dissolution of the Fund might result.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”) was enacted in July 2010. The Reform Act includes provisions that comprehensively regulate the over-the-counter derivatives markets for the first time. The Reform Act will mandate that a substantial portion of over-the-counter derivatives must be executed in regulated markets and submitted for clearing to regulated clearinghouses. The mandates imposed by the Reform Act may result in the Fund bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees.
The Reform Act also amended the definition of eligible contract participant, and the CFTC has interpreted that definition in such a manner that the Fund may no longer be permitted to engage in forward currency transactions by directly accessing the interbank market. Rather, if and when the Reform Act’s new definition goes into effect, the Fund may be limited to engaging in retail forex transactions which could limit the Fund’s potential forward currency counterparties to futures commission merchants and retail foreign exchange dealers. Thus, limiting the Fund’s potential forward currency counterparties could lead to the Fund bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees. The retail forex markets could also be significantly less liquid than the interbank market. Moreover, the creditworthiness of the futures commission merchants and retail foreign exchange dealers with whom the Fund may be required to trade could be significantly weaker than the creditworthiness of the financial institutions with whom the Fund currently engages for its forward currency transactions. Although the impact of requiring the Fund to conduct forward currency transactions in the retail market could be substantial, the full scope is currently unknown and the ultimate effect could also be negligible.
Additionally, the CFTC and certain commodity exchanges have established limits on the maximum net long and net short positions which any person, including the Fund, may hold or control in particular commodities. Most exchanges also limit the maximum changes in futures contract prices that may occur during a single trading day. The Fund also trades in dealer markets for forward currency contracts, which are not regulated by the CFTC. Federal and state banking authorities do not regulate forward trading or forward dealers. In addition, the Fund trades on foreign commodity exchanges, which are not subject to regulation by any U.S. government agency. The CFTC adopted a separate position limits regime for 28 so-called “exempt” (i.e. metals and energy products) and agricultural futures and options contracts and their economically equivalent swap contracts, subject to a delayed implementation schedule. Position limits in spot months are 25% of the official estimated deliverable supply of the underlying commodity and in a non-spot month a percentage of the average open interest in all months for each contract. The General Partner believes that the proposed limits are sufficiently large that when implemented, they should not restrict the Fund’s trading strategy.
Competition
The Fund operates in a competitive environment in which it faces several forms of competition, including, without limitation, the following:
• The Fund competes with other commodity pools and other investment vehicles for investors.
• The Trading Advisors may compete with other traders in the markets in establishing or liquidating positions on behalf of the Fund.
Available Information
The Fund files Forms 10-K, 10-Q, 8-K, 3 and 4, as required, with the SEC. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Additional information about the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. Reports filed electronically with the SEC, including the Fund’s annual report, may be found at http://www.sec.gov.
Reports to Security Holders
None.
Enforceability of Civil Liabilities Against Foreign Persons
None.
Item 1A.
Item 1A. Risk Factors
A smaller reporting company, as defined by Rule 12b-2 of the 1934 Act, is not required to provide the information under this Item.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Fund does not use any physical properties in the conduct of its business. Its assets currently consist of futures and other contracts, cash and fixed income instruments.
The General Partner’s principal business office is in Gaithersburg, Maryland.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
There is no established public trading market for Units of the Fund.
Units of the Fund are offered continuously to the public by selling agents on a best-efforts basis. The minimum investment is $10,000. Currently, Units of each Series are issued as of the commencement of business each Wednesday and are valued at the net asset value per unit of the relevant Series at the close of business on the preceding day.
The Fund issued General Partner Units to the General Partner to memorialize its ownership interest in the Fund. The General Partner may determine and adjust the number of General Partner Units which represent the General Partner’s interest in the Fund.
Holders
As of February 28, 2014, there were 597, 298, 186 and 455 holders of Series A, B, C and I Units, respectively.
Dividends
The General Partner has sole discretion to determine what distributions, if any, the Fund will make to its limited partners. The General Partner has not made any distributions as of the date hereof.
Securities Authorized for Issuance under Equity Compensation Plans
None.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
There were no sales of unregistered securities of the Fund during the year ended December 31, 2013.
The Fund’s Registration Statement on Form S-1 (Registration No.: 333-148049), registering $26,876,688 Series A Units, $78,797,196 Series B Units and $93,487,075 Series I Units, was declared effective on May 1, 2013 with information with respect to the use of proceeds from the sale of Units being disclosed therein.
The proceeds from the sale of registered securities are deposited in the Fund’s bank and brokerage accounts for the purpose of engaging in trading activities in accordance with the Fund’s trading policies and each Trading Advisors’ trading programs.
Issuer Purchases of Equity Securities
The Fund offers weekly liquidity. Redemptions may be made by a limited partner as of the close of business day each Tuesday at the net asset value of the redeemed Units (or portion thereof) on that day. Partial redemptions must be for at least $1,000, unless such requirement is waived by the General Partner. In addition, the limited partner, if making a partial redemption, must maintain at least $10,000 or his original investment amount, whichever is less, in the Fund unless such requirement is waived by the General Partner. The redemption of Units has no impact on the value of Units that remain outstanding, and Units are not reissued once redeemed.
Redemptions of Units during the fourth quarter of 2013 were as follows:
Item 6.
Item 6.	Selected Financial Data
A smaller reporting company, as defined by Rule 12b-2 of the 1934 Act, is not required to provide the information under this Item.
Item 7.
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Trading Advisors
The Fund’s current trading advisors are Blackwater Capital Management, LLC, Estlander & Partners Ltd., Quantitative Investment Management LLC and Winton Capital Management Ltd (Winton).
Effective June 12, 2013, the General Partner decided to remove Aspect Capital Ltd. as a trading advisor to the Fund and allocate assets to Winton, a new trading advisor to the Fund.
As part of its manager selection process, the General Partner strives to identify the best trading advisors available relative to the Fund’s objectives. The General Partner believes that the addition of Winton’s Diversified Program provides diversification of trading models and market strategies for the Fund.
The Winton Diversified Program is in many ways a natural fit for the Seneca Global Fund, L.P. as a systematic, diversified, futures trading program. It provides diversification for the Fund due to its longer term trend-following approach, as well as its large allocation to non-trend strategies.
Winton is a registered Commodity Trading Advisor and NFA member, managing over $25 billion in assets. Winton’s headquarters are located in London, England. Winton began trading the Winton Diversified Program in October 1997, and the firm’s founder, David Harding, has more than 25 years’ experience developing systematic trading models. Winton also has one of the largest investment research departments in the managed futures industry, with over 120 researchers currently on staff.
The Winton Diversified Program trades in global futures markets across a broad range of sectors, including bonds and interest rates, stock indices, currencies, energy, metals and agricultural commodities. It also trades in over-the-counter currency forward contracts. The Program trades in over 100 markets in total. The Program employs a quantitative or systematic approach, meaning that trading is driven by computer models rather than human discretion. The Program blends trend-following systems over multiple time frames, with more weight assigned to longer term trends. While trend-following is the Program’s primary trading style, there is a significant portfolio allocation to non-trend strategies.
At December 31, 2013, the allocation of trading levels to the Trading Advisors was as follows:
The General Partner may cause a trading advisor to trade its allocated Fund assets at a trading level of approximately 0.90 - 1.50 times the trading level normally used by the trading advisor employing its own trading program. Thus, the Fund could experience either greater or less volatility and greater or less brokerage commission expenses relative to a client who invests at the normal trading level of the trading programs depending on the amount of leverage used.
Liquidity
At December 31, 2013, there are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Fund’s liquidity increasing or decreasing in any material way.
Capital Resources
The Fund intends to raise additional capital through the continued sale of Units offered pursuant to the offering, and does not intend to raise capital through borrowing. Due to the nature of the Fund’s business, the Fund does not contemplate making capital expenditures. The Fund does not have, nor does it expect to have, any capital assets. Redemptions, exchanges and sales of Units in the future will affect the amount of funds available for investment in futures contracts, etc. in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future inflows and outflows funds related to the sale and redemption of Units. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Fund’s capital resource arrangements at the present time.
Contractual Obligations
The Fund does not have any contractual obligations of the type contemplated by Item 303(a)(5) of Regulation S-K. The Fund’s sole business is trading futures and forward currency contracts, both long (contracts to buy) and short (contracts to sell).
Off-Balance Sheet Risk
The term “off-balance sheet risk” refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in future obligation or loss. The Fund trades in futures and forward currency contracts and is therefore a party to financial instruments with elements of off-balance sheet market and credit risk. In entering into these contracts there exists a risk to the Fund, market risk, that such contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. If the markets should move against all of the futures interests positions of the Fund at the same time, and if the Trading Advisors were unable to offset futures interest positions of the Fund, the Fund could lose all of its assets and the limited partners would realize a 100% loss. The General Partner attempts to decrease market risk through maintenance of a margin-to-equity ratio that rarely exceeds 30%.
In addition to subjecting the Fund to market risk, upon entering into futures and forward currency contracts there is a risk that the counterparty will not be able to meet its obligations to the Fund. The counterparty for futures contracts traded in the U.S. and on most foreign exchanges is the clearinghouse associated with such exchange. In general, clearinghouses are backed by the corporate members of the clearinghouse who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this risk. In cases where the clearinghouse is not backed by the clearing members, like some foreign exchanges, it is normally backed by a consortium of banks or other financial institutions.
In the case of forward currency contracts, which are traded on the interbank market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a group of financial institutions; thus there may be a greater counterparty risk. The General Partner utilizes only those counterparties that it believes to be creditworthy for the Fund. There can be no assurance, however, that any clearing member, clearinghouse or other counterparty will be able to meet its obligations to the Fund. All positions of the Fund are valued each day on a mark-to-market basis.
The Fund invests in U.S. Treasury securities, U.S. and foreign government sponsored enterprise notes, commercial paper, corporate notes and certificates of deposit. Should an issuing entity default on its obligation to the Fund and such entity is not backed by the full faith and credit of the U.S. government, the Fund bears the risk of loss of the amount expected to be received. The Fund minimizes this risk by only investing in securities and certificates of deposit of firms with high quality debt ratings.
Results of Operations
The returns for each Series of Units for the years ended December 31, 2013 and 2012 were:
Past performance is not indicative of expected future financial condition or results of operations. Further analysis of the trading gains and losses is provided below.
During the year ended December 31, 2013, the Fund experienced a net realized gain on futures and forwards trading of $1,666,379, a change in unrealized gain on futures and forwards trading of $146,893 and incurred brokerage commissions of $142,559, resulting in a net gain from futures and forwards trading of $1,670,713. The Fund’s expenses during the year ended December 31, 2013 consisted of $344,179 in selling agent, custodial and servicing fees, and $1,396,340 in offering and administrative expenses, of which $715,426 were waived. Additionally, the Fund incurred $499,206 in Trading Advisor management fees, $112,352 in Trading Advisor incentive fees, $31,464 in Cash Manager fees and a General Partner fee of $613,444. Interest income of $293,986 and net realized and change in unrealized loss on securities and certificates of deposit of $160,371, combined with Fund expenses resulted in net loss of $477,231 for the year ended December 31, 2013.
During the year ended December 31, 2013, the Fund issued $5,818,965 of Units and redeemed $21,785,777 of Units, and when combined with the net loss, resulted in a net decrease in the Fund’s net asset value for the year from $50,003,744 to $33,559,701.
Discussion of monthly performance for the year ended December 31, 2013 follows:
January
Spurred on by the resolution of the U.S. “fiscal cliff” negotiations, markets began 2013 with a strong risk appetite. This led to a rally in global equities and industrial commodities and caused a sell-off in safe haven bonds. In Europe, investors gained confidence that the region’s sovereign debt crisis had been contained, helping the euro strengthen against other currencies. Meanwhile, Japan’s new government implemented a stimulus program consisting of major fiscal spending, coupled with measures to weaken the yen to help the country’s exporters.
The Fund started the year on a positive note, as it profited from long positions in stock indices and energy, as well as long positions in the euro and short positions in the Japanese yen. These gains were partially offset by losses from long fixed income positions, as bond yields and interest rates climbed during the month. Overall, the Fund finished the month with a gain of 2.59%, 2.72%, 2.84% and 2.77% for Series A, B, C and I Units, respectively.
February
Although February began with a continuation of January’s risk-seeking market trends, the second half of the month saw “risk-off” price reversals across many sectors. Weak European data signaled a region-wide economic contraction. The UK suffered a credit rating downgrade as it is on the verge of a triple-dip recession. Meanwhile, Italian voters toppled the country’s incumbent government with an election result that repudiated austerity as a means of managing Europe’s sovereign debt crisis. In the U.S., minutes from the most recent Fed meeting hinted at a sooner than expected slowdown of monetary stimulus, frightening investors who anticipated longer term quantitative easing.
The Fund entered February with “risk-on” exposures in many of the markets it trades, including long positions in equities, industrial commodities, the euro and high-yielding currencies. February’s market reversals caused losses in a number of these positions. The largest losses came from energy, as oil prices fell late in the month on concerns over global demand as well as U.S. supply hitting a 20-year high due to shale fracking. In currencies, the decline of the euro detracted from performance. The Fund did however make gains in fixed income with long positions in Japanese bonds. In the agricultural sector, easing drought conditions in the Midwest lowered wheat prices, helping the Fund’s short position. In metals, the Fund made profits from a short position in gold, offsetting losses in base metals. Overall, the Fund finished the month with a loss of 1.05%, 0.92%, 0.81% and 0.87% for Series A, B, C and I Units, respectively.
March
In March, financial headlines were dominated by the banking crisis in Cyprus. Eurozone members led by Germany made the release of bailout funds contingent on a Cypriot financial contribution through a one-time “tax” on bank deposits. This action sparked protests over the plan’s fairness. A last minute compromise deal exempted smaller insured deposits from capital seizure. Investors feared that the Cyprus bailout might create a precedent for haircutting depositors at troubled banks in Spain and Italy. This prompted a sell-off in the euro, a slide in southern European stock markets and a rally in safe haven German bunds. Meanwhile, in the U.S., equities climbed with largely positive economic data and a statement from Fed Chairman Bernanke that he saw no evidence of a stock bubble. In Japan, monetary easing by the Abe government continued, boosting bond and equity markets and depreciating the yen.
The Fund profited in the currency sector in March, particularly from a long position in the Mexican peso. The Fund also gained from a fall in industrial metals prices, with short positions in aluminum and copper, as investors worried about the impact of a clampdown on Chinese property speculation. Profits were also made from long positions in stocks, especially in the U.S. The Fund was down slightly in fixed income as gains from being long Japanese bonds were offset by losses in the choppy U.S. bond market. The Fund finished the month with a net profit of 0.89%, 1.02%, 1.14% and 1.07% for Series A, B, C and I Units, respectively.
April
April, economic data in China confirmed a slowdown in growth, while U.S. GDP estimates for the first quarter were weaker than expected. This led to a sell-off in industrial commodities such as energy and base metals, and a rally in Treasury bonds. The price of gold tumbled mid-month, triggered by reports that Cyprus might sell part of its gold reserves to pay down the country’s debt. Furthermore, the current absence of global inflation has reduced the attractiveness of precious metals that are often used as a hedge against inflation. Meanwhile, the Japanese central bank continued its policy of monetary stimulus, further weakening the yen and boosting the Nikkei stock index.
The Fund entered the month with short positions in gold and copper, which profited on the decline in precious and base metals prices. The Fund also had a positive contribution from its long bond positions, particularly in the U.S., where the fixed income market rallied on disappointing economic growth. Partly offsetting these gains were losses from long exposures to declining oil markets, as well as from trend reversals in agricultural markets such as corn. Overall, the Fund finished the month with a profit of 2.38%, 2.51%, 2.63% and 2.56% for Series A, B, C and I Units, respectively.
May
In May, improving economic data in the U.S. drove stock indices higher, but also prompted the Fed to signal that it might soon taper its quantitative easing program. Fixed income markets reacted negatively to the prospect of a reduction in the Fed’s $85 billion in monthly purchases of Treasury bonds and mortgage-backed securities. U.S. 10-year Treasury bond yields jumped 46 basis points from 1.67% to 2.13% during the month, while international bond markets also sold off. Meanwhile in Japan, the high flying Nikkei index, which at one point was up 50% on the year, fell abruptly by 13% over the last 9 days of the month. This was caused by investors taking profits after signs of slowing Chinese growth and impending U.S. monetary tightening.
May proved to be a challenging month for the Fund’s trend-following strategies. The majority of losses were a result of sharp declines in global bond markets, particularly in the U.S. and Europe, which hurt the Fund’s long positions. The Fund’s trading systems responded by cutting back bond positions substantially, standing ready to reposition as new trends emerge, whether bullish or bearish. In energy markets, long positions in natural gas suffered as prices declined on higher than expected inventory levels. The Fund did however make a profit in equity indices through its long positions across the globe. The Fund was also positive in agricultural commodities, benefitting from a rally in soybeans. Overall, the Fund finished the month with a loss of 2.40%, 2.27%, 2.16% and 2.22% for Series A, B, C and I Units, respectively.
June
In June, the Fed reaffirmed its desire to phase out its quantitative easing program as long as U.S. economic data continues to improve. Markets interpreted this as the beginning of the end of an era of ultra-easy monetary policy. As a result, global equities and bonds sold off sharply. Ironically, the largest stock market declines were not in the U.S. Prospective tightening by the U.S. Federal Reserve had a greater impact in Europe, where the economic recovery lags the U.S., and in Asia and emerging markets, where a slowdown in China also worried investors. Meanwhile, the Fed’s new stance caused gold prices to plummet to levels last seen in 2010, as the risk of inflation due to loose monetary conditions diminished. The market moves in June were a continuation of the sharp and sudden trend reversals that began at the end of May.
These price patterns are particularly difficult for trend-following systems to navigate. The Fund came into June with long exposure to global equities. Although these positions were reduced significantly over the month, the Fund nevertheless saw losses in this sector, particularly in Europe and Canada. In currencies, choppy price movements in the euro and British pound sterling against the U.S. dollar were also a detriment to performance. Losses in bonds and interest rates were muted in June, despite the market sell-off, as the Fund had unwound most of its long positions relatively early in the month. By the end of the month, most of the Fund’s trading advisors had systematically moved to net short positions in fixed income instruments. On the positive side, the Fund was able to profit from the downward trend in precious metals, such as gold and silver, as well as in industrial metals, such as copper. Overall, the Fund finished the month with a loss of 3.28%, 3.16%, 3.05% and 3.11% for Series A, B, C and I Units, respectively.
July
In July, global equity indices rebounded from their losses in the prior month. This was a result of central banks seeking to reassure skittish investors that they would wait to pull back on monetary easing until an economic recovery became more firmly established. In the U.S., investors came to believe that the imminent tapering of the Fed’s quantitative easing program may be more gradual than previously thought, as Bernanke softened his tone on potential tightening amid still modest economic growth and low inflation. Meanwhile, the European Central Bank announced that interest rates would stay at current levels or lower for an extended period. Gold and bond markets saw a bounce as a result. In energy markets, surprisingly high summer demand in the U.S. coupled with lower inventories caused WTI crude oil prices to jump to a 16-month high of $108/barrel.
The Fund profited from long equity positions, particularly in the U.S. However, the size of these gains was tempered by the fact that our trend-following managers had trimmed their exposures after stock market declines in the previous month. Offsetting these profits were losses from short positions in metals, as gold prices reversed from their downward trend. Overall, the Fund finished the month with a loss of 1.19%, 1.07%, 0.96% and 1.02% for Series A, B, C and I Units, respectively.
August
August saw continued positive economic data in the U.S. and early signs of a recovery in the Eurozone, where a positive second quarter GDP report marked the end of an 18-month recession in the region. This raised the risk of near-term monetary policy tightening, which caused bond yields to rise across developed markets and weighed on equity indices. In the latter half of the month, political tensions escalated in the Middle East. The U.S. and France threatened to intervene in Syria’s civil war, causing a sell-off in stocks and a rally in oil and gold.
In August, the Fund’s short positions in metals suffered losses, as stronger than expected Chinese industrial production caused a rebound in base metal prices, while the Syrian crisis boosted demand for precious metals. The currency sector also detracted from performance as a result of choppy movements in European exchange rates. Meanwhile, the Fund saw a negative contribution from long positions in equity indices as global stock markets fell, with the S&P 500 seeing its biggest monthly decline since May 2012. On the positive side, the Fund’s long energy positions were able to profit from the rise in oil prices. Overall, the Fund finished the month with a loss of 3.90%, 3.78%, 3.67% and 3.73% for Series A, B, C and I Units, respectively.
September
In September, the Federal Reserve surprised markets by delaying a much anticipated “tapering” of its quantitative easing program until there are more signs of a robust U.S. economic recovery. The Fed’s decision boosted stock indices, lowered bond yields and weakened the U.S. dollar. Meanwhile, oil prices fell as the U.S. backed away from military intervention in Syria, following the Assad regime’s acceptance of a chemical disarmament proposal. Towards the end of the month, a breakdown in U.S. budget and debt ceiling negotiations caused a sell-off in equities ahead of a government shutdown.
The Fund profited in September from long exposure to rising equity indices, although the political impasse over the U.S. budget led to a giveback of some of the stock gains from early in the month. The Fund’s main losses came from long positions in the energy sector, as oil prices fell from their highs with an easing of the Syrian crisis. The Fund also saw small losses in metals and agricultural commodities. In currencies, gains from long positions in the Euro and British pound were more than offset by losses from whipsawing in the Mexican peso and short positions in the Australian dollar and Canadian dollar. Overall the Fund finished the month with a loss of 1.46%, 1.33%, 1.22% and 1.28% for Series A, B, C and I Units, respectively.
October
In October, a budget stalemate in Washington caused a government shutdown and threatened to trigger a sovereign default as the U.S. hovered at its debt ceiling. An agreement reached mid-month reopened government offices and extended the nation’s borrowing capacity until February 2014. As a result, global equities rallied, with the S&P 500 rising to all-time highs. Amid a dysfunctional fiscal policy environment with weak employment growth, the Federal Reserve decided to maintain its current level of bond purchases through its quantitative easing program and pushed out the likely start of monetary tightening further into the future. Meanwhile, in energy markets, crude oil prices fell from their highs reached during the Syrian crisis while natural gas was down on warmer temperature forecasts for the fall season.
The Fund enjoyed strong gains in its long equity positions on the back of rallies in the U.S. and European stock markets. In the fixed income sector, interest rates and bond yields fell, benefiting the Fund’s long positions, particularly in German and Japanese bonds. These gains outweighed losses sustained on trend reversals in cotton, gold and currencies including the Australian dollar and British pound, allowing the Fund to end the month with gain of 1.65%, 1.78%, 1.90% and 1.83% for Series A, B, C and I Units, respectively.
November
Global equity markets continued their broad- based rally in November, as positive economic news in the U.S. outweighed potentially bearish Fed comments that suggested it could begin to taper its quantitative easing program in future months. Meanwhile, the European Central Bank added to its monetary stimulus with a surprise cut in interest rates. Elsewhere, the Bank of Japan signaled it would continue its expansionary monetary policy, which resulted in the Japanese yen falling to new lows. In commodity markets, precious metals declined in anticipation of Fed tightening, while some energy markets rallied due to higher demand from unseasonably cold weather. The Fund profited from the global stock rally, with the largest gains coming from long positions in the S&P 500 and DAX indices. In currencies, the Fund garnered strong returns through a short position in the depreciating Japanese yen. However, a short position in Brent crude oil saw losses as priced reversed their downward trend. The Fund closed the month with a gain of 1.17%, 1.30%, 1.42% and 1.36% for Series A, B, C and I Units, respectively.
December
In December, equities initially fell as strong U.S. economic performance heightened concerns that the Federal Reserve might unwind its quantitative easing program more sharply than previously expected. However, the Fed allayed the worst of investors’ fears by announcing a moderate $10B reduction in monthly bond purchases, while also signaling that it would keep short-term interest rates low through 2015. This prompted a relief rally in global stock indices into the year-end. Elsewhere, the European Union received a credit rating downgrade, but saw stronger than expected economic growth data. In Asia, the Japanese yen fell to multi-year lows on the belief that the Bank of Japan would continue its monetary easing program.
The Fund made its largest gains during the month in currencies, primarily through short positions in the Japanese yen, which profited from a continued depreciation of the currency. Long equity index positions also generated positive returns as stocks rebounded in the second half of the month. In metals, short gold positions led to gains as prices trended lower. However, the Fund saw losses in the fixed income sector, particularly in long positions in short and medium term instruments, which sold off as the Fed began to taper its monetary stimulus. The Fund closed the month with a gain of 1.99%, 2.13%, 2.24% and 2.18% for Series A, B, C and I Units, respectively.
During the year ended December 31, 2012, the Fund experienced a net realized loss on futures and forwards trading of $6,587,850, a change in unrealized loss on futures and forwards trading of $178,582 and incurred brokerage commissions of $207,526, resulting in a net loss from futures and forwards trading of $6,973,958. The Fund’s expenses during the year ended December 31, 2012 consisted of $555,273 in selling agent, custodial and servicing fees, and $1,329,420 in offering and administrative expenses, of which $292,441 were waived. Additionally, the Fund incurred $859,607 in Trading Advisor management fees, $73,650 in Trading Advisor incentive fees, $45,503 in Cash Manager fees and a General Partner fee of $912,982. Interest income of $618,426 and net realized and change in unrealized loss on securities and certificates of deposit of $22,383, combined with Fund expenses resulted in net loss of $9,861,909 for the year ended December 31, 2012.
During the year ended December 31, 2012, the Fund issued $11,885,064 of Units and redeemed $16,682,729 of Units, and when combined with the net loss, resulted in a net decrease in the Fund’s net asset value for the year from $64,663,318 to $50,003,744.
Discussion of monthly performance for the year ended December 31, 2012 follows:
January
In January, markets responded positively to supportive monetary policy from central banks around the world. In the U.S., the Fed announced that it expected to keep interest rates low through 2014. Meanwhile, in Europe, the European Central Bank was expected to extend its Long-Term Refinancing Operations program by providing additional loans to the region’s banks later this year, beyond the nearly half trillion euros (approximately $650 billion) already distributed to banks in December. This improved the European credit environment, helping France, Italy and Spain to hold successful bond auctions at reduced yields and allowing them to shrug off Standard & Poor’s sovereign credit downgrades earlier in the month. Positive sentiment fueled by easy monetary policy led to a rally in global equities, industrial commodities, as well as short and medium term interest rate instruments. Among currencies, it also led to a decline in the U.S. dollar, a rebound in the euro, and a surge in commodity currencies.
The Fund finished the month with a decline of 0.72%, 0.59% and 0.54% for Series A, B and I Units, respectively. It profited from long positions in interest rate instruments, particularly Eurodollar and Euribor contracts, as well as from long exposure to the Australian dollar. In addition, a continued decline in natural gas prices benefited the Fund’s short positions. These gains were offset by losses from short positions in metals, including aluminum and zinc. Meanwhile, short exposure to Asian equity indices, such as the Hang Seng Index, caused additional losses.
February
In February, markets were driven by continued monetary stimulus from central banks around the world. The European Central Bank extended an additional €529 billion (approximately $700 billion) in low interest three-year loans to 800 of the region’s banks in the second round of its Long Term Refinancing Operation to shore up the balance sheets of the financial sector in Europe. Since December, the ECB has made over €1 trillion (approximately $1.3 trillion) in loans to Europe’s banking sector. Elsewhere, the Bank of Japan and the Bank of England implemented new rounds of quantitative easing in their respective markets. These actions encouraged a greater risk appetite among investors, driving up global equity indices. Meanwhile, the U.S. saw an improvement in labor market data, prompting a rise in U.S. bond yields. In the Middle East, the threat of oil supply disruptions from rising tensions over Iran’s nuclear program led to a rally in energy prices, with Brent crude prices exceeding $125 per barrel.
The Fund’s largest gains came from its long positions in global equity indices and energy. However, long positions in the fixed income sector caused losses as bonds in the U.S. and Australia sold off. There was also a modest decline in currencies, as depreciation of the Japanese yen hurt the Fund’s long positions. Overall, the Fund enjoyed a gain for the month of 2.23%, 2.36% and 2.41% for Series A, B and I Units, respectively.
March
In March, markets continued to price in a stronger economic growth outlook for the U.S. Following improved labor and consumption data, the Fed raised its forecast from “modest” to “moderate” growth. Investors interpreted this positive language as a signal that further Fed stimulus in the form of bond purchases was not necessary. As a result U.S. long-term bonds sold off sharply. Meanwhile U.S. equities continued to rally, with the S&P 500 enjoying its best quarter since Q3 of 2009. Elsewhere, the attempt by Chinese authorities to limit domestic inflation through a gradual deceleration of economic growth had a negative impact on commodity currencies such as the Australian dollar. In energy markets, crude oil halted its 6 month rise due to softer prospective Chinese demand as well as an expected release of strategic oil reserves by the U.S., UK and France.
Although the Fund was able to profit from trends in agricultural commodities, other sectors proved more difficult to trade. Long bond positions in the U.S., Europe and Japan suffered from the mid-month spike in bond yields. Meanwhile, in Australia, central bank comments suggested an easing bias going forward which hurt the Fund’s new short bond positions in that market. In currencies, the reversal of the Australian dollar also detracted from performance. Lastly, in equities, declines in peripheral markets such as Canada and Hong Kong offset gains in the U.S. Overall the Fund finished with a loss for the month of 4.63%, 4.50% and 4.45% for Series A, B and I Units, respectively.
April
April saw a reversal of the positive equity market sentiment that characterized much of the first quarter of 2012, with renewed worries over global growth and the European debt crisis. Both the U.S. and China reported slowing GDP growth for Q1. Meanwhile in Europe, the UK and Spain posted a second consecutive quarter of negative growth and thus joined Italy, Ireland, Portugal and Greece in falling into a double dip recession. The possibility of a Spanish default became the latest focus for sovereign bond investors, as the effectiveness of its fiscal austerity program came into doubt, with the unemployment rate rising to 24%.
The Fund saw profits in April from its long positions in fixed income, as bond yields in major markets declined, with a global swing towards risk aversion. The Fund also made gains in the agricultural sector, as soybeans continued their strong year-to-date rally due to a lack of rain in South America threatening the harvest. These profits were partly offset by losses from long positions in global equities and in oil-related commodities. Overall the Fund finished with a positive return for the month of 0.54%, 0.67% and 0.73% for Series A, B and I Units, respectively.
May
In May, the escalating European debt crisis and weak U.S. and Chinese economic data led to a flight to safety in financial markets. In Greece, electoral gains by anti-austerity political parties stoked fears that the country might ultimately exit the Eurozone. Elsewhere, concerns grew over the health of Spain’s banks, as the already debt-laden Spanish government was forced to bail out the country’s third largest lender. Meanwhile, labor market conditions deteriorated in the U.S. and industrial production slowed in China. In response, investors sold global equities, energies and commodity currencies and sought the relative safe harbor of bonds and the U.S. dollar.
The Fund made its largest gains from long positions in U.S., German and UK bonds, as yields trended lower and prices moved higher. In currencies, the Fund profited from a short position in the euro which depreciated over 6% against the U.S. dollar during the month. The Fund had some offsetting losses in long equity index and oil positions, before reversing some of those exposures by month-end. Overall, the Fund finished May with a positive return for the month of 3.76%, 3.90% and 3.95% for Series A, B and I Units, respectively.
June
The risk appetite of global investors returned in June, as markets anticipated increased central bank intervention to spur weakening economic growth. In Europe, the risk of a splintering of the euro currency union subsided, as Greek parliamentary elections were won by political parties favoring a European bailout with austerity conditions attached, in effect keeping the country in the Eurozone. This was followed by a European summit meeting at month end where EU leaders agreed to ease conditions on loans to Spain and Italy, thereby stemming the surge in borrowing costs in those countries. In response, investors rotated from bonds into equities and sold off the U.S. dollar in favor of the euro and emerging market currencies.
June’s market reversals caused losses for the Fund which was positioned in “risk-off” trades due to trends over the prior two months. The largest detractor was currencies, where the fund was positioned short in both the euro and the Mexican peso. The Fund’s performance was also hurt by short exposure to equity indices and long exposure to bonds, particularly the German Bund which saw its largest monthly decline since 1994. Meanwhile, trading in the physical commodities was unprofitable, as jumps in energy and corn prices led to losses for the Fund’s short positions. Overall, the Fund finished the month with a loss for the month of 9.42%, 9.29% and 9.25% for Series A, B and I Units, respectively.
July
The Fund delivered strong returns in July, as more signs emerged of a faltering global economic recovery. U.S. labor market data continued to disappoint and Chinese growth weakened. Europe, however, remained the primary focus of investors. Spain’s credit conditions deteriorated, as the 10-year sovereign bond yield spiked as high as 7.75% during the month, its highest level since the inception of the euro. The European Central Bank (ECB) cut interest rates, but this did little to reverse the depreciation of the euro. The tide of negative sentiment was stanched only later in the month, when the ECB President vowed to use all necessary means to save the currency union.
The largest contribution to the Fund came from the fixed income sector, where long positions profited from the ECB rate cut as well as market speculation of additional future central bank easing in Europe and the U.S. The Fund also made solid gains in currencies through its short euro exposure. Lastly, in the agricultural sector, the Fund profited from a surge in grain prices, as hot, dry weather in the U.S. damaged crop yields. Overall, the Fund finished the month with a gain for the month of 5.28%, 5.42% and 5.47% for Series A, B and I Units, respectively.
August
In August, investor sentiment towards the future of the Eurozone turned from pessimistic to mildly optimistic. U.S. economic reports, including non-farm payroll data, also came in better than expected. These factors extended the rally in global equities, caused a rebound in the euro and prompted an initial sell-off in safe haven U.S. and German government bonds. As the month progressed, speculation mounted that global central banks would engage in further quantitative easing, which caused bonds to recover from their earlier declines. Rising tensions between Iran and Israel caused crude oil prices to climb, while the U.S. experienced its most widespread drought since 1956, leading to higher grain prices. During the month, the Fund gave back some of the profits it made in July. The Fund’s short positions in the euro and long positions in the Japanese yen suffered on market reversals. Long bond exposures were also a negative contributor in the first half of the month. The Fund did see gains in the agricultural sector due to its long soybean positions. Overall, the Fund finished the month with a loss for the month of 3.54%, 3.42% and 3.37% for Series A, B and I Units, respectively.
September
September saw an increase in the scale of global central bank intervention in an attempt to prevent further deterioration of economic growth. The European Central Bank announced a plan to buy unlimited amounts of government bonds of distressed countries such as Spain, in exchange for their accepting austerity reforms. Meanwhile in the U.S., the Fed announced “QE3”, a third round of quantitative easing, involving the purchase of $40B of agency-backed mortgages each month for an indefinite period of time. In response, equities rallied worldwide, as did the euro, gold and industrial metals. There was a corresponding sell-off in perceived safe haven assets such as U.S. bonds and the U.S. dollar.
The main impact of September’s macroeconomic policy announcements was to hurt the Fund’s long bond positions. As the equity markets rose, the Fund added to its long positions, although this did not happen quickly enough to benefit from the equity rally. In the agricultural markets, grain prices corrected after their recent run-up, hurting the Fund’s long positions, after reports that the U.S. drought had not damaged crop yields as much as expected. Overall, the Fund finished the month with a loss for the month of 3.11%, 2.98%, 2.87% and 2.93% for Series A, B, C and I Units, respectively.
October
October was characterized by trend reversals across a broad range of sectors. Weaker than expected corporate earnings prompted a sell-off in U.S. equity markets, as well as in global risk assets such as oil, industrial metals, and commodity-related currencies. In spite of this, safe haven assets such as bonds and gold did not rally and in fact declined, as investors pared back previous expectations over the scope and duration of quantitative easing by central banks.
Given the breadth of market reversals, October proved to be a difficult month for trend-following programs across the entire managed futures industry. The Fund was no exception and experienced losses that were spread across all sectors in the portfolio. The largest declines came from the Fund’s long bond positions both in the U.S. and Europe. Other major markets that detracted from performance included U.S. equities, gasoline, zinc and cotton. On the positive side, the Fund reversed its net long position in crude oil in time to profit from the decline in that market. The Fund also made gains on long exposure to certain non-U.S. stock markets. Overall, the Fund finished the month with a loss for the month of 6.11%, 5.99%, 5.88% and 5.94% for Series A, B, C and I Units, respectively.
November
As the U.S. election maintained the status quo in Washington, investor attention turned to the ability of a divided government to deal with the looming “fiscal cliff”. The year-end expiration of key tax cuts and automatic reduction in government expenditures, if unaddressed, could potentially cause a recession in 2013, according to the Congressional Budget Office. Global equities sold off over the first half of November as a result. However, sentiment recovered and stocks rebounded in the latter part of the month, as reports indicated some willingness on the part of Democrats and Republicans to compromise in budget talks.
In November, the Fund made gains in long positions in the fixed income sector as global bonds rallied on continued easy central bank monetary policy. The currency sector made a small profit from short positions in the Japanese yen, which depreciated on speculation of more aggressive money printing with a potential Liberal Democratic Party victory in the country’s upcoming election. However, the Fund saw losses due to price reversals in physical commodities. Base metals and crude oil prices rebounded from their downward trend on stronger Chinese industrial production data, while grain prices declined from their recent highs on higher than expected supply. Equity markets also proved difficult to trade during the month, as an early sell-off reversed sharply mid-month with a return of investor risk appetite. Overall, the Fund finished the month with a loss for the month of 2.27%, 2.15%, 2.04% and 2.10% for Series A, B, C and I Units, respectively.
December
In December, U.S. “fiscal cliff” negotiations dominated news headlines. Investors rotated from bonds into stocks on speculation the two U.S. political parties would ultimately reach a compromise budget deal by the end of the year. Meanwhile, in Japan, the Liberal Democratic Party (LDP) returned to power, pledging to lift the country out of a deflationary spiral with an aggressive fiscal stimulus plan and by pressuring the Bank of Japan to further weaken the yen.
The Japanese election was the primary driver of the Fund’s performance for the month. The Fund profited from both a short position in the depreciating Japanese yen and a long position in the surging Nikkei stock index. Elsewhere, the Fund benefited from its long exposure to other global stock indices which rallied on optimism over U.S. budget talks, although these gains were partly offset by losses from the related decline in bond prices. The Fund saw small losses in physical commodities, as choppy conditions prevailed in a number of markets. Overall, the Fund enjoyed a gain for the month of 1.49%, 1.62%, 1.74% and 1.68% for Series A, B, C and I Units, respectively.
Significant Accounting Estimates
A summary of the Fund’s significant accounting policies are included in Note 1 to the Financial Statements.
The Fund’s most significant accounting policy is the valuation of its assets invested in U.S. and foreign futures and forward currency contracts, and fixed income investments. The Fund’s futures contracts are exchange-traded, with the fair value of these contracts based on exchange settlement prices. The fair values of non-exchange-traded contracts, such as forward currency contracts, are based on third-party quoted dealer values on the interbank market. The fair value of money market funds is based on quoted market prices for identical shares. U.S. Treasury securities are stated at fair value based on quoted market prices for identical assets in an active market. Notes of U.S. and foreign government sponsored enterprises, as well as certificates of deposit, commercial paper and corporate notes, are stated at fair value based on quoted market prices for similar assets in an active market. Given the valuation sources, there is little judgment or uncertainty involved in the valuation of these assets, and it is unlikely that materially different amounts would be reported under different valuation methodologies or assumptions.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company, as defined by Rule 12b-2 of the 1934 Act, is not required to provide the information under this item.
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial statements meeting the requirements of Regulation S-X appear in Part IV of this report. A smaller reporting company, as defined by Rule 12b-2 of the 1934 Act, is not required to provide the supplementary data under this item.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The General Partner of the Fund, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Fund’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the 1934 Act) as of December 31, 2013 (“Evaluation Date”). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer of the General Partner concluded that, as of the Evaluation Date, the Fund’s disclosure controls and procedures were effective.
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
The management of the General Partner is responsible for establishing and maintaining adequate internal control over financial reporting by the Fund. The Fund’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S. The Fund’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Fund; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that receipts and expenditures of the Fund are being made only in accordance with authorizations of management of the Fund; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Fund’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Fund’s internal control over financial reporting as of December 31, 2013, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework published in 1992. Based on that assessment, management concluded that, as of December 31, 2013, the Fund’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated Framework published in 1992.
Changes in Internal Control Over Financial Reporting
There has been no change in internal control over financial reporting (as defined in the Rules 13a-15(f) and 15d-15(f) of the 1934 Act) that occurred during the Fund’s last fiscal quarter that has materially affected or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The Fund itself has no directors or officers and has no employees. It is managed by the General Partner in its capacity as general partner. The Kenneth E. Steben Revocable Trust, dated January 29, 2008, (“Trust”) is the primary shareholder of the General Partner and Mr. Kenneth E. Steben is the sole trustee and beneficiary of the Trust. The principals, directors and executive officers of the General Partner are Kenneth E. Steben, Michael D. Bulley, Neil D. Menard, Carl A. Serger and Francine Rosenberger. Their respective biographies are set forth below.
Kenneth E. Steben is the General Partner’s founder, President and Chief Executive Officer. Additionally, he is Chairman of the board of directors of the General Partner. Mr. Steben, born in January 1955, received his Bachelor’s Degree in Interdisciplinary Studies, with a concentration in Accounting in 1979 from Maharishi University of Management. Mr. Steben has been a licensed stockbroker since 1981 and a licensed commodities broker since 1983. Mr. Steben holds his Series 3, 5, 7, 24, 63 and 65 FINRA and NFA licenses. Mr. Steben has been a CFTC listed Principal, and registered as an Associated Person since March 15, 1989.
Michael D. Bulley is Senior Vice President of Research and Risk Management, and a Director. Mr. Bulley is a CAIASM designee and Member of the Chartered Alternative Investment Analyst Association®. Mr. Bulley, born in October 1957, received his Bachelor’s Degree in Electrical Engineering from the University of Wisconsin - Madison in 1980 and his Master’s in Business Administration with a concentration in Finance from Johns Hopkins University in 1998. Mr. Bulley joined the General Partner in November 2002, and holds Series 3, 7, 28 and 30 FINRA licenses. Mr. Bulley has been a CFTC listed Principal and registered as an Associated Person of the General Partner since January 18, 2003.
Neil D. Menard is Senior Vice President of Distribution. Mr. Menard, born in August 1967, graduated from Colby College in 1989 with a BA in political science. Prior to joining the General Partner in July of 2006, Mr. Menard was the Director of Sales for Engagement Systems, LLC, a strategic outsource solution for independent financial advisors from October 2004 to June 2006. From June 2003 to October 2004, Mr. Menard served as the Managing Director of New Business Development of SEI Investments Distribution Company. SEI is a provider of asset management, investment processing and investment operations solutions for institutional and personal wealth management. Mr. Menard created sales and selection systems for the new business development team and utilized these processes to select independent investment advisors for SEI. Mr. Menard holds his Series 3, 7, 24 and 63 FINRA and NFA licenses and is a General Securities Principal. Mr. Menard has been a CFTC listed Principal of the General Partner since July 6, 2006, and registered as an Associated Person of the General Partner since August 7, 2006.
Carl A. Serger is Chief Financial Officer and a Director. Mr. Serger joined the General Partner in December of 2009 and has been listed as a CFTC Principal of the General Partner since February 2, 2010. Mr. Serger, born in March 1960, graduated cum laude from Old Dominion University with a BS in Business Administration and has a Technology Management Certification from the California Institute of Technology. Prior to joining the General Partner, Mr. Serger was the CFO and Senior Vice President of Operations of Peracon, Inc., a software platform for institutional commercial real estate transactions from November 2007 through November 2009. From July 2007 to November 2007, he acted as an independent consultant to start-up companies in the financial services and technology industries. From January 2007 to July 2007, Mr. Serger was the CFO, Senior Vice President and Treasurer of Ebix, Inc., an international software company serving the financial services and insurance industries. From October 2006 through December 2006, he was President of Finetre Corporation, a division of Ebix, Inc. From December 1999 until its October 2006 acquisition by Ebix, Inc., Mr. Serger was the CFO, Senior Vice President and Treasurer of Finetre Corporation, a financial technology platform company providing services to major brokerage firms, banks and insurance companies. Mr. Serger holds a Series 28 FINRA license.
Francine Rosenberger is General Counsel. Ms. Rosenberger, born in October 1967, earned her Bachelor of Arts from Juniata College in 1989, and graduated magna cum laude, with a J.D., from The Columbus School of Law at Catholic University in 1995. Prior to joining the General Partner, Ms. Rosenberger was in the Investment Management practice at the law firm of K&L Gates from September 1995 until January 2013. At K&L Gates, Ms. Rosenberger specialized in the formation, structuring and operation of investment companies, ETFs, and commodity pools. She has been pending as a CFTC listed Principal of the General Partner since January 31, 2013.
Kenneth E. Steben Revocable Trust, dated January 29, 2008, has been a CFTC listed Principal of the General Partner since March 10, 2008. The Trust is the sole shareholder of the General Partner. Kenneth E. Steben is the sole beneficiary of the Trust and serves as its sole trustee. A biography of Mr. Steben is set forth above.
Since May 11, 1989, Steben & Company, Inc. has acted as a general partner to a Maryland limited partnership, Futures Portfolio Fund, Limited Partnership, an SEC registrant under the 1934 Act whose shares are privately offered. Additionally, since August 2, 1995, Steben & Company, Inc. has acted as a general partner to another Maryland limited partnership, Sage Fund Limited Partnership, an SEC registrant under the 1934 Act whose shares are privately offered. Since August 1, 2013, the General Partner has acted as the general partner for Steben Select Multi-Strategy Partners, L.P., a privately offered investment fund. Since August 1, 2013, the General Partner has been the Investment Manager for Steben Select Multi-Strategy Master Fund, a privately offered closed-end fund. Additionally, since January 1, 2014, the General Partner acts as the investment manager for Steben Select Multi-Strategy Fund, a publicly offered closed-end fund. Because Steben & Company, Inc. serves as the sole general partner or manager of all of these funds, the officers and directors of Steben & Company, Inc. effectively manage them as officers and directors of the respective funds.
Significant Employees
The General Partner is dependent on the services of Mr. Steben and key management personnel. If Mr. Steben’s services became unavailable, another principal of the firm or a new principal (whose experience cannot be known at this time) will need to take charge of the General Partner.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires that reports of beneficial ownership of limited partner interests and changes in such ownership be filed with the SEC by Section 16 “reporting persons.” The Fund is required to disclose in this Annual Report on Form 10-K each reporting person whom it knows to have failed to file any required reports under Section 16(a) on a timely basis during the fiscal year ended December 31, 2013. During the fiscal year ended December 31, 2013, all reporting persons complied with all Section 16(a) filing requirements applicable to them.
Code of Ethics
The General Partner, on behalf of the Fund, has adopted a code of ethics, as of the period covered by this report, which applies to the Fund’s principal executive officer and principal financial officer or persons performing similar functions. A copy of the code of ethics is available without charge upon request by calling 240-631-7600.
Item 11.
Item 11. Executive Compensation
The Fund does not itself have any officers, directors or employees. The managing officers of the General Partner are remunerated by the General Partner in their respective positions. The directors and managing officers of the General Partner receive no other compensation from the Fund. The Fund does not and will not make any loans to the General Partner, its affiliates, or their respective officers, directors or employees.
As compensation for its services in managing the Fund, the General Partner earns the following compensation:
• General Partner Fee - each Series of Units, except for General Partner Units, incurs a monthly fee equal to 1/12th of 1.5% of the respective Series’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears. During 2013 and 2012, the General Partner earned $613,444 and $912,982, respectively.
• Selling Agent Fees - the Series A Units incur a monthly fee equal to 1/12th of 2% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears. The General Partner pays to the selling agents an upfront fee of 2% of the aggregate subscription amount for the Series A Units. Beginning in the 13th month, the General Partner pays the selling agents a monthly fee in arrears equal to 1/12th of 2% of the outstanding Series A Unit’s month-end net asset value. If there is no designated selling agent or the General Partner was the selling agent, such portions of the selling agent fees are retained by the General Partner. During 2013 and 2012, the General Partner earned $273,527 and $449,067, respectively.
• Broker Dealer Servicing Fee - the Series A Units incur a monthly fee equal to 1/12th of 0.15% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. The Series B Units which are not subject to a broker dealer custodial fee incur a monthly fee equal to 1/12th of 0.6% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. These fees are payable in arrears to the selling agents by the General Partner. Where the General Partner acts as the selling agent, it retains these fees. During 2013 and 2012, the General Partner earned $28,442 and $43,682, respectively.
• Broker Dealer Custodial Fee - the Series B Units that are held by broker dealers who act as the custodian for Series B Units for the benefit of the limited partners incur a fee equal to 1/12th of 0.6% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. These fees are payable to the selling agents by the General Partner. During 2013 and 2012, the General Partner earned $42,210 and $62,524, respectively.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
At February 28, 2014, no person or group is known to have been the beneficial owner of more than 5% of the Units.
At February 28, 2014, the General Partner had an investment in the Fund of $784,003 (7,460.6309 units), and the directors, executive officers and principals of the General Partner beneficially owned Series I Units as follows:
The address of each director and officer is c/o Steben & Company, Inc., 9711 Washingtonian Blvd., Suite 400, Gaithersburg, Maryland 20878.
There has been no change of control of the Fund.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See “Item 1. Business” for a description of the relationships between the General Partner, the Fund, the Trading Advisors, the futures brokers and forward currency counterparty and the Cash Managers. See “Item 10. Executive Compensation” and “Item 11. Security Ownership of Certain Beneficial Owners and Management.”
Item 14.
Item 14. Principal Accountant Fees and Services
The following table sets forth the fees billed to the Fund for professional audit services provided by McGladrey LLP (formerly known as McGladrey & Pullen, LLP), the Fund’s independent registered public accountant, for the audits of the Fund’s annual financial statements for the years ended December 31, 2013 and 2012, and fees billed for other professional services rendered by McGladrey LLP and RSM McGladrey, Inc. (formerly an associated entity that McGladrey LLP acquired on December 1, 2011) (collectively “McGladrey”) during those years.
(1) Audit fees consist of fees for professional services rendered for the audit of the Fund’s financial statements and review of financial statements included in the Fund’s quarterly reports, as well as services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements.
(2) Tax fees consist of fees for the preparation of original tax returns.
The General Partner’s Board of Directors pre-approves all audit and permitted non-audit services of the Fund’s independent accountants, including all engagement fees and terms. The General Partner’s Board of Directors approved all the services provided by McGladrey during 2013 and 2012 to the Fund described above. The General Partner’s Board of Directors has determined that the payments made to McGladrey for these services during 2013 and 2012 are compatible with maintaining that firm’s independence.
PART IV
Item 15:
Item 15: Exhibits and Financial Statements Schedules
Financial Statements
Seneca Global Fund, L.P.
Report of Independent Registered Public Accounting Firm
Statements of Financial Condition as of December 31, 2013 and 2012
Condensed Schedule of Investments as of December 31, 2013
Condensed Schedule of Investments as of December 31, 2012
Statements of Operations for the Years Ended December 31, 2013 and 2012
Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
Statements of Changes in Partners’ Capital (Net Asset Value) for the Years Ended December 31, 2013 and 2012
Notes to Financial Statements
Exhibits.
The following exhibits are filed herewith or incorporated by reference.
Exhibit Number
Description of Document
1.1*
Form of Selling Agreement
4.1****
Form of Fourth Amended and Restated Limited Partnership Agreement
9.1***
Delaware Amended and Restated Certificate of Limited Partnership
10.1****
Form of Subscription Agreement
10.5**
Third Amended and Restated Trading Advisory Agreement with Aspect Capital Ltd.
10.6**
Trading Advisory Agreement with Estlander & Partners Ltd.
10.7**
Trading Advisory Agreement with Blackwater Capital Management, LLC
10.8
Trading Advisory Agreement with Quantitative Investment Management, LLC
10.9
Trading Advisory Agreement with Winton Capital Management, Ltd.
31.01
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.02 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.01
Section 1350 Certification of Principal Executive Officer
32.02
Section 1350 Certification of Principal Financial Officer
* Previously filed on May 23, 2008 as an exhibit to Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 (Reg. No. 333-148049), and incorporated herein by reference.
** Previously filed on April 19, 2011 as an exhibit to the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 (Reg. No. 333-148049).
*** Previously filed on May 3, 2011 with Form 8-K (File No. 000-53453), and incorporated herein by reference.
**** Previously filed on August 15, 2011 as an exhibit to the Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Reg. No. 333-175052), and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the General Partner of the Registrant in the capacities and on the date indicated.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Kenneth E. Steben
Name: Kenneth E. Steben
Title:
President, Chief Executive Officer and
Director of the General Partner
Report of Independent Registered Public Accounting Firm
To the Partners of
Seneca Global Fund, L.P.
We have audited the accompanying statements of financial condition, including the condensed schedules of investments, of Seneca Global Fund, L.P. (formerly Aspect Global Diversified Fund LP), (the "Fund") as of December 31, 2013 and 2012, and the related statements of operations, cash flows, and changes in partners' capital (net asset value) for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seneca Global Fund, L.P. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Chicago, Illinois
March 28, 2014
Seneca Global Fund, L.P.
Statements of Financial Condition
December 31, 2013 and 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments
December 31, 2013
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2013
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2013
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2013
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2013
1 Represents the annualized yield at date of purchase for discount securities, the stated coupon rate for coupon-bearing securities, or the stated interest rate for certificates of deposit.
2 No individual futures or forward currency contract position constituted one percent or greater of partners’ capital (net asset value). Accordingly, the number of contracts and expiration dates are not presented.
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments
December 31, 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Condensed Schedule of Investments (continued)
December 31, 2012
1 Represents the annualized yield at date of purchase for discount securities, the stated coupon rate for coupon-bearing securities, or the stated interest rate for certificates of deposit.
2 No individual futures or forward currency contract position constituted one percent or greater of partners’ capital (net asset value). Accordingly, the number of contracts and expiration dates are not presented.
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Statements of Operations
Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Statements of Cash Flows
Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Statements of Changes in Partners’ Capital (Net Asset Value)
Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these financial statements.
Seneca Global Fund, L.P.
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Description of the Fund
Seneca Global Fund, L.P. (“Fund”) is a Delaware limited partnership, which was formed in 2007. The Fund, which operates as a commodity investment pool, commenced investment operations on September 1, 2008. The Fund issues units of limited partner interests (“Units”) in four series: Series A, Series B, Series C and Series I, which represent units of fractional undivided beneficial interest in and ownership of the Fund.
The Fund uses multiple commodity trading advisors to engage in the speculative trading of futures contracts, forward currency contracts and other financial instruments traded in the United States (“U.S.”) and internationally. The Fund does not currently use options or swaps as part of its trading system, but may employ them in the future. Each trading advisor uses a proprietary, systematic trading system that deploys multiple trading strategies utilizing derivatives that seeks to identify and exploit directional moves in market behavior to a broad and diversified range of global market sectors including stock indices, currencies, interest rate instruments, energy products, metals and agricultural commodities.
Only Series A, B and I Units are offered by the fund. Series A, B and I Units will be re-designated as Series C Units after the Fee Limit has been reached. The Series C Units are identical to the other Units except that the Series C Units only incur the Trading Advisor management fee, Trading Advisor incentive fee, brokerage expenses, Cash Manager fees, General Partner management fee and administrative expenses. The Fee Limit is the total amount of selling agent commissions, broker dealer servicing fees paid to the selling agents, payments for wholesalers, payments for sales conferences, and other offering expenses that are items of compensation to Financial Industry Regulatory Authority (“FINRA”) members (but excluding among other items, the production and printing of prospectuses and related collateral material, as well as various legal and regulatory fees) paid by particular Series A, B or I Units when it is equal to 10% of the original purchase price paid by holders of those particular Units.
The Fund is a registrant with the U.S. Securities and Exchange Commission (“SEC”) pursuant to the U.S. Securities Exchange Act of 1933, as amended, (“1933 Act”) and the U.S. Securities Exchange Act of 1934, as amended, (“1934 Act”). As a registrant, the Fund is subject to the regulations of the SEC and the disclosure requirements of the 1933 Act and the 1934 Act. As a commodity pool, the Fund is subject to the regulations of the U.S. Commodity Futures Trading Commission (“CFTC”), an agency of the U.S. government, which regulates most aspects of the commodity futures industry; rules of the National Futures Association (“NFA”), an industry self-regulatory organization; rules of FINRA, an industry self-regulatory organization; and the requirements of commodity exchanges where the Fund executes transactions. Additionally, the Fund is subject to the requirements of its futures brokers and interbank market makers through which the Fund trades.
Under its Fourth Amended and Restated Limited Partnership Agreement (“Partnership Agreement”), the Fund’s business and affairs are managed and conducted by the Fund’s general partner, Steben & Company, Inc. (“General Partner”), a Maryland corporation. The General Partner is registered with the CFTC as a commodity pool operator and a commodities introducing broker, and is registered with the SEC as an investment adviser and a broker dealer. Additionally, the General Partner is a member of the NFA and FINRA. The General Partner manages all aspects of the Fund’s business and serves as one of the Fund’s selling agents.
Significant Accounting Policies
Accounting Principles
The Fund’s financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Futures, options on futures, forward currency contracts, investments in securities, and certificates of deposit are recorded on a trade date basis, and gains or losses are realized when contracts/positions are liquidated. Realized gains and losses on investments in securities and certificates of deposit are determined on a specific identification basis and are included in net realized and change in unrealized gain (loss) in the statements of operations. Unrealized gains and losses on open contracts (the difference between contract trade price and fair value) are reported in the statements of financial condition as net unrealized gain or loss, as there exists a right of offset of any unrealized gains or losses. The difference between cost and the fair value of open investments in securities and certificates of deposit is reflected as unrealized gain or loss on investments in securities and certificates of deposit. Any change in net unrealized gain or loss on from the preceding period is reported in the statements of operations. Interest income earned on investments in securities, certificates of deposit and other cash and cash equivalent balances is recorded on an accrual basis.
Fair Value of Financial Instruments
Financial instruments are recorded at fair value, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities recorded at fair value are classified within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 - Fair value is based on unadjusted quoted prices for identical instruments in active markets. Financial instruments utilizing Level 1 inputs include futures contracts, money market funds and U.S. Treasury securities.
Level 2 - Fair value is based on quoted prices for similar instruments in active markets and inputs other than quoted prices that are observable for the financial instrument, such as interest rates and yield curves that are observable at commonly quoted intervals using a market approach. Financial instruments utilizing Level 2 inputs include forward currency contracts, certificates of deposit, commercial paper, corporate notes and U.S. and foreign government sponsored enterprise notes.
Level 3 - Fair value is based on valuation techniques in which one or more significant inputs are unobservable. The Fund has no financial instruments utilizing Level 3 inputs.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The Fund assesses the classification of the instruments at each measurement date, and any transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Fund’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the years ended December 31, 2013 and 2012, there were no such transfers between levels.
A description of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis follows.
The investment in money market fund, included in cash and cash equivalents in the statements of financial condition, and futures contracts, all of which are exchange-traded, are valued using quoted market prices for identical assets and are classified within Level 1. The fair values of forward currency contracts are based upon third-party quoted dealer values on the interbank market and are classified within Level 2.
U.S. Treasury securities are recorded at fair value based on bid and ask quotes for identical instruments. Commercial paper, certificates of deposit, corporate notes and U.S. and foreign government sponsored enterprise notes are recorded at fair value based on bid and ask quotes for similar, but not identical, instruments. Accordingly, U.S. Treasury securities are classified within Level 1, and commercial paper, certificate of deposits, corporate notes and U.S. and foreign government sponsored enterprise notes are classified within Level 2.
Cash and Cash Equivalents
Cash and cash equivalents include investments with original maturities of three months or less at the date of acquisition that are not held for sale in the ordinary course of business. The Fund maintains deposits with financial institutions in amounts that are in excess of federally insured limits; however, the Fund does not believe it is exposed to any significant credit risk.
Brokerage Commissions and Trading Expenses
Brokerage commissions and trading expenses include brokerage and other trading fees, and are charged to expense when contracts are opened and closed.
Redemptions Payable
Redemptions payable represent redemptions that meet the requirements of the Fund and have been approved by the General Partner prior to period-end. These redemptions have been recorded using the period-end net asset value per Unit.
Income Taxes
The Fund prepares calendar year U.S. and applicable state and local tax returns. The Fund is not subject to federal income taxes as each partner is individually liable for his or her allocable share of the Fund’s income, expenses and trading gains or losses. The Fund evaluates the tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are more-likely-than-not to be sustained when examined by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense and asset or liability in the current year. Management has determined there are no material uncertain income tax positions through December 31, 2013. With few exceptions, the Fund is no longer subject to U.S. or state and local income tax examinations by tax authorities for years before 2010.
Foreign Currency Transactions
The Fund has certain investments denominated in foreign currencies. The purchase and sale of investments, and income and expenses are translated at the rates of exchange prevailing on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of investments held. Such fluctuations are included with the net realized and change in unrealized gain or loss on such investments in the statement of operations.
Reclassification
Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 presentation without affecting previously reported partners’ capital (net asset value).
Recently Issued Accounting Pronouncement
In November 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance became effective for the Fund on January 1, 2013. The adoption of this guidance did not have a material impact on the Fund’s financial position or results of operations.
2. Fair Value Disclosures
The Fund’s assets and liabilities, measured at fair value on a recurring basis, are summarized in the following tables by the type of inputs applicable to the fair value measurements:
There were no Level 3 holdings at December 31, 2013 and 2012, or during the years then ended.
In addition to the financial instruments listed above, substantially all of the Fund’s other assets and liabilities are considered financial instruments and are reflected at fair value, or at carrying amounts that approximate fair value because of the short maturity of the instruments.
3. Derivative Instruments Disclosures
The Fund’s derivative contracts are comprised of futures and forward currency contracts, none of which are designated as hedging instruments. At December 31, 2013, the Fund’s derivative contracts had the following impact on the statements of financial condition:
At December 31, 2013, there were 2,186 open futures contracts and 68 open forward currency contracts.
The Fund’s financial assets, derivative assets, and cash collateral held by counterparties at December 31, 2013 were:
At December 31, 2012, the Fund’s derivative contracts had the following impact on the statements of financial condition:
At December 31, 2012, there were 3,605 open futures contracts and 191 open forward currency contracts.
The Fund’s financial assets, derivative assets, and cash collateral held by counterparties at December 31, 2012 were:
For the years ended December 31, 2013 and 2012, the Fund’s futures and forward currency contracts had the following impact on the statements of operations:
For the years ended December 31, 2013 and 2012, the number of futures contracts closed was 37,659 and 51,295, respectively, and the number of forward currency contracts closed was 2,104 and 4,013, respectively.
4. General Partner
In accordance with the Partnership Agreement, the General Partner must maintain its interest in the capital of the Fund at no less than the greater of: (i) 1% of aggregate capital contributions to the Fund by all partners (including the General Partner’s contributions) or (ii) $25,000. The General Partner shares in the profits and losses of the Fund in proportion to its respective ownership interest.
At December 31, 2013 and 2012, the General Partner had an investment of 7,460.6309 units valued at $794,660 and $782,908, respectively.
The General Partner earns the following compensation:
• General Partner Fee - each Series of Units, other than General Partner Units, incurs a monthly fee equal to 1/12th of 1.5% of the respective Series’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears.
• Selling Agent Fees - the General Partner charges Series A Units a monthly fee equal to 1/12th of 2% of the outstanding Series A Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions, and payable in arrears. The General Partner pays to the selling agents an upfront fee of 2% of the aggregate subscription amount for the sale of Series A Units. Beginning in the 13th month, the General Partner pays the selling agents a monthly fee in arrears equal to 1/12th of 2.00% of the outstanding Series A Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. If there is no designated selling agent or the General Partner was the selling agent, such portions of the selling agent fee are retained by the General Partner.
• Broker Dealer Servicing Fee - the General Partner charges Series A Units a monthly fee equal to 1/12th of 0.15% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. The Series B Units which are not subject to a broker dealer custodial fee incur a monthly fee equal to 1/12th of 0.6% of their month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. These fees are payable in arrears to the selling agents by the General Partner. If there is no designated selling agent or the General Partner was the selling agent, such portions of the broker dealer servicing fee are retained by the General Partner.
• Broker Dealer Custodial Fee - the General Partner charges Series B Units that are held by broker dealers who act as custodian for Series B Units for the benefit of the limited partners, a monthly fee to such broker dealers equal to 1/12th of 0.6% of the outstanding Series B Units’ month-end net asset value, prorated for partial months and adjusted for weekly subscriptions and redemptions. These fees are payable in arrears to the selling agents by the General Partner.
5. Trading Advisors and Cash Managers
Trading advisor management fees range from 0% to 1.5% per annum of each trading advisors’ respective trading level (as defined in each respective advisory agreement) and trading advisor incentive fees equal to 20% to 30% of net new trading profits (as defined in each respective advisory agreement).
The Fund has engaged J.P. Morgan Investment Management, Inc. and Principal Global Investors, LLC (collectively, the “Cash Managers”) to provide cash management services to the Fund. The Fund incurs monthly fees, payable in arrears to the Cash Managers, equal to approximately 1/12th of 0.13% of the investments in securities and certificates of deposit.
6. Deposits with Brokers
To meet margin requirements, the Fund deposits funds with its brokers, subject to CFTC regulations and various exchange and broker requirements. The Fund earns interest income on its assets deposited with its brokers. At December 31, 2013 and 2012, the Fund had margin deposit requirements of $4,038,995 and $8,464,415, respectively.
7. Administrative and Offering Expenses
The Fund reimburses the General Partner for actual monthly administrative expenses paid to various third-party service providers, including the General Partner, up to 1/12th of 0.95% of the Fund’s month-end net asset value, payable in arrears. Actual administrative expenses may vary; however, such administrative expenses will not exceed 0.95% of the Fund’s month-end net asset value per annum. The administrative expenses include legal, accounting, clerical and other back office related expenses related to the administration of the Fund and all other associated costs incurred by the Fund. For the years ended December 31, 2013 and 2012, actual administrative expenses were $909,095 and $791,912, respectively. Such amounts are presented as administrative expenses in the statements of operations.
During the years ended December 31, 2013 and 2012, the General Partner absorbed administrative expenses in excess of the 0.95% limitation of $513,063 and $206,541, respectively. Such amounts are included in administrative and offering expenses waived in the statements of operations.
At December 31, 2013 and 2012, $26,737 and $40,089, respectively, were payable to the General Partner for administrative expenses incurred on behalf of the Fund and not waived by the General Partner. Such amounts are presented as administrative expenses payable - General Partner in the statements of financial condition.
The Fund reimburses the General Partner for actual ongoing offering expenses, up to 1/12th of 0.75% of the Fund’s month-end net asset value pro rata for each Series of Units except for the General Partner and Series C Units, payable monthly in arrears. Actual ongoing offering expenses in excess of this limitation are absorbed by the General Partner. For the years ended December 31, 2013 and 2012, actual offering expenses were $487,245 and $537,508, respectively. Such amounts are presented as offering expenses in the statements of operations.
During the years ended December 31, 2013 and 2012, the General Partner absorbed offering expenses in excess of the 0.75% limitation of $202,363 and $85,900, respectively. Such amounts are included in administrative and offering expenses waived in the statements of operations. At December 31, 2013 and 2012, $19,163 and $30,206, respectively, were payable to the General Partner for offering expenses incurred on behalf of the Fund and not waived by the General Partner. Such amounts are presented as offering expenses payable - General Partner in the statements of financial condition.
8. Subscriptions, Distributions and Redemptions
Investments in the Fund are made by subscription agreement, subject to a minimum investment of $10,000. Subscriptions into and redemptions out of the Fund occur weekly. Each series of units will be offered to the public as of the open of business on each Wednesday at the net asset value per Unit of the relevant series at the close of the preceding business day. At December 31, 2013 and 2012, the Fund received advance subscriptions of $62,372 and $236,268, respectively, which were recognized as subscriptions to the Fund or returned, if applicable, subsequent to year-end.
The Fund is not required to make distributions, but may do so at the sole discretion of the General Partner. Redemptions may be made by a limited partner as of the close of business day each Tuesday at the net asset value of the redeemed Units (or portion thereof) on that day.
Series A Units redeemed prior to the first anniversary of the subscription date are subject to a redemption fee equal to the product of (i) 2% of the subscription price for such Series A Units on the subscription date, divided by 52 (ii) multiplied by the number of weeks remaining before the first anniversary of the subscription date. Series B, C and I Units are not subject to the redemption fee. During 2013 and 2012, these redemption fees were negligible.
The General Partner may require a limited partner to redeem from the Fund if the General Partner deems the redemption (a) necessary to prevent or correct the occurrence of a non-exempt prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended, or the Internal Revenue Code of 1986, as amended, (b) beneficial to the Fund, or (c) necessary to comply with any applicable government or self-regulatory agency regulations. Limited partners will not be required to pay any redemption fees if such limited partners are subject to a mandatory redemption of their Units within the first year of purchase.
9. Trading Activities and Related Risks
The Fund engages in the speculative trading of futures and forward currency contracts traded in the U.S. and internationally. Trading in derivatives exposes the fund to both market risk, the risk arising from a change in the fair value of a contract and credit risk, the risk of failure by another party to perform according to the terms of a contract.
Purchase and sale of futures contracts requires margin deposits with futures brokers. Additional deposits may be necessary for any loss of contract value. The Commodity Exchange Act (“CEAct”) requires a broker to segregate all customer transactions and assets from such broker’s proprietary activities. A customer’s cash and other property (for example, U.S. Treasury securities) deposited with a broker are considered commingled with all other customer funds subject to the broker’s segregation requirements. In the event of a broker’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than (or none of) the total cash and other property deposited. The Fund uses Newedge USA, LLC and J. P. Morgan Securities, LLC as its futures brokers and Newedge UK Financial Limited as its forward currency counterparty.
For futures contracts, risks arise from changes in the fair value of the contracts. Theoretically, the Fund is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short. In addition to market risk, upon entering into commodity interest contracts there is a credit risk that the counterparty will not be able to meet its obligations to the Fund. The counterparty for futures and options on futures contracts traded in the U.S. and on most non-U.S. futures exchanges is the clearinghouse associated with such exchanges. In general, clearinghouses are backed by the corporate members of the clearinghouse who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members, like some non-U.S. exchanges, it is normally backed by a consortium of banks or other financial institutions.
In the case of forward currency contracts, which are traded on the interbank or other institutional market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a clearinghouse backed by a group of financial institutions; thus, there likely will be greater counterparty credit risk. While the Fund trades only with those counterparties that it believes to be creditworthy, there can be no assurance that any clearing member, clearinghouse or other counterparty will be able to meet its obligations to the Fund. The Fund trades forward currency contracts in unregulated markets between principals and assumes the risk of loss from counterparty non-performance. Accordingly, the risks associated with forward currency contracts are generally greater than those associated with exchange-traded contracts because of the greater risk of counterparty default. Additionally, the trading of forward currency contracts typically involves delayed cash settlement.
The Cash Managers manage the Fund’s cash and excess margin through investments in fixed income instruments, pursuant to investment parameters established by the General Partner. The Fund’s objective in retaining the Cash Managers is to enhance the return on its assets not required to be held by the Fund’s brokers to support the Fund’s trading. There is no guarantee that the Cash Managers will achieve returns for the Fund, net of fees payable to the Cash Managers, in excess of the returns previously achieved through the General Partner’s efforts and/or available through the Fund’s brokers, or that the Cash Managers will avoid a loss of principal on amounts placed under their management. Prior to April 2011, the Fund used UBS Financial Services, Inc. as its cash management securities broker for the investment of a portion of the Fund’s excess margin amounts into fixed income instruments.
The General Partner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The limited partners bear the risk of loss only to the extent of the fair value of their respective investments and, in certain circumstances, distributions and redemptions received.
Through its investments in debt securities and certificates of deposit, the Fund has exposure to U.S. and foreign enterprises. The following table presents the exposure at December 31, 2013.
The following table presents the exposure at December 31, 2012.
10. Indemnifications
In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, and which provide general indemnifications. The Fund’s maximum exposure under these arrangements cannot be estimated. However, the Fund believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for such indemnifications.
11. Financial Highlights
The following information presents per Unit operating performance results and other supplemental financial ratios for the years ended December 31, 2013 and 2012. This information has been derived from information presented in the financial statements for limited partner Units and assumes that a Unit is outstanding throughout the entire year:
Total returns are calculated based on the change in value of a Series A, Series B, Series C or Series I Units during the year. An individual limited partner’s total returns and ratios may vary from the above total returns and ratios based on the timing of subscriptions and redemptions.
† Series C units began investment operations on September 1, 2012. Therefore, the performance for Series C units is for the four month period ended December 31, 2012. The ratios for expenses prior to Trading Advisor incentive fee and net investment loss have been annualized.
(1) The net investment loss per unit is calculated by dividing the net investment loss by the average number of Series A, B, C or I Units outstanding during the year/period. Loss from futures and forwards trading is a balancing amount necessary to reconcile the change in net asset value per unit with the other per unit information. Such balancing amount may differ from the calculation of loss from futures and forwards trading per unit due to the timing of trading gains and losses during the year relative to the number of units outstanding.
(2) All of the ratios under Other Financial Ratios are computed net of involuntary waivers of administrative and offering expenses. For the years ended December 31, 2013 and 2012, the ratios are net of 1.24% and 0.33% effect of waived administrative expenses, respectively. For the years ended December 31, 2013 and 2012, the ratios are net of 0.53% and 0.15% effect of waived offering expenses, respectively.
(3) The net investment loss includes interest income and excludes realized and change in unrealized gain (loss) from futures and forwards trading activities as shown on the statements of operations. The total amount is then reduced by all expenses, excluding brokerage commissions, which are included in net loss from futures and forwards trading on the statements of operations. The resulting amount is divided by the average net asset value for the year.
12. Subsequent Events
From January 1 to February 28, 2014, there were $404,882 of contributions and $2,236,290 of redemptions from the Fund.