10-Q 1 file1.htm

    

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 2006

Commission File Number 333-117275

CITIGROUP DIVERSIFIED FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)


New York 13-4224248
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

c/o Citigroup Managed Futures LLC
731 Lexington Avenue. – 25th Fl.
New York, New York 10022

(Address and Zip Code of principal executive offices)

(212) 559-2011

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X     No     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer          Accelerated filer          Non-accelerated filer X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes          No X



CITIGROUP DIVERSIFIED FUTURES FUND L.P.

FORM 10-Q

INDEX


    Page
Number
PART I - Financial Information:  
Item 1. Financial Statements:  
  Statements of Financial Condition
at September 30, 2006 and December 31, 2005
(unaudited).		 3
  Condensed Schedules of Investments
at September 30, 2006 and December 31, 2005
(unaudited).		 4 – 5
  Statements of Income and Expenses
and Partners' Capital for the three and nine months
ended September 30, 2006 and 2005
(unaudited).		 6
  Statements of Cash Flows for the
three and nine months ended September 30, 2006 and 2005 (unaudited).		 7
  Notes to Financial Statements
(unaudited).		 8 – 15
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations.		 16 – 18
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.		 19 – 23
Item 4. Controls and Procedures. 24
PART II - Other Information 25

2



PART I

Item 1. Financial Statements

Citigroup Diversified Futures Fund L.P.
Statements of Financial Condition
(Unaudited)


  September 30,
2006		 December 31,
2005
Assets:  
 
Investment in Partnerships, at fair value $ 832,993,933
$ 667,759,623
Equity in commodity futures trading account:  
 
Cash (restricted $22,450,980 and $22,985,532
in 2006 and 2005, respectively)		 96,776,620
208,332,148
Net unrealized appreciation on open future positions 8,013,342
—
Unrealized appreciation on open forward contracts 891,440
4,784,209
  938,675,335
880,875,980
Interest receivable 320,882
502,917
  $ 938,996,217
$ 881,378,897
Liabilities and Partners' Capital:  
 
Liabilities:  
 
Net unrealized depreciation on open futures positions $ —
$ 1,263,893
Unrealized depreciation on open forward contracts 712,518
3,146,365
Accrued expenses:  
 
Brokerage commissions 4,300,467
4,096,436
Management fees 1,500,494
1,426,974
Incentive fees —
3,507,443
Other 311,123
137,437
Due to CGM —
94,719
Redemptions payable 13,210,402
10,569,334
  20,035,004
24,242,601
Partners' Capital:  
 
General Partner, 8,799.7212 Unit equivalents
outstanding in 2006 and 2005		 8,127,950
8,192,188
Limited Partners, 986,113.8404 and 911,901.3814 Redeemable Units of Limited Partnership Interest outstanding
in 2006 and 2005, respectively		 910,833,263
848,944,108
  918,961,213
857,136,296
  $ 938,996,217
$ 881,378,897

See accompanying Notes to Financial Statements.

3



Citigroup Diversified Futures Fund L.P.
Condensed Schedule of Investments
September 30, 2006
(Unaudited)


  Fair Value % of Partners'
Capital
Futures Contracts Purchased  
 
Grains $ 128,775
0.01
%
Indices 157,128
0.01
Interest Rates U.S.  2,075,247
0.23
Interest Rates Non-U.S.  1,076,258
0.12
Softs 199,715
0.02
Total futures contracts purchased 3,637,123
0.39
Futures Contracts Sold  
 
Energy 3,384,185
0.37
Grains 1,330,476
0.15
Interest Rates Non-U.S.  (98,320
)
 (0.01
)
Metals (1,085,560
)
 (0.12
)
Softs 845,438
0.09
Total futures contracts sold 4,376,219
0.48
Unrealized Appreciation on Forward Contracts  
 
Currencies 891,440
0.10
Total unrealized appreciation on forward contracts 891,440
0.10
Unrealized Depreciation on Forward Contracts  
 
Currencies (712,518
)
 (0.08
)
Total unrealized depreciation on forward contracts (712,518
)
 (0.08
)
Investment in Partnerships  
 
CMF Drury Capital Master Fund L.P.  115,839,902
12.60
CMF Willowbridge Argo Master Fund L.P. 97,190,937
10.57
CMF Aspect Master Fund L.P. 134,130,416
14.59
CMF Capital Fund Management Master Fund L.P. 173,886,546
18.93
CMF Winton Master L.P.  111,523,938
12.14
SB AAA Master Fund LLC 83,958,253
9.14
CMF Graham Capital Master Fund L.P. 98,263,794
10.70
CMF Avant Master Fund L.P.  18,200,147
1.98
Total Investment in Partnerships 832,993,933
90.65
Total fair value $ 841,186,197
91.54
%

Percentages are based on Partners' Capital unless otherwise indicated

See accompanying Notes to Financial Statements.

4



Citigroup Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2005
(Unaudited)


  Fair Value % of Partners'
Capital
Futures Contracts Purchased  
 
Energy $ (5,580,168
)
 (0.65
)%
Grains (5,200
)
 (0.00
)*
Indices 1,075,454
0.13
Interest Rates Non-U.S.  179,277
0.02
Metals 2,783,890
0.32
Softs 2,592,168
0.30
Total futures contracts purchased 1,045,421
0.12
Futures Contracts Sold  
 
Energy 195,765
0.02
Grains (308,795
)
 (0.04
)
Indices 15,052
0.00
*
Interest Rates U.S.  (656,698
)
 (0.08
)
Interest Rates Non-U.S.  (385,834
)
 (0.04
)
Softs (1,168,804
)
 (0.13
)
Total futures contracts sold (2,309,314
)
 (0.27
)
Unrealized Appreciation on Forward Contracts  
 
Currencies 2,661,556
0.31
Metals 2,122,653
0.25
Total unrealized appreciation on forward contracts 4,784,209
0.56
Unrealized Depreciation on Forward Contracts  
 
Currencies (1,753,794
)
 (0.21
)
Metals (1,392,571
)
 (0.16
)
Total unrealized depreciation on forward contracts (3,146,365
)
 (0.37
)
Investment in Partnerships  
 
CMF Drury Capital Master Fund L.P.  127,905,544
14.92
CMF Willowbridge Argo Master Fund L.P.  96,524,350
11.26
CMF Aspect Master Fund L.P.  131,198,236
15.31
CMF Capital Fund Management Master Fund L.P.  167,920,417
19.59
CMF Winton Master L.P.  90,342,493
10.54
SB AAA Master Fund LLC 53,868,583
6.29
Total Investment in Partnerships 667,759,623
77.91
   
 
Total fair value $ 668,133,574
77.95
%

Percentages are based on Partners' Capital unless otherwise indicated
* Due to rounding
See accompanying Notes to Financial Statements.

5



Citigroup Diversified Futures Fund L.P.
Statements of Income and Expenses and Partners' Capital
(Unaudited)


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Income:  
 
 
 
Net gains (losses) on trading of commodity futures:  
 
 
 
Realized gains (losses) on closed positions $ (10,763,858
)
 $ 21,003,850
$ (3,697,500
)
 $ (59,142,164
)
Change in unrealized gains (losses) on open positions and investment in Partnerships (19,238,547
)
 34,944,736
51,535,573
64,373,467
  (30,002,405
)
 55,948,586
47,838,073
5,231,303
Interest income 972,059
1,960,386
4,431,914
8,293,276
  (29,030,346
)
 57,908,972
52,269,987
13,524,579
Expenses:  
 
 
 
Brokerage commissions and including clearing fees of $50,969, $281,618, $248,966 and $2,191,637, respectively 12,915,902
12,407,991
39,524,808
37,441,598
Management fees 4,445,722
4,144,793
13,541,259
11,791,299
Incentive fees —
4,808,653
6,585,533
8,287,648
Other 274,583
384,819
697,306
827,407
  17,636,207
21,746,256
60,348,906
58,347,952
Net income (loss) (46,666,553
)
 36,162,716
(8,078,919
)
 (44,823,373
)
   
 
 
 
Additions – Limited Partners 63,695,000
48,073,000
206,435,000
198,161,000
Additions – General Partner —
—
—
400,000
Redemptions – Limited Partners (39,143,221
)
 (45,210,562
)
 (136,531,164
)
 (103,177,365
)
Net increase (decrease) in Partners' Capital (22,114,774
)
 39,025,154
61,824,917
50,560,262
Partners' Capital, beginning of period 941,075,987
815,859,745
857,136,296
804,324,637
Partners' Capital, end of period $ 918,961,213
$ 854,884,899
$ 918,961,213
$ 854,884,899
Net Asset Value per Redeemable
    Unit (994,913.5616 and 929,818.3711     Redeemable Units outstanding at
    September 30, 2006 and 2005,     respectively)		 $ 923.66
$ 919.41
$ 923.66
$ 919.41
Net income (loss) per Redeemable Unit of
    Limited Partnership Interest and
    General Partner Unit equivalent		 $ (46.74
)
 $ 37.90
$ (7.30
)
 $ (54.72
)
Redemption/subscription value per
    Redeemable Unit		 $ 923.66
$ 919.55
$ 923.66
$ 919.55
See accompanying Notes to Financial Statements.

6



Citigroup Diversified Futures Fund L.P.
Statements of Cash Flows
(Unaudited)


  Three months ended
September 30,		 Nine months ended
September 30,
  2006 2005 2006 2005
Cash flows from operating activities:  
 
 
 
Net income (loss) $ (46,666,553
)
 $ 36,162,716
$ (8,078,919
)
 $ (44,823,373
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
 
 
 
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		 (7,924,287
)
 72,596,469
534,552
87,775,065
Purchase of investments in Partnership(s) (60,901,200
)
 (405,374,294
)
 (306,993,833
)
 (580,606,722
)
Proceeds from sale of investments in Partnership(s) 40,875,375
42,380,421
164,491,173
74,439,376
Net unrealized (appreciation) depreciation on investment in Partnerships 38,088,339
(45,167,317
)
 (22,731,650
)
 (75,678,006
)
(Increase) decrease in net unrealized appreciation on open futures positions (8,013,342
)
 11,651,415
(8,013,342
)
 6,749,774
(Increase) decrease in unrealized appreciation on open forward contracts (750,882
)
 19,091,154
3,892,769
25,806,105
(Increase) decrease in interest receivable 20,121
613,129
182,035
495,634
Increase (decrease) in unrealized depreciation on open futures positions (1,202,931
)
 —
(1,263,893
)
 —
Increase (decrease) in unrealized depreciation on open forward contracts (782,118
)
 (17,120,222
)
 (2,433,847
)
 (16,128,791
)
Accrued expenses:  
 
 
 
Increase (decrease) in brokerage commissions (83,712
)
 192,260
204,031
148,680
Increase (decrease) in management fees (26,978
)
 69,222
73,520
47,055
Increase (decrease) in incentive fees (1,301,256
)
 2,072,315
(3,507,443
)
 4,215,774
Increase (decrease) in due to CGM —
(54,040
)
 (94,719
)
 (158,713
)
Increase (decrease) in other (95,738
)
 55,346
173,686
23,580
Net cash provided by (used in) operating activities (48,765,162
)
 (282,831,426
)
 (183,565,880
)
 (517,694,562
)
Cash flows from financing activities:  
 
 
 
Proceeds from additions - Limited Partners 63,695,000
48,073,000
206,435,000
198,161,000
Proceeds from additions - General Partner —
—
—
400,000
Payments for redemptions - Limited Partners (33,785,268
)
 (44,040,416
)
 (133,890,096
)
 (100,105,812
)
Net cash provided by (used in) financing activities 29,909,732
4,032,584
72,544,904
98,455,188
Net change in cash (18,855,430
)
 (278,798,842
)
 (111,020,976
)
 (419,239,374
)
Unrestricted cash, at beginning of period 93,181,070
468,431,290
185,346,616
608,871,822
Unrestrited cash, at end of period $ 74,325,640
$ 189,632,448
$ 74,325,640
$ 189,632,448
Non cash financing activities:  
 
 
 
Contribution of open commodity futures and forwards positions $ —
$ (14,760,516
)
 $ —
$ (23,314,913
)
See accompanying Notes to Financial Statements.

7



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

1.    General:

Citigroup Diversified Futures Fund L.P. (the ‘‘Partnership’’) is a limited partnership organized under the laws of the State of New York on December 3, 2002 to engage directly or indirectly in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk.

Between March 27, 2003 (commencement of the offering period) and April 30, 2003, 36,616 redeemable units of limited partnership interest (‘‘Redeemable Units’’) were sold at $1,000 per Redeemable Unit. The proceeds of the offering were held in an escrow account until May 1, 2003, at which time they were turned over to the Partnership for trading. The Partnership was authorized to sell 300,000 Redeemable Units of Limited Partnership Interest during the initial offering period. As of December 4, 2003, the Partnership was authorized to sell an additional 700,000 Redeemable Units of Limited Partnership Interest. As of October 7, 2004, the Partnership was authorized to sell an additional 1,000,000 Redeemable Units of Limited Partnership Interest. The Partnership continues to offer Redeemable Units.

Citigroup Managed Futures LLC, a Delaware Limited Liability Company, acts as the general partner (the ‘‘General Partner’’) and commodity pool operator of the Partnership. The Partnership's commodity broker is Citigroup Global Markets Inc. (‘‘CGM’’). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. (‘‘CGMHI’’), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. (‘‘Citigroup’’). As of September 30, 2006, all trading decisions are made for the Partnership by Drury Capital, Inc. (‘‘Drury’’), Graham Capital Management, L.P. (‘‘Graham’’), John W. Henry & Company, Inc. (‘‘JWH’’), Willowbridge Associates Inc. (‘‘Willowbridge’’), Aspect Capital Limited (‘‘Aspect’’), Capital Fund Management S.A. (‘‘CFM’’), Winton Capital Management Limited (‘‘Winton’’), AAA Capital Management Advisors, Ltd. (successor to AAA Capital Management, Inc.) (‘‘AAA’’) and Avant Capital Management L.P. (‘‘Avant’’) (each an ‘‘Advisor’’ and collectively, the ‘‘Advisors’’). Effective July 1, 2006, Avant was added as an Advisor to the Partnership.

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership's financial condition at September 30, 2006 and December 31, 2005, and the results of its operations and its cash flows for the three and nine months ended September 30, 2006, and 2005. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership's annual report on Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2005.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

Certain prior period amounts have been reclassified to conform to current period presentation.

8



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

2.    Financial Highlights:

Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2006 and 2005 were as follows:


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Net realized and unrealized gains (losses)* $ (43.01
)
 $ 45.67
$ 9.44
$ (41.31
)
Interest income 0.97
2.06
4.54
9.04
Expenses ** (4.70
)
 (9.83
)
 (21.28
)
 (22.45
)
Increase (decrease) for the period (46.74
)
 37.90
(7.30
)
 (54.72
)
Net Asset Value per Redeemable Unit, beginning of period 970.40
881.51
930.96
974.13
Net Asset Value per Redeemable Unit, end of period $ 923.66
$ 919.41
$ 923.66
$ 919.41
Redemption/subscription value per Redeemable Unit versus Net Asset Value per Redeemable Unit —
0.14
—
0.14
Redemption/subscription value per Redeemable Unit, end of period *** $ 923.66
$ 919.55
$ 923.66
$ 919.55
* Includes brokerage commissions
** Excludes brokerage commissions
*** For the purpose of a redemption/subscription, any remaining deferred liability for reimbursement of offering costs will not reduce redemption/subscription net asset value.

  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Ratios to average net assets:****  
 
 
 
Net investment loss before incentive fees ***** (7.2
)%
 (7.1
)%
 (7.2
)%
 (6.9
)%
Operating expenses 7.6
%
 8.1
%
 7.9
%
 8.3
%
Incentive fees 0.0
%
 0.6
%
 0.7
%
 1.0
%
Total expenses 7.6
%
 8.7
%
 8.6
%
 9.3
%
Total return:  
 
 
 
Total return before incentive fees (4.8
)%
 4.9
%
 (0.1
)%
 (4.7
)%
Incentive fees —
(0.6
)%
 (0.7
)%
 (0.9
)%
Total return after incentive fees (4.8
)%
 4.3
%
 (0.8
)%
 (5.6
)%
**** Annualized (other than incentive fees)
***** Interest income less total expenses (exclusive of incentive fees)

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets.

3.    Offering Costs:

Offering and organization costs of $650,000 relating to the issuance and marketing of the Partnership's Redeemable Units offered were initially paid by CGM. These costs were recorded as due

9



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

to CGM in the statement of financial condition. These costs were reimbursed to CGM by the Partnership in 36 monthly installments (together with interest at the prime rate quoted by JP Morgan Chase & Co.).

As of September 30, 2006, all of these costs have been reimbursed to CGM by the Partnership.

In addition, the Partnership recorded cumulative interest expense of $42,348 from the initial date through September 30, 2006, which was included in other expenses.

4.    Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership's trading activities are shown in the Statements of Income and Expenses and Partners' Capital and are discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Customer Agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures positions.

All of the commodity interests owned by the Partnership are held for trading purposes. The average fair value of these interests during the nine and twelve months ended September 30, 2006 and December 31, 2005 based on a monthly calculation, were $6,956,264 and $16,839,471, respectively. The fair value of these commodity interests, including options thereon, if applicable, at September 30, 2006 and December 31, 2005 were $8,192,264 and $373,951, respectively. Fair values for exchange traded commodity futures and options are based on quoted market prices for those futures and options. Fair values for all other financial instruments for which market quotations are not readily available are based on calculations approved by the General Partner.

5.    Investment in Partnerships:

On December 1, 2004, the cash allocated to Winton for trading was allocated to the CMF Winton Master L.P. (‘‘Winton Master’’) a limited partnership which was organized under the partnership laws of the State of New York. With this cash, the Partnership purchased 52,981.2908 units of Winton Master with a fair value of $57,471,493. Winton Master was formed in order to permit accounts managed now or in the future by Winton using the Diversified Program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure should promote efficiency and economy in the trading process.

On March 1, 2005, the cash allocated to Aspect for trading was allocated to the CMF Aspect Master Fund L.P. (‘‘Aspect Master’’), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 131,340.8450 units of Aspect Master with cash equal to $122,786,448 and a contribution of open commodity futures and forward positions with a fair value of $8,554,397. Aspect Master was formed in order to permit accounts managed now or in the future by Aspect using the Diversified Program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Aspect Master. Individual and pooled accounts currently managed by Aspect, including the Partnership are permitted to be limited partners of Aspect Master. The General Partner and Aspect believe that trading through this structure should promote efficiency and economy in the trading process.

On July 1, 2005, the cash allocated to Willowbridge for trading was allocated to the CMF Willowbridge Argo Master Fund L.P. (‘‘Willowbridge Master’’), a limited partnership organized under the

10



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

partnership laws of the State of New York. The Partnership purchased 95,795.8082 units of Willowbridge Master with cash equal to $85,442,868 and a contribution of open futures and forward positions with a fair value of $10,352,940. Willowbridge Master was formed in order to permit accounts managed now or in the future by Willowbridge using the Argo Trading System, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process.

On August 1, 2005, the cash allocated to Drury for trading was allocated to the CMF Drury Capital Master Fund L.P. (‘‘Drury Master’’), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 120,720.7387 units of Drury Master with cash equal to $117,943,205 and a contribution of open futures and forward positions with a fair value of $2,777,533. Drury Master was formed in order to permit accounts managed now or in the future by Drury using the Diversified Trend-Following Program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Drury Master. Individual and pooled accounts currently managed by Drury, including the Partnership are permitted to be limited partners of Drury Master. The General Partner and Drury believe that trading through this structure should promote efficiency and economy in the trading process.

On August 1, 2005, the cash allocated to CFM for trading was allocated to the CMF Capital Fund Management Master Fund L.P. (‘‘CFM Master’’), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 159,434.0631 units of CFM Master with cash equal to $157,804,021 and a contribution of open futures and forward positions with a fair value of $1,630,043. CFM Master was formed in order to permit accounts managed now or in the future by CFM using the Discus Program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of CFM Master. Individual and pooled accounts currently managed by CFM, including the Partnership are permitted to be limited partners of CFM Master. The General Partner and CFM believe that trading through this structure should promote efficiency and economy in the trading process.

On October 1, 2005, the cash allocated to AAA for trading was allocated to the SB AAA Master Fund LLC (‘‘AAA Master’’) a limited liability company which was organized under the limited liability company laws of the State of New York. With this cash, the Partnerhip purchased 13,956.1190 units of the AAA Master with a fair value of $50,000,000. The AAA Master was formed in order to permit accounts managed now or in the future by AAA using the Energy Program – Futures and Swaps, to invest in one trading vehicle. The General Partner is the managing member of AAA Master. Individual and pool accounts currently managed by AAA, including the Partnership are permitted to be non-managing members of AAA Master. The General Partner and AAA believe that trading through this structure should promote efficiency and economy in the trading process.

On June 1, 2006, the cash allocated to Graham for trading was allocated to the CMF Graham Capital Master Fund L.P. (‘‘Graham Master’’), a limited partnership organized under the partnership laws of the State of New York. The partnership purchased 101,486.0491 units of Graham Master with cash equal to $103,008,482. Graham Master was formed in order to permit accounts managed now or in the futures by Graham using the Multi-Trend Program at 125% Leverage, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Graham Master. Individual and pooled accounts currently managed by Graham, including the Partnership are permitted to be limited partners of Graham Master. The General Partner and Graham believe that trading through this structure should promote efficiency and economy in the trading process.

On July 1, 2006, the cash allocated to Avant for trading was allocated to the CMF Avant Master Fund L.P. (‘‘Avant Master’’), a limited partnership organized under the partnership laws of the State of

11



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

New York. The partnership purchased 17,941.7382 units of Avant Master with cash equal to $20,000,000. Avant Master was formed in order to permit accounts managed now or in the futures by Avant using the Diversified Program, to invest together in one trading vehicle. The General Partner of the Partnership is the general partner of Avant Master. Individual and pooled accounts currently managed by Avant, including the Partnership are permitted to be limited partners of Avant Master. The General Partner and Avant believe that trading through this structure should promote efficiency and economy in the trading process.

The Winton Master's, Aspect Master's, Drury Master's, Willowbridge Master's, CFM Master's, Graham Master's, AAA Master's and Avant Master's (the ‘‘Funds’’) trading of futures, forwards and options contracts, if applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. Each engages in such trading through commodity brokerage accounts maintained with CGM.

A limited partner/non-managing member may withdraw all or part of its capital contribution and undistributed profits, if any, from the Funds in multiples of the net asset value per unit of limited partnership interest as of the last day of a month after a request for redemption has been made to the General Partner at least 3 days in advance of month-end.

Management and incentive fees are not directly charged to the Funds. These fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and National Futures Association fees are borne by the Funds. All other fees including CGM's direct brokerage commission are charged at the Partnership level.

At September 30, 2006, the Partnership owned 43.7% of Winton Master, 68.2% of Aspect Master, 94.4% of Drury Master, 52.3% of Willowbridge Master, 94.6% of CFM Master, 42.6% of Graham Master, 8.5% of AAA Master and 58.5% of Avant Master. At December 31, 2005, the Partnership owned 50.5% of Winton Master, 67.2% of Aspect Master, 96.0% of Drury Master, 56.7% of Willowbridge Master, 96.6% of CFM Master and 5.6% of AAA Master. The performance of the Partnership is directly affected by the performance of the Funds. It is the Partnership's intention to continue to invest in the Funds. Expenses to investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.

Summarized information reflecting the total assets, liabilities and capital for the Funds are shown in the following tables.


  September 30, 2006
  Investments'
Total Assets		 Investments'
Total Liabilities		 Investments'
Total Capital
Drury Master $ 139,435,284
$ 17,158,515
$ 122,276,769
Willowbridge Master 186,164,106
913,159
185,250,947
Aspect Master 196,925,103
991,797
195,933,306
CFM Master 183,646,992
382,563
183,264,429
Winton Master 255,612,473
1,242,389
254,370,084
AAA Master 1,250,379,878
260,954,070
989,425,808
Graham Master 233,518,778
3,523,441
229,995,337
Avant Master 33,686,940
2,697,727
30,989,213
Total $ 2,479,369,554
$ 287,863,661
$ 2,191,505,893

12



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)


  December 31, 2005
  Investments'
Total Assets		 Investments'
Total Liabilities		 Investments'
Total Capital
Drury Master $ 139,528,502
$ 6,629,011
$ 132,899,491
Willowbridge Master 170,157,028
474,977
169,682,051
Aspect Master 200,507,575
5,680,632
194,826,943
CFM Master 173,850,276
449,771
173,400,505
Winton Master 182,130,723
3,524,134
178,606,589
AAA Master 1,253,296,106
299,213,954
954,082,152
Total $ 2,119,470,210
$ 315,972,479
$ 1,803,497,731

Summarized information reflecting the Partnership's investment in, and the operations of, the Funds are as shown in the following tables.


  September 30, 2006 For the three months ended September 30, 2006    
        Expenses      
Investment % of
Partnership's
Net Assets		 Fair
Value		 Income
(Loss)		 Commissions Other Net Income
(Loss)		 Investment
Objective		 Redemptions
Permitted
Drury Master 12.60
%
 $ 115,839,902
$ (6,416,841
)
 $ 66,585
$ 5,755
$ (6,489,181
)
 Commodity
Portfolio		 Monthly
Willowbridge Master 10.57
%
 97,190,937
(2,866,558
)
 83,294
4,582
(2,954,434
)
 Commodity
Portfolio		 Monthly
Aspect Master 14.59
%
 134,130,416
(6,382,661
)
 78,816
3,988
(6,465,465
)
 Commodity
Portfolio		 Monthly
CFM Master 18.93
%
 173,886,546
(4,454,318
)
 546,146
—
(5,000,464
)
 Commodity
Portfolio		 Monthly
Winton Master 12.14
%
 111,523,938
3,722,663
78,456
653
3,643,554
Commodity
Portfolio		 Monthly
AAA Master 9.14
%
 83,958,253
(7,592,281
)
 64,524
8,949
(7,665,754
)
 Energy
Markets		 Monthly
Graham Master 10.70
%
 98,263,794
(2,468,624
)
 67,646
6,224
(2,542,494
)
 Commodity
Portfolio		 Monthly
Avant Master 1.98
%
 18,200,147
(2,456,082
)
 51,286
6,215
(2,513,583
)
 Commodity
Portfolio		 Monthly
Total  
$ 832,993,933
$ (28,914,702
)
 $ 1,036,753
$ 36,366
$ (29,987,821
)
    

  September 30, 2006 For the nine months ended September 30, 2006  
        Expenses      
Investment % of
Partnership's
Net Assets		 Fair
Value		 Income
(Loss)		 Commissions Other Net Income
(Loss)		 Investment
Objective		 Redemptions
Permitted
Drury Master 12.60
%
 $ 115,839,902
$ (5,851,747
)
 $ 284,028
$ 31,910
$ (6,167,685
)
 Commodity
Portfolio		 Monthly
Willowbridge Master 10.57
%
 97,190,937
5,421,362
274,353
14,124
5,132,885
Commodity
Portfolio		 Monthly
Aspect Master 14.59
%
 134,130,416
5,760,680
253,682
24,545
5,482,453
Commodity
Portfolio		 Monthly
CFM Master 18.93
%
 173,886,546
20,897,079
2,333,111
43,354
18,520,614
Commodity
Portfolio		 Monthly
Winton Master 12.14
%
 111,523,938
10,940,266
325,861
1,382
10,613,023
Commodity
Portfolio		 Monthly
AAA Master 9.14
%
 83,958,253
16,748,209
235,742
26,339
16,486,128
Energy
Markets		 Monthly
Graham Master 10.70
%
 98,263,794
(3,729,769
)
 99,562
7,248
(3,836,579
)
 Commodity
Portfolio		 Monthly
Avant Master 1.98
%
 18,200,147
(2,456,082
)
 51,285
6,215
(2,513,582
)
 Commodity
Portfolio		 Monthly
Total  
$ 832,993,933
$ 47,729,998
$ 3,857,624
$ 155,117
$ 43,717,257
   

13



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)


  December 31, 2005 For the three months ended September 30, 2005  
        Expenses      
Investment % of
Partnership's
Net Assets		 Fair
Value		 Income
(Loss)		 Commissions Other Net Income
(Loss)		 Investment
Objective		 Redemptions
Permitted
Drury Master 14.92
%
 $ 127,905,544
$ 4,567,092
$ 95,525
$ 17,299
$ 4,454,268
Commodity
Portfolio		 Monthly
Willowbridge Master 11.26
%
 96,524,350
5,609,604
123,284
8,972
5,477,348
Commodity
Portfolio		 Monthly
Aspect Master 15.31
%
 131,198,236
5,073,334
85,355
9,420
4,978,559
Commodity
Portfolio		 Monthly
CFM Master 19.59
%
 167,920,417
20,533,548
694,970
1,480
19,837,098
Commodity
Portfolio		 Monthly
Winton Master 10.54
%
 90,342,493
(832,413
)
 199,147
9,305
(1,040,865
)
 Commodity
Portfolio		 Monthly
AAA Master 6.29
%
 53,868,583
—
—
—
—
Energy
Markets		 Monthly
Total  
$ 667,759,623
$ 34,951,165
$ 1,198,281
$ 46,476
$ 33,706,408
   

  December 31, 2005 For the nine months ended September 30, 2005  
        Expenses      
Investment % of
Partnership's
Net Assets		 Fair
Value		 Income
(Loss)		 Commissions Other Net Income
(Loss)		 Investment
Objective		 Redemptions
Permitted
Drury Master 14.92
%
 $ 127,905,544
$ 4,567,092
$ 95,525
$ 17,299
$ 4,454,268
Commodity
Portfolio		 Monthly
Willowbridge Master 11.26
%
 96,524,350
5,609,604
123,284
8,972
5,477,348
Commodity
Portfolio		 Monthly
Aspect Master 15.31
%
 131,198,236
17,359,551
222,528
22,199
17,114,824
Commodity
Portfolio		 Monthly
CFM Master 19.59
%
 167,920,417
20,533,548
694,970
1,480
19,837,098
Commodity
Portfolio		 Monthly
Winton Master 10.54
%
 90,342,493
11,073,540
440,606
27,439
10,605,495
Commodity
Portfolio		 Monthly
AAA Master 6.29
%
 53,868,583
—
—
—
—
Energy
Markets		 Monthly
Total  
$ 667,759,623
$ 59,143,335
$ 1,576,913
$ 77,389
$ 57,489,033
   

14



Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2006
(Unaudited)

6.    Financial Instrument Risks:

In the normal course of its business, the Partnership and the Funds are party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options and swaps, whose values are based upon an underlying asset, index or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (‘‘OTC’’). Exchange-traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange-traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's/Funds' risk of loss in the event of counterparty default is typically limited to the amounts recognized as unrealized appreciation in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership/Funds have credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's/Funds' assets is CGM.

The General Partner monitors and controls the Partnership's/Funds' risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds are subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these instruments mature within one year of September 30, 2006. However, due to the nature of the Partnership's/Funds' businesses, these instruments may not be held to maturity.

15



Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in the sale of goods or services. The Partnerships only assets are its investments in Partnerships, equity in its commodity futures trading account, consisting of cash, net unrealized appreciation on open futures and forward contracts, commodity options, if applicable, and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a decrease in liquidity, no such losses occurred during the third quarter of 2006.

The Partnership's capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading, expenses, interest income, additions and redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2006, Partnership capital increased 7.2% from $857,136,296 to $918,961,213. This increase was attributable to additional sales of 217,533.0050 Redeemable Units of limited partnership totaling $206,435,000, which was partially offset by a net loss from operations of $8,078,919 coupled with the redemption of 143,320.5460 Redeemable Units of Limited Partnership totaling $136,531,164. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

All commodity interests (including derivative financial instruments and derivative commodity instruments) held by the Partnership are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statements of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available including dealer quotes for swaps and certain option contracts. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests. Investments in partnerships are recorded at fair value, based upon the Partnership's proportionate interest held.

Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting dates, is included in the statements of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and Partners' capital.

Results of Operations

During the third quarter of 2006, the Partnership Net Asset Value per Redeemable Unit decreased 4.8% from $970.40 to $923.66 as compared to an increase of 4.3% in the third quarter of 2005. The Partnership experienced a net trading loss before brokerage commissions and related fees during the third quarter of 2006, of $30,002,405. Losses were primarily attributable to the trading of commodity contracts

16



in energy, metals, currencies, grains, livestock, indices and non-U.S. interest rates and were partially offset by gains in U.S. interest rates, softs and lumber. The Partnership experienced a net trading gain before brokerage commissions and related fees during the third quarter of 2005 of $55,948,586. Gains were primarily attributable to the trading of commodity contracts in energy, metals, indices, grains and softs and were partially offset by losses in currencies, U.S. and non-U.S. interest rates, livestock and lumber.

The third quarter of 2006 presented a challenging investment landscape for the advisors. The fund was negatively impacted by a number of price trend reversals in both financial and commodity markets. Gains earned in September were insufficient to offset losses accumulated in July and August.

High levels of market uncertainty resulted in losses in the currency and fixed income sectors, and equity indices. The fund posted gains from trading in Japanese Yen as the dollar strengthened on speculation that Japan's central bank would refrain from raising interest rates again this year. However, these gains were insufficient to offset losses from trading in Euro and British Pound. While trading in U.S. interest rates was profitable for the quarter, yields lacked direction in the international fixed income markets, resulting in unfavorable results for the fund. The fund also suffered small losses in global equity indices, amassed mainly in July amid speculation over the Federal Reserve's rate decision.

Trading results in commodity markets varied as gains were realized in the soft commodities but failed to materialize in the energy and metals sectors. Advisors captured downward price trends in sugar and cotton. However, losses were accumulated in the energy markets due to unanticipated price declines across the petroleum complex. A series of unrelated events associated with favorable inventory data and moderated geopolitical concerns triggered a downward but non-orderly drop in crude prices. Gains from the industrial metals only partially offset losses in precious metals, where prices reflected unfavorable trading ranges and sharp price reversals.

During the Partnership's nine months ended September 30, 2006, the Net Asset Value per Redeemable Unit decreased 0.8% from $930.96 to $923.66 as compared to a decrease of 5.6% during the nine months ended September 30, 2005. The Partnership experienced a net trading gain before brokerage commissions and related fees during the nine months ended September 30, 2006 of $47,838,073. Gains were primarily attributable to the trading of commodity futures in energy, metals, indices, U.S. and non-U.S. interest rates and were partially offset by losses in softs, currencies, grains, livestock and lumber. The Partnership experienced a net trading gain before brokerage commissions and related fees during the nine months ended September 30, 2005 of $5,231,303. Gains were primarily attributable to the trading of commodity futures in energy, non-U.S. interest rates and indices and were partially offset by losses in lumber, currencies, grains, livestock, metals, softs and U.S. interest rates.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations.

Interest income is earned on 80% of the Partnership's average daily equity maintained in cash in its account during each month at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. CGM may continue to maintain the Partnership's assets in cash and/or place all of the Partnership's assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. CGM will retain 20% of any interest earned on Treasury bills. Interest income for the three and nine months ended September 30, 2006 decreased $988,327 and $3,861,362, respectively, as compared to the corresponding periods in 2005. The decrease is due to the Partnership's use of cash to fund additional investments in other partnerships. The interest earned at the Investment in Partnerships level is included in the Partnership's share of overall net income (loss) of the other partnerships in 2006 and 2005.

17



Brokerage commissions are calculated as a percentage of the Partnership's adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Commissions and fees for the three and nine months ended September 30, 2006 increased $507,911 and $2,083,210, respectively, as compared to the corresponding periods in 2005. The increase is due to an increase in net assets in 2006 as compared to 2005.

Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and nine months ended September 30, 2006 increased $300,929 and $1,749,960, respectively, as compared to the corresponding periods in 2005. The increase is due to an increase in net assets in 2006 as compared to 2005.

Incentive fees paid quarterly are based on the new trading profits generated by each Advisor as defined in the management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and nine months ended September 30, 2006 resulted in incentive fees of $0 and $6,585,533, respectively. Trading performance for the three and nine months ended September 30, 2005 resulted in incentive fees of $4,808,653 and $8,287,648, respectively.

18



Item 3.    Quantitative and Qualitative Disclosures about Market Risk

The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business.

Market movements result in frequent changes in the fair value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the value of financial instruments and contracts, the diversification effects of the Partnership's open positions and the liquidity of the markets in which it trades.

The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results.

Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., ‘‘risk of ruin’’). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

19



The following table indicates the trading Value at Risk associated with the Partnership's investments and investments in other Partnerships by market category as of September 30, 2006 and the highest, lowest and average values, during the three months ended September 30, 2006. All open position trading risk exposures have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2005. As of September 30, 2006, the Partnership's total capitalization was $918,961,213.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–OTC Contracts $ 2,635,095
0.29
%
 $ 3,501,795
$ 1,148,726
$ 1,724,125
Energy 5,952,800
0.65
%
 7,154,900
1,067,600
3,465,267
Grains 988,312
0.11
%
 1,180,400
196,200
661,492
Interest Rates U.S. 1,359,000
0.15
%
 1,359,000
356,100
791,050
Interest Rates Non-U.S. 3,247,743
0.35
%
 3,247,743
1,243,720
2,451,075
Metals:  
 
 
 
 
–Exchange Traded Contracts 2,422,500
0.26
%
 2,422,500
552,500
1,795,500
Softs 2,104,800
0.23
%
 2,104,800
1,027,200
1,910,127
Indices 507,978
0.05
%
 1,938,345
298,709
924,057
Total $ 19,218,228
2.09
%
  
 
 
* Average of month-end Values at Risk

As of September 30, 2006, Drury Master's total capitalization was $122,276,769. The Partnership owned 94.4% of Drury Master.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–OTC Contracts $ 3,974,538
3.25
%
 $ 4,074,642
$ 1,721,584
$ 3,109,545
Energy 1,575,500
1.29
%
 2,044,000
611,500
1,031,900
Grains 1,324,900
1.08
%
 1,947,325
585,217
1,074,466
Interest Rates U.S. 784,430
0.64
%
 814,400
406,430
699,791
Interest Rates Non-U.S. 2,058,261
1.68
%
 2,648,128
718,261
1,317,335
Metals:  
 
 
 
 
–Exchange Traded Contracts 440,000
0.36
%
 946,167
440,000
465,750
–OTC Contracts 1,644,833
1.35
%
 3,663,295
1,090,002
1,369,433
Softs 3,071,575
2.51
%
 3,428,282
1,410,900
2,636,150
Indices 1,938,141
1.59
%
 2,554,530
4,271
1,416,997
Total $ 16,812,178
13.75
%
  
 
 
* Average of month-end Values at Risk

20



As of September 30, 2006, Willowbridge Master's total capitalization was $185,250,947. The Partnership owned 52.3% of Willowbridge Master.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–Exchange Traded Contracts $ 3,743,173
2.02
%
 $ 7,745,700
$ 1,121,900
$ 3,886,457
Energy 7,176,000
3.87
%
 10,936,000
3,976,500
8,088,500
Grains 1,527,200
0.82
%
 1,527,200
289,200
1,087,195
Interest Rates U.S. 3,864,000
2.09
%
 3,864,000
362,000
3,192,600
Interest Rates Non-U.S. 9,439,773
5.10
%
 9,499,826
650,146
6,337,231
Metals:  
 
 
 
 
–Exchange Traded Contracts 920,000
0.49
%
 3,258,000
920,000
1,392,667
Softs 864,800
0.47
%
 1,048,800
144,800
821,333
Total $ 27,534,946
14.86
%
  
 
 
* Average of month-end Values at Risk

As of September 30, 2006, Aspect Master's total capitalization was $195,933,306. The Partnership owned 68.2% of Aspect Master.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–OTC Contracts $ 4,104,102
2.09
%
 $ 4,222,798
$ 2,216,294
$ 3,797,115
Energy 3,066,400
1.56
%
 4,310,900
740,100
2,533,500
Grains 476,910
0.24
%
 984,281
377,635
714,899
Interest Rates U.S. 132,381
0.07
%
 2,011,350
70,748
758,344
Interest Rates Non-U.S. 2,900,765
1.48
%
 10,270,797
2,878,685
5,365,014
Livestock 112,700
0.06
%
 272,150
52,373
151,700
Metals:  
 
 
 
 
–Exchange Traded Contracts 687,000
0.35
%
 1,131,500
341,500
847,167
–OTC Contracts 1,980,610
1.01
%
 2,925,433
1,035,707
2,050,168
Softs 977,909
0.50
%
 1,733,252
824,088
1,118,053
Indices 6,867,871
3.51
%
 8,758,977
207,377
5,651,007
Total $ 21,306,648
10.87
%
  
 
 
* Average of month-end Values at Risk

21



As of September 30, 2006, CFM Master's total capitalization was $183,264,429. The Partnership owned 94.6% of CFM Master.

September 30, 2006

(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–Exchange Traded Contracts $ 1,045,357
0.57
%
 $ 1,045,357
$ 428,775
$ 1,141,064
–OTC Contracts 2,656,395
1.45
%
 2,656,395
669,747
1,425,317
Energy 652,840
0.36
%
 3,582,015
162,263
1,434,780
Interest Rates U.S. 243,540
0.13
%
 3,477,200
43,008
1,120,830
Interest Rates Non-U.S. 2,299,853
1.25
%
 7,674,917
804,301
2,729,100
Metals:  
 
 
 
 
–Exchange Traded Contracts 40,500
0.02
%
 83,700
2,250
35,820
Indices 3,417,781
1.87
%
 6,892,233
1,268,724
4,623,873
Softs 29,269
0.02
%
 91,334
5,067
36,521
Total $ 10,385,535
5.67
%
  
 
 
* Average of month-end Values at Risk

As of September 30, 2006, Winton Master's total capitalization was $254,370,084. The Partnership owned 43.7% of Winton Master.

September 30, 2006

(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–Exchange Traded Contracts $ 4,037,796
1.59
%
 $ 4,838,344
$ 2,506,658
$ 4,016,334
Energy 588,575
0.23
%
 3,465,600
588,575
1,996,647
Grains 551,952
0.22
%
 591,674
188,657
452,208
Interest Rates U.S. 4,545,650
1.79
%
 4,545,650
332,923
3,203,058
Interest Rates Non-U.S. 8,481,585
3.33
%
 8,481,585
3,996,398
6,663,421
Livestock 110,343
0.04
%
 183,465
78,165
142,568
Metals:  
 
 
 
 
–Exchange Traded Contracts 701,250
0.28
%
 1,067,170
405,020
849,593
–OTC Contracts 2,525,950
0.99
%
 2,764,433
1,721,910
2,319,815
Indices 12,465,611
4.90
%
 12,465,611
3,187,773
7,609,794
Lumber 1,100
0.00
%**
 1,100
1,100
1,100
Softs 597,876
0.24
%
 753,230
409,900
489,692
Total $ 34,607,688
13.61
%
  
 
 
* Average of month-end Values at Risk
** Due to rounding

22



As of September 30, 2006, AAA Master's total capitalization was $989,425,808. The Partnership owned 8.5% of AAA Master.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Energy $ 80,290,980
8.11
%
 $ 85,359,642
$ 52,516,591
$ 67,201,456
Energy Swaps 4,720,046
0.48
%
 4,720,046
4,130,046
4,326,713
Total $ 85,011,026
8.59
%
  
 
 
* Average of month-end Values at Risk

As of September 30, 2006, Graham Master's total capitalization was $229,995,337. The Partnership owned 42.6% of Graham Master.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Currencies:  
 
 
 
 
–OTC Contracts $ 5,750,924
2.50
%
 $ 6,566,306
$ 1,385,168
$ 3,938,103
Energy 189,000
0.08
%
 775,300
91,000
346,433
Grains 239,562
0.10
%
 689,600
239,562
500,419
Interest Rates U.S. 1,990,800
0.87
%
 1,990,800
101,360
748,642
Interest Rates Non-U.S. 2,436,575
1.06
%
 4,572,318
1,300,259
2,338,322
Metals:  
 
 
 
 
–Exchange Traded Contracts 37,500
0.02
%
 37,500
10,000
12,500
–OTC Contracts 265,386
0.12
%
 756,150
43,345
139,821
Softs 652,162
0.28
%
 657,569
396,182
544,994
Indices 9,891,409
4.30
%
 9,891,409
918,882
5,472,919
Total $ 21,453,318
9.33
%
  
 
 
* Average of month-end Values at Risk

As of September 30, 2006 Avant Master's total capitalization was $30,989,213. The Partnership owned 58.5% of Avant Masters.

September 30, 2006
(Unaudited)


      Three months ended September 30, 2006
Market Sector Value at Risk % of Total
Capitalization		 High
Value at Risk		 Low
Value at Risk		 Average
Value at Risk*
Energy $ 544,996
1.76
%
 $ 2,690,730
$ 420,350
$ 948,824
Total $ 544,996
1.76
%
  
 
 
* Average of month-end Values at Risk

23



Item 4.    Controls and Procedures

The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) the Exchange Act) with respect to the Partnership as of the end of the period covered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. There was no change in the Partnership's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting.

24



PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The following information supplements and amends our discussion set forth under Part I, Item, 3 ‘‘Legal Proceedings’’ in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2005 and under Part II, Item 1, ‘‘Legal Proceedings’’ in the Partnerships Quarterly Report on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

Enron Corp.

In light of the settlement of the securities class action (Newby, et al. v. Enron Corp., et al.), the plaintiffs have agreed to dismiss the following lawsuits against Citigroup and its affiliates: California Public Employees' Retirement System v. Banc of America Securities LLC, et al., Headwaters Capital LLC v. Lay et al., and Variable Annuity Life Ins. Co. v. Credit Suisse First Boston Corp., et al. Plaintiffs in two other cases, which are not part of the Newby class, have also voluntarily dismissed their claims against Citigroup and its affiliates: Steiner v. Enron Corp., et al. and Town of New Hartford v. Lay, et al.

Research

On August 17, 2006, the United States District Court for the Southern District of New York approved the class action settlement of Citigroup and its affiliates in In Re Salomon Analyst AT&T Litigation, and on September 29, 2006 that same court approved the class action settlements in In Re Salomon Analyst Level 3 Litigation, In Re Salomon Analyst XO Litigation and In Re Salomon Analyst Williams Litigation.

On September 14, 2006, Citigroup and its affiliates settled all claims in Sturm, et al. v. Citigroup, et al. The settlement was covered by existing reserves.

On October 6, 2006, the United States Court of Appeals granted a review of the district court's decision certifying a plaintiff class in In Re Salomon Analyst Metromedia Litigation.

Adelphia Communications Corporation

Defendant banks in In Re Adelphia Communications Corporation Securities and Derivative Litigation, including the Citigroup Parties, have entered into settlement agreements with the Los Angeles County Employees Retirement Association and with The Division of Investment of the New Jersey Department of Treasury. The Citigroup Parties' share of the settlement was covered by existing reserves.

Item 1A.    Risk Factors.

There are no material changes from the risk factors set forth under Part I, Item 1A. ‘‘Risk Factors’’ in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The use of proceeds information is being disclosed for Registration Statement Nos. 333-102038 and 333-110076 and Post-Effective Amendment No. 1 to Registration Statement No. 333-110076. Post-Effective Amendment No. 2 to Registration Statement No. 333-110076 and Post-Effective Amendment No. 3 to Registration Statement No. 333-110076, each filed pursuant to Rule 429 under the Securities Act of 1933, as amended, declared effective on March 27, 2003, December 4, 2003, September 7, 2004, April 14, 2006 and April 21, 2006, respectively.

For the account of the Partnership, the amount of Redeemable Units sold as of September 30, 2006 is 1,378,756.9628 and the aggregate offering price of the amount sold as of September 30, 2006 is $1,306,129,000.

From the effective date of the first Registration Statement to September 30, 2006, the amount of expenses incurred for the Partnership's account in connection with the issuance and distribution of the securities registered totaled $1,150,000.

25



From the effective date of the first Registration Statement to September 30, 2006 the amount of net offering proceeds to the Partnership used for trading of commodity interests, including futures contracts, options, forwards and swap contracts, and to make investments in other partnerships for use for the same purposes, totaled $1,306,129,000.

The following chart sets forth the purchases of Redeemable Units by the Partnership.


Period (a) Total Number
of Shares
(or Units) Purchased*		 (b) Average
Price Paid per
Share (or Unit)**		 (c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs		 (d) Maximum Number
(or Approximate
Dollar Value) of Shares
(or Units) that
May Yet Be
Purchased Under the
Plans or Programs
July 1, 2006 –
July 31, 2006		 10,960.0455
$ 916.67
N/A
N/A
August 1, 2006 –
August 31, 2006		 17,517.4768
$ 906.87
N/A
N/A
September 1, 2006 –
September 30, 2006		 14,302.2346
$ 923.66
N/A
N/A
  42,779.7569
$ 915.73
N/A
N/A
* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days' notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership's business in connection with effecting redemptions for Limited Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day.

Item 3.    Defaults Upon Senior Securities – None

Item 4.    Submission of Matters to a Vote of Security Holders – None

Item 5.    Other Information – None

Item 6.    Exhibits

  The exhibits required to be filed by Item 601 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the period ended December 31, 2005 and the exhibit index of the Partnership's Quarterly Report on form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

Exhibit – 31.1 – Rule 13a-14(a)/15d-14(a) Certification
(Certification of President and Director)

Exhibit – 31.2 – Rule 13a-14(a)/15d-14(a) Certification
(Certification of Chief Financial Officer and Director)

Exhibit – 32.1 – Section 1350 Certification
(Certification of President and Director).

Exhibit – 32.2 – Section 1350 Certification
(Certification of Chief Financial Officer and Director).

Exhibit – 10.1 – Management Agreement among the Partnership, the General Partner and Avant Capital Management L.P. (filed herein).

26



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CITIGROUP DIVERSIFIED FUTURES FUND L.P.


By: Citigroup Managed Futures LLC
  (General Partner)
By: /s/ David J. Vogel
  David J. Vogel
President and Director
Date: November 14, 2006
By: /s/ Jennifer Magro
  Jennifer Magro
Chief Financial Officer and Director
Date: November 14, 2006

27