10-K 1 lv.htm LV FUTURES FUND L.P. lv.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012 or

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to__________________

Commission file number: 000-53114
   
LV FUTURES FUND L.P.
  
   
(Exact name of registrant as specified in its charter)
  
 
Delaware
  
20-8529012
 
      State or other jurisdiction of
      incorporation or organization
  
(I.R.S. Employer
Identification No.)
       
Ceres Managed Futures LLC
    
522 Fifth Avenue, 14th Floor
    
New York, NY
  
10036
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code
  
(855) 672-4468
     
Securities registered pursuant to Section 12(b) of the Act:
    
     
Title of each class
  
Name of each exchange
   
on which registered
     
None
  
None
     
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o No x

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.404 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes 0  No T

Limited Partnership Redeemable Units with an aggregate value of $27,354,352 of Class A, $4,859,517 of Class B, $8,956,295 of Class C, and $59,407 of Class D, $683,172 of Class Z, were outstanding and held by non-affiliates as of the last business day of the registrants most recently completed second fiscal quarter.

As of February 28, 2013, 22,577.185 Limited Partnership Class A Redeemable Units were outstanding, 4,141.422 Limited Partnership Class B Redeemable Units were outstanding, 6,122.665 Limited Partnership Class C Redeemable Units were outstanding, 23.012 Limited Partnership Class D Redeemable Units were outstanding, 405.437 Class Z Redeemable Units were outstanding
.
DOCUMENTS INCORPOARED BY REFERENCE
(See Page 1)


 
 
 
LV FUTURES FUND L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 2012



Part I.
    
     
Item 1.
Business
1-6
     
Item 1A.
Risk Factors
6-27
     
Item 1B.
Unresolved Staff Comments
27
     
Item 2.
Properties
27
     
Item 3.
Legal Proceedings
27-37
     
Item 4.
Mine Safety Disclosures
37
     
     
Part II.
    
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities
38-40
     
Item 6.
Selected Financial Data
41
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42-60
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
60-77
     
Item 8.
Financial Statements and Supplementary Data
77-113
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
113
     
Item 9A.
Controls and Procedures
114-115
     
Item 9B.
Other Information
115
     
     
Part III.
    
     
Item 10.
Directors, Executive Officers and Corporate Governance
116-126
     
Item 11.
Executive Compensation
126
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
127
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
127
     
Item 14.
Principal Accountant Fees and Services
127-128
     
Part IV.
    
     
Item 15.
Exhibits, Financial Statement Schedules
129





 
 
 

PART I
Item 1.  BUSINESS
(a)  General Development of Business. LV Futures Fund L.P. (“LV” or the “Partnership”), was formed on February 22, 2007, under the Delaware Revised Uniform Limited Partnership Act, as a multi-advisor commodity pool created to profit from the speculative trading of domestic commodities and foreign commodity futures contracts, forward contracts, foreign exchange commitments, options on physical commodities and futures contracts, spot (cash) commodities and currencies, exchange of futures contracts for physicals transactions, exchange of physicals for futures contracts transactions, and any rights pertaining thereto (collectively, “Futures Interests”) through the Partnership’s investments in its affiliated trading companies (each a “Trading Company” or collectively the “Trading Companies”).  The Partnership is one of the partnerships in the Managed Futures Multi-Strategy Profile Series (“Profile Series”), comprised of LV and Meritage Futures Fund L.P. (“Meritage”).
 
 
The Partnership invests substantially all of its assets to multiple affiliated Trading Companies, each of which allocates substantially all of its assets to the trading program of an unaffiliated commodity trading advisor (each a “Trading Advisor” or collectively, the “Trading Advisors”) registered with the Commodity Futures Trading Commission (“CFTC”) or exempt from such registration, which makes investment decisions for each respective Trading Company.  The Trading Companies are each Delaware limited liability companies operated by Ceres Managed Futures LLC (“Ceres” or the “General Partner”).


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The Partnership commenced trading operations on August 1, 2007, in accordance with the terms of the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).

Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) serves as a placement agent (the “Placement Agent”) for the Partnership.  Morgan Stanley & Co. LLC (“MS&Co.”) acts as each Trading Company’s primary clearing commodity broker.  Morgan Stanley & Co. International plc (“MSIP”) acts as each Trading Company’s commodity broker to the extent it trades on the London Metal Exchange (collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”).  Each Trading Company’s over-the-counter foreign exchange spot, options, and forward contract counterparty is either MS&Co. and/or Morgan Stanley Capital Group Inc. (“MSCG”) to the extent a Trading Company trades options on over-the-counter foreign currency forward contracts.

The financial statements of the Partnership have been prepared using the “Fund of Funds” approach and accordingly all revenue and expense information from the Trading Companies is reflected as a total net realized/net change in unrealized appreciation (depreciation) on investments on the Statements of Income and Expenses.  The Partnership maintains sufficient cash balances on hand to satisfy ongoing operating expenses for the Partnership.  As of December 31, 2012 and 2011, the Partnership’s cash balances were zero.


The Trading Companies and their Trading Advisors for the Partnership at December 31, 2012, are as follows:


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Trading Company
 
 
Trading Advisor
 
Morgan Stanley Smith Barney Augustus I, LLC (“Augustus I, LLC”)
 
 
GAM International Management Limited
Morgan Stanley Smith Barney Chesapeake Diversified I, LLC (“Chesapeake I, LLC”)
 
Chesapeake Capital Corporation
Morgan Stanley Smith Barney GLC I, LLC (“GLC I, LLC”)
GLC Ltd.
Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC”)
Kaiser Trading Group Pty. Ltd.
Morgan Stanley Smith Barney Rotella I, LLC (“Rotella I, LLC”)
Rotella Capital Management, Inc. (“Rotella”)
Morgan Stanley Smith Barney TT II, LLC (“TT II, LLC”)
Transtrend B.V.
Morgan Stanley Smith Barney WNT I, LLC (“WNT I, LLC”)
Winton Capital Management Limited (“Winton”)



The trading system style of each Trading Advisor is as follows:
Commodity Trading Advisor
Trading System Style
Chesapeake Capital Corporation
Systematic
GAM International Management Limited
Discretionary
GLC Ltd.
Discretionary
Kaiser Trading Group Pty. Ltd.
Systematic
Rotella Capital Management, Inc.
Systematic
Transtrend B.V.
Systematic
Winton Capital Management Limited
Systematic

Ceres, the general partner and commodity pool operator of the Partnership and the trading manager (the “Trading Manager”) of each Trading Company, is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”).  MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc.  Morgan Stanley Wealth Management is the principal subsidiary of MSSBH.  MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley.



Ceres may reallocate the Partnership’s assets to different Trading Companies in its sole discretion.



Prior to February 29, 2012, units of limited partnership interest (“Units”) of the Partnership were

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being offered in four classes in a private placement pursuant to Regulation D under the Securities Act of 1933,  as amended.  Depending on the aggregate amount invested in the Partnership, limited partners received either class A, B, C or D Units in the Partnership (each a “Class” and collectively the “Classes”).  Certain limited partners who are not subject to the ongoing placement agent fee are deemed to hold Class Z Units. Ceres received Class Z Units with respect to its investment in the Partnership.  Effective February 29, 2012, Class B and Class C Units are no longer being offered to new investors but continue to be offered to existing Class B and Class C investors..

Ceres is not required to maintain any investment in the Partnership and may withdraw any portion of its interest in the Partnership at any time, as permitted by the Limited Partnership Agreement.  In addition, Class Z shares are only being offered to certain individuals affiliated with Morgan Stanley at Ceres’ sole discretion.  Class Z Unit holders are not subject to paying the Placement Agent fee.

Effective January 4, 2012, Kaiser I, LLC uses MS&Co. as its clearing commodity broker.

The Partnership began the year at a net asset value per Unit of $959.86, $981.31, $1,003.23, $1,014.52 and $1,048.53 and returned (6.96)%, (6.49)%, (6.02)%, (5.74)%, and (5.07)% to $893.04, $917.60, $942.83,  $956.28 and $995.36 for Class A, Class B, Class C, Class D, and Class Z, respectively, on December 31, 2012.



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(b)  Financial Information about Segments.  The Partnership’s business consists of only one  segment, which is the speculative trading of Futures Interest as discussed in Item 1(a).  The Partnership does not engage in the sale of goods or services.  The Partnership’s net income (loss) from operations for the years ended December 31, 2012, 2011, and 2010 is set forth under Item 6. Selected Financial Data.

(c)  Narrative Description of Business.  See Item 1(a) above for a complete description of the Partnership’s business.  The information requested in Section 101(c)(i) through (xiii) of Regulation S-K is not applicable to the Partnership.  Additionally, the Partnership does not have any employees.  The directors and officers of the General Partner are listed in Part III. Item 10. Directors, Executive Officers and Corporate Governance.

(d)  Financial Information about Geographic Areas.
Not applicable.

(e)  Available Information.  Effective with the Form 10 filed on October 2, 2008, the Partnership files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission (“SEC”).  You may read and copy any document filed by the Partnership at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.  20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room.  The Partnership does not maintain an internet website however, the Partnership’s SEC filings are available to the public from the EDGAR

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database on the SEC’s website at “http://www.sec.gov”.  The Partnership’s CIK number is 0001428043.

Item 1A.  RISK FACTORS
 
 
This section includes some of the principal risks that investors will face with an investment in the Partnership. All trading activities take place at the Trading Company level, but since the Partnership invests substantially all of its assets in multiple Trading Companies, each of the risks applicable to the Trading Companies flow through to the Partnership.
 
THE UNITS IN THE PARTNERSHIP ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THEY ARE SUITABLE ONLY FOR PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
 
Risks Relating to the Partnership and the Offering of Units
 
You Should Not Rely on Past Performance of the General Partner or the Trading Advisors In Deciding To Purchase Units. The past investment performance of other entities managed by the General Partner and the Trading Advisors is not necessarily indicative of a Partnership’s or a Trading Company’s future results. No assurance can be given that the General Partner will succeed in meeting the investment objectives of the Partnership. You may lose all or substantially all of your investment in the Partnership.
 
The Trading Companies and Partnership Incur Substantial Charges. Each Trading Company must pay substantial charges, and must generate profits and interest income which
 

 
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exceed its fixed costs in order to avoid depletion of its assets. Each Trading Company is required
 
to pay brokerage commissions and monthly management fees to the Trading Advisors regardless of its performance. In addition, each Trading Company pays its Trading Advisor an incentive fee of 20% of new trading profits. Each Trading Company pays a fee equal to 1/12 of 0.35% of the beginning of the month net assets to cover its administrative, operating, offering and organizational expenses. As a limited partner in the Partnership, you will be indirectly responsible for the expenses paid by the Trading Companies in which the Partnership invests.
 
 
The Partnership pays the General Partner’s Fee, and pays the Placement Agent’s ongoing compensation. In addition, the Partnership pays a fee equal to 1/12 of 0.40% of the beginning of the month net asset value to cover its administrative, operating, offering and organizational expenses.
 
Incentive Fees may be Paid by a Trading Company Even Though the Trading Company Sustains Trading Losses. Each Trading Company pays its Trading Advisor an incentive fee based upon the new trading profits it generates for each account in the Trading Company. These new trading profits include unrealized appreciation on open positions. Accordingly, it is possible that a Trading Company will pay an incentive fee on new trading profits that do not become realized. Also, each Trading Advisor will retain all incentive fees paid to it, even if it incurs a subsequent loss after payment of an incentive fee. Due to the fact that incentive fees are paid quarterly, it is possible that an incentive fee may be paid to a Trading Advisor during a year in which the assets allocated to the Trading Advisor suffer a loss for the year. Because each
 

 
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Trading Advisor receives an incentive fee based on the new trading profits earned by the Trading Advisor, the Trading Advisors may have an incentive to make investments that are riskier than would be the case in the absence of such an incentive fee being paid to the Trading Advisors based on new trading profits. In addition, as incentive fees are calculated on a Trading Company-by-Trading Company basis, it is possible that one or more Trading Advisors could receive incentive fees during periods when the Partnership has a negative return as a whole.
 
 
Restricted Investment Liquidity in the Units. There is no secondary market for the Units, and you may not redeem your Units other than as of the third to last business day of each month. Your right to receive payment for a redemption of some or all of your Units is dependent upon (a) the Partnership having sufficient assets to pay its liabilities on the redemption date, and (b) the General Partner’s receipt of your request for redemption in such manner as determined by the General Partner no later than 3:00 p.m., New York City time, on the third business day before the end of the month. The General Partner will not permit a transfer, sale, pledge or assignment of Units unless it is satisfied that the transfer, sale, pledge or assignment would not be in violation of Delaware law or applicable federal, state, or foreign securities laws and notwithstanding any transfer, sale, pledge or assignment, the Partnership will continue to be classified as a partnership rather than as an association taxable as a corporation under the Internal Revenue Code of 1986, as amended (the “Code”). No transfer, sale, pledge or assignment of Units will be effective or recognized by a Partnership if the transfer, sale, pledge or assignment would result in the termination of the Partnership for U.S. federal income tax purposes. Any attempt to transfer, sell, pledge or assign Units in violation of the Limited Partnership Agreement will be ineffective.
 
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General Partner Redemptions. The General Partner has a right to redeem all or part of its investment in the Partnership at any time without notice to the limited partners. For any such redemption, the General Partner will redeem its Units at the end of the month in the same manner as any limited partner would follow to redeem Units. Additionally, the General Partner has the right to redeem Units it holds in the event redemptions for limited partners are suspended.

The Partnership’s Structure Has Conflicts of Interest.
 
The General Partner, the Placement Agent, MS&Co., MSCG and MSIP are affiliates. As a result, the fees and other compensation received by these parties and other terms relating to the operation of the Partnership and the sale of Units have not been negotiated independently.
 
 
Employees of the Placement Agent receive a portion of the ongoing placement agent fee paid by the Partnership or, for consulting clients, they receive the fees and expenses described in such consulting client’s consulting agreement. Therefore, these employees have a conflict of interest in making recommendations regarding the purchase or redemption of Units.
 
“Bid-ask” spreads are incorporated in the price of all over-the-counter foreign exchange trades executed by the Trading Companies, and MS&Co. and MSCG may benefit from such spreads as the Trading Advisors execute a substantial portion of over-the-counter foreign exchange trades with MS&Co. and MSCG and bid/ask spreads are charged.
 

 

 
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The Trading Advisors, MS&Co., MSCG, MSIP and the General Partner and their affiliates may trade futures, forwards and options for their own accounts, and thereby compete with the Trading Companies for positions. Also, the other commodity pools managed by the General Partner and the Trading Advisors may compete with the Trading Companies for futures, forwards, and options positions. These conflicts can result in less favorable prices on the Partnership’s transactions.
 
No specific policies regarding conflicts of interest have been adopted by the General Partner, Morgan Stanley Wealth Management, the Partnership, or any of their affiliates, and investors will be dependent on the good faith of, and legal and fiduciary obligations imposed on the parties involved with such conflicts to resolve them equitably.
 
An Investment in Units may not Diversify an Overall Portfolio. Because futures, forwards and options have historically performed independently of traditional investments in equities and bonds, the General Partner believes that managed futures funds like the Partnership can diversify a traditional portfolio of equities and bonds. However, the General Partner cannot assure you that the Partnership will perform with a significant degree of non- or low-correlation to limited partners’ other investments in the future. You may lose your entire investment in the Partnership.
 
Neither the Partnership nor the Trading Companies are Registered Investment Companies. The Partnership and Trading Companies are not required to register, and are not registered, as investment companies under the Investment Company Act of 1940, as amended
 

 
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(the “Investment Company Act”). Accordingly, investors will not have the protections afforded by the Investment Company Act (which, among other matters, requires investment companies to have a majority of disinterested directors and regulates the relationship between the advisor and the investment company).
 

 
The Federal Reserve Board's Regulation of Morgan Stanley Could Affect the Activities of the Partnership and the Trading Companies. As a financial holding company (“FHC”) under the Bank Holding Company Act, Morgan Stanley and its affiliates are subject to the comprehensive, consolidated supervision and regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve”). A significant focus of this regulatory framework is the operation of Morgan Stanley and its subsidiaries in a safe and sound manner, with sufficient capital, earnings and liquidity that Morgan Stanley may serve as a source of financial and managerial strength to Morgan Stanley Bank, N.A., and Morgan Stanley Private Bank, National Association, (the “Banks”). These Banks must remain well-capitalized and well-managed if Morgan Stanley is to maintain its FHC status and continue to engage in the widest range of permissible financial activities. In addition, the general exercise by the Federal Reserve of its regulatory, supervisory and enforcement authority with respect to Morgan Stanley and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) could result in changes to Morgan Stanley’s business practices or the scope of its current lines of business, including certain limited divestitures. Although such changes could have an impact on and consequences for Morgan Stanley, the General Partner, the Partnership and the Trading Companies, any limited divestiture should not directly involve the Partnership or the Trading Companies.
 
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The enactment of the Dodd-Frank Act will result in enhanced regulation by the Federal Reserve and, with respect to the Banks, may result in enhanced regulation by the Office of the Comptroller of the Currency (“OCC”). The Act will require that, in order to maintain FHC status, Morgan Stanley (as well as the Banks) be well-capitalized and well-managed, as those terms are defined by the Federal Reserve. The Dodd-Frank Act also grants the Federal Reserve greater regulatory authority over the subsidiaries of a bank holding company. Additionally, because it is a bank holding company with more than $50 billion in consolidated assets, Morgan Stanley is subject to enhanced supervision by and more stringent prudential standards to be established by the Federal Reserve. The Federal Reserve is required to apply higher capital requirements to bank holding companies with more than $50 billion in consolidated assets than to other bank holding companies.
 

 
The Units are not being offered by the Banks, and as such: (1) are not Federal Deposit Insurance Corporation (“FDIC”) insured, (2) are not deposits or other obligations of the Banks, (3) are not guaranteed by the Banks, and (4) involve investment risks, including possible loss of principal.

Assets Held in Accounts at U.S. Banks May Not Be Fully Insured. The assets of each Trading Company that are deposited with Commodity Brokers or their affiliates may be placed in deposit accounts at U.S. banks. The FDIC insures deposits held at its member banks for up to $250,000 (including principal and accrued interest) for each insurable capacity (e.g., individual accounts, joint accounts, corporate accounts, etc.). If the FDIC were to become receiver of U.S.

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bank holding deposit accounts that were established by a Commodity Broker or one of its affiliates, then it is uncertain whether the Commodity Broker, the affiliate involved, the Trading Company, the Partnership, or the investor would be able to reclaim cash in the deposit accounts above $250,000.
 

 
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THEY ARE SUITABLE ONLY FOR PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
 

 
Risks Relating to Futures Interests Trading and the Futures Interests Markets
 
Futures Interests Trading is Speculative and Volatile. The rapid fluctuations in the market prices of futures, forwards and options make an investment in the Partnership volatile. Volatility is caused by, among other things, changes in supply and demand relationships; weather; agricultural, trade, fiscal, monetary and exchange control programs; domestic and foreign political and economic events and policies; and changes in interest rates. If a Trading Advisor incorrectly predicts the direction of prices in futures, forwards and options, large losses may occur. The Partnership’s performance will be volatile on a monthly and an annual basis. The Partnership could lose all or substantially all of its assets. The multi-advisor feature of the Partnership, through the Trading Companies, may reduce the return volatility relative to the performance of single-advisor investment funds.
 

 

 

 

 
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The Trading Companies’ Futures Interests Trading is Highly Leveraged. The Trading Advisors for the Partnership use substantial leverage. Trading futures, forwards and options involves substantial leverage, which could result in immediate and substantial losses. Due to the low margin deposits normally required in trading futures, forwards and options (typically between 2% and 15% of the value of the contract purchased or sold), an extremely high degree of leverage is typical of a futures interests trading account. As a result, a relatively small price movement in futures, forwards, and options may result in immediate and substantial losses to the investor. For example, if 10% of the face value of a contract is deposited as margin for that contract, a 10% decrease in the value of the contract would cause a total loss of the margin deposit. A decrease of more than 10% in the value of the contract would cause a loss greater than the amount of the margin deposit.
 

 
The leverage employed by each Trading Advisor in its trading can vary substantially from month to month. This leverage, expressed as the underlying value of each Trading Company’s positions compared to the average net assets of such Trading Company, is anticipated to range from two times the Trading Company’s net assets to ten times the Trading Company’s net assets. Under certain conditions, however, a Trading Company’s leverage could exceed (or be less than) such range.
 

 
Options Trading can be More Volatile than Futures Trading. A Trading Company may trade options on futures. Although successful options trading requires many of the same skills as successful futures trading, the risks are different. Successful options trading requires a trader to
 

 
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assess accurately near-term market volatility because that volatility is immediately reflected in
 
the price of outstanding options. Correct assessment of market volatility can therefore be of much greater significance in trading options than it is in many long-term futures strategies where volatility does not have as great an effect on the price of a futures contract.
 

 
Market Illiquidity May Cause Less Favorable Trade Prices. Although the Trading Advisors for each Trading Company generally will purchase and sell actively traded contracts where last trade price information and quoted prices are readily available, the prices at which a sale or purchase occurs may differ from the prices expected because there may be a delay between receiving a quote and executing a trade, particularly in circumstances where a market has limited trading volume and prices are often quoted for relatively limited quantities. In addition, most U.S. futures exchanges have established “daily price fluctuation limits” which preclude the execution of trades at prices outside of the limit, and, from time to time, the CFTC or the exchanges may suspend trading in market disruption circumstances. In these cases it is possible that a Trading Company could be required to maintain a losing position, that it otherwise would execute and incur significant losses or be unable to establish a position and miss a profit opportunity.
 


 
 
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Trading on Foreign Exchanges Presents Greater Risks to the Trading Companies than Trading on U.S. Exchanges. Each Trading Company trades on exchanges located outside the United States. Trading on U.S. exchanges is subject to CFTC regulation and oversight, including, for example, minimum capital requirements for commodity brokers, segregation of customer funds, regulation of trading practices on the exchanges, prohibitions against trading ahead of customer orders, prohibitions against filling orders off exchanges, prescribed risk disclosure statements, testing and licensing of industry sales personnel and other industry professionals, and recordkeeping requirements. Trading on foreign exchanges is not regulated by the CFTC or any other U.S. governmental agency or instrumentality and may be subject to regulations that are different from those to which U.S. exchange trading is subject, provide less protection to investors than trading on U.S. exchanges, and be less vigorously enforced than regulations in the U.S.

The percentage of each Trading Company’s positions which are traded on foreign exchanges can vary significantly from month to month. The average percentage of each Trading Company’s positions which are expected to be traded on foreign exchanges in any given month is anticipated to range from 30% to 65% of such Trading Company’s positions, but could be greater or less than such expected range during any time period.


 
Positions on foreign exchanges also are subject to the risk of, among other things, exchange controls, expropriation, excessive taxation or government disruptions.
 

 
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A Trading Company may incur losses when determining the value of its foreign positions in U.S. dollars because of fluctuations in exchange rates.
 
The Unregulated Nature of the Over-The-Counter (“OTC”) Markets Creates Counterparty Risks that Do Not Exist in Futures Trading on Exchanges. Unlike futures contracts, over-the-counter “spot” and forward contracts are entered into between private parties off of an exchange and are not regulated by the CFTC or by any other U.S. or foreign governmental agency. Due to the fact that such contracts are not traded on an exchange, the performance of those contracts is not guaranteed by an exchange or its clearinghouse, and a Trading Company is at risk with respect to the ability of the counterparty to perform on the contract, including the creditworthiness of the counterparty. Trading in the over-the-counter foreign exchange markets is not regulated; therefore, there are no specific standards or regulatory supervision of trade pricing and other trading activities that occur in those markets. The Trading Companies trade such contracts with MS&Co. and MSCG, and are at risk with respect to the creditworthiness and trading practices of each of MS&Co. and MSCG as the counterparty to the contracts. The relative exposure of the Partnership to contracts that are not cleared by a registered clearing firm as of December 31, 2012 is approximately 22.07%, all of which represents OTC foreign exchange forward and/or options on foreign exchange forward transactions.
 

 
The Dodd-Frank Act will affect the manner in which OTC swap transactions are traded and the credit risk associated with such trading. Depending upon actions taken by regulatory authorities, these changes may also affect the manner of trading of OTC foreign currency
 

 
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transactions. The general effective date of the derivatives portion of the Dodd-Frank Act is one year following its enactment. Transactions that have been entered into prior to implementation of the provisions of the Dodd-Frank Act will remain in effect. Accordingly, even after the new regulatory framework is fully implemented, the risks of OTC foreign exchange transactions will continue to be considerations with respect to transactions entered into prior to the implementation of the provisions of the Dodd-Frank Act.
 
 
The percentage of each Trading Company’s positions that are expected to constitute forward currency contracts can vary substantially from month to month.

Trading Swaps Creates Distinctive Risks.  The Trading Advisors may trade in certain swaps.  Unlike futures and options on futures contracts and commodities, swap contracts are currently not generally traded on or cleared by an exchange or clearinghouse.  Nevertheless, the Dodd-Frank Act contemplates that certain swaps will be exchange-traded and cleared by a clearinghouse in the future and the CFTC proposed regulations requiring that certain classes of interest rate and credit default swaps be cleared in the future.  As with any forward foreign currency or spot contract, until such time as these transactions are cleared or guaranteed by an exchange, the Trading Companies will be subject to the risk of counterparty default on its swaps.  Because swaps do not generally involve the delivery of underlying assets or principal, the loss would be calculated by referring to the current market value of the contract.  One of the factors in such calculation may be the net present value of future payments required by contract.  In addition, some swap counterparties may require the Trading Companies to deposit collateral to

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support the Trading Companies’ obligations under the swap agreement but may not themselves deposit collateral.  If the counterparty to such a swap defaults, a Trading Company would be a general unsecured creditor for any termination amounts owed by the counterparty as well as for any collateral deposits in excess of the amounts owed by a Trading Company to the counterparty, which would result in losses to such Trading Company (and the Partnership).

Swap counterparties may hold collateral in U.S. or non-U.S. depositories.  Non-U.S. depositories are not subject to U.S. regulation.  The Trading Companies’ assets held in these depositories are subject to the risk that events could occur which would hinder or prevent the availability of these funds for distribution to customers including the Trading Companies.  Such events may include actions by the government of the jurisdiction in which the depository is located including expropriation, taxation, moratoria and political or diplomatic events.

 
Deregistration of the Commodity Pool Operator or Commodity Trading Advisors Could Disrupt Operations. The General Partner is a registered commodity pool operator and except for GAM International Management Limited and GLC Ltd, each Trading Advisor is registered with the CFTC as a commodity trading advisor. If the CFTC were to terminate, suspend, revoke or not renew the registration of the General Partner, the General Partner would withdraw as general partner of the Partnership. The limited partners would then determine whether to select a replacement general partner or to dissolve the Partnership. If the CFTC were to terminate, suspend, revoke or not renew the registration of any Trading Advisor, the General Partner would terminate the Trading Advisor’s advisory agreement(s) with the Partnership. The General Partner
 

 
- 19 -
 
 
 
 
could reallocate the Partnership’s assets managed by the relevant Trading Advisor to new
 
Trading Advisor(s), or terminate the Partnership. No action is currently pending or threatened against the General Partner or the Trading Advisors.

The Trading Companies are Subject to Speculative Position Limits.
The CFTC and/or U.S. exchanges have established “speculative position limits” on the maximum net long or net short position, which any person or group of persons may hold or control in particular futures, options on futures and swaps that perform a significant price discovery function.  Most exchanges also limit the amount of fluctuation in commodity futures contract prices on a single trading day.  The trading instructions of the Trading Advisors may have to be modified, and positions held by the Trading Companies may have to be liquidated in order to avoid exceeding these limits.  Such modification or liquidation could adversely affect the operations and profitability of the Trading Companies by increasing transaction costs to liquidate positions and limiting potential profits on the liquidated positions.

 
In October 2011, the CFTC adopted new rules governing position limits.  In September 2012, these rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC for further consideration.  It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling.  The vacated rules established position limits on certain futures contracts and any economically equivalent futures, options and swaps.  These rules could have an adverse effect on the Trading Advisors and the Trading Companies.

- 20 -
 
 
 
 
The Trading Companies have Credit Risk to the Commodity Brokers. Each Trading Company has credit risk because the Commodity Brokers act as the futures commission merchants for futures transactions or the counterparties of OTC transactions, with respect to most of each Trading Company’s assets. As such, in the event that the Commodity Brokers are unable to perform, the Trading Companies’ assets are at risk and, in such event, investors may only recover a pro rata share of their investment in the Partnership or nothing at all. Exchange-traded futures and futures-styled option contracts are marked to market on a daily basis, with variations in value credited or charged to each Trading Company’s account on a daily basis. The Commodity Brokers, as futures commission merchants for each Trading Company’s exchange-traded contracts, are required, pursuant to CFTC regulations, to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures and futures-styled options contracts, including an amount equal to the net unrealized gain on all open futures and futures-styled options contracts. With respect to each Trading Company’s over-the-counter foreign exchange contracts with MS&Co. and MSCG, prior to the implementation of the Dodd-Frank Act’s provisions, there were no daily settlements of variations in value, and there was no requirement to segregate funds held with respect to such contracts. In the event of a shortfall in segregated customer funds held by the futures commission merchant, the Trading Company’s assets on account with the futures commission merchant may be at risk, and in such event, the Trading Company may only recover a pro rata share of the available customer funds.
 

 
 
- 21 -
 
 
 
 
Risks Relating to the Trading Advisors
 
You should not rely on the past performance of the Trading Advisors in deciding to purchase Units. Since the future performance of a Trading Advisor is unpredictable, each Trading Advisor’s past performance is not necessarily indicative of future results.
 
 
Reliance on the Trading Advisors to Trade Successfully. Each Trading Advisor is responsible for making all futures, forwards and options trading decisions on behalf of the applicable Trading Company. The General Partner has no control over the specific trades that the Trading Advisors may make, leverage used, risks and/or concentrations assumed, or whether the Trading Advisors will act in accordance with the disclosure documents or descriptive materials furnished by them to the General Partner. The General Partner can provide no assurance that the trading programs employed by the Trading Advisors will be successful.
 
 
Market Factors may Adversely Influence the Trading Programs. Often, the most unprofitable market conditions for the Trading Companies are those in which prices “whipsaw,” that is, such price moves quickly upward (or downward), then reverses, then moves upward (or downward) again, then reverses again. In such conditions, the Trading Advisors may establish positions based on incorrectly identifying both the brief upward or downward price movements as trends, where in fact no trends sufficient to generate profits develop.
 

 
Possible Consequences of Using Multiple Trading Advisors. Each Trading Advisor makes trading decisions independent of the other Trading Advisors for the Partnership. Thus, it is
 

 
- 22 -
 
 
 
 
possible that the Partnership could hold opposite positions in the same or similar futures, forwards and options, thereby offsetting any potential for profit from these positions.
 

 
Increasing Assets Managed by a Trading Advisor may Adversely Affect Performance. The rates of return achieved by a Trading Advisor often diminish as the assets under its management increases. This can occur for many reasons, including the inability of the Trading Advisor to execute larger position sizes at desired prices and because of the need to adjust the Trading Advisor’s trading program to avoid exceeding speculative position limits. These are limits established by the CFTC and the exchanges on the number of speculative futures and options contracts in a commodity that one trader may own or control. The Trading Advisors have not agreed to limit the amount of additional assets that they will manage.
 
You will not be Aware of Changes to Trading Programs. Because of the proprietary nature of each Trading Advisor’s trading programs, you generally will not be advised if adjustments are made to a Trading Advisor’s trading program in order to accommodate additional assets under management or for any other reason.
 

 
A Trading Advisor may Terminate its Advisory Agreement. Generally, the advisory agreements with the current Trading Advisors had initial one-year terms, which renew for additional one-year terms annually, unless terminated by the Trading Manager or the Trading Advisor. One of the advisory agreements had a shorter initial term and has a three-month renewal term. In the event that an advisory agreement is not renewed, the Trading Manager may not be able to enter into arrangements with that Trading Advisor or another trading advisor on
 

 
- 23 -
 
 
 
 
terms substantially similar to the advisory agreements described in the Partnership’s private placement memorandum.
 

 
Disadvantages of Replacing or Switching Trading Advisors. A Trading Advisor generally is required to recoup previous trading losses before it can earn performance-based compensation. However, the Trading Manager may elect to replace a Trading Advisor that has a “loss carry-forward.” In that case, the Trading Company would lose the “free ride” of any potential recoupment of the prior losses. In addition, the new Trading Advisor would earn performance-based compensation on the first dollars of investment profits. The effect of the replacement of or the reallocation of assets away from Trading Advisors therefore could be significant.

Partnership Performance May Be Hindered by Increased Competition for Positions.  Assets in managed futures have grown from an estimated $300 million in 1980 to over 300 billion in 2012.  This has resulted in increased trading competition.  Since futures are traded in an auction-like market, the more competition there is for some contracts, the more difficult it is for the Partnership’s Trading Advisors to obtain the best prices for the Partnership.

You Will Not Have Access to the Partnership’s Positions and Must Rely on the General Partner to Monitor the Trading Advisors.  As a Limited Partner, you will not have access to the Trading Companies’ trade positions.  Consequently, you will not know whether the Trading Advisors are adhering to the Partnership’s trading policies and must rely on the ability of the General Partner to monitor trading and protect your investment.
 

 
- 24 -
 
 
 
 
Taxation Risks
 
You May Have Tax Liability Attributable To Your Interest in a Partnership Even If You Have Received No Distributions and Redeemed No Units and Even If the Partnership Generated a Loss. If the Partnership has a profit for a taxable year, the profit will be includible in your taxable income, whether or not cash or other property is actually distributed to you by the Partnership. The General Partner presently does not intend to make any distributions from the Partnership. Accordingly, it is anticipated that U.S. federal income taxes on your allocable share of the Partnership’s profits will exceed the amount of distributions to you, if any, for a taxable year, so you must be prepared to fund any tax liability from redemptions of Units or other sources. In addition, the Partnership may have capital losses from trading activities that cannot be deducted against the Partnership’s ordinary income (e.g. interest income, periodic net swap payments) so that you may have to pay taxes on ordinary income even if the Partnership generates a net loss.
 
 
The Partnership’s Tax Returns Could be Audited. The Internal Revenue Service (the “IRS”) could audit the Partnership’s U.S. federal income tax returns. If an audit results in an adjustment to the Partnership’s tax return, limited partners in the Partnership could be required to file amended returns and pay additional tax.
 
 
You Will Recognize Short-Term Capital Gain. Profits on futures contracts traded in regulated U.S. and some foreign exchanges, foreign currency contracts traded in the interbank market, and U.S. and some foreign exchange-traded options on commodities are generally taxed
 

 
- 25 -
 
 
 
 
as short-term capital gain to the extent of 40% of gains with respect to Section 1256 contracts and at least 50% of the gain arising from a mixed straddle account and are taxed at ordinary income rates.
 

 
The IRS Could Take the Position that Deductions for Certain Partnership Expenses Are Subject To Various Limitations. Non-corporate taxpayers are subject to certain limitations for deductions for “investment advisory expenses” for U.S. federal income tax and alternative minimum tax purposes. The IRS could argue that certain Partnership expenses are investment advisory expenses. Prospective investors should discuss the tax consequences of an investment in the Partnership with their tax advisers.
 

 
Tax Laws Are Subject To Change at Any Time, Including Already Enacted Changes Scheduled To Take Effect in 2013. Tax laws and court and IRS interpretations thereof, are subject to change at any time, possibly with retroactive effect. For example, various tax rate reductions for non-corporate taxpayers enacted in 2001 and 2003 are scheduled to expire for taxable years beginning after December 31, 2012. Further, the maximum ordinary income rates for non-corporate taxpayers are scheduled to increase from 35% to 39.6%, and the maximum long-term capital gains rates are scheduled to increase from 15% to 20%. Prospective investors are urged to discuss scheduled and potential tax law changes with their tax advisers.
 

 

 

 
- 26 -
 
 
 
 
Non-U.S. Investors May Face Exchange Rate Risk and Local Tax Consequences. Non-U.S. investors should note that Units are denominated in U.S. dollars and that changes in rates of exchange between currencies may cause the value of their investment to decrease or to increase. Non-U.S. investors should consult their own advisors concerning the applicable U.S. and foreign tax implications of this investment.

Item 1B.  UNRESOLVED STAFF COMMENTS
Not applicable.

Item 2.  PROPERTIES
The Partnership’s executive and administrative offices are located within the offices of the General Partner.  The General Partner’s offices utilized by the Partnership are located at 522 Fifth Avenue, 14th Floor, New York, New York 10036.



Item 3.  LEGAL PROCEEDINGS
On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company.  As a result of that conversion, Morgan Stanley & Co. Incorporated is now named MS&Co. or (the “Company”).

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company.  Morgan Stanley files periodic reports with the Securities and Exchange Commission as required by the Securities Exchange Act of 1934, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or

- 27 -
 
 
 
 
regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co.  As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations.  As a result, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2012, 2011, 2010, 2009, and 2008.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution.  Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.  Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties.  The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware corporation with its main business office located at 1585 Broadway, New York, New York 10036.  Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.


- 28 -
 
 
 
 
During the preceding five years, the following administrative, civil, or criminal actions pending, on appeal or concluded against MS&Co. or any of its principals are material within the meaning of CFTC Rule 4.24(l)(2) or 4.34(k)(2):

On June 2, 2009, Morgan Stanley executed a final settlement with the Office of the New York State Attorney General (“NYAG”) in connection with its investigation relating to the sale of auction-rate securities (“ARS”).  Morgan Stanley agreed, among other things to: (1) repurchase at par illiquid ARS that were purchased by certain retail clients prior to February 13, 2008; (2) pay certain retail clients that sold ARS below par the difference between par and the price at which the clients sold the securities; (3) arbitrate, under special procedures, claims for consequential damages by certain retail clients; (4) refund refinancing fees to certain municipal issuers of ARS; and (5) pay a total penalty of $35 million.  On August 13, 2008, Morgan Stanley reached an agreement in principle on substantially the same terms with the Office of the Illinois Secretary of State, Securities Department (on behalf of a task force of other states under the auspices of the North American Securities Administrators Association) that would settle their investigations into the same matters.  A separate investigation of these matters by the SEC remains ongoing.

On June 5, 2012, the Company consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by the CFTC to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures

- 29 -
 
 
 
 
transactions unless there is an Exchange for Related Position (EFRP).  Specifically, the CFTC found that from April 2008 through October 2009, the Company violated Section 4c(a) of the Commodity Exchange Act and Commission Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position.  In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Act and Regulations.  Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, the Company accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine.  The Company entered into corresponding and related settlements with the CME and CBOT in which the CME found that the Company violated CME Rules 432.Q and 538 and fined the Company $750,000 and CBOT found that the Company violated CBOT Rules 432.Q and 538 and fined the Company $1,000,000.
 

On August 25, 2008, the Company and two ratings agencies were named as defendants in a purported class action related to securities issued by a structured investment vehicle called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case is styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. and is pending in the
 
 

 
 
- 30 -
 
 
 
 
 
United States District Court for the Southern District of New York (“SDNY”). The complaint alleges, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime residential mortgage backed securities held by the Cheyne SIV. The plaintiffs currently assert allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. The plaintiffs’ motion for class certification was denied in June 2010.  The court denied the Company’s motion for summary judgment on the aiding and abetting fraud claim in August 2012.  The Company’s motion for summary judgment on the negligent misrepresentation claim, filed on November 30, 2012, is pending.  The court has set a trial date of May 6, 2013.  There are currently 14 named plaintiffs in the action claiming damages of approximately $638 million.  Plaintiffs are also seeking punitive damages. Based on currently available information, the Company believes that the defendants could incur a loss up to approximately $638 million, plus pre- and post-judgment interest, fees and costs.
 
 
On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints were filed on June 10, 2010. The amended complaints allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass through certificates backed by securitization trusts
 
 

 
 
- 31 -
 
 
 
 
 
containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by
 
 
the Company in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates.  On July 29, 2011 and September 8, 2011, the court presiding over both actions sustained defendants’ demurrers with respect to claims brought under the Securities Act, and overruled defendants’ demurrers with respect to all other claims.  At January 25, 2013, the current unpaid balance of the mortgage pass through certificates at issue in these cases was approximately $365 million, and the certificates had not yet incurred losses. Based on currently available information, the Company believes it could incur a loss up to the difference between the $365 million unpaid balance of these certificates and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
 
 
On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against the Company and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints assert claims on behalf of certain clients of plaintiff’s affiliates and alleges that defendants made untrue statements and material omissions in
 
 
the sale of a number of mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Company or sold to
 
 
- 32 -
 
 
 
 
 
plaintiff’s affiliates’ clients by the Company in the two matters was approximately $344 million. The complaints raise claims under the Massachusetts Uniform Securities Act and seek, among other things, to rescind the plaintiff’s purchase of such certificates.  On October 14, 2011, plaintiffs filed an amended complaint in each action. On November 22, 2011, defendants filed a motion to dismiss the amended complaints.  On March 12, 2012, the court denied defendants’ motion to dismiss with respect to plaintiff’s standing to bring suit. Defendants sought interlocutory appeal from that decision on April 11, 2012. On April 26, 2012, defendants filed a second motion to dismiss for failure to state a claim upon which relief can be granted, which the court denied, in substantial part, on October 2, 2012.  Based on currently available information, the Company believes it could incur a loss for these actions of up to the difference between the as yet undetermined unpaid balance of these certificates and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
 
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, which is styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al. and is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY, NY County”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and
 
 

 
 
- 33 -
 
 
 
 
alleges that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court presiding over this action denied the Company’s motion to dismiss the complaint and on March 21, 2011, the Company appealed that order.  On July 7, 2011, the appellate court affirmed the lower court’s decision denying the motion to dismiss. Based on currently available information, the Company believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
 
On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by the Company in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. On May 27, 2011, defendants filed a motion to dismiss the amended complaint, which motion was denied on
 
 

 
 
- 34 -
 
 
 
 
 
September 19, 2012.  The Company filed its answer on December 21, 2012.  At January 25,
 
 
2013, the current unpaid balance of the mortgage pass through certificates at issue in this case was approximately $105 million, and certain certificates had begun to incur losses. Based on currently available information, the Company believes it could incur a loss up to the difference between the $105 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
 
On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately $153 million.  The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates.  On May 21, 2012, the Company filed a motion to dismiss the amended complaint, which motion was denied on August 3, 2012.  The court has set a trial date of November 2013.  At January 25, 2013, the current unpaid balance of the mortgage
 
 

 
 
- 35 -
 
 
 
 
 
pass through certificates at issue in this case was approximately $123 million, and certain certificates had begun to incur losses.
 
 
Based on currently available information, the Company believes it could incur a loss up to the difference between the $123 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus post-judgment interest, fees and costs.  The Company may be entitled to an offset for interest received by the plaintiff prior to a judgment.
 
 
On September 2, 2011, the Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including the Company. A complaint against the Company and other defendants was filed in the Supreme Court of NY, NY County, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass through certificates with an original unpaid balance of approximately $11 billion. The complaint raises claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On September 26, 2011, defendants removed the action to the SDNY and on October 26, 2011, the FHFA moved to remand the action back to the Supreme Court of the State of New York. On May 11, 2012, plaintiff withdrew its motion to remand. On July 13, 2012, the Company filed a motion to dismiss the complaint, which motion was denied in large part on

- 36 -
 
 
 
 
November 19, 2012.  Trial is currently scheduled to begin in January 2015.  At January 25, 2013, the current unpaid balance of the mortgage pass through certificates at issue in these cases was approximately $2.9 billion, and the certificates had incurred losses in excess of $40 million.  Based on currently available information, the Company believes it could incur a loss up to the difference between the $2.9 billion unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
 

 
Item 4.  MINE SAFETY DISCLOSURES
 
 
Not applicable.
 
 
 
 

 
 
- 37 -
 
 
 
 
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


(a)  Market Information.  The Partnership has issued no stock.  There is no established public trading market for Units of the Partnership.

(b)  Holders.  The number of holders of Units at December 31, 2012, was approximately 672.

(c) Distributions. No distributions have been made by the Partnership since it commenced trading operations on August 1, 2007.  Ceres has sole discretion to decide what distributions, if any, shall be made to investors in the Partnership.  Ceres currently does not intend to make any distributions of the Partnership’s profits until termination of the Partnership.

(d)  Securities Authorized for Issuance under Equity Compensation Plan.  None.

(e)  Performance Graph.  Not applicable.

(f) Securities Sold; Consideration.  The Registrant’s Units of limited partnership interest are being sold only to persons and entities who are accredited investors as the term is defined in Rule 501(a) of Regulation D.  In determining, the applicability of the exemption, the General Partner relied on the fact that the Units were purchased by accredited investors.


- 38 -
 
 
 
 
The aggregate proceeds of securities sold in all share Classes to the limited partners through December 31, 2012, was $112,893,874.  The Partnership received $805,000 in consideration from the sale of Units to Ceres.

Proceeds of net offering were used for the trading of commodity interests including futures contracts, options, and forward and swap contracts.

(g) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.  The following chart sets forth the purchases of redeemable Units by the Partnership.
 
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
(a) Total Number of
Redeemable
Units Purchased*
 
 
 
 
 
(b) Average
Price Paid per
Redeemable Unit**
 
 
 
(c) Total Number Of
Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
 
 
 
 
     (d) Maximum Number
      (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
       Plans or Programs
Class A
  
$        
   
October 1, 2012 - October 31, 2012
997.999
887.02
 N/A
    N/A
November 1, 2012 - November 30, 2012
977.505
890.36
 N/A
N/A
December 1, 2012 - December 31, 2012
1,654.167
  893.04
 N/A
N/A
 
3,629.671
  890.66
    
         

 
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
(a) Total Number of
Redeemable
Units Purchased*
 
 
 
 
 
(b) Average
Price Paid per
Redeemable Unit**
 
 
 
(c) Total Number Of
Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
 
 
 
    
  (d) Maximum Number
      (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
       Plans or Programs
Class B
  
$        
   
October 1, 2012 - October 31, 2012
93.886
910.66
 N/A
   N/A
November 1, 2012 - November 30, 2012
389.201
914.47
 N/A
N/A
December 1, 2012 - December 31, 2012
           –       
              –    
 N/A
N/A
 
   483.087
913.73
    
         





- 39 -
 
 
 
 

 
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
(a) Total Number of
Redeemable
Units Purchased*
 
 
 
 
 
 
(b) Average
Price Paid
per Redeemable Unit**
 
 
 
(c) Total Number Of
Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
 
 
 
 
      (d) Maximum Number
      (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
       Plans or Programs
Class C
  
$          
   
October 1, 2012 - October 31, 2012
250.000
934.93
N/A
N/A
November 1, 2012 - November 30, 2012
463.225
939.22
N/A
N/A
December 1, 2012 - December 31, 2012
  559.229
  942.83
N/A
N/A
 
1,272.454
   939.97
    
         

 
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
(a) Total Number of
Redeemable
Units Purchased*
 
 
 
 
 
 
(b) Average
Price Paid per
Redeemable Unit**
 
 
 
(c) Total Number Of
Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
 
 
 
   
   (d) Maximum Number
      (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
       Plans or Programs
Class Z
  
$         
   
October 1, 2012 - October 31, 2012
93.776
985.37
N/A
N/A
November 1, 2012 - November 30, 2012
66.779
990.72
N/A
N/A
December 1, 2012 - December 31, 2012
            –   
              –      
N/A
N/A
 
  160.555
987.60
    
         


*
  
Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business 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.









- 40 -
 
 
 
 
Item 6.  SELECTED FINANCIAL DATA (in dollars)


 
 
 
 
                                            For the Years Ended December 31, 
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
$
$
 $
$
$ 
Total Realized/Net Change in Unrealized Appreciation (Depreciation) on Investments
 
 
(1,432,407)
 
 
(4,583,530)
 
 
4,237,952
 
 
  (1,723,660)
 
 
  3,645,877
Net Income (Loss)
(2,770,169)
(6,505,584)
1,935,125
  (3,368,471)
  2,992,013
Net Income (Loss) per Unit by Share Class
          
A
(66.82)
(108.89)
24.15
  (75.35)
  113.18
B
(63.71)
(105.82)
  29.85
  (70.58)
  118.99
C
(60.40)
(102.60)
  35.72
  (65.72)
 124.86
D*
(58.24)
(100.60)
  38.71
  (60.59)
N/A
Z
(53.17)
(95.64)
  47.95
  (55.69)
136.73
Total Assets
35,090,939
52,692,211
73,967,469
81,061,765
33,614,161
Total Partners’ Capital
33,086,444
49,441,224
72,434,102
78,145,994
32,370,055
Net asset value per Units by Share Class
          
A
   893.04
   959.86
1,068.75
1,044.60
1,119.95
B
   917.60
   981.31
1,087.13
1,057.28
1,127.86
C
   942.83
1,003.23
1,105.83
1,070.11
1,135.83
D*
   956.28
1,014.52
1,115.12
1,076.41
  N/A
Z
   995.36
1,048.53
1,144.17
1,096.22
1,151.91





* Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,137.00.













- 41 -

 
 
 

Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
As of December 31, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 28.9%; Currency 24.3%; Equity 21.2%; and Commodity 25.6%.

Liquidity.  MS&Co. and its affiliates act as custodians of each Trading Company’s assets pursuant to customer agreements and foreign exchange customer agreements.  The Partnership allocates substantially all of its assets to multiple Trading Companies.  Such assets are deposited in the Trading Companies’ trading accounts with MS&Co. or its affiliates.  The funds in such accounts are available for margin and are used to engage in Futures Interest trading pursuant to instructions provided by the Trading Advisors.  The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds.  Since the Partnership’s sole purpose is to trade Futures Interests indirectly through the investment in the Trading Companies, it is expected that the Trading Companies will continue to own such liquid assets for margin purposes.

The Trading Companies’ investment in Futures Interests may, from time to time, be illiquid.  Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuations limits” or “daily limits.”  Trades may not be executed at prices beyond the daily limit.  If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor

- 42 -
 
 
 
 

liquidated unless traders are willing to effect trades at or within the limit.  Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading.  These market conditions could prevent the Trading Companies from promptly liquidating their futures or options contracts and result in restrictions on redemptions.

There is no limitation on daily price movements in trading forward contracts on foreign currencies.  The markets for some world currencies have low trading volume and are illiquid, which may prevent the Trading Companies from trading in potentially profitable markets or prevent the Trading Companies from promptly liquidating unfavorable positions in such markets, subjecting them to substantial losses.  Either of these market conditions could result in restrictions on redemptions.  For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

Capital Resources.  The Partnership 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 investments in Futures Interests in subsequent periods.  It is not possible to estimate the amount, and therefore the impact, of future inflows and outflows of Units.


- 43 -
 
 
 
 
There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.

Results of Operations
General.  The Partnership's results depend on the Trading Advisors and the ability of each Trading Advisor's trading program to take advantage of price movements in the futures, forwards, and options markets.  The following presents a summary of the Partnership's operations for each of the three years in the period ended December 31, 2012, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.

The Partnership’s results of operations set forth in the financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts that the Trading Companies trade are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and fair value is recorded on the Statements of Income and Expenses as “Net change in unrealized appreciation (depreciation) on Investments” for open

- 44 -
 
 
 
 
contracts, and recorded as “Realized” when open positions are closed out.  The sum of these amounts constitutes the Trading Companies trading results.  The fair value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day.  The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.) the close of the business day.

Ceres believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.


Year Ended December 31, 2012
The Partnership recorded total realized/net change in unrealized depreciation on investments of $(1,432,407) and expenses totaling $1,337,762, resulting in a net loss of $2,770,169 for the year ended December 31, 2012.  The Partnership’s net asset value per Unit by share Class is provided in the table below.

Share Class
NAV at 12/31/12
NAV at 12/31/11
     
A
$893.04
  $959.86
B
$917.60
  $981.31
C
$942.83
$1,003.23
D*
$956.28
$1,014.52
Z
$995.36
$1,048.53



* Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,137.00.



- 45 -
 
 
 
 
Total subscriptions and redemptions across all share Classes for the year ended December 31, 2012, were $621,500 and $14,206,111, respectively, and the Partnership’s ending capital was $33,086,444 at December 31, 2012, a decrease of $16,354,780 from ending capital at December 31, 2011 of $49,441,224.

The most significant trading losses during the year were incurred within the agricultural complex during June from short positions in corn futures as prices rose after inventories dropped and on speculation hot, dry weather will increase stress on crops in the U.S. Additional agricultural losses were experienced during September from long futures positions in the soybean complex as prices fell on speculation favorable weather in August limited crop damage caused by the severe drought in June and July. Within the energy sector, losses were recorded during May from long futures positions in crude oil and its related products as prices declined after crude stockpiles increased in the U.S., the world’s largest energy consumer. Additional losses were experienced in energies during September from short positions in natural gas futures as prices advanced on concern U.S. government data show a smaller-than-normal increase in stockpiles following production shutdowns due to Hurricane Isaac. Meanwhile, losses in metals trading were incurred during October and December from long positions in gold and silver futures as prices moved lower amid a rally in the U.S. dollar, which curbed demand for the precious metals. Within the currency markets, losses were experienced during June from short positions in the euro, Swedish krona, and Swiss franc versus the U.S. dollar as the value of these European currencies increased against the U.S. dollar after European Union leaders eased terms on Spanish bank loans and moved towards resolving the region’s debt crisis. During August, short positions in the euro

- 46 -
 
 
 
 
versus the U.S. dollar and Australian dollar resulted in additional losses as the value of the euro advanced against these currencies after German Chancellor Angela Merkel reiterated her commitment to working with the European Central Bank to resolve the euro-zone’s financial turmoil. A portion of the Partnership’s losses during the year was offset by gains achieved within the global interest rate sector during April and May from long positions in European and U.S. fixed income futures as prices increased after Standard & Poor’s cut Spain’s credit rating and Greece failed to form a unified government. During July, long positions in European and U.S. fixed income futures resulted in further gains as prices moved higher on concern the global economic recovery was slowing. Within the global stock index markets, gains were recorded during February from long positions in European, U.S., and Pacific Rim equity index futures as prices rose amid positive economic news, including a better-than-expected U.S. employment report and an expansion in manufacturing in China, Europe, and the U.S. Additional gains were achieved during December from long positions in Asian equity index futures as prices rose after China’s manufacturing survey added to signs of recovery in the world’s second-largest economy.

Year Ended December 31, 2011
The Partnership recorded total realized/net change in unrealized depreciation on investments of $(4,583,530) and expenses totaling $1,922,054, resulting in a net loss of $6,505,584 for the year ended December 31, 2011.  The Partnership’s net asset value per Unit by share Class is provided in the table below.



- 47 -
 
 
 
 
Share Class
NAV at 12/31/11
NAV at 12/31/10
     
A
   $959.86
$1,068.75
B
   $981.31
$1,087.13
C
$1,003.23
$1,105.83
D*
$1,014.52
$1,115.12
Z
$1,048.53
$1,144.17

* Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,137.00.

Total subscriptions and redemptions across all share Classes for the year ended December 31, 2011, were $6,697,035 and $23,184,329, respectively, and the Partnership’s ending capital was $49,441,224 at December 31, 2011, a decrease of $22,992,878 from ending capital at December 31, 2010 of $72,434,102.

The most significant trading losses during the year were recorded within the currency markets, primarily during May and August. In May, long positions in the Australian dollar, Canadian dollar, and South African rand versus the U.S. dollar resulted in losses as the value of these “commodity currencies” fell in tandem with declining commodity prices. During August, long positions in the Australian dollar, Canadian dollar, and Mexican peso versus the U.S. dollar recorded losses as the value of the U.S. dollar was boosted higher against these currencies by “safe haven” demand following central bank intervention in the Japanese yen. Within the agricultural complex, losses were recorded during March from long positions in corn futures as prices fell after a U.S. Department of Agriculture report revealed increasing world stockpiles and declining U.S. exports of the crop. Additional losses were incurred in this sector during

- 48 -
 
 
 
 
September from long futures positions in corn and soybeans as prices declined on speculation that Europe’s sovereign debt crisis may hinder the global economy, reducing demand for the grains. Within the global stock index markets, losses were experienced in March from long positions in European and Pacific Rim equity index futures as prices reversed lower amid concern that the natural disaster and subsequent nuclear crisis in Japan was going to threaten the global economic recovery. Further losses were recorded during May from long positions in European, U.S., and Pacific Rim equity index futures as prices declined on concern the global economic recovery was faltering. Additional losses were experienced during July and August from long positions in European and U.S. equity index futures as prices dropped in response to the European debt crisis and Standard & Poor’s downgrade of the United States’ sovereign credit rating. Lastly, losses were incurred within the metals sector, primarily during May, due to long positions in silver futures as prices fell sharply from a 31-year high. Further losses were recorded within this sector during September from long futures positions in silver and gold as prices reversed lower amid a rise in the value of the U.S. dollar, which reduced demand for the precious metals. A portion of the Partnership’s losses for the year was offset by gains achieved within the global interest rate sector during May from long positions in U.S. fixed-income futures as prices increased following reports that showed the U.S. economy grew less than forecast and U.S. jobless claims unexpectedly rose. Additional gains were recorded during the majority of the third quarter from long positions in European, U.S., and Australian fixed income futures as prices advanced higher due to concern about the European sovereign debt crisis and a faltering global economy. During December, long positions in European and U.S. fixed-income futures were profitable as prices rose due to increased demand for the relative

- 49 -
 
 
 
 
“safety” of government bonds amid continuing concern the European sovereign debt crisis may slow economic growth. Within the energy markets, gains were experienced primarily during January and February from long futures positions in gas oil, RBOB (unleaded) gas, and brent crude as prices rose after protests in Egypt turned violent, prompting fear of contagion to other Middle Eastern and North African nations and causing concern that crude oil supplies may be disrupted. Additional gains were recorded during November and December due to short positions in natural gas futures as prices fell on speculation of abundant supplies and low demand amid mild weather across the U.S.

Year Ended December 31, 2010
The Partnership recorded total realized/net change in unrealized appreciation on investments of $4,237,952 and expenses totaling $2,302,827, resulting in net income of $1,935,125 for the year ended December 31, 2010.  The Partnership’s net asset value per Unit by share Class is provided in the table below.
Share Class
NAV at 12/31/10
NAV at 12/31/09
     
A
$1,068.75
$1,044.60
B
$1,087.13
$1,057.28
C
$1,105.83
$1,070.11
D*
$1,115.12
$1,076.41
Z
$1,144.17
$1,096.22

* Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,137.00.



- 50 -
 
 
 
 
Total subscriptions and redemptions across all share Classes for the year ended December 31, 2010, were $18,138,428 and $25,785,445, respectively, and the Partnership’s ending capital was $72,434,102 at December 31, 2010, a decrease of $5,711,892 from ending capital at December 31, 2009 of $78,145,994.

The most significant trading gains were achieved within the global interest rate sector from long positions in U.S., European, and Japanese fixed-income futures. Prices in this sector increased during the first quarter on concerns that lending restrictions in China, possible reductions in U.S. stimulus measures, and Greece’s fiscal struggles might stifle the global economic rebound. Prices were then pressured higher during the second quarter amid an unexpected drop in U.S. consumer confidence, increased regulatory scrutiny of the financial industry, and the growing European debt crisis. During the third quarter, prices continued to climb higher due to concern that European governments may struggle to repay their debt and that Chinese economic growth may be slowing. Within the metals complex, gains were experienced primarily during March from long futures positions in nickel, copper, aluminum, and zinc as prices rose after China indicated it might boost state reserves of base metals. During September, long positions in gold and silver futures resulted in gains as prices rose amid increased demand for the precious metals due to a drop in the value of the U.S. dollar. Additional gains were recorded in September from long futures positions in copper and aluminum as prices moved higher after industrial output beat analyst estimates in China, the world’s biggest metals user. Meanwhile, long positions in copper futures resulted in gains as prices reached an all-time high in December following strong Chinese import data and news of supply interruptions at a major Chilean copper mine. Within the

- 51 -
 
 
 
 
agricultural complex, gains were recorded primarily during September and October from long positions in corn futures after prices advanced to the highest level in almost two years as freezing weather threatened crops in China and Canada and a prolonged drought slowed planting in Russia. Further gains in this sector were recorded during October from long positions in soybean futures as prices reached a 16-month high after U.S. exporters boosted sales to China, the world’s largest consumer and importer of soybeans. In December, additional gains were experienced due to long futures positions in corn and soybeans as prices reached a 29-month high and 28-month high, respectively, amid supply concerns due to drought-like conditions in Argentina, the world’s second-biggest exporter of corn and third-biggest exporter of soybeans. Within the currency markets, gains were recorded primarily during March from long positions in the Mexican peso and Canadian dollar versus the U.S. dollar as the value of these currencies moved higher against the U.S. dollar after signs of a continued global economic recovery caused investors to increase their risk appetite for higher-yielding currencies. During September, gains were achieved from long positions in the Australian dollar versus the U.S. dollar as the value of the Australian dollar appreciated to a 26-month high against the U.S. dollar amid speculation that the Reserve Bank of Australia may raise interest rates in October. Meanwhile, additional currency gains were experienced in December from long positions in the Australian dollar, Canadian dollar, South African rand, and New Zealand dollar versus the U.S. dollar as the value of these “commodity currencies” moved higher against the U.S. dollar in tandem with rising commodity prices. A portion of the Partnership’s gains for the year was offset by losses of incurred within the energy markets primarily during January, May, and June from long futures positions in crude oil and its related products. During January, prices in these markets declined

- 52 -
 
 
 
 
due to reports of increased U.S. inventories, as well as on speculation that China’s economic activity and energy demand might ease. Prices also dropped during May and June amid worries that Europe’s aforementioned debt troubles might weaken global energy demand. Additional losses in the energies were experienced during July due to short positions in natural gas futures as prices rose after reports showed a smaller-than-forecast inventory increase due to above-average temperatures in the U.S. Within the global stock index sector, losses were recorded primarily during January, May, July, and August. During January, long positions in U.S., European, and Pacific Rim equity index futures incurred losses as prices reversed sharply lower amid disappointing U.S. corporate earnings reports, concerns regarding U.S. President Barack Obama’s proposed limits on risk-taking by banks, and speculation that China might raise interest rates. Losses were also recorded in these markets during May as prices once again moved lower on growing concerns that Greece’s sovereign debt crisis might begin to spread throughout Europe. Prices then continued to fall throughout May due to uncertainty regarding policy actions in Europe and the impact on global economic growth. During July, newly established short positions in European and U.S. equity index futures resulted in losses as prices were pressured higher amid unexpected growth in Europe’s manufacturing and service industries, rising U.K. retail sales, and positive U.S. corporate earnings reports. Additional losses in this sector were recorded during August due to newly established long positions in European, U.S., and Pacific Rim equity index futures as prices fell after the U.S. Federal Reserve said the pace of economic recovery is likely to be “more modest” than forecast and a report revealed U.S. productivity unexpectedly fell in the second quarter.


- 53 -
 
 
 
 
For further sector trading information, please refer to the Partnership’s Financial Statements for the year ended December 31, 2012, which are included in Item 8 of this Form 10-K.

The Partnership's income and losses are allocated among its partners for income tax purposes.

Off-Balance Sheet Arrangements and Contractual Obligations.
Not applicable.

Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”)  2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS.  However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This new guidance did not have a material impact on the Partnership’s financial statements.


- 54 -
 
 
 
 
Financial instruments are carried at fair value, which is the price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants.  Assets and liabilities carried at fair value are classified and disclosed in the following three levels: Level 1 – unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than unadjusted quoted market prices that are observable for the asset or liability, either directly or indirectly (including quoted market prices for similar investments, interest rates, and credit risk); and Level 3 – unobservable inputs for the asset or liability (including the Partnership’s own assumptions used in determining the fair value of investments).

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of the factors specific to the investment.

The Partnership’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.
 
 
 
                  Assets
December 31, 2012
Unadjusted                      
Quoted Prices in                  
Active Markets for                
  Identical Assets                
        (Level 1)                         
 
 Significant Other
   Observable
       Inputs
     (Level 2)
 
Significant
   Unobservable
     Inputs
   (Level 3)
  
 
 
 
 
            Total       
 
$
   $
  $     
 
 $
Investment in TT II, LLC
    –      
12,246,448
    –      
  
12,246,448
Investment in WNT I, LLC
    –      
7,072,401
    –      
  
7,072,401
Investment in Chesapeake I, LLC
    –      
  4,408,930
    –      
  
  4,408,930
Investment in Rotella I, LLC
    –      
  3,383,788
    –      
  
  3,383,788
Investment in Kaiser I, LLC
    –      
  3,186,918
    –      
  
  3,186,918
Investment in Augustus I, LLC
    –      
 2,433,314
    –      
  
 2,433,314
Investment in GLC I, LLC
    –      
 2,359,140
    –      
  
 2,359,140
- 55 -
 
 
 
 

 
 
 
                  Assets
December 31, 2011
Unadjusted                  
Quoted Prices in                
Active Markets for             
  Identical Assets               
        (Level 1)                       
 
 Significant Other             
   Observable                
       Inputs                     
     (Level 2)                   
 
Significant            
   Unobservable         
     Inputs               
   (Level 3)             
 
 
 
 
 
            Total         
 
$
   $
  $      
 
 $
Investment in TT II, LLC
    –      
14,111,867
    –      
  
14,111,867
Investment in Kaiser I, LLC
    –      
10,573,213
    –      
  
10,573,213
Investment in WNT I, LLC
    –      
  8,959,457
    –      
  
  8,959,457
Investment in Augustus I, LLC
    –      
  5,112,295
    –      
  
  5,112,295
Investment in Rotella I, LLC
    –      
  5,082,011
    –      
  
  5,082,011
Investment in Chesapeake I, LLC
    –      
 4,910,449
    –      
  
 4,910,449
Investment in GLC I, LLC
    –      
 3,942,919
    –      
  
 3,942,919


The Partnership’s assets identified as “Investments in Affiliated Trading Companies” reflected on the Statements of Financial Condition represent the net asset value of the Partnership’s pro rata share of  each Trading Company.  The net assets of each Trading Company are equal to the total assets of the Trading Company (including, but not limited to all cash and cash equivalents, accrued interest and amortization of original issue discount, and the fair value of all open Futures Interests contract positions and other assets) less all liabilities of the Trading Company (including, but not limited to, brokerage commissions that would be payable upon the closing of open Futures Interest positions, management fees, incentive fees, and extraordinary expenses), determined in accordance with U.S. GAAP.

Summarized information for the Partnership’s pro rata investment in affiliated Trading Companies for the years ended December 31, 2012 and 2011 is as follows:






- 56 -
 
 
 
 
December 31, 2012
Investment
 
 % of LV’s
Partners’              
Capital
 
             Fair Value
 
 
 LV’s pro rata
Net Income/
(Loss)     
 
LV’s Management
Fees                  
 
LV’s Incentive
Fees
 
LV’s Administrative
    Fees
 
   
             $
   $             
    $
             $
                             $
TT II, LLC
37.0
12,246,448
(23,003)
247,227
4,069
49,445
WNT I, LLC
21.4
7,072,401
(401,771)
124,221
    232 
28,985
Chesapeake I, LLC
13.3
4,408,930
(1,151,518)
99,845
–
17,473
Rotella I, LLC
10.2
3,383,788
(218,126)
44,554
–
15,594
Kaiser I, LLC
  9.6
3,186,918
(74,042)
73,604
–
15,863
Augustus I, LLC
  7.4
2,433,314
281,992
49,184
–
11,476
GLC I, LLC
  7.1
2,359,140
154,061
51,848
–
12,098


December 31, 2011
Investment
 
                % of LV’s
Partners’                 
                 Capital
 
            Fair Value
 
 
 LV’s pro rata
Net Income/
(Loss)
 
LV’s Management
Fees                 
 
LV’s Incentive
Fees     
 
LV’s Administrative
    Fees         
 
   
$               
   $             
    $
      $
   $            
TT II, LLC
28.5
14,111,867
(1,664,435)
273,205
1,319
51,306
Kaiser I, LLC
21.4
10,573,213
(820,064)
301,052
–
52,684
WNT I, LLC
18.1
8,959,457
  302,748
107,555
81,715
18,822
Augustus I, LLC
10.3
5,112,295
(516,309)
86,378
1,718
20,155
Rotella I, LLC
10.3
5,082,011
(253,281)
120,017
19,966
25,533
Chesapeake I, LLC
  9.9
4,910,449
(753,265)
94,741
103,139
16,580
GLC I, LLC
  8.0
3,942,919
(381,969)
71,600
–
16,707
DKR I, LLC
  –
  –
(496,954)
102,838
4,110
18,333


As of December 31, 2012 and September 30, 2012, the allocations between the Trading Companies were as follows:

Trading Company
 
 Allocation as of 12/31/2012
 
                      Allocation as of 9/30/2012
 
  
         
Augustus I, LLC
6.95%
7.15%
     
Chesapeake I, LLC
12.55%
11.75%
     
GLC I, LLC
6.70%
8.00%
     
Kaiser I, LLC
9.10%
9.40%
     
Rotella I, LLC
9.65%
11.25%
     
TT II, LLC
34.90%
33.60%
     
WNT I, LLC
20.15%
18.85%
- 57 -
 
 
 
 
For all Trading Companies, Contributions and Withdrawals are permitted on a monthly basis.  As of December 31, 2012 and 2011, there have been no suspended redemptions, “lockup” periods or gate provisions imposed before a withdrawal can be made by the Partnership.


Other Pronouncements
On October 1, 2012, the FASB issued ASU 2012-04 “Technical Corrections and Improvements”, which makes minor technical corrections and clarifications to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. The ASU also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820. The amendments are effective for fiscal periods beginning after December 15, 2012. The adoption of this ASU will not have a significant impact on the Partnership’s financial statements.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative

- 58 -
 
 
 
 
instruments. Subsequently in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11.  Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership would also provide the disclosures retrospectively for all comparative periods presented.  The Partnership is currently evaluating the impact that these pronouncements would have on the financial statements. 

In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company.  Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company.  The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements.  In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company would be required to consolidate another investment company if it

- 59 -
 
 
 
 
holds a controlling financial interest in the entity.  In August 2012, the FASB updated the proposed ASU to state that entities regulated under Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guide.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

Subsequent Events
Management of Ceres (“Management”) performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements other than disclosed below.

Effective January 1, 2013, Boronia Capital Pty. Ltd was added as a trading advisor to the Partnership.

Effective January 31, 2013, GLC I, LLC and Ceres terminated the Advisory Agreement by and among the Trading Advisor, the Trading Company and Ceres.  The Trading Advisor ceased trading on behalf of the Partnership as of the close of business on January 31, 2013.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
All of the Partnership’s assets are subject to the risk of trading loss through its investments in the Trading Companies, each of which invests substantially all of its assets in the trading program of

- 60 -
 
 
 
 
an unaffiliated Trading Advisor.  The market-sensitive instruments held by the Trading Companies are acquired for speculative trading purposes, and substantially all of the respective Trading Companies’ 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 Trading Companies’ main line of business.

The futures, forwards and options traded by the Trading Companies involve varying degrees of related market risk.  Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates and prices of financial instruments and commodities.  These factors result in frequent changes in the fair value of the Trading Companies’ open positions, and consequently in their earnings, whether realized or unrealized, and cash flow.  Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts and forward currency options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts and forward currency options contracts are settled upon termination of the contract.

The total market risk of the respective Trading Companies may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Trading Companies’ open positions, the volatility present within the markets, and the liquidity of the markets.


- 61 -
 
 
 
 
The face value of the market sector instruments held by the Trading Companies is typically many times the applicable margin requirements.  Margin requirements generally range between 2% and 15% of contract face value.  Additionally, the use of leverage causes the face value of the market sector instruments held by the Trading Companies typically to be many times the total capitalization of the Trading Companies.

The Partnership’s and the Trading Companies’ past performance is no guarantee of their future results.  Any attempt to numerically quantify the Trading Companies’ market risk is limited by the uncertainty of their speculative trading.  The Trading Companies’ speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Trading Companies’ experiences to date disclosed under the “Trading Companies’ Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed below.

Limited partners will not be liable for losses exceeding the current net asset value of their investment.

Quantifying the Trading Companies’ Trading Value at Risk
The following quantitative disclosures regarding the Trading Companies’ market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of

- 62 -
 
 
 
 
1934).  All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

The Trading Companies account for open positions on the basis of fair value accounting principles.  Any loss in the market value of the Trading Companies’ open positions is directly reflected in the Trading Companies’ earnings and cash flow.

VaR is a measure of the maximum amount which each Trading Company could reasonably be expected to lose in a given market sector.  However, the inherent uncertainty of each Trading Company’s speculative trading and the recurrence in the markets traded by the Trading Companies of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR of each Trading Company’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 Trading Companies’ losses in any market sector will be limited to VaR or by the Trading Companies’ attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Trading Companies as the measure of its VaR.  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 VaR.
- 63 -
 
 
 
 
The Trading Companies’ Value at Risk in Different Market Sectors
As of December 31, 2012, Chesapeake I, LLC’s total capitalization was $11,573,391.  The Partnership owned approximately 38% of Chesapeake I, LLC.
Primary Market
  
% of
Risk Category
VaR
Total Capitalization
     
Currency
$404,917
3.50%
     
Interest Rate
335,583
2.90%
     
Equity
785,203
6.78%
     
Commodity
  881,948
7.62%
     
Total
$2,407,651
20.80%


                               Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$460,983
$227,842
$344,791
Interest Rate
$421,156
$201,281
$320,623 
Equity
$795,284
$158,395
$476,526 
Commodity
$1,106,623
$576,110
$912,448

As of December 31, 2012, Kaiser I, LLC’s total capitalization was $7,455,921.  The Partnership owned approximately 43% of Kaiser I, LLC.
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$23,049
0.31%
     
Interest Rate
3,459
0.05%
     
Equity
129,192
1.73%
     
Total
$155,700
2.09%
- 64 -
 
 
 
 
                                  Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$521,285
$258
$138,683
Interest Rate
$399,602
–
$121,015
Equity
$856,581
–
$139,546
Commodity
$137,073
–
$37,418

As of December 31, 2012, TT II, LLC’s total capitalization was $510,360,229.  The Partnership owned approximately 2% of TT II, LLC.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$23,189,886
4.54%
     
Interest Rate
19,215,839
3.77%
     
Equity
17,602,639
3.45%
     
Commodity
  22,355,094
4.38%
     
Total
$82,363,458
16.14%



                                  Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$41,325,209
$8,600,405
$21,558,410
Interest Rate
$35,683,131  
$8,280,746
$22,479,992
Equity
$20,130,770  
  $4,231,868
$12,999,235
Commodity
$26,447,811
   $11,600,669
$18,814,310

- 65 -
 
 
 
 
As of December 31, 2012, Rotella I, LLC’s total capitalization was $4,795,730.  The Partnership owned approximately 71% of Rotella I, LLC.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$191,053
3.98%
     
Interest Rate
136,189
2.84%
     
Equity
288,745
6.02%
     
Commodity
         52,671
1.10%
     
Total
$668,658
13.94%


                                  Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$373,337
 $109,557
$235,656
Interest Rate
$373,496 
$85,246
$205,973
Equity
$449,114 
$65,648
$230,244
Commodity
$182,129
$33,706
  $112,448


As of December 31, 2012, Augustus I, LLC’s total capitalization was $8,493,083.  The Partnership owned approximately  29% of Augustus I, LLC.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$243,718
2.87%
     
Total
 $243,718 
2.87%



- 66 -
 
 
 
 
                                     Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,984,508
$242,834
$868,132
Interest Rate
$222,112
–
$73,876
Equity
$1,000,000
–
$5,571

As of December 31, 2012, GLC I, LLC’s total capitalization was $7,173,981.  The Partnership owned approximately 33% of GLC I, LLC.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$521,574
7.27%
     
Interest Rate
92,337 
1.29%
     
Equity
            76,130
0.54%
     
Total
$690,041
9.10%


                               Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$915,618
$64,476
$521,537
Interest Rate
$386,741
–
$93,360
Equity
$2,045,803 
–
$91,432 
Commodity
$236,250
–
$1,354

As of December 31, 2012, WNT I, LLC’s total capitalization was $10,023,479.  The Partnership owned approximately 71% of WNT I, LLC.

- 67 -
 
 
 
 
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$528,259
5.27%
     
Interest Rate
305,078
3.04%
     
Equity
482,073
4.81%
     
Commodity
     168,941
1.69%
     
Total
$1,484,351
14.81%

                                  Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$676,272
$316,730
$470,415
Interest Rate
$687,293
$225,412
$469,729
Equity
$504,132
$89,555
$306,720
Commodity
$442,465
$165,035
$346,418
* Average of month-end VaR.

As of December 31, 2011, Chesapeake I, LLC’s total capitalization was $10,859,791.  The Partnership owned approximately 45% of Chesapeake I, LLC.
Primary Market
  
% of
Risk Category
VaR
Total Capitalization
     
Currency
$389,541
3.59%
     
Interest Rate
355,542
3.27%
     
Equity
158,814
1.46%
     
Commodity
  575,673
5.30%
     
Total
$1,479,570
13.62%


- 68 -
 
 
 
 
                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$459,497
$143,547
$252,159
Interest Rate
$379,708
$155,184
$231,456
Equity
$551,279
$75,094  
$306,229
Commodity
$882,032
$429,419
  $618,534

As of December 31, 2011, Kaiser I, LLC’s total capitalization was $27,734,037.  The Partnership owned approximately 38% of Kaiser I, LLC.
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$6,147
  0.02%
     
Interest Rate
80,677
0.29%
     
Equity
   70,976
   0.26%
     
Total
$157,800
0.57%



                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$816,769
$6,147
$221,158
Interest Rate
$498,385
–
$229,132
Equity
$886,068
–
$182,840
Commodity
$389,614
–
$144,118


- 69 -
 
 
 
 
As of December 31, 2011, TT II, LLC’s total capitalization was $476,615,913.  The Partnership owned approximately  3% of TT II, LLC.
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$9,977,318
2.09%
     
Interest Rate
14,916,316
3.13%
     
Equity
4,335,111
0.91%
     
Commodity
  17,904,472
3.76%
     
Total
$47,133,217
9.89%



                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$22,372,356
$688,683
$7,090,978
Interest Rate
$15,002,665  
$398,638
$5,207,746
Equity
$9,307,243
$778,042
$2,729,767
Commodity
$26,711,030
$512,564
$9,752,503



As of December 31, 2011, Rotella I, LLC’s total capitalization was $6,960,774.  The Partnership owned approximately 73% of Rotella I, LLC.
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$264,167
3.80%
     
Interest Rate
275,444
3.96%
     
Equity
113,818
1.64%
     
Commodity
  80,855
1.16%
     
Total
$734,284
10.56%
- 70 -
 
 
 
 
                               Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$819,044
$78,222
$255,710
Interest Rate
$479,029
$83,022
$192,477
Equity
$424,761
$58,388
$160,825
Commodity
$268,327
$49,937
$138,984

As of December 31, 2011, Augustus I, LLC’s total capitalization was $12,936,533.  The Partnership owned approximately 40% of Augustus I, LLC.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$1,615,546
12.49%
     
Interest Rate
  162,443
1.26%
     
Total
$1,777,989
13.75%

                               Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,193,622
$229,785
$985,151
Interest Rate
$433,616
$11,222
$118,598

As of December 31, 2011, GLC I, LLC’s total capitalization was $10,399,401.  The Partnership owned approximately 38% of GLC I, LLC.


- 71 -
 
 
 
 
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$446,689
4.30%
     
Interest Rate
198,318
1.91%
     
Equity
  149,844
1.44%
     
Total
$794,851
7.65%

                               Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$620,871
$2,036
$167,011
Interest Rate
$441,278
$4,738
$125,982
Equity
$349,678
$33,318
$134,083
Commodity
$13,017
 –
$2,537

As of December 31, 2011, WNT I, LLC’s total capitalization was $12,271,476.  The Partnership owned approximately 73% of WNT I, LLC.  Effective June 1, 2011, WNT I, LLC was added as a Trading Company.

   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$300,739
2.45%
     
Interest Rate
297,714
2.43%
     
Equity
104,471
0.85%
     
Commodity
  231,173
1.88%
     
Total
$934,097
  7.61%





- 72 -
 
 
 
 
                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$429,467
$90,742
$232,971
Interest Rate
$409,363
$136,938
$212,095
Equity
$512,198
$49,529
$204,206
Commodity
$679,393
$87,985
$294,411
* Average of month-end VaR.

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets.  However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
·  
past changes in market risk factors will not always result  in accurate predictions of the distributions and correlations of future market movements;
·  
changes in portfolio value caused by market movements may differ from those of the VaR model;
·  
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
·  
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and

- 73 -
 
 
 
 
·  
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

Non-Trading Risk
The Trading Companies have non-trading market risk on their foreign cash balances.  These balances and any market risk they may represent are immaterial.

A decline in short-term interest rates would result in a decline in the Trading Companies’ cash management income.  This cash flow risk is not considered to be material.

Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Trading Companies’ market-sensitive instruments, in relation to the Trading Companies’ net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures – except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures – constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisors for managing such

- 74 -
 
 
 
 
exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.

The Trading Advisor for each Trading Company, in general, tends to utilize its trading system(s) to take positions when market opportunities develop, and Ceres anticipates that the Trading Advisors will continue to do so.

Investors must be prepared to lose all or substantially all of their investment in the Partnership.

The following were the primary trading risk exposures of the Partnership at December 31, 2012 by market sector. It may be anticipated, however, that these market exposures will vary materially over time.

Interest Rates.  Interest rate movements directly affect the price of the futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure

- 75 -
 
 
 
 
is to interest rate fluctuations in the United States and the other G-8 countries. However, the Partnership also take futures positions on the government debt of smaller nations — e.g., Australia and New Zealand.

Currencies.  The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Partnership’s currency sector will change significantly in the future.

Equities.  The Partnership’s primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Partnership are limited to futures on broadly based indices. As of December 31, 2012 the Partnership’s primary exposures were in the Euro Stoxx 50 (Europe), S&P 500 (U.S.), SPI 200 (Australia), DAX (Germany), CAC 40 (France), Topix (Japan), and Hang Seng (Hong Kong) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major European, U.S., and Pacific Rim indices. (Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being “whipsawed” into numerous small losses.)

Commodities.
Energy.  The Partnership’s primary energy market exposure is to natural gas and oil price movements, often resulting from political developments in the Middle East and weather

- 76 -
 
 
 
 
conditions. Energy prices can be volatile and substantial profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets in the future.

Metals.  The Partnership’s primary metal market exposure as of December 31, 2012 was to fluctuations in the price of gold, copper, and aluminum.

Grains. The Partnership’s trading risk exposure in the grains is primarily to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Corn, wheat, and the soybean complex accounted for the majority of the Partnership’s grain exposure as of December 31, 2012.

Softs.  The Partnership’s trading risk exposure in the soft commodities is to agricultural-related price movements which are often directly affected by severe or unexpected weather conditions. Sugar and coffee accounted for the majority of the Partnership’s soft commodities exposure as of December 31, 2012.





Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and related items of the Partnership are filed under this Item 8: Report of Deloitte & Touche LLP, independent registered public accounting firm, for the years ended December 31, 2012, 2011, and 2010; Statements of Financial Condition as of

- 77 -
 
 
 
 
December 31, 2012 and 2011; Statements of Income and Expenses for the years ended December 31, 2012, 2011, and 2010; Statements of Changes in Partners’ Capital for the years ended December 31, 2012, 2011, and 2010; and Notes to Financial Statements.  Additional financial information has been filed as Exhibits 99.1, 99.2 and 99.3 to this Form 10-K.





 



- 78 -
 
 
 


To the Limited Partners of:

LV Futures Fund L.P.


To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.





/s/ Walter Davis                                                                      
Walter Davis
President and Director
Ceres Managed Futures LLC,
General Partner of
LV Futures Fund L.P.





 


- 79 -
 
 
 
 
LV Futures Fund L.P.
Management’s Report on Internal Control Over Financial Reporting

Ceres Managed Futures LLC (“Ceres”), the general partner of LV Futures Fund L.P. (the “Partnership”), is responsible for the management of the Partnership.

Management of the Partnership, Ceres (“Management”), is responsible for establishing and maintaining adequate internal control over financial reporting.  The internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Partnership’s internal control over financial reporting includes those policies and procedures that:

·  
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

·  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Partnership’s transactions are being made only in accordance with authorizations of Management and directors of Ceres; and

·  
Provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’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.  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.



 




- 80 -


 
 
 
Management assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2012.  In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control – Integrated Framework.  Based on its assessment and those criteria, Management believes that the Partnership maintained effective internal control over financial reporting as of December 31, 2012.



/s/ Walter Davis                                                                      
Walter Davis
President and Director
Ceres Managed Futures LLC
General Partner of
LV Futures Fund L.P.


/s/ Damian George                                                                      
Damian George
Chief Financial Officer and Director
Ceres Managed Futures LLC
General Partner of
LV Futures Fund L.P.



 



- 81 -


 
 
 







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Limited Partners and the General Partner of LV Futures Fund L.P.:

We have audited the accompanying statements of financial condition of LV Futures Fund L.P. (the "Partnership") as of December 31, 2012 and 2011, and the related statements of income and expenses and changes in partners’ capital for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnership’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 Partnership 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 Partnership’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, such financial statements present fairly, in all material respects, the financial position of LV Futures Fund L.P. as of December 31, 2012 and 2011, and the results of its operations and its changes in partners’ capital for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP

New York, New York
 
March 25, 2013








- 82 -
 
 
 
 
LV FUTURES FUND L.P.
STATEMENTS OF FINANCIAL CONDITION

                                                           December 31, 
 
2012
  
2011
ASSETS
$
  
$
Investments in Affiliated Trading Companies:
      
Investment in TT II, LLC
12,246,448
  
14,111,867
Investment in WNT I, LLC
7,072,401
  
8,959,457
Investment in Chesapeake I, LLC
4,408,930
  
4,910,449
Investment in Rotella I, LLC
3,383,788
  
5,082,011
Investment in Kaiser I, LLC
3,186,918
  
10,573,213
Investment in Augustus I, LLC
2,433,314
  
5,112,295
Investment in GLC I, LLC
2,359,140
  
3,942,919
       
Total Investments in Affiliated Trading Companies, at fair value  (cost $37,798,976 and $54,509,713, respectively)
35,090,939
  
52,692,211
       
Total Assets
35,090,939
  
52,692,211
       
LIABILITIES
      
       
Redemptions payable
2,004,495
  
3,250,987
       
Total Liabilities
2,004,495
  
3,250,987
       
PARTNERS’ CAPITAL
      
Class A (23,931.981 and 34,210.600 Units, respectively)
21,372,186
  
32,837,331
Class B (4,141.422 and 6,075.289 Units, respectively)
3,800,182
  
5,961,752
Class C (7,860.274 and 9,546.728 Units, respectively)
7,410,939
  
9,577,626
Class D (23.012 and 59.829 Units, respectively)
22,006
  
60,698
Class Z (483.374 and 957.352 Units, respectively)
481,131
  
1,003,817
       
Total Partners’ Capital
33,086,444
  
49,441,224
       
Total Liabilities and Partners’ Capital
35,090,939
  
52,692,211
       
NET ASSET VALUE PER UNIT
      
Class A
893.04
  
959.86
Class B
917.60
  
981.31
Class C
942.83
  
1,003.23
Class D
956.28
  
1,014.52
Class Z
995.36
  
1,048.53










The accompanying notes are an integral part of these financial statements.


- 83 -
 
 
 
 
LV FUTURES FUND L.P.
STATEMENTS OF INCOME AND EXPENSES

   For the Years Ended December 31,
 
2012
  
2011  
 
              2010  
 
$   
 
 $   
 
$   
EXPENSES
          
Ongoing Placement Agent fees
732,465
  
1,039,336
  
1,206,634
General Partner fees
432,355
  
630,513
  
782,995
Administrative fees
172,942
  
252,205
  
313,198
           
Total Expenses
1,337,762
  
1,922,054
  
2,302,827
           
NET INVESTMENT LOSS
(1,337,762)
  
(1,922,054)
  
(2,302,827)
           
REALIZED/NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
          
Realized
(541,872)
  
1,077,135
  
842,602
Net change in unrealized appreciation
          
(depreciation) on investments
(890,535)
  
(5,660,665)
  
3,395,350
Total Realized/Net Change in Unrealized Appreciation (Depreciation) on Investments
(1,432,407)
  
(4,583,530)
  
4,237,952
           
NET INCOME (LOSS)
              (2,770,169)
  
               (6,505,584)
  
                   1,935,125
           
NET INCOME (LOSS) ALLOCATION
          
Class A
(1,873,111)
  
(4,144,003)
  
1,076,183
Class B
(306,932)
  
(670,226)
  
225,906
Class C
(551,918)
  
(1,394,279)
  
654,126
Class D
(1,173)
  
(205,358)
  
(69,190)
Class Z
(37,035)
  
(91,718)
  
48,100
           
NET INCOME (LOSS) PER UNIT *
          
Class A
(66.82)
  
(108.89)
  
24.15
Class B
(63.71)
  
(105.82)
  
29.85
Class C
(60.40)
  
(102.60)
  
35.72
Class D
(58.24)
  
(100.60)
  
38.71
Class Z
(53.17)
  
(95.64)
  
47.95
           
 
Units
 
Units
  
Units
WEIGHTED AVERAGE NUMBER
          
OF UNITS OUTSTANDING
          
Class A
29,893.266
  
37,931.711
  
40,591.771
Class B
5,200.825
  
6,891.892
  
8,607.177
Class C
9,107.493
  
13,486.546
  
16,441.434
Class D
46.777
  
1,524.871
  
9,011.137
Class Z
766.181
  
958.881
  
1,068.666

* Based on the changes in Net Asset Value per Unit.

The accompanying notes are an integral part of these financial statements.

- 84 -

 
 
 

LV FUTURES FUND L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Years ended December 31, 2012, 2011 and 2010



 
Class A
  
Class B
  
Class C
  
Class D
  
Class Z
  
Total
 
$
  
$
  
$
  
$
  
$
  
$
Partners’ Capital,
                      
December 31, 2009
39,684,890
  
8,492,803
  
16,633,598
  
12,265,562
  
1,069,141
  
78,145,994
                       
Subscriptions
10,249,309
  
2,791,182
  
4,862,937
  
65,000
  
170,000
  
18,138,428
                       
Net Income (Loss)
1,076,183
  
225,906
  
654,126
  
(69,190)
  
48,100
  
1,935,125
                       
Redemptions
(8,362,118)
  
(3,046,644)
  
(3,972,304)
  
(10,233,117)
  
(171,262)
  
 (25,785,445)
 
Partners’ Capital,
                      
December 31, 2010
42,648,264
  
8,463,247
  
18,178,357
  
2,028,255
  
1,115,979
  
72,434,102
                       
Subscriptions
4,343,219
  
1,680,316
  
673,500
  
–
  
–
  
  6,697,035
                       
Net Loss
(4,144,003)
  
(670,226)
  
(1,394,279)
  
(205,358)
  
(91,718)
  
(6,505,584)
                       
Redemptions
(10,010,149)
  
(3,511,585)
  
(7,879,952)
  
(1,762,199)
  
(20,444)
  
 (23,184,329)
                       
Partners’ Capital,
                      
December 31, 2011
32,837,331
  
5,961,752
  
9,577,626
  
60,698
  
1,003,817
  
49,441,224
                       
Subscriptions
496,500
  
125,000
  
–
  
–
  
–
  
621,500
                       
Net Loss
(1,873,111)
  
(306,932)
  
(551,918)
  
(1,173)
  
(37,035)
  
(2,770,169)
                       
Redemptions
(10,088,534)
  
(1,979,638)
  
(1,614,769)
  
(37,519)
  
(485,651)
  
 (14,206,111)
                       
Partners’ Capital,
                      
December 31, 2012
21,372,186
  
3,800,182
  
7,410,939
  
22,006
  
481,131
  
33,086,444














The accompanying notes are an integral part of these financial statements.



- 85 -

 
 
 


LV Futures Fund L.P.
Notes to Financial Statements
 
 
 
1.  Organization

 
LV Futures Fund L.P. (“LV” or the “Partnership”) is one of the partnerships in the Managed Futures Multi-Strategy Profile Series, comprised of the Partnership and Meritage Futures Fund L.P. (collectively, the “Profile Series”), and was formed on February 22, 2007, under the Delaware Revised Uniform Limited Partnership Act, as a multi-advisor commodity pool created to profit from the speculative trading of domestic commodities, and foreign commodity futures contracts, forward contracts, foreign exchange commitments, options on physical commodities and futures contracts, spot (cash) commodities and currencies, exchange of futures contracts for physicals transactions, exchange of physicals for futures contracts transactions, and any rights pertaining thereto (collectively, “Futures Interests”) (refer to Note 6. Financial Instruments of the Trading Companies).  The Partnership indirectly allocates substantially all of its assets in multiple affiliated Trading Companies (each a “Trading Company” or collectively, the “Trading Companies”), each of which allocates substantially all of its assets in the trading program of an unaffiliated commodity trading advisor (each a “Trading Advisor” or collectively, the “Trading Advisors”), each of which, except for GAM International Management Limited (“GAM”)  and GLC Ltd. (“GLC”), is registered with the Commodity Futures Trading Commission, and which makes investment decisions for each respective Trading Company.  Prior to May 1, 2011, Polaris Futures Fund L.P. was also one of the partnerships in the Profile Series.
 

 

 

 
- 86 -
 
 
 
 
 
The Partnership commenced trading operations on August 1, 2007, in accordance with the terms of the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).
 

 
Ceres Managed Futures LLC, a Delaware limited liability company, serves as the Partnership’s general partner and commodity pool operator and as each Trading Company’s trading manager and commodity pool operator (the “General Partner,” “Ceres” or the “Trading Manager” as the context requires).  Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”).  Morgan Stanley is the indirect majority owner of MSSBH and Citigroup Inc. is the indirect minority owner of MSSBH.  Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) and also serves as the placement agent (the “Placement Agent”) to the Partnership.  Morgan Stanley & Co. LLC (“MS&Co.”) acts as each Trading Company’s primary clearing commodity broker.  Morgan Stanley & Co. International plc (“MSIP”) acts as each Trading Company’s commodity broker to the extent it trades on the London Metal Exchange (collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”).  Each Trading Company’s over-the-counter foreign exchange spot, options, and forward contract counterparty is either MS&Co. and/or Morgan Stanley Capital Group Inc. (“MSCG”) to the extent a Trading Company trades options on over-the-counter foreign currency forward contracts.
 

 
Prior to February 29, 2012, units of limited partnership interest (“Units”) of the Partnership were offered in four classes in a private placement pursuant to Regulation D under the Securities Act
 

 
- 87 -
 
 
 
 
 
of 1933, as amended.  Depending on the aggregate amount invested in the Partnership, limited partners received class A, B, C or D Units in the Partnership (each a “Class” and collectively the “Classes”).  Certain limited partners who are not subject to the ongoing placement agent fee are deemed to hold Class Z Units.  Ceres received Class Z Units with respect to its investment in the Partnership.  Effective February 29, 2012, Class B and Class C Units are no longer being offered to new investors but continue to be offered to existing Class B and Class C investors.
 

 
Effective January 4, 2012, Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC”) uses MS&Co. as its clearing commodity broker.
 
 
Effective October 31, 2011, State Street Bank and Trust Company (“State Street”) ceased to serve as the administrator to the Partnership and each Trading Company.   Effective November 1, 2011, the administrative services previously provided by State Street are provided by Morgan Stanley Wealth Management.
 

 
On August 18, 2011, Ceres notified DKR Fusion Management L.P. (“DKR”) that the Advisory Agreement dated as of April 30, 2007, and any amendments or revisions subsequently made thereto, among Morgan Stanley Smith Barney DKR Fusion I, LLC  (“DKR” I, LLC”), the General Partner and DKR (the “DKR Advisory Agreement”), pursuant to which DKR traded a
 

 

 

 
- 88 -
 
 
 
 
 
portion of the Trading Company’s (and, indirectly, the Partnership’s) assets in futures interests, will be terminated effective August 31, 2011.  Consequently, DKR ceased all futures interest trading on behalf of the Trading Company (and, indirectly, the Partnership) effective August 31, 2011.
 
 
Effective June 1, 2011, the Partnership through its investment in Morgan Stanley Smith Barney WNT I, LLC (“WNT I, LLC”) added Winton Capital Management Limited as a Trading Advisor to the Partnership.
 
 
Effective May 31, 2011, Morgan Stanley & Co., Incorporated changed its name to Morgan Stanley & Co. LLC.
 
 
Effective May 18, 2011, Ceres changed the name of Managed Futures Profile LV, L.P. to LV Futures Fund L.P.  The name change did not have any impact on the operation of the Partnership or its limited partners.
 

The financial statements have been prepared using the “Fund of Funds” approach and accordingly all revenue and expense information from the Trading Companies is reflected as a total realized/net change in unrealized appreciation (depreciation) on investments on the Statements of Income and Expenses.  The Partnership maintains sufficient cash balances on hand to satisfy ongoing operating expenses for the Partnership.  As of December 31, 2012 and 2011, the Partnership’s cash balances were zero.
 
- 89 -
 
 
 
 
 
Ceres is not required to maintain any investment in the Partnership, and may withdraw any portion of its interest in the Partnership at any time, as permitted by the Limited Partnership
 
Agreement.  In addition, Class Z shares are only being offered to certain individuals affiliated with Morgan Stanley at Ceres’ sole discretion. Class Z Unit holders are not subject to paying the placement agent fee (as defined in Note 2. Summary of Significant Accounting Policies).
 

 
2.  
Summary of Significant Accounting Policies
 
Use of Estimates – The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require management to make estimates and assumptions that affect the reported amounts in the financial statements and related disclosures.  Management believes that the estimates utilized in the preparation of the financial statements are prudent and reasonable.  Actual results could differ from these estimates and the differences could be material.
 

 
Revenue Recognition – Net change in appreciation (depreciation) on investments in the Trading Companies is recorded based upon the proportionate share of the Partnership’s aggregate amount of the net performance recorded by each Trading Company.
 

 
Valuation of Investments in Affiliated Trading Companies – The Partnership’s investments in affiliated Trading Companies are stated at fair value which is based on (1) the Partnership’s net
 
contribution to the Trading Companies and (2) its allocated share of the undistributed profits
 

 
- 90 -
 
 
 
 
and losses, including realized and the net change in unrealized gains/losses of the Trading Company.
 

 
Net Income (Loss) per Unit – Net income (loss) per Unit is computed in accordance with the specialized accounting for Investment Companies as illustrated in the Financial Highlights Footnote (refer to Note 9. Financial Highlights) and is allocated to all partners at the end of each month in proportion to their respective opening capital accounts.
 

 
General Partner Fee – The Partnership pays Ceres a monthly administration fee equal to 1/12 of 1.0% (a 1.0% annual rate) of the net asset value of each Class in the Partnership at the beginning of each month for services in operating and managing the Partnership.
 

 
Placement Agent Fee – Morgan Stanley Wealth Management currently serves as the Placement Agent and may appoint affiliates or third parties as additional Placement Agents.  The Partnership pays the Placement Agent an ongoing compensation on a monthly basis equal to a percentage of the net asset value of a limited partner’s Units as of the beginning of each month.
 

 
The applicable rate payable by each limited partner is determined by the Class of Units each limited partner may hold.  The Partnership pays the Placement Agent the following percentage based on the aggregate amount invested in the Partnership (as adjusted) by each limited partner in accordance with the following schedule:  
 

 
- 91 -
 
 
 
 
Class of Units
 
Aggregate Investment
 
Monthly/Annualized Rate (%)
 
A
Up to $4,999,999
     0.167%/2.0%
D
$5,000,000 and above
     0.063%/0.75%
Z
All
     0%
 

 
 
The limited partners still holding Class B and Class C Units pay the Placement Agent fee in accordance with the following schedule:
Class of Units
 
Aggregate Investment
 
Monthly/Annualized Rate (%)
 
B
$250,000 - $499,999
     0.125%/1.5%
C
$500,000 - $4,999,999
     0.083%/1.0%
 

 
 
Certain limited partners who are not subject to the ongoing Placement Agent fee (as described herein) are deemed to hold Class Z Units.  The Placement Agent pays a portion of the ongoing placement agent fee it receives from the Partnership to the Morgan Stanley Financial Advisor or Private Wealth Advisor responsible for selling the Units to the limited partners.
 

 
Administrative Fee – The Partnership pays Ceres a monthly fee to cover all of the administrative, operating, offering and organizational expenses (the “Administrative Fee”).  The monthly Administrative Fee is equal to 1/12th of 0.40% (0.40% on an annual basis) of the beginning of the month net asset value of the Partnership.
 

 
Continuing Offering – Units of the Partnership are offered in two Classes, identical in all material respects except for the ongoing Placement Agent fees charged. Depending on the aggregate amount invested in the Partnership, a limited partner will receive Class A or Class D Units in the Partnership.  Prior to February 29, 2012, Units were offered in four Classes.  Units within each Partnership Class were initially offered at $1,000 per Unit, except for class D shares
 

 
- 92 -
 
 
 
 
 
which were initially offered on March 1, 2009, at $1,137.  Thereafter, Units are offered on a continuous basis as of the first day of each month (a “Subscription Date”) at the net asset value per Unit for each Class as of the last day of the immediately preceding month.  The minimum subscription amount in the Partnership is $25,000, subject to the discretion of Ceres to accept a lower amount.  The minimum subscription amount for ERISA/IRA investors is $10,000.  Additional subscriptions can be made in increments of $10,000 if a limited partner has already
 
met the minimum subscription amount, subject to the discretion of Ceres to accept a lower amount.  The request for the subscriptions must be delivered to the limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor at Morgan Stanley Wealth Management branch office in time for it to be forwarded to and received by Ceres, no later than 3:00 p.m., New York City time, on the third business day before the end of the month.

Redemptions – Limited partners may redeem some or all of their Units at 100% of the net asset value per Unit as of the last day of any month (a “Redemption Date”).  The request for redemption must be delivered to a limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor at Morgan Stanley Wealth Management branch office in time for it to be forwarded to and received by Ceres, no later than 3:00 p.m. New York City time, on the third business day before the end of the month in which the redemption is to be effective. Investors must maintain a minimum investment in the Partnership of three Units unless an investor is withdrawing his or her entire investment. Ceres may cause a limited partner to withdraw (in whole or in part) from the Partnership at any time and for any reason.  Ceres will not cause a limited partner to withdraw if the value of his or her investment falls below the minimum described above due to the performance of the Partnership.
- 93 -
 
 
 
 
Ceres may also, in its sole discretion, permit redemptions by limited partners in any amount at any time.  There are no redemption charges.  Ceres endeavors to pay all redemptions within 10
business days after the applicable Redemption Date.  Ceres may suspend redemptions in certain circumstances.
 

 
Exchanges – Limited partners may redeem some or all of their Units in the Partnership on the Redemption Date and use the proceeds to purchase Units in any other commodity pools operated by the General Partner that are accepting subscriptions on the following subscription date; provided the limited partner meets the suitability criteria for the other commodity pool and has redeemed its Partnership Units according to the Limited Partnership Agreement.  Investors also may redeem their Units in any other commodity pool operated by the General Partner and use the proceeds to purchase Units in the Partnership on the following Subscription Date; provided the potential limited partner meets the suitability criteria for the Partnership and has redeemed its Partnership Units in the other commodity pool(s) according to the applicable operating agreement.  In order to effect an exchange, the limited partner must send a subscription and exchange agreement and power of attorney to the limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor, and that agreement must be forwarded by the Morgan Stanley Wealth Management branch office in time for it to be received by Ceres no later than 3:00 p.m., New York City time, on the third business day before the end of the month.
 

 

Units Outstanding by Share Class – The table below shows the Units outstanding by share Class for the Partnership for the three years in the period ended December 31, 2012.
- 94 -
 
 
 
 
Share Class
 
A
 
B
 
C
 
D
Z  
 
Ending Units
          
December 31, 2009
37,990.609
  8,032.706
15,543.827
11,394.809
               975.295
           
Subscriptions
10,083.111
                 2,686.485
                 4,664.661
     59.828
               157.826
Redemptions
(8,168.731)
   (2,934.271)
  (3,769.848) 
  (9,635.794)
      (157.762)
           
Ending Units
December 31, 2010
39,904.989
  7,784.920
16,438.640
 
 1,818.843 
   975.359
           
Subscriptions
  4,234.446
                 1,662.825
                   605.343
          –     
          –       
Redemptions
(9,928.835)
   (3,372.456)
  (7,497.255) 
  (1,759.014)
      (18.007)
Ending Units
December 31, 2011
34,210.600 
  6,075.289 
                 9,546.728
 
      59.829 
   957.352 
           
Subscriptions
  519.393
                 126.801
      –
      –
            –
Redemptions
(10,798.012)
   (2,060.668)
  (1,686.454) 
  (36.817)
      (473.978)
Ending Units
          
 December 31, 2012
23,931.981
    4,141.422
  7,860.274
   23.012
    483.374
           
           
 

 
Distributions – Distributions, other than redemptions of Units, are made on a pro rata basis at the sole discretion of Ceres.  No distributions have been made to date. Ceres does not intend to make any distributions of the Partnership’s profits.

Income Taxes – No provision for income taxes has been made in the accompanying financial statements, as limited partners are individually responsible for reporting income or loss based upon their respective share of the Partnership’s revenues and expenses for income tax purposes. The Partnership files U.S. federal and state tax returns.

The guidance issued by the Financial Accounting Standards Board (“FASB”) on income taxes clarifies the accounting for uncertainty in income taxes recognized in the Partnership’s financial statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken.  The

- 95-
 
 
 
 
Partnership has concluded that there were no significant uncertain tax positions that would require recognition in the financial statements as of December 31, 2012 and 2011.  If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses.  Generally, the 2009 through 2012 tax years remain subject to examination by U.S. federal and most state tax authorities.  No income tax returns are currently under examination.

Dissolution of the Partnership – The Partnership may be terminated upon any of the circumstances first to occur: (i) receipt by Ceres of a notice setting forth an election to terminate and dissolve the Partnership by limited partners holding not less than a Majority of Units (as defined in the Limited Partnership Agreement), with or without cause, (ii) the withdrawal, insolvency, bankruptcy, dissolution, or liquidation of Ceres, (iii) the occurrence of an event which shall make it unlawful for the existence of the Partnership to be continued, or (iv) a determination by Ceres upon 60 days notice to the limited partners to terminate the Partnership.
 
 
Other Pronouncements
 
On October 1, 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-04 “Technical Corrections and Improvements”, which makes minor technical corrections and clarifications to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and
 

 
- 96 -
 
 
 
 
 
disclosure requirements” of ASC 820. The ASU also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820. The amendments are effective for fiscal periods beginning after December 15, 2012. The adoption of this ASU will not have a significant impact on the Partnership’s financial statements.
 

 
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Subsequently in January 2013, the FASB issued ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (“IFRS”). The disclosure requirements are effective for annual reporting periods
 

 
- 97 -
 
 
 
 
beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership would also provide the disclosures retrospectively for all comparative periods presented.  The Partnership is currently evaluating the impact that these pronouncements would have on the financial statements. 
 
 
In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company.  Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company.  The primary changes
 
being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements.  In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB
 
also proposes that an investment company would be required to consolidate another investment company if it holds a controlling financial interest in the entity.  In August 2012, the FASB updated the proposed ASU to state that entities regulated under Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guide.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.
 

3.  
Trading Companies
Investments in Affiliated Trading Companies – The Partnership’s assets identified as “Investments in Affiliated Trading Companies” reflected on the Statements of Financial

- 98 -
 
 
 
 
Condition represent the Partnership’s pro rata share of each Trading Company’s net asset value.  The net assets of each Trading Company are equal to the total assets of the Trading Company (including, but not limited to all cash and cash equivalents, accrued interest, and the fair value of all open Futures Interests contract positions and other assets) less all liabilities of the Trading Company (including, but not limited to, brokerage commissions that would be payable upon the closing of open Futures Interests positions, management fees, incentive fees, and extraordinary expenses), determined in accordance with U.S. GAAP.

The clearing commodity brokers for the Trading Companies are MS&Co. and MSIP.  Collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”.  MSIP serves as the commodity broker for trades on the London Metal Exchange.  MS&Co. acts as the counterparty on all trading of foreign currency forward contracts for all the Trading Companies.  MSCG acts as the counterparty on all trading of options on foreign currency forward contracts for all the Trading Companies MS&Co. and its affiliates act as custodians of the Trading  Companies assets.  MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley.

Each Trading Company pays a brokerage fee to MS&Co. as described below.  Each Trading Company’s cash is on deposit in commodity brokerage accounts with Morgan Stanley.
 

 
The following tables summarize the Partnership’s investments in affiliated Trading Companies as of December 31, 2012 and 2011.  Each Trading Company pays each Trading Advisor a
 

 
- 99 -
 
 
 
 
monthly management fee and a quarterly incentive fee equal to 20% of the trading profits earned (refer to Note 5. Trading Advisors to the Trading Companies) for further information.
 

 
December 31, 2012
Investment
 
% of
LV’s Partners’
Capital
 
Fair Value
 
LV’s
     pro rata Net  Income/(Loss)
LV’s
Management
Fees
 
LV’s
Incentive
Fees
 
 LV’s         
Administrative
Fees        
 
   
    $
$           
  $
$        
$           
TT II, LLC
37.0
      12,246,448    
(23,003)
247,227
4,069      
49,445
WNT I, LLC
21.4
7,072,401
    (401,771)
124,221
232
28,985
Chesapeake I, LLC
13.3
4,408,930
(1,151,518)
99,845
–
17,473
Rotella I, LLC
10.2
3,383,788
   (218,126)
44,554
–
15,594
Kaiser I, LLC
  9.6
3,186,918
(74,042)
73,604
–
15,863
Augustus I, LLC
  7.4
2,433,314
    281,992
49,184
–
11,476
GLC I, LLC
  7.1
2,359,140
   154,061
51,848
–
12,098
 

 
December 31, 2011
Investment
 
% of
LV’s Partners’
Capital
 
Fair Value
 
LV’s
     pro rata Net  Income/(Loss)
LV’s
Management
Fees       
 
LV’s
Incentive
Fees   
 
 LV’s        
Administrative
Fees       
 
   
    $      
$   
  $         
$         
$           
TT II, LLC
28.5
14,111,867
 (1,664,435)
273,205
1,319
51,306
Kaiser I, LLC
21.4
 10,573,213
    (820,064)
301,052
    –       
52,684
WNT I, LLC
18.1
   8,959,457
   302,748
107,555
81,715
18,822
Augustus I, LLC
10.3
   5,112,295
  (516,309)
86,378
1,718
20,155
Rotella I, LLC
10.3
   5,082,011
(253,281)
120,017
19,966
25,533
Chesapeake I, LLC
  9.9
     4,910,449
 (753,265)
94,741
103,139
16,580
GLC I, LLC
  8.0
     3,942,919
 (381,969)
71,600
    –       
16,707
DKR I, LLC
    –
    –
 (496,954)
102,838
4,110
18,333

The strategy for each Trading Company is disclosed in Note 5. Trading Advisors to the Trading Companies.

For all Trading Companies, contributions and withdrawals are permitted on a monthly basis.  As of December 31, 2012 and 2011, there have been no suspended redemptions, “lock up” periods or gate provisions imposed before a withdrawal can be made by the Partnership.


 
Valuation – Futures Interests are open commitments until the settlement date, at which time they are realized.  They are valued at fair value, generally on a daily basis, and the unrealized gains
 

 
- 100 -
 
 
 
 
 
and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as net unrealized gain or loss on open contracts.  The resulting net change in unrealized gains and losses is reflected in the net change in unrealized trading profit (loss) from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forwards contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period.  The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period.  The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as input, the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 p.m. (E.T.) on the last business day of the reporting period.  Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

The Trading Companies may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest on the underlying asset at a specified price prior to or on a specified expiration date. The writer of

- 101 -
 
 
 
 
an option is exposed to the risk of loss if the fair value of a Futures Interest on the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.

Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Trading Companies’ Statements of Financial Condition and are subsequently adjusted to fair values. The difference between the fair value of an option and the premiums received/premiums paid is treated as an unrealized gain or loss.
 

 
Revenue Recognition – Monthly, MS&Co. pays each Trading Company interest income on 100% of its average daily equity maintained in cash in the Trading Companies’ accounts during each month at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero.   When the effective rate is less than zero, no interest is earned.  For purposes of such interest payments, daily funds do not include monies due to each Trading Company on Futures Interests that have not been received.  MS&Co. and Ceres will retain any excess interest not paid to each Trading Company in permitted investments.

Fair Value of Financial Instruments – The fair value of each Trading Company’s assets and liabilities that qualify as financial instruments under the FASB ASC guidance relating to Financial Instruments approximates the carrying amount presented in the Trading Company’s Statements of Financial Condition.
- 102 -
 
 
 
 
Foreign Currency Transactions and Translation - The Trading Companies’ functional currency is the U.S. dollar; however, the Trading Companies may transact business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rate in effect at the date of the Statements of Financial Condition.  Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rate in effect during the period.  Gains and losses resulting from the translation to U.S. dollars are reported in net change in unrealized appreciation (depreciation) on investments in the Statements of Income and Expenses.

Brokerage, Clearing and Transaction Fees – Each Trading Company accrues and pays brokerage, clearing and transaction fees to MS&Co.  Brokerage fees and transaction costs are paid as they are incurred on a half-turn basis at 100% of the rates MS&Co. charges retail commodity customers and parties that are not clearinghouse members.  In addition, the Trading Companies pay transactional and clearing fees as they are incurred.

Trading Company Administrative Fee – Each Trading Company pays Ceres a monthly fee to cover all administrative and operating expenses (the “Trading Company Administrative Fee”).  The monthly Trading Company Administrative Fee is equal to 1/12th of 0.35% (a 0.35% annual rate) of the beginning of the month net asset of each Trading Company.




- 103 -
 
 
 
 
4.  Related Party Transactions
The Partnership pays monthly administrative fees and General Partner fees to Ceres as described in Note 2. Summary of Significant Accounting Policies.  The Partnership pays monthly Placement Agent fees to Morgan Stanley Wealth Management as described in Note 2. Summary of Significant Accounting Policies.

The cash held by each Trading Company is on deposit in commodity brokerage accounts with Morgan Stanley.  MS&Co. pays each Trading Company interest income at each month end as described in Note 3. Trading Companies.  Each Trading Company pays MS&Co. brokerage fees and transactions fees as described in Note 3. Trading Companies.  Each Trading Company pays Ceres a monthly Trading Company Administrative Fee as described in Note 3. Trading Companies.

5.  Trading Advisors to the Trading Companies
Ceres retains certain commodity Trading Advisors to make all trading decisions for the Trading Companies.  The Trading Advisors and their strategies for each Trading Company as of December 31, 2012 are as follows:






- 104 -
 
 
 
 

Trading Company
 
 Trading Advisor
 
Strategy
 
Morgan Stanley Smith Barney Augustus I, LLC
 
GAM International Management
  
(“Augustus I, LLC”)
Limited
Global Rates Program – Futures/FX Only
     
Morgan Stanley Smith Barney Chesapeake Diversified I, LLC
    
(“Chesapeake I, LLC”)
Chesapeake Capital Corporation
Diversified Trading Program
     
Morgan Stanley Smith Barney
GLC I, LLC
    
(“GLC I, LLC”)
GLC Ltd.
Global Macro Program
     
Kaiser I, LLC
Kaiser Trading Group Pty. Ltd.
Global Diversified Trading Program
     
Rotella I, LLC
Rotella Capital Management, Inc.
Polaris Program
     
Morgan Stanley Smith Barney
TT II, LLC
 
Transtrend B.V.
 
Enhanced Risk Profile (USD) of Diversified
(“TT II, LLC”)
  
Trend Program
     
WNT I, LLC
Winton Capital Management Limited
Diversified Trading Program

 
Compensation to the Trading Advisors by the Trading Companies consists of a management fee and an incentive fee as follows:
 

 
Management Fee – Each Trading Company pays its Trading Advisor a monthly management fee based on a percentage of net assets as described in the advisory agreement among each Trading Company, Ceres, and each Trading Advisor.
 

 
Incentive Fee – Each Trading Company pays each Trading Advisor a quarterly incentive fee equal to 20% of the trading profits earned by the applicable Trading Company. Such fee is accrued on a monthly basis.
 

 

 
- 105 -
 
 
 
 
 
Trading profits represent the amount by which profits from Futures Interests trading exceed losses after management fees and administrative fees are deducted.  When a Trading Advisor experiences losses with respect to net assets as of the end of a calendar quarter, the Trading Advisor must recover such losses before that Trading Advisor is eligible for an incentive fee in the future.
 

 
6.  Financial Instruments of the Trading Companies
 
 
The Trading Advisors trade Futures Interests on behalf of the Trading Companies. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price.   Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.
 
The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined.  If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first
 
subsequent day on which the contract could be liquidated.  The fair value of off-exchange-traded contracts is based on the fair value quoted by the counterparty.
 

 

 

 
- 106 -
 
 
 
 
 
The Trading Companies’ contracts are accounted for on a trade-date basis.  A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:
 
 
 (1)
a) One or more “underlyings” and b) one or more “notional amounts” or payment provisions or both;
 
 
(2)
Requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response relative to changes in market factors; and
 
(3)       Terms that require or permit net settlement.
 
Generally, derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.
 

 
7.  Investment Risks
 
The Partnership’s investments in the affiliated Trading Companies expose the Partnership to various types of risks that are associated with Futures Interests trading and the markets in which the Trading Companies invest.  The significant types of financial risks to which the Trading Companies are exposed are market risk, liquidity risk, and counterparty credit risk.
 

 
The rapid fluctuations in the market prices of Futures Interests in which the Trading Companies invest make an investment of the Partnership volatile.  If a Trading Advisor incorrectly predicts the direction of prices in the Futures Interests in which it invests, large losses may occur.
 
- 107-
 
 
 
 
 
Illiquidity in the markets in which the Trading Companies invest may cause less favorable trade prices. Although the Trading Advisors for each Trading Company generally will purchase and sell actively traded contracts where last trade price information and quoted prices are readily available, the prices at which a sale or purchase occur may differ from the prices expected because there may be a delay between receiving a quote and executing a trade, particularly in circumstances where a market has limited trading volume and prices are often quoted for relatively limited quantities.
 

 
The credit risk on Futures Interests arises from the potential inability of counterparties to perform under the terms of the contracts.  Each Trading Company has credit risk because the commodity brokers will act as the futures commission merchants or the counterparties with respect to most of each Trading Company’s assets.  Each Trading Company’s exposure to credit risk associated
 
with counterparty nonperformance is typically limited to the cash deposits with, or other form of collateral held by, the counterparty.  


8. Fair Value Measurements and Disclosures

Effective January 1, 2012, the Partnership adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.”  The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS.  However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair

- 108 -
 
 
 
 
value or for disclosing information about fair value measurements.  This new guidance did not have a material impact on the Partnership’s financial statements.
 

 
Financial instruments are carried at fair value, which is 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 carried at fair value are classified and disclosed in the following three levels: Level 1 — unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 — inputs other than unadjusted quoted market prices that are observable for the asset or liability, either directly or indirectly (including unadjusted quoted market prices for similar investments, interest rates, and credit risk); and Level 3 — unobservable inputs for the asset or liability (including the Partnership’s own assumptions used in determining the fair value of investments).
 

 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of the factors specific to the investment.
 

 
The Partnership’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.
 

 
- 109 -
 
 
 
 
 
LV
Assets
Unadjusted
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other          
Observable              
   Inputs                 
(Level 2)              
Significant
Unobservable
Inputs
(Level 3) 
Total                 
 
December 31, 2012
   $
         $
   $
          $
 Investment in TT II, LLC
    —
12,246,448                    
   —
12,246,448                 
 Investment in WNT I, LLC
    —
 7,072,401                    
    —
7,072,401                
 Investment in Chesapeake I, LLC
    —
  4,408,930
    —
  4,408,930
 Investment in Rotella I, LLC
    —
  3,383,788
    —
  3,383,788
 Investment in Kaiser I, LLC
    —
  3,186,918
    —
  3,186,918
 Investment in Augustus I, LLC
    —
  2,433,314
    —
  2,433,314
 Investment in GLC I, LLC
    —
  2,359,140
    —
  2,359,140
         
         
December 31, 2011
        
 Investment in TT II, LLC
    —
14,111,867                      
   —
14,111,867                 
 Investment in Kaiser I, LLC
    —
10,573,213
    —
10,573,213
 Investment in WNT I, LLC
    —
  8,959,457
    —
  8,959,457
 Investment in Augustus I, LLC
    —
  5,112,295
    —
  5,112,295
 Investment in Rotella I, LLC
    —
  5,082,011
    —
  5,082,011
 Investment in Chesapeake I, LLC
    —
  4,910,449
    —
  4,910,449
 Investment in GLC I, LLC
    —
  3,942,919
    —
  3,942,919
 

 
At December 31, 2012, LV’s investment in the Trading Companies represented approximately: TT II, LLC 34.90%; WNT I, LLC 20.15%; Kaiser I, LLC 9.10%; Rotella I, LLC 9.65%; Augustus I, LLC 6.95%; GLC I, LLC 6.70%; and Chesapeake I, LLC 12.55% of the total investments of LV, respectively.
 

 
At December 31, 2011, LV’s investment in the Trading Companies represented approximately: TT II, LLC 26.80%; Kaiser I, LLC 20.05%; WNT I, LLC 17.00%; Rotella I LLC 9.65%; Augustus I L.L.C. 9.70%; GLC I, LLC 7.50%; and Chesapeake I, LLC 9.30% of the total investments of LV, respectively.
 

 

 

 
- 110 -
 
 
 
 
 
9.  Financial Highlights
 

 
LV
 
     Class A
 
     Class B
 
    Class C
 
    Class D
   Class Z
 
PER UNIT OPERATING PERFORMANCE:
          
NET ASSET VALUE,
          
  JANUARY 1, 2012:
$            959.86
$        981.31
$  1,003.23
$       1,014.52
$       1,048.53
           
NET OPERATING RESULTS:
          
   Net investment loss
    (32.19)
             (28.15)
 (23.82)
 (21.73)
               (14.65)
   Net realized/unrealized loss
     (34.63)
    (35.56)
       (36.58 )
       (36.51 )
               (38.52)
   Net loss
     (66.82)
    (63.71)
       (60.40 )
               (58.24)
               (53.17)
           
NET ASSET VALUE,
          
  DECEMBER 31, 2012:
$            893.04
$          917.60
$      942.83
$          956.28
$         995.36
RATIOS TO AVERAGE NET ASSETS:
          
   Net investment loss
    -3.40%
              -2.90%
               -2.40%
 -2.15%
            -1.40%
   Partnership expenses (1)
3.40%
              2.90%
               2.40%
 2.15%
            1.40%
TOTAL RETURN:
    -6.96%
              -6.49%
               -6.02%
 -5.74%
            -5.07%
           
PER UNIT OPERATING PERFORMANCE:
          
NET ASSET VALUE,
          
  JANUARY 1, 2011:
$            1,068.75
$        1,087.13
$  1,105.83
$       1,115.12
$       1,144.17
           
NET OPERATING RESULTS:
          
   Net investment loss
    (34.74)
             (30.23)
 (25.62)
 (23.30)
 (15.43)
   Net realized/unrealized loss
     (74.15)
    (75.59)
       (76.98 )
       (77.30 )
               (80.21)
   Net loss
     (108.89)
           (105.82)
             (102.60)
             (100.60)
               (95.64)
           
NET ASSET VALUE,
          
  DECEMBER 31, 2011:
$            959.86
$          981.31
$      1,003.23
$        1,014.52
$       1,048.53
RATIOS TO AVERAGE NET ASSETS:
          
   Net investment loss
    -3.40%
              -2.90%
               -2.40%
 -2.15%
            -1.40%
   Partnership expenses (1)
3.40%
              2.90%
               2.40%
 2.15%
            1.40%
TOTAL RETURN:
-10.19%
              -9.73%
               -9.28%
 -9.02%
            -8.36%
           
PER UNIT OPERATING PERFORMANCE:
          
NET ASSET VALUE,
          
  JANUARY 1, 2010:
$            1,044.60
$        1,057.28
$  1,070.11
$     1,076.41
$       1,096.22
NET OPERATING RESULTS:
          
   Net investment loss
    (34.71)
             (30.03)
 (25.21)
 (22.71)
 (15.14)
   Net realized/unrealized gain
      58.86
        59.88 
       60.93
        61.42
        63.09
   Net Income
      24.15
                29.85 
       35.72
        38.71
        47.95
           
NET ASSET VALUE,
          
DECEMBER 31, 2010:
$            1,068.75
$        1,087.13
$     1,105.83
$       1,115.12
$       1,144.17
           
RATIOS TO AVERAGE NET ASSETS:
          
   Net investment loss
    -3.40%
              -2.90%
               -2.40%
 -2.15%
            -1.40%
   Partnership expenses (1)
3.40%
              2.90%
               2.40%
 2.15%
            1.40%
TOTAL RETURN:
2.31%
              2.82%
               3.34%
 3.60%
            4.37%
           


 

 

 
- 111 -

 
 
 

RATIOS TO AVERAGE NET ASSETS FOR TRADING COMPANIES AS OF
DECEMBER 31, 2012:



 
 
 
 
 
 
  LV
  
 Interest Income
–      (2)
    
 Trading Company Administrative Fees
-0.35%
    
 Management Fees
-1.60%
    
 Incentive Fees
-0.01%
    

 (1) Does not include the expenses of the Trading Companies in which the Partnership invests.

 (2) Amounts less than 0.005%.



 
10.  Subsequent Events
 
Management performed its evaluation of subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements other than disclosed below.
 

 
Effective January 1, 2013, Boronia Capital Pty Ltd was added as a trading advisor to the Partnership.
 

 
Effective January 31, 2013, GLC I, LLC and Ceres terminated the Advisory Agreement by and among the Trading Advisor, the Trading Company and Ceres.  The Trading Advisor ceased trading on behalf of the Partnership as of the close of business on January 31, 2013.
 








 
- 112 -

 
 
 

Supplementary data specified by Item 302 of Regulation S-K:

Summary of Quarterly Results (Unaudited)

Quarter Ended
Total Trading Results
Net Loss
     
2012
    
March 31
$  151,831
$(227,587)
June 30
(552,697)
(902,086)
September 30
 (57,104)
(380,788)
December 31
     (974,437)
     (1,259,708)
     
Total
$  (1,432,407)
$  (2,770,169)

                                  Net Loss Per Unit
Share Class
 
       Class A
Class B
Class C
 
Class D
Class Z
March 31
$(5.53)
 $(4.43)
$(3.28)
$(2.70)
$(0.81)
June 30
(20.75)
     (20.04)
  (19.27)
  (18.87)
  (17.60)
September 30
  (10.64)
  (9.71)
(8.74)
  (7.77)
  (6.62)
           
December 31
  (29.90)
  (29.53)
  (29.11)
  (28.90)
  (28.14)
           
Total
 $(66.82)
 $(63.71)
  $(60.40)
$(58.24)
$(53.17)

Quarter Ended
Total Trading Results
Net Loss
     
2011
    
March 31
$   (504,302)
$(1,044,506)
June 30
(2,761,138)
(3,264,185)
September 30
   (867,191)
(1,328,297)
December 31
     (450,899)
     (868,596)
     
Total
$  (4,583,530)
$  (6,505,584)

                         Net Loss Per Unit
Share Class
 
       Class A
Class B
Class C
Class D
Class Z
March 31
$(17.05)
$(15.99)
$(14.90)
$(14.33)
$(12.58)
June 30
(53.53)
     (53.22)
  (52.89)
  (52.70)
  (52.11)
September 30
  (23.13)
  (22.34)
  (21.49)
  (21.05)
  (19.70)
           
December 31
  (15.18)
  (14.27)
  (13.32)
  (12.52)
  (11.25)
           
Total
 $(108.89)
 $(105.82)
  $(102.60)
$(100.60)
$(95.64)


Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


- 113 -
 
 
 
 
Item 9A.  CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, at the time this annual report was filed, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012.  The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms.  Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at December 31, 2012.

Management’s Report on Internal Control Over Financial Reporting
Ceres is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).  Ceres has assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2012.  In making this assessment, Ceres used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control-Integrated Framework.  Ceres has concluded that, as of December 31, 2012, the Partnership’s internal control over financial reporting is effective based on these criteria.  This report shall not be deemed to be


- 114 -

 
 
 

filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  This annual report does not include an attestation report of the Partnership’s independent registered public accounting firm regarding internal control over financial reporting pursuant to SEC rules that permit the Partnership, as a non-accelerated filer, to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting
There have been no changes during the period covered by this annual report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting.

Limitations on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can provide 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.

Item 9B.  OTHER INFORMATION
None.





- 115 -
 
 
 
 
PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Partnership has no officers or directors and its affairs are managed by its General Partner.  Investment decisions are made by the Advisors.

The officers and directors of the General Partner are Walter Davis (President and Chairman of the Board of Directors), Damian George (Chief Financial Officer and Director), Colbert Narcisse (Director), Douglas J. Ketterer (Director), Harry Handler (Director), Patrick T. Egan (Director), Alper Daglioglu (Director) and Craig Abruzzo (Director).  Each director holds office until the earlier of his or her death, resignation or removal.  Vacancies on the board of directors may be filed by either (i) the majority vote of the remaining directors of (ii) MSSBH, as the sole member of the General partner.  The officers of the General Partner are designated by the General Partner’s board of directors.  Each officer will hold office until his or her successor is designated and qualified or until his or her death, resignation or removal.

Directors of the General Partner are responsible for overall corporate governance of the General Partner and meet periodically to consider strategic decisions regarding the General Partner’s activities.  Under CFTC rules, each Director of the General Partner is deemed to be a principal of the General Partner and, as a result, is listed as such with the NFA.  Walter Davis, Damian George, Patrick T. Egan and Alper Daglioglu serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions.

 
- 116 -
 
 
 
 
Walter Davis, age 48, has been President and Chairman of the Board of Directors of the General Partner since June 2010, where his responsibilities include oversight of the General Partner’s funds and accounts.  Since June 2010, Mr. Davis has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA.  Since December 2012, Mr. Davis has been registered as a swap associated person of General Partner.  Since June 2009, Mr. Davis has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as a Managing Director and the Director of the Managed Futures Department.  Since June 2009, Mr. Davis has been registered as an associated person of Morgan Stanley Wealth Management.  From May 2006 through June 2010, Mr. Davis served as President and Chairman of the Board of Directors of Demeter Management LLC (“Demeter”), a registered commodity pool operator, where his responsibilities included oversight of Demeter’s funds and accounts.  From May 2006 through December 2010, Mr. Davis was listed as a principal of Demeter, and from July 2006 through December 2010, Mr. Davis was registered as an associated person of Demeter.  From April 2007 through June 2009, Mr. Davis was employed by MS&Co., a financial services firm, where his responsibilities included serving as the Managing Director and the Director of the Managed Futures Department.  From April 2007 through June 2009, Mr. Davis was registered as an associated person of MS&Co.  From August 2006 through April 2007, Mr. Davis was employed by Morgan Stanley DW Inc., a financial services firm, where his responsibilities included serving as a Managing Director and the Director of the Managed Futures Department.  From August 2006 through April 2007, Mr. Davis was registered as an associated person of Morgan Stanley DW Inc.  From September 1999 through August 2006, Mr. Davis was employed by MS&Co., a financial
 

 
- 117 -
 
 
 
 
services firm, where his responsibilities included oversight of the sales and marketing of MS&Co.’s managed futures funds to high net worth and institutional investors on a global basis.  From January 1992 through September 1999, Mr. Davis was employed by Chase Manhattan Bank’s Alternative Investment Group, an alternative investment group, where his responsibilities included marketing managed futures funds to high net worth investors, as well as developing and structuring managed futures funds.  Mr. Davis earned his Bachelor of Arts degree in Economics in May 1987 from the University of the South and his Master of Business Administration in Finance and International Business in May 1992 from Columbia University Graduate School of Business.
 

 
Damian George, age 45, has been a Director of the General Partner since November 2012.  Since June 2012, Mr. George has been the Chief Financial Officer and a principal of the General Partner and is an associate member of the NFA.  Mr. George has been Vice President and listed as a principal since December 2012, and registered as an associated person since January 2013, of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous hedge fund feeder funds.  Since January 2013, each such entity has been registered as a commodity pool operator with CFTC.  Mr. George is responsible for overseeing the implementation of certain CFTC and NFA regulatory requirements applicable to such entities.  Since August 2009, Mr. George has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include oversight of futures funds, budgeting, finance and Sarbanes-Oxley testing for the
 

 
- 118 -
 
 
 
 
Alternative Investments–Managed Futures group.  Since August 2009, Mr. George has been registered as an associated person of Morgan Stanley Wealth Management.  From November 2005 through July 2009, Mr. George was employed by Citi Alternative Investments, a division of Citigroup Inc., a financial services firm, which administered Citigroup Inc.’s hedge fund and fund of funds business, where he served as Director and was responsible for futures funds budgeting, finance and Sarbanes-Oxley testing for the Hedge Fund Management group.  From November 2004 through July 2009, Mr. George was registered as an associated person of Citigroup Global Markets.  Mr. George earned his Bachelor of Science degree in Accounting in May 1989 from Fordham University and his Master of Business Administration degree in International Finance in February 1998 from Fordham University.  Mr. George is a Certified Public Accountant.
 
Colbert Narcisse, age 47, has been a Director of the General Partner since December 2011 and listed as a principal of the General Partner since February 2012.  Since December 2012, Mr. Narcisse has been a Director on the Board of Directors and listed as a principal of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous hedge fund feeder funds.  Since January 2013, each such entity has been registered as a commodity pool operator with CFTC.  Since February 2011, Mr. Narcisse has been a Managing Director at Morgan Stanley Wealth Management, a financial services firm, where his responsibilities have included serving as Head of the Alternative Investment Group, Head of the Corporate Equity Solutions Group, and Chief Operating Officer
 

 
- 119 -
 
 
 
 
of the Investment Strategy and Client Solutions Division.  From July 2009 until February 2011, Mr. Narcisse served as Chief Executive Officer of Gold Bullion International, a business services company that enables retail investors to acquire, manage and store physical precious metals through their financial advisor.  From March 2009 until July 2009, Mr. Narcisse took personal leave.  From August 1990 until March 2009, Mr. Narcisse was employed by Merrill Lynch & Co., Inc., a financial services firm, where his responsibilities included serving as Chief Operating Officer of Americas Investment Banking, Chief Operating Officer of the Global Wealth Management Division, and as an investment banker in both the Financial Institutions and Public Finance Groups.  From July 1987 until August 1990, Mr. Narcisse was employed by the Federal Reserve Bank of New York, where his responsibilities included serving as a Bank Examiner.  Additionally, Mr. Narcisse serves on the Board of Harlem RBI, as the Vice Chair of Finance for the Montclair Cooperative School Board of Trustees, as an Audit Committee Member of the New York City Housing Authority, and as a Member of the Executive Leadership Council.  Mr. Narcisse received his Bachelor of Science degree in Finance in June 1987 from New York University.  He received his Master of Business Administration degree in July 1992 from Harvard Business School.
 

Douglas J. Ketterer, age 47, has been a Director and a principal of the General Partner since December 2010.  Since December 2012, Mr. Ketterer has been a Director on the Board of Directors and listed as a principal of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous
 

 
- 120 -
 
 
 
 
hedge fund feeder funds.  Since January 2013, each such entity has been registered as a commodity pool operator with CFTC.  From October 2003 through December 2010, Mr. Ketterer was listed as a principal of Demeter, a commodity pool operator, until Demeter’s combination with the General Partner.  From July 2010 through the present, Mr. Ketterer has been employed by Morgan Stanley Wealth Management, a financial services firm, as Managing Director and as Head of the U.S. Field Management and U.S. Private Wealth Management Group, where his responsibilities include overseeing the U.S. Private Wealth Management Group and, as of June 2012, Head of U.S. Field Management.  From March 1990 through July 2010, Mr. Ketterer was employed by MS&Co., a financial services firm, where his responsibilities included serving as Chief Operating Officer of the Wealth Management Group and Head of the Products Group.  During Mr. Ketterer’s employment at MS&Co. his responsibilities included oversight over a number of departments including the Alternative Investments Group, the Consulting Services Group, the Annuities & Insurance Department, and the Retirement & Equity Solutions Group, which offered products and services through MS&Co.’s Global Wealth Management Group.  Mr. Ketterer received his Master of Business Administration degree from New York University’s Leonard N. Stern School of Business in January 1994 and his Bachelor of Science degree in Finance from the University at Albany’s School of Business in May 1987.
 

Harry Handler, age 54, has been a Director of the General Partner since December 2010.  Since December 2010, Mr. Handler has been registered as an associated person and listed as a principal of the General Partner, and is an associate member of the NFA.  Mr. Handler was listed as a principal of Demeter from May 2005, and was registered as an associated person of Demeter
 

 
- 121 -
 
 
 
 
 
from April 2006, until Demeter’s combination with the General Partner in December 2010.  Mr. Handler was registered as an associated person of Morgan Stanley DW Inc., a financial services firm, from February 1984 until on or about April 2007, when, because of the merger of Morgan Stanley DW Inc. into MS&Co., he became registered as an associated person of MS&Co. due to the transfer of his original registration as an associated person of Morgan Stanley DW Inc.  Mr. Handler withdrew as an associated person of MS&Co. in June 2009.  Mr. Handler has been registered as an associated person of Morgan Stanley Wealth Management since June 2009 and as a branch office manager since February 2013.  Mr. Handler serves as an Executive Director at Morgan Stanley Wealth Management in the Global Wealth Management Group.  Mr. Handler works in the Capital Markets Division and is responsible for Electronic Equity and Securities Lending.  Additionally, Mr. Handler serves as Chairman of the Global Wealth Management Group’s Best Execution Committee.  In his prior position, Mr. Handler was a Systems Director in Information Technology, in charge of Equity and Fixed Income Trading Systems along with the Special Products, such as Unit Trusts, Managed Futures, and Annuities.  Prior to his transfer to the Information Technology Area, Mr. Handler managed the Foreign Currency and Precious Metals Trading Desk of Dean Witter, a financial services firm and predecessor company to Morgan Stanley, from July 1982 until January 1984.  He also held various positions in the Futures Division where he helped to build the Precious Metals Trading Operation at Dean Witter.  Before joining Dean Witter, Mr. Handler worked at Mocatta Metals, a precious metals trading firm and futures broker that was sold to Standard Charted Bank in the 1980’s, as an Assistant to the Chairman from March 1980 until June 1982.  His roles at Mocatta Metals included positions on the Futures Order Entry Desk and the Commodities Exchange Trading
 

 
- 122 -
 
 
 
 
 
Floor.  Additional work included building a computerized Futures Trading System and writing a history of the company.  Mr. Handler graduated on the Dean’s List from the University of Wisconsin-Madison with a Bachelor of Arts degree in History and Political Science.
 

 
Patrick T. Egan, age 43, has been a Director of the General Partner since December 2010.  Since December 2010, Mr. Egan has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA.  Since June 2011, Mr. Egan has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as Executive Director and as Chief Risk Officer for Morgan Stanley Wealth Management  Managed Futures.  From June 2009 through June 2011, Mr. Egan was employed by Morgan Stanley Wealth Management, where his responsibilities included serving as Co-Chief Investment Officer for Morgan Stanley Wealth Management Managed Futures.  Since November 2010, Mr. Egan has been registered as an associated person of Morgan Stanley Wealth Management.  From April 2007 through June 2009, Mr. Egan was employed by MS&Co., a financial services firm, where his responsibilities included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department.  From April 2007 through November 2010, Mr. Egan was registered as an associated person of MS&Co.  From March 1993 through April 2007, Mr. Egan was employed by Morgan Stanley DW Inc., a financial services firm, where his initial responsibilities included serving as an analyst and manager within the Managed Futures Department (with primary responsibilities for product development, due diligence, investment analysis and risk management of the firm’s commodity pools) and later included serving as Head of Due Diligence and Manager Research
 

 
- 123 -
 
 
 
 
 
for Morgan Stanley’s Managed Futures Department.   From February 1998 through April 2007, Mr. Egan was registered as an associated person of Morgan Stanley DW Inc.  From August 1991 through March 1993, Mr. Egan was employed by Dean Witter Intercapital, the asset management arm of Dean Witter Reynolds, Inc., where his responsibilities included serving as a mutual fund administration associate.  Mr. Egan also served as a Director from November 2004 through October 2006, and from November 2006 through October 2008 of the Managed Funds Association’s Board of Directors, a position he was elected to by industry peers for two consecutive two-year terms.  Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.
 

 
Alper Daglioglu, age 36, has been a Director and listed as a principal of the General Partner since December 2010.  Since December 2010, Mr. Daglioglu has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as Executive Director and Chief Investment Officer for Morgan Stanley Wealth Management Managed Futures and serving on the Alternative Investments Product Review Committee of Morgan Stanley Wealth Management’s  Alternative Investments Group.  From June 2009 through December 2010, Mr. Daglioglu was employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group.  From December 2003 through June 2009, Mr. Daglioglu was employed by Morgan Stanley, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group, and serving as the lead investment
 

 
- 124 -
 
 
 
 
 
analyst for Global Macro and Managed Futures strategies within Morgan Stanley Graystone Research Group from February 2007 through June 2009.  Mr. Daglioglu earned his Bachelor of Science degree in Industrial Engineering in June 2000 from Galatasaray University and his Master of Business Administration degree in Finance in May 2003 from the University of Massachusetts-Amherst’s Isenberg School of Management.  Mr. Daglioglu was awarded a full merit scholarship and research assistantship at the Center for International Securities and Derivatives Markets during his graduate studies.  In this capacity, he worked with various major financial institutions in performance monitoring, asset allocation and statistical analysis projects and specialized on alternative approaches to risk assessment for hedge funds and managed futures.  Mr. Daglioglu wrote and published numerous research papers on alternative investments.  Mr. Daglioglu is a Chartered Alternative Investment Analyst charterholder.
 

Craig Abruzzo, age 44, has been a Director and a principal of the General Partner since March 2013 and is an associate member of the NFA.  Since October 2007, Mr. Abruzzo has been the U.S. Head of Listed Derivatives for a financial services firm, where his responsibilities include overseeing the institutional futures commission merchant business.  Since May 2012, Mr. Abruzzo has also served as the Global Head of OTC Clearing for MS&Co., where his responsibilities include oversight of the institutional OTC swap clearing business. Mr. Abruzzo has been listed as a principal of MS&Co. since October 2010, and has been registered as an associated person of MS&Co. since July 2007 and as a swap associated person since November 2012. Mr. Abruzzo earned his Bachelor of Arts degree in Political Science and Economics in May 1990 from Drew University and his juris doctor degree in May 1994 from the New York University School of Law.  
- 125 -
 
 
 
 
Section 16(a) Beneficial Ownership Reporting Compliance
To the Partnership’s knowledge, all required Section 16(a) filings during the fiscal year ended December 31, 2012 were timely and correctly made.

Code of Ethics
The Partnership has not adopted a code of ethics that applies to the Partnership’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  The Partnership is operated by its general partner, Ceres.  The President, Chief Financial Officer, and each member of the Board of Directors of Ceres are employees of Morgan Stanley and are subject to the code of ethics adopted by Morgan Stanley, the text of http://www.morganstanley.com/individual/ourcommitment which can be viewed on Morgan Stanley’s website at codeofconduct.html.

The Audit Committee
The Partnership is operated by its general partner, Ceres, and has no audit committee.

Item 11.  EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers.  As a limited partnership, the business of the Partnership is managed by Ceres, which is responsible for the General Partner of the business affairs of the Partnership.  The Partnership pays Ceres a monthly administration fee equal to 1/12th of 1.0% (a 1.0% annual rate) and a monthly administrative fee equal to 1/12th of 0.40% (a 0.40% annual rate) of the net asset value of each Class of Units at the beginning of each month.



- 126 -
 
 
 
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

(a)  Security Ownership of Certain Beneficial Owners – At December 31, 2012, Good Life Broadcasting, Inc. was a beneficial owner of 1,059.730 outstanding Class C Units of the Partnership.

(b)  Security Ownership of Management - At December 31, 2012, the officers and directors of Ceres did not own any Units.

(c)  Changes in Control – None.


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

For a description of the relationships between Ceres, Commodity Brokers, counterparties, and Trading Advisors refer to Note 3. Trading Companies of "Notes to Financial Statements", and Note 4. Related Party Transactions of “Notes to Financial Statements:; in the Financial Statements of the Partnership, which are included in Item 8 of this Form 10-K.

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
MS&Co. on behalf of the Partnership, pays all accounting fees.  The Partnership reimburses MS&Co. through the Partnership administrative fee it pays, as discussed in the Notes to Financial Statements which are included in Item 8 of this Form 10-K.
 
 
- 127 -
 
 
 
 
(1)  Audit Fees.  The aggregate fees for professional services rendered by Deloitte & Touche LLP (“D&T”) in connection with their audit of the Partnership’s Financial Statements and review of the financial statements included in the Quarterly Reports on Form 10-Q, and in connection with statutory and regulatory filings were approximately $225,294 for the year ended December 31, 2012, and $192,053 for the year ended December 31, 2011.

(2)  Audit-Related Fees.  None.

(3)  Tax Fees.  The Partnership did not pay D&T any amounts in 2012 and 2011 for professional services in connection with tax compliance, tax advice, and tax planning.

(4)  All Other Fees.  None.











- 128 -
 
 
 
 
PART IV
Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. Listing of Financial Statements
The following financial statements and report of independent registered public accounting firm are filed in Item 8 of this Form 10-K:
 
-
Report of Deloitte & Touche LLP, independent registered public accounting firm.

 
-
Statements of Financial Condition as of December 31, 2012 and December 31, 2011.

 
-
Statements of Income and Expenses for the years ended December 31, 2012, 2011 and 2010.

 
-
Statements of Changes in Partners’ Capital for the years ended December 31, 2012, 2011 and 2010.

-           Notes to Financial Statements.



Additionally, Financial Statements of the Trading Companies required by Regulation S-X are filed as Exhibit 99.1, 99.2 and 99.3 to this Form 10-K.
2. Listing of Financial Statement Schedules
 
None.

 
3. Exhibits
For the exhibits incorporated by reference or filed herewith to this report, refer to Exhibit Index on Pages E-1 to E-4.


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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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.

 
LV FUTURES FUND L.P.
 
(Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
March 27, 2013
By:
/s/ Walter Davis
   
  Walter Davis,
   
   President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Ceres Managed Futures LLC

BY:
/s/
Walter Davis
  
March 27, 2013
   
Walter Davis, President, Director
    
         
 
/s/
Damian George
  
March 27, 2013
   
Damian George, Chief Financial Officer, Principal Accounting
    
   
Officer, Director
    
         
 
/s/
Craig Abruzzo
  
March 27, 2013
   
Craig Abruzzo, Director
    
         
 
/s/
Alper Daglioglu
  
March 27, 2013
   
Alper Daglioglu, Director
    
         
 
/s/
Patrick T. Egan
  
March 27, 2013
   
Patrick T. Egan, Director
    
         
 
/s/
Harry Handler
  
March 27, 2013
   
Harry Handler, Director
    
         
 
/s/
Douglas J. Ketterer
  
March 27, 2013
   
Douglas J. Ketterer, Director
    
         
 
/s/
Colbert Narcisse
  
March 27, 2013
   
Colbert Narcisse, Director
    
- 130 -

 
 
 
 
 
 

EXHIBIT INDEX
ITEM

 
1.1!
Placement Agent Agreement dated June 1, 2007 by and among Morgan Stanley Managed Futures L.V., L.P., Morgan Stanley Managed Futures MV, L.P., Morgan Stanley Managed Futures HV, L.P., the General Partner and Morgan Stanley & Co. Incorporated.
 
3.1!
Certificate of Limited Partnership of the Registrant, dated February 22, 2007.
 
3.2+
Certificate of Amendment of Certificate of Limited Partnership of the Registrant, dated as of June 1, 2009.
 
3.3†
Certificate of Amendment of Certificate of Limited Partnership of the Registrant, dated as of October 1, 2009.
 
3.4!!
Third Amended and Restated Limited Partnership Agreement of the Registrant, dated as of December 1, 2010.
 
3.5!!
Fourth Amended and Restated Limited Partnership Agreement of the Registrant, dated as of June 1, 2011.
 
10.1!
Form of Operating Agreement for the Trading Companies.
 
10.2
Advisory Agreement among Morgan Stanley Managed Futures Chesapeake I, LLC, the General Partner and Chesapeake Capital Corporation, dated April 30, 2007.
 
10.3
Advisory Agreement among Morgan Stanley Managed Futures Kaiser I, LLC, the General Partner and Kaiser Trading Group Pty. Ltd., dated April 30, 2007.
 
10.4
Amendment No. 1 to Advisory Agreement among Morgan Stanley Smith Barney Kaiser I, LLC, the General Partner and Kaiser Trading Group Pty. Ltd., dated March 1, 2012.
 
10.5
Amendment No. 2 to Advisory Agreement among Morgan Stanley Smith Barney Kaiser I, LLC, the General Partner and Kaiser Trading Group Pty. Ltd., dated January 1, 2013.
 
10.6
Advisory Agreement among Morgan Stanley Managed Futures Transtrend II, LLC, the General Partner and Transtrend B.V., dated April 30, 2007.
 
10.7!
Form of Subscription and Exchange Agreement and Power of Attorney.
 
10.8!
Foreign Exchange and Options Master Agreement by and among Morgan Stanley & Co. Incorporated, the Trading Companies listed on Exhibit I thereto, and the General Partner, dated as of November 28, 2007.
 
 
E-1
 
 
 
 
10.9!
Foreign Exchange and Options Master Agreement by and among Morgan Stanley Capital Group, Inc., Morgan Stanley Managed Futures DKR I, LLC, and the General Partner, dated as of November 8, 2007.
 
10.10!
Customer Agreement among Morgan Stanley & Co. International PLC and the Trading Companies listed on Schedule A thereto, dated July 24, 2007.
 
10.11!
Customer Agreement among Morgan Stanley & Co. International Limited, Morgan Stanley Securities Limited, and the Trading Companies listed on Schedule A thereto, dated as of July 26, 2007.
 
10.12!
Escrow Agreement by and among The Bank of New York, the General Partner and the entities listed on Annex A thereto, dated July 25, 2007.
 
10.13!
Commodity Futures Customer Agreement between Morgan Stanley & Co. Incorporated and the Trading Companies listed on Schedule A thereto dated July 23, 2007.
 
10.14!
Rider to Customer Agreement between Morgan Stanley & Co. Incorporated and the Trading Companies listed on Schedule A thereto dated March 26, 2008.
 
10.15!
Amendment to Foreign Exchange and Options Master Agreement by and among Morgan Stanley & Co. Incorporated, the Trading Companies listed on Exhibit I thereto and the General Partner, dated March 26, 2008.
 
10.16!
Rider to Customer Agreement among Morgan Stanley & Co. International PLC and the Trading Companies listed on Schedule A thereto dated March 26, 2008.
 
10.17!
Rider to Customer Agreement among Morgan Stanley & Co. International Limited, Morgan Stanley Securities Limited, and the Trading Companies listed on Schedule A thereto, dated March 26, 2008.
 
10.18∆*
Advisory Agreement among MSSB Managed Futures Rotella I, LLC, the General Partner and Rotella Capital Management, Inc. dated July 1, 2009.
 
10.19‡*
Advisory Agreement among Morgan Stanley Smith Barney Augustus I, LLC, the General Partner and Augustus Asset Managers Limited, dated September 28, 2009.
 
10.20‡*
Advisory Agreement among Morgan Stanley Smith Barney GLC I, LLC, the General Partner and GLC Ltd., dated October 1, 2009.
 
 
10.21
Advisory Agreement among Morgan Stanley Managed Futures WCM I, LLC, the General Partner and Winton Capital Management Limited, dated April 30, 2007.
 
 
10.22††
Amendment to the Advisory Agreement dated January 1, 2012, by and among Ceres Managed Futures LLC, Morgan Stanley Smith Barney WNT I, LLC, and Winton Capital Management Limited.
 
 
E-2
 
 
 
 
 
31.01
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.01
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.1
Morgan Stanley Smith Barney Chesapeake Diversified I, LLC Financial Statements.
 
 
99.2
Morgan Stanley Smith Barney TT II, LLC Financial Statements.
 
 
99.3
Morgan Stanley Smith Barney WNT I, LLC Financial Statements.
 

 
 
101.INS^
XBRL Instance Document
 
101.SCH^
XBRL Taxonomy Extension Schema
 
101.CAL^
XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF^
XBRL Taxonomy Extension Definition Linkbase
 
101.LAB^
XBRL Taxonomy Extension Label Linkbase
 
101.PRE^
XBRL Taxonomy Extension Presentation Linkbase

 
 
____________________________________
 
    !
Incorporated herein by reference from the Registrant’s Form 10 filed on August 8, 2008.
 
    +
Incorporated herein by reference from the Registrant’s Form 8-K, filed on June 5, 2009.
 
    ∆
Incorporated herein by reference from the Registrant’s Form 10-Q, filed on August 14, 2009.
 
    †
Incorporated herein by reference from the Registrant’s Form 8-K, filed on October 1, 2009.
 
    ‡
Incorporated herein by reference from the Registrant’s Form 10-Q, filed on November 16, 2009.
 
  ††
Incorporated herein by reference from the Registrant’s Form 8-K, filed on January 6, 2012.
 
 
E-3
 
 
 
 
  !!
Incorporated herein by reference from the Registrant’s Form 10-K, filed on March 30, 2012.
 
*
Confidential treatment has been granted with respect to the omitted portions of this exhibit.
 

 
^  Submitted electronically herewith.

Pursuant to applicable securities laws and regulations, the Partnership is deemed to have complied with the reporting obligation relating to the submission of interactive data files in Exhibit 101 to this report and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Partnership has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements.  Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
E-4