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The following is an excerpt from a 10-Q SEC Filing, filed by ORION FUTURES FUND LP on 5/16/2011.
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ORION FUTURES FUND LP - 10-Q - 20110516 - NOTES_TO_FINANCIAL_STATEMENT
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
1.   General:
 
Orion Futures Fund L.P. (the “Partnership”), is a limited partnership organized on March 22, 1999 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, livestock, indices, U.S. and non-U.S. interest rates, softs and metals. The commodity interests that are traded by the Partnership and the Funds (as defined in Note 5 “Investment in Funds”) are volatile and involve a high degree of market risk. The Partnership commenced trading on June 10, 1999. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.
 
Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Global Markets Inc. (“CGM”), the commodity broker for the Partnership, owns a minority equity interest in MSSB Holdings. Citigroup Inc. (“Citigroup”), indirectly through various subsidiaries, wholly owns CGM. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup. As of March 31, 2011, all trading decisions for the partnership are made by the Advisors (defined below).
 
As of March 31, 2011, all trading decisions are made by Willowbridge Associates Inc. (“Willowbridge”), Winton Capital Management Limited (“Winton”) and AAA Capital Management Advisors, Ltd. (“AAA”) (each an “Advisor” and, collectively, the “Advisors”), each of which is a registered commodity trading advisor.
 
The General Partner and each limited partner of the Partnership share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no Limited Partner shall be liable for obligations of the Partnership in excess of their capital contribution and profits, if any, net of distributions.
 
The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at March 31, 2011 and December 31, 2010, and the results of its operations and changes in partners’ capital for the three months ended March 31, 2011 and 2010. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K , as amended, filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2010.
 
The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.
 
 
Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.
 


7


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
2.   Financial Highlights:
 
Changes in the net asset value per unit for the three months ended March 31, 2011 and 2010 were as follows:
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Net realized and unrealized gains (losses) *
  $ 53.85     $ (41.60 )
Interest income
    0.65       0.37  
Expenses **
    (21.06 )     (15.80 )
 
           
Increase (decrease) for the period
    33.44       (57.03 )
Net asset value per unit, beginning of period
    2,754.39       2,693.18  
 
           
Net asset value per unit, end of period
  $ 2,787.83     $ 2,636.15  
 
           
 
*   Includes brokerage commissions.
 
**   Excludes brokerage commissions.
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Ratios to Average Net Assets:***
               
Net investment income(loss) before incentive fees****
    (3.4 )%     (3.8 )%
 
           
 
               
Operating expenses
    3.6 %     3.9 %
Incentive fees
    0.2 %     %
 
           
Total expenses
    3.8 %     3.9 %
 
           
 
               
Total return:
               
Total return before incentive fees
    1.4 %     (2.1 )%
Incentive fees
    (0.2 )%     %
 
           
Total return after incentive fees
    1.2 %     (2.1 )%
 
           
 
***   Annualized (other than incentive fees)*
 
****   Interest income less total expenses (exclusive of incentive fees).
 
The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.
 
3.   Trading Activities:
 
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
The customer agreements between the Partnership and CGM and the Funds and CGM give the Partnership and the Funds, respectively the legal right to net unrealized gains and losses on open futures and open forward contracts. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures and open forward contracts on the Statements of Financial Condition.
 
All of the commodity interests owned by the Partnership and the Funds are held for trading purposes. The monthly average number of futures contracts traded directly by the Partnership during the three months ended March 31, 2011 and 2010 were 4,969 and 3,242, respectively. The monthly average number of metal forward contracts traded directly by the Partnership during the three months ended March 31, 2011 and 2010 were 9,217 and 1,427, respectively. The monthly average number of option contracts traded directly by the Partnership during the three months ended March 31, 2011 and 2010 were 342 and 20, respectively. The monthly average notional value of currency forward contracts, held directly by the Partnership, during the three months ended March 31, 2011 and 2010 were $16,830,166 and $2,594,293, respectively.


8


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
Brokerage commissions are based on the number of trades executed by the Advisors and the Funds.
 
The following tables indicate the gross fair values of derivative instruments of futures, forward and options contracts traded directly by the Partnership as separate assets and liabilities as of March 31, 2011 and December 31, 2010.
         
    March 31, 2011  
Assets
       
Futures Contracts
       
Currencies
  $ 1,432,311  
Energy
    1,726,557  
Grains
    368,011  
Interest Rates Non-U.S.
    291,614  
Livestock
    97,940  
Metals
    4,294,490  
Softs
    189,992  
 
     
Total unrealized appreciation on open futures contracts
  $ 8,400,915  
 
     
 
       
Liabilities
       
Futures Contracts
       
Currencies
  $ (90,537 )
Energy
    (9,240 )
Grains
    (549,895 )
Indices
    (1,300 )
Interest Rates U.S.
    (5,750 )
Interest Rates Non-U.S.
    (52,130 )
Metals
    (504,260 )
Softs
    (161,796 )
 
     
Total unrealized depreciation on open futures contracts
  $ (1,374,908 )
 
     
Net unrealized appreciation on open futures contracts
  $ 7,026,007 *
 
     
 
*   This amount is in “Net unrealized appreciation on open futures contracts” on the Statements of Financial Condition.  
         
    March 31, 2011  
Assets
       
Forward Contracts
       
Metals
  $ 28,178,645  
 
     
Total unrealized appreciation on open forward contracts
  $ 28,178,645  
 
     
 
       
Liabilities
       
Forward Contracts
       
Metals
  $ (46,439,323 )
 
     
Total unrealized depreciation on open forward contracts
  $ (46,439,323 )
 
     
Net unrealized depreciation on open forward contracts
  $ (18,260,678) **
 
     
 
**   This amount is in “Net unrealized depreciation on open forward contracts” on the Statements of Financial Condition.  
 


9


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
         
    March 31, 2011  
Assets
       
Options Purchased
       
Metals
  $ 2,550,776  
 
     
Options Purchased
  $ 2,550,776 ***
 
     
 
***   This amount is in “Options purchased, at fair value” on the Statements of Financial Condition.  
 
 
         
    December 31,
 
    2010  
 
Assets
       
Futures Contracts
       
Currencies
  $ 1,023,400  
Energy
    1,076,962  
Grains
    2,158,741  
Interest Rates U.S. 
    35,017  
Interest Rates Non-U.S. 
    113,936  
Livestock
    95,380  
Metals
    3,589,089  
Softs
    2,714,932  
         
Total unrealized appreciation on open futures contracts
  $ 10,807,457  
         
Liabilities
       
Futures Contracts
       
Currencies
  $ (43,300 )
Energy
    (13,740 )
Grains
    (126,997 )
Interest Rates U.S. 
    (6,375 )
Interest Rates Non-U.S. 
    (2,758 )
Metals
    (15,796,062 )
Softs
    (65,993 )
         
Total unrealized depreciation on open futures contracts
  $ (16,055,225 )
         
Net unrealized depreciation on open futures contracts
  $ (5,247,768 )*
         
 
 
This amount is in “Net unrealized depreciation on open futures contracts” on the Statements of Financial Condition.
         
    December 31,
 
    2010  
 
Assets
       
Forward Contracts
       
Metals
  $ 67,511,368  
         
Total unrealized appreciation on open forward contracts
  $ 67,511,368  
         
Liabilities
       
Forward Contracts
       
Currencies
  $ (313 )
Metals
    (54,420,487 )
         
Total unrealized depreciation on open forward contracts
  $ (54,420,800 )
         
Net unrealized appreciation on open forward contracts
  $ 13,090,568 **
         
Assets
       
Options Purchased
       
Grains
  $ 55,000  
Metals
    5,280,173  
         
Total options purchased
  $ 5,335,173 ***
         
Liabilities
       
Options Premium Received
       
Metals
  $ (14,130 )
         
Total options premium received
  $ (14,130 )****
         
 
 
**  This amount is in “Net unrealized appreciation on open forward contracts” on the Statements of Financial Condition.
 
***  This amount is in “Options purchased, at fair value” on the Statements of Financial Condition.
 
****  This amount is in “Options premium received, at fair value” on the Statements of Financial Condition.
 
 


10


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
The following tables indicate the Partnership’s trading results, by market sector, on derivative instruments traded directly by the Partnership for the three months ended March 31, 2011 and 2010.
                 
    Three Months Ended     Three Months Ended  
    March 31, 2011     March 31, 2010  
Sector   Total trading results     Total trading results  
Currencies
  $ (1,402,868 )   $ 470,724
Energy
    3,530,419     (3,230,788 )
Grains
    (2,466,349 )     (324,613 )
Indices
    (30,618 )      
Interest Rates U.S.
    (1,997,411 )     (1,953,819 )
Interest Rates Non-U.S.
    (15,903 )     109,962
Livestock
    (85,180 )     (420 )
Metals
    2,327,456       (3,520,884 )
Softs
    450,231       1,938,924
             
Total
  $ 309,777     $ (6,510,914 )
             
   
4.   Fair Value Measurements:
 
Partnership’s and the Funds’ Investments.   All commodity interests held by the Partnership and the Funds (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

Partnership and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Partnership’s and the Funds’ Level 1 assets and liabilities are actively traded.
GAAP also requires the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the markets become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Funds’ Level 2 assets and liabilities.
The Partnership and the Funds will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required by GAAP.

11


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
The Partnership and the Funds consider prices for exchange-traded commodity futures, forward and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forward, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers that derive fair values for those assets from observable inputs (Level 2). Investments in funds (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the periods ended March 31, 2011 and December 31, 2010, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
 
                                 
          Quoted Prices in
             
          Active Markets
    Significant Other
    Significant
 
          for Identical
    Observable Inputs
    Unobservable
 
    03/31/2011     Assets (Level 1)     (Level 2)     Inputs (Level 3)  
 
Assets
                               
Options purchased
  $ 2,550,776     $ 2,550,776     $     $  
Futures
    8,400,915       8,400,915              
Forwards
    28,178,645       28,178,645              
Investment in Funds
    1,060,363,037             1,060,363,037        
 
                       
Total assets
  $ 1,099,493,373     $ 39,130,336     $ 1,060,363,037     $  
 
                       
Liabilities
                               
Futures
  $ 1,374,908     $ 1,374,908     $     $  
Forwards
    46,439,323     46,439,323            
 
                       
Total liabilities
    47,814,231     47,814,231            
 
                       
Net fair value
  $ 1,051,679,142     $ (8,683,895 )   $ 1,060,363,037     $  
 
                       
 
   
          Quoted Prices in
             
          Active Markets
    Significant Other
    Significant
 
          for Identical
    Observable Inputs
    Unobservable
 
    12/31/2010*     Assets (Level 1)     (Level 2)     Inputs (Level 3)  
 
Assets
                               
Options purchased
  $ 5,335,173     $ 5,335,173     $     $  
Futures
    10,807,457       10,807,457              
Forwards
  67,511,368     67,511,368                        —  
Investment in Funds
    981,904,411             981,904,411        
                                 
Total assets
  $ 1,065,558,409     $ 83,653,998     $ 981,904,411     $  
                                 
Liabilities
                               
Futures
  $ 16,055,225     $ 16,055,225     $     $  
Forwards
    54,420,800       54,420,487       313        
Options premium received
    14,130       14,130              
                                 
Total liabilities
    70,490,155       70,489,842       313        
                                 
Net fair value
  $ 995,068,254     $ 13,164,156     $ 981,904,098     $  
                                 
 
*    The amounts have been reclassified from the December 31, 2010 prior year financial statements to conform to current year presentation based on new fair value guidance.

12


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
5.   Investment in Funds:
 
On September 1, 2001, the assets allocated to AAA for trading were invested in AAA Master Fund LLC, (“AAA Master”), a limited liability company organized under the limited liability company laws of the State of New York. The Partnership purchased 5,173.4381 units of AAA Master with cash equal to $5,173,438. AAA Master was formed in order to permit accounts managed now or in the future by AAA using the Energy Program – Futures and Swaps, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the managing member of AAA Master. Individual and pooled accounts currently managed by AAA, including the Partnership, are permitted to be non-managing members of AAA Master. The General Partner and AAA believe that trading through this structure should promote efficiency and economy in the trading process.
 
On November 1, 2004, the assets allocated to Winton for trading were invested in CMF Winton Master L.P. (“Winton Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 35,389.8399 units of Winton Master with cash equal to $33,594,083 and a contribution of open commodity futures and forward contracts with a fair value of $1,795,757. Winton Master was formed in order to permit accounts managed now or in the future by Winton using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership, are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure should promote efficiency and economy in the trading process.
 
On July 1, 2005, a portion of the assets allocated to Willowbridge for trading were invested in CMF Willowbridge Argo Master Fund L.P. (“Willowbridge Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 33,529.1186 units of Willowbridge Master with cash equal to $29,866,194 and a contribution of open commodity futures and forward contracts with a fair value of $3,662,925. Willowbridge Master was formed in order to permit accounts managed now or in the future by Willowbridge using the Argo Trading System, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts managed by Willowbridge, including the Partnership are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process.
 
Additional assets allocated to Willowbridge are not invested in a separate limited partnership established by the General Partner, but are held and traded by Willowbridge directly in separate managed accounts in the Partnership’s name. Willowbridge trades the Partnership’s assets directly, pursuant to its Vulcan Trading System, Consolidated Commodities Technical, Consolidated Commodities Fundamental and MStrategy trading programs.
 
The General Partner is not aware of any material changes to the trading programs discussed above during the fiscal quarter ended March 31, 2011.
 
AAA Master’s, Willowbridge Master’s and Winton Master’s (collectively, the “Funds”) and the Partnership’s trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on U.S. commodity exchanges and foreign commodity exchanges. The Funds and the Partnership engage in such trading through commodity brokerage accounts maintained with CGM.
 
A limited partner/non-managing member may withdraw all or part of its capital contribution and undistributed profits, if any, from the Funds in multiples of the net asset value per unit

13


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the general partner/managing member at least three days in advance of the Redemption Date. The units are classified as a liability when the limited partner/non-managing member elects to redeem and informs the Funds.
 
Management, administrative and incentive fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and National Futures Association fees are borne by the Partnership directly and through its investments in the Funds. All other fees, including CGM’s direct brokerage commission, are charged at the Partnership level.
 
At March 31, 2011, the Partnership owned approximately 34.4% of AAA Master, 71.1% of Willowbridge Master and 64.1% of Winton Master. At December 31, 2010, the Partnership owned approximately 28.7% of AAA Master, 70.0% of Willowbridge Master and 61.9% of Winton Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of the investment in the Funds are approximately the same and redemption rights are not affected.
 
Summarized information reflecting the Total Assets, Liabilities and Capital for the Funds are shown in the following tables.
                         
    March 31, 2011  
    Total Assets     Total Liabilities     Total Capital  
AAA Master
  $ 1,298,771,812     $ 311,711,140     $ 987,060,672  
Willowbridge Master
    168,695,333       80,498       168,614,835  
Winton Master
    938,976,048       889,625       938,086,423  
 
                 
Total
  $ 2,406,443,193     $ 312,681,263     $ 2,093,761,930  
 
                 
                         
    December 31, 2010  
    Total Assets     Total Liabilities     Total Capital  
AAA Master
  $ 1,234,677,140     $ 254,307,502     $ 980,369,638  
Willowbridge Master
    216,360,362       61,729       216,298,633  
Winton Master
    883,842,483       122,612       883,719,871  
 
                 
Total
  $ 2,334,879,985     $ 254,491,843     $ 2,080,388,142  
 
                 
 
Summarized information reflecting the net investment income (loss) from trading, total trading results and net income (loss) for the Funds are shown in the following tables.
                         
    For the three months ended March 31, 2011  
    Net Investment     Total Trading        
    Income (loss)     Results     Net Income (Loss)  
AAA Master
  $ (635,255   $ 23,936,932     $ 23,301,677  
Willowbridge Master
    (25,559     6,874,935       6,849,376  
Winton Master
    46,285       22,234,532       22,280,817  
 
                 
Total
  $ (614,529   $ 53,046,399     $ 52,431,870  
 
                 
 
   
    For the three months ended March 31, 2010  
    Net Investment     Total Trading        
    Income (loss)     Result     Net Income (Loss)  
AAA Master
  $ (1,020,434 )   $ (32,837,037 )   $ (33,857,471 )
Willowbridge Master
    (67,599 )     (20,526,632 )     (20,594,231 )
Winton Master
    (96,434 )     32,303,622       32,207,188  
 
                 
Total
  $ (1,184,467 )   $ (21,060,047 )   $ (22,244,514 )
 
                 


14


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
Summarized information reflecting the Partnership’s investments in, and the operations of, the Funds are as shown in the following tables.
                                                         
    March 31, 2011     For the three months ended March 31, 2011          
    % of                                  
    Partnership’s     Fair     Income     Expenses     Net     Investment   Redemption
Investment   Net Assets     Value     (Loss)     Commissions     Other     Income (Loss)     Objective   Permitted
AAA Master
    27.96 %   $ 339,591,575     $ 7,705,865     $ 209,582     $ 55,847     $ 7,440,436   Energy Markets Monthly
Willowbridge Master
    9.77 %     119,838,286       5,006,433       27,220       20,937       4,958,276   Commodity Portfolio Monthly
Winton Master
    49.00 %     600,933,176       14,294,470       80,552       18,825       14,195,093   Commodity Portfolio Monthly
 
                                             
Total
          $ 1,060,363,037     $ 27,006,768     $ 317,354     $ 95,609     $ 26,593,805          
 
                                             
                                                         
    December 31, 2010     For the three months ended March 31, 2010          
    % of                                  
    Partnership’s     Fair     Income     Expenses     Net     Investment   Redemption
Investment   Net Assets     Value     (Loss)     Commissions     Other     Income (Loss)     Objective   Permitted
AAA Master
    24.22 %   $ 283,238,250     $ (8,094,618 )   $ 234,143     $ 43,419     $ (8,372,180 )   Energy Markets Monthly
Willowbridge Master
    12.95 %     151,432,714       (12,502,125 )     50,269       12,156       (12,564,550 )   Commodity Portfolio Monthly
Winton Master
    46.79 %     547,233,447       17,841,061       91,278       9,307       17,740,476     Commodity Portfolio Monthly
 
                                             
Total
          $ 981,904,411     $ (2,755,682 )   $ 375,690     $ 64,882     $ (3,196,254 )        
 
                                             

15


 

 
Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
6. Financial Instrument Risks:
 
In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments on specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures, forwards and option contracts. OTC contracts are negotiated between contracting parties and include swaps and certain forward and options contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.
 
The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law.
 
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership/Funds are exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
 
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership’s/Funds’ assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through CGM, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.
 
As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Funds do not consider these contracts to be guarantees.
 
The General Partner/managing member monitors and attempts to control the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds may be subject. These monitoring systems generally allow the general partner/managing member to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.
 
The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Funds’ businesses, these instruments may not be held to maturity.

16


 

Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
7. Critical Accounting Policies:
 
Use of Estimates.   The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.
 
Partnership’s and the Funds’ Investments.   All commodity interests held by the Partnership and the Funds (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
Partnership and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Partnership’s and the Funds’ Level 1 assets and liabilities are actively traded.
GAAP also requires the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the markets become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Funds’ Level 2 assets and liabilities.
The Partnership and the Funds will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.
The Partnership and the Funds consider prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in funds (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the periods ended March 31, 2011 and December 31, 2010, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).


17


 

Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
Futures Contracts.   The Partnership and the Funds trade futures contracts and exchange-cleared swaps. Exchange-cleared swaps are swaps that are traded as futures. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date, or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and Funds. When the contract is closed, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
Forward Foreign Currency Contracts . Foreign currency contracts are those contracts where the Partnership and the Funds agree to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership’s and the Funds’ net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses and Changes in Partners Capital.
 
London Metals Exchange Forward Contracts.   Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and the Funds. A contract is considered offset when all long positions have been matched with a like number of short portions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and changes in net unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
Options.   The Partnership and Funds may purchase and write (sell) both exchange listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Partnership and the Funds write an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Partnership and the Funds purchase an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.
 
Brokerage Commissions.   Commission charges to open and close futures and exchange-traded swap contracts are expensed at the time the positions are opened. Commission charges on option contracts are expensed at the time the position is established and when the option contract is closed.
 
Income Taxes.   Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.


18


 

Orion Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
 
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.
 
The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. Generally, the 2007 through 2010 tax years remain subject to examination by U.S. federal and most state tax authorities. Management does not believe that there are any uncertain tax positions that require recognition of a tax liability.
 
Subsequent Events . Management of the Partnership evaluates events that occur after the balance sheet date but before financial statements are filed. Management has assessed the subsequent events through the date of filing and determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.
 
Net income (loss) per unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.


19


BROKERAGE PARTNERS