UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1999 or
[ ] 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 0-13299
DEAN WITTER CORNERSTONE FUND III
(Exact name of registrant as specified in its charter)
New York 13-3190919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 FL. New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
(Former name, former address, and former fiscal year, if changed
since last report)
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
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
March 31, 1999 (Unaudited) and December 31, 1998...........2
Statements of Operations for the Quarters Ended
March 31, 1999 and 1998 (Unaudited)........................3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 1999 and 1998 (Unaudited).........4
Statements of Cash Flows for the Quarters Ended
March 31, 1999 and 1998 (Unaudited)........................5
Notes to Financial Statements (Unaudited)...............6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 11-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . 17-29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 30
Item 2. Changes in Securities and Use of Proceeds.........30-31
Item 6. Exhibits and Reports on Form 8-K.....................31
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
March 31, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 36,701,618 38,504,975
Net unrealized gain on open contracts 649,464 2,102,810
Net option premiums (74,375) (50,047)
Total Trading Equity 37,276,707 40,557,738
Interest receivable (DWR) 114,342 120,465
Due from DWR 75,007 81,647
Total Assets 37,466,056 40,759,850
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 289,838 220,184
Accrued management fees 124,063 135,067
Accrued administrative expenses 123,192 104,780
Total Liabilities 537,093 460,031
Partners' Capital
Limited Partners (11,858.359 and
12,193.413 Units, respectively) 36,491,670 39,835,572
General Partner (142.103 Units) 437,293 464,247
Total Partners' Capital 36,928,963 40,299,819
Total Liabilities and Partners' Capital 37,466,056 40,7
59,850
NET ASSET VALUE PER UNIT 3,077.30 3,266.97
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended March 31,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (264,935) 3,312,479
Net change in unrealized (1,453,346) (307,009)
Total Trading Results (1,718,281) 3,005,470
Interest Income (DWR) 343,469 430,094
Total Revenues (1,374,812) 3,435,564
EXPENSES
Brokerage commissions (DWR) 494,855 556,591
Management fees 383,211 418,738
Transaction fees and costs 45,762 56,265
Administrative expenses 18,412 13,542
Total Expenses 942,240 1,045,136
NET INCOME (LOSS) (2,317,052) 2,390,428
NET INCOME (LOSS) ALLOCATION:
Limited Partners (2,290,098) 2,323,110
General Partner (26,954) 67,318
NET INCOME (LOSS) PER UNIT:
Limited Partners (189.67) 176.18
General Partner (189.67) 176.18
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 1999 and 1998
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S> <C> <C> <C>
<C>
Partners' Capital
December 31, 1997 13,734.437$39,970,539 $1,143,835$41,114
,374
Net Income - 2,323,110 67,3182,390,428
Redemptions (261.278) (798,899) -
(798,899)
Partners' Capital
March 31, 1998 13,473.159 $41,494,750 $1,211,153 $42
,705,903
Partners' Capital
December 31, 1998 12,335.516$39,835,572 $464,247$40,299,8
19
Net Loss - (2,290,098) (26,954)(2,317,052)
Redemptions (335.054) (1,053,804) -
(1,053,804)
Partners' Capital
March 31, 1999 12,000.462 $36,491,670 $437,293 $36,92
8,963
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Quarters Ended March 31,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) (2,317,052) 2,390,428
Noncash item included in net income (loss):
Net change in unrealized 1,453,346 307,009
(Increase) decrease in operating assets:
Net option premiums 24,328 (131,265)
Interest receivable (DWR) 6,123 1,306
Due from DWR 6,640 45,073
Increase (decrease) in operating liabilities:
Accrued management fees (11,004) 4,580
Accrued administrative expenses 18,412 13,542
Net cash provided by (used for) operating activities (819,207)
2,630,673
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable69,654 (217,614)
Redemptions of units (1,053,804) (798,899)
Net cash used for financing activities (984,150) (1,016,513)
Net increase (decrease) in cash (1,803,357) 1,614,160
Balance at beginning of period 38,504,975 39,762,715
Balance at end of period 36,701,618 41,376,875
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation of the results
of operations and financial condition of Dean Witter Cornerstone
Fund III (the "Partnership"). The financial statements and
condensed notes herein should be read in conjunction with the
Partnership's December 31, 1998 Annual Report on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund III is a limited partnership
organized to engage in the speculative trading of futures,
options and forward contracts on foreign currencies and other
commodity interests (collectively, "futures interests"). The
Partnership is one of the Dean Witter Cornerstone Funds,
comprised of Dean Witter Cornerstone Fund II, the Partnership,
and Dean Witter Cornerstone Fund IV. The Partnership's general
partner is Demeter Management Corporation ("Demeter"). The non-
clearing commodity broker is Dean Witter Reynolds Inc. ("DWR")
and an unaffiliated clearing commodity broker, Carr Futures Inc.
("Carr"), provides clearing and execution services. Both Demeter
and DWR are wholly-owned subsidiaries of Morgan Stanley Dean
Witter & Co. ("MSDW"). The trading advisors to the Partnership
are Abraham Trading Co., Welton Investment Corporation and
Sunrise Capital Management Inc., (collectively, the "Trading
Advisors").
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Related Party Transactions
The Partnership's cash is on deposit with DWR and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on current 13-week U.S.
Treasury bill rates. The Partnership pays brokerage commissions
to DWR.
3. Financial Instruments
The Partnership trades futures, options and forward contracts on
foreign currencies and other commodity interests. 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 market value of these contracts, including interest
rate volatility.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. The
Partnership has elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year ended December 31, 1998. SFAS No.
133 supersedes SFAS No. 119 and No. 105, which required the
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
disclosure of average aggregate fair values and contract/notional
values, respectively, of derivative financial instruments for an
entity which carries its assets at fair value. The application
of SFAS No. 133 does not have a significant effect on the
Partnership's financial statements.
The net unrealized gain on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the Statements of Financial Condition and totaled $649,464 and
$2,102,810 at March 31, 1999 and December 31, 1998, respectively.
Of the $649,464 net unrealized gain on open contracts at March
31, 1999, $585,811 related to exchange-traded futures and futures-
styled option contracts and $63,653 related to off-exchange-
traded forward currency contracts.
Of the $2,102,810 net unrealized gain on open contracts at
December 31, 1998, $2,250,314 related to exchange-traded futures
and futures-styled option contracts and $(147,504) related to off-
exchange-traded forward currency contracts.
Exchange-traded futures and futures-styled options contracts held
by the Partnership at March 31, 1999 and December 31, 1998 mature
through March 2000 and June 1999, respectively. Off-exchange-
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
traded forward currency contracts held by the Partnership at
March 31, 1999 and December 31, 1998 mature through June 1999 and
March 1999, respectively.
The Partnership is subject to the credit risk associated with
counterparty non-performance. The credit risk associated with
the instruments in which the Partnership is involved is limited
to the amounts reflected in the Partnership's Statements of
Financial Condition. DWR and Carr act as the futures commission
merchants or the counterparties with respect to most of the
Partnership's assets. Exchange-traded futures and futures-styled
options contracts are marked to market on a daily basis, with
variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for all of the
Partnership's exchange-traded futures and futures-styled options
contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission ("CFTC") 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, which funds, in the aggregate, totaled
$37,287,429 and $40,755,289 at March 31, 1999 and December 31,
1998, respectively.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
With respect to the Partnership's off-exchange-traded forward
currency contracts, there are no daily settlements of variations
in value nor is there any requirement that an amount equal to the
net unrealized gain on open forward contracts be segregated.
With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of Carr, the
sole counterparty on all of such contracts, to perform. Carr's
parent, Credit Agricole Indosuez, has guaranteed to the
Partnership payment of the net liquidating value of the
transactions in the Partnership's account with Carr (including
foreign currency contracts).
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - Assets of the Partnership are deposited with DWR as
non-clearing broker and Carr as clearing broker in separate
futures interest trading accounts. Such assets are held in either
non-interest bearing bank accounts or in securities approved by
the CFTC for investment of customer funds. The Partnership's
assets held by DWR and Carr may be used as margin solely for the
Partnership's trading. Since the Partnership's sole purpose is
to trade in futures interests, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership's investment in futures interests may, from
time to time, be illiquid. Most United States futures exchanges
limit fluctuations in certain futures interest prices during a
single day by regulations referred to as "daily price
fluctuations limits" or "daily limits". Pursuant to such
regulations, during a single trading day no trades may be
executed at prices beyond the daily limit. If the price for a
particular futures interest has increased or decreased by an
amount equal to the daily limit, positions in such futures
interest can neither be taken nor liquidated unless traders are
willing to effect trades at or within the limit. Futures
interests prices have occasionally moved the daily limit for
several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly
liquidating its futures interests and result in restrictions on
redemptions.
<PAGE>
There is no limitation on daily price moves in trading
forward contracts on foreign currency. The markets for some
world currencies have low trading volume and are illiquid, which
may prevent the Partnership from trading in potentially
profitable markets or from promptly liquidating unfavorable
positions, subjecting it to substantial losses. Either of these
market conditions could result in restrictions on redemptions.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Future redemptions and
exchanges of Units of Limited Partnership Interest ("Unit(s)")
will affect the amount of funds available for investment in
futures interests in subsequent periods. Since they are at the
discretion of Limited Partners, it is not possible to estimate
the amount and therefore, the impact of future redemptions and
exchanges.
Results of Operations
For the Quarter Ended March 31, 1999
For the quarter ended March 31, 1999, the Partnership recorded
total trading losses net of interest income of $1,374,812 and
posted a decrease in Net Asset Value per Unit. The most
significant losses were recorded from short positions in Japanese
government bond futures as prices increased during January and
February. During January, Japanese government bond prices moved
higher in a "flight-to-quality" due to renewed concerns regarding
the Brazilian economy. Prices in this market continued to
<PAGE>
increase during February amid growing speculation that a rise in
Japanese bond yields would result in Japanese investors replacing
international bonds with yen-denominated debt. In currencies,
losses were incurred from long Japanese yen positions as the
value of the yen, despite reaching a 27-month high in early
January, reversed sharply lower after the Bank of Japan
intervened in an effort to keep Japanese exports affordable. The
yen continued to move lower versus the dollar during late January
and throughout February on concerns regarding the Brazilian
economy, strong economic data out of the U.S. and following
comments by key Tokyo officials that Japanese policy makers were
satisfied with a weaker yen. In metals, losses were experienced
during the first half of March from short aluminum futures
positions as prices increased amid a possible drawdown in
warehouse stocks and reports of increased global demand. Smaller
losses were recorded in global stock index futures during mid-
March from long futures positions in the Financial Times 100
Index as British equity prices slipped following the Bank of
England's Monetary Policy Committee decision to keep rates
unchanged. A portion of the Partnership's overall losses for the
quarter were offset by gains recorded in the energy markets from
long futures positions in crude oil as oil prices climbed on news
that both OPEC and non-OPEC countries had reached an agreement to
cut total output beginning April 1st. Smaller gains were
recorded in the agricultural markets from short futures positions
in soybean and soybean products as prices declined due to a
healthy South American crop, fears that Brazil will increase
exports to support its economy and a continued decline in world
<PAGE>
demand. Total expenses for the three months ended March 31, 1999
were $942,240, resulting in a net loss of $2,317,052. The value
of a Unit decreased from $3,266.97 at December 1998 to $3,077.30
at March 31, 1999.
For the Quarter Ended March 31, 1998
For the quarter ended March 31, 1998, the Partnership recorded
total trading revenues including interest income of $3,435,564
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded from long U.S. and European stock
index futures positions as prices in these markets trended
consistently higher throughout the quarter. Additional profits
were recorded from long European bond futures positions as prices
in these markets also trended higher during the quarter. In
energies, gains were recorded from short crude oil futures
positions as oil prices declined during January and February as
tensions eased in the Middle East. Smaller gains were recorded
from short positions in livestock futures as prices in these
markets moved lower during February. These gains were partially
offset by losses experienced in metals from long silver futures
positions as silver prices reversed lower during March after
trending steadily higher during January and February and from
short gold futures positions as gold prices reversed higher
during January. Smaller losses were recorded in currencies as
the value of the Australian dollar and British pound moved
without consistent direction throughout a majority of the
quarter. Total expenses for the three months ended March 31,
1998 were $1,045,136, resulting in net income of $2,390,428. The
value of
<PAGE>
a Unit increased from $2,993.52 at December 31, 1997 to $3,169.70
at March 31, 1998.
Year 2000 Problem. Commodity pools, like financial and business
organizations and individuals around the world, depend on the
smooth functioning of computer systems. Many computer systems in
use today cannot recognize the computer code for the year 2000,
but revert to 1900 or some other date. This is commonly known as
the "Year 2000 Problem". The Partnership could be adversely
affected if computer systems used by it or any third party with
whom it has a material relationship do not properly process and
calculate date-related information and data concerning dates on
or after January 1, 2000. Such a failure could adversely affect
the handling or determination of futures trades and prices and
other services.
MSDW began its planning for the Year 2000 Problem in 1995,
and currently has several hundred employees working on the
matter. It has developed its own Year 2000 compliance plan to
deal with the problem and had the plan approved by the company's
executive management, Board of Directors and Information
Technology Department. Demeter is coordinating with MSDW to
address the Year 2000 Problem with respect to Demeter's computer
systems that affect the Partnership. This includes hardware and
software upgrades, systems consulting and computer maintenance.
Beyond the challenge facing internal computer systems, the
systems failure of any of the third parties with whom the
Partnership has a material relationship - the futures exchanges
and clearing organizations through which it trades, Carr, or the
<PAGE>
Trading Advisors - could result in a material financial risk
to the Partnership. All U.S. futures exchanges are subject to
monitoring by the CFTC of their Year 2000 preparedness and the
major foreign futures exchanges are also expected to be subject
to market-wide testing of their Year 2000 compliance during 1999.
Demeter intends to monitor the progress of Carr and the Trading
Advisors throughout 1999 in their Year 2000 compliance and, where
applicable, to test its external interface with Carr and the
Trading Advisors.
A worst case scenario would be one in which trading of
contracts on behalf of the Partnership becomes impossible as a
result of the Year 2000 problem encountered by any third parties.
A less catastrophic but more likely scenario would be one in
which trading opportunities diminish as a result of technical
problems resulting in illiquidity and fewer opportunities to make
profitable trades. MSDW has begun developing various "contingency
plans" in the event that the systems of such third parties fail.
Demeter intends to consult closely with MSDW in implementing
those plans. Despite the best efforts of both Demeter and MSDW,
however, it is possible that these steps will not be sufficient
to avoid any adverse impact to the Partnership.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the "euro"). During a three-year
transition period, the sovereign currencies will continue to
<PAGE>
exist but only as a fixed denomination of the euro. Conversion
to the euro prevents the Trading Advisors from trading in certain
currencies and thereby limits their ability to take advantage of
potential market opportunities that might otherwise have existed
had separate currencies been available to trade. This could
adversely affect the performance results of the Partnership.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures interests. The market sensitive
instruments held by the Partnership are acquired solely for
speculative trading purposes and, as a result, all or
substantially all of the Partnership's assets are subject to the
risk of trading loss. Unlike an operating company, the risk of
market sensitive instruments is integral, not incidental, to the
Partnership's primary business activities.
The futures interests traded by the Partnership involve varying
degrees of related market risk. Such market risk is often
dependent upon changes in the level or volatility of interest
rates, exchange rates, and/or market values of financial
instruments and commodities. Fluctuations in related market risk
based upon the aforementioned factors result in frequent changes
in the fair value of the Partnership's open positions, and,
consequently, in its earnings and cash flow.
<PAGE>
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification effects among
the Partnership's existing open positions, the volatility present
within the market(s), and the liquidity of the market(s). At
varying times, each of these factors may act to exacerbate or
mute the market risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt at quantifying the
Partnership's market risk must be qualified by the inherent
uncertainty of its speculative trading, which may cause future
losses and volatility (i.e. "risk of ruin") far in excess of the
Partnership's experience to date and/or any reasonable
expectation premised upon historical changes in the fair value of
its market sensitive instruments.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the
Partnership's 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 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.
<PAGE>
The Partnership accounts for open positions on the basis of mark-
to-market accounting principles. As such, any loss in the fair
value of the Partnership's open positions is directly reflected
in the Partnership's earnings, whether realized or unrealized,
and the Partnership's cash flow, as profits and losses on open
positions of exchange-traded futures interests are settled daily
through variation margin.
The Partnership's risk exposure in the various market sectors
traded by the Trading Advisors is estimated below in terms of
Value at Risk ("VaR"). The VaR model employed by the Partnership
incorporates numerous variables that could impact the fair value
of the Partnership's trading portfolio. The Partnership
estimates VaR using a model based on historical simulation with a
confidence level of 99%. Historical simulation involves
constructing a distribution of hypothetical daily changes in
trading portfolio value. The VaR model generally takes into
account linear exposures to price and interest rate risk. Market
risks that are incorporated in the VaR model include equity and
commodity prices, interest rates, foreign exchange rates, as well
as correlation that exists among these variables. The
hypothetical changes in portfolio value are based on daily
observed percentage changes in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. In the case of the Partnership's VaR, the historical
observation period is approximately four years. The
Partnership's one-day 99% VaR
<PAGE>
corresponds to the negative change in portfolio value that, based
on observed market risk factor moves, would have been exceeded
once in 100 trading days.
VaR models such as the Partnership's are continually evolving as
trading portfolios become more diverse and modeling techniques
and systems capabilities improve. It must also be noted that the
VaR model is used to quantify market risk for historic reporting
purposes only and is not utilized by either Demeter or the
Trading Advisors in their daily risk management activities.
The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by market category as of March 31, 1999. As of March 31, 1999,
the Partnership's total capitalization was approximately $37
million.
Primary Market March 31, 1999
Risk Category Value at Risk
Interest Rate (0.43)%
Currency (1.37)
Equity (0.50)
Commodity (0.79)
Aggregate Value at Risk (1.99)%
<PAGE>
Aggregate value at risk represents the aggregate VaR of the
Partnership's open positions and not the sum of the VaR of the
individual categories listed above. Aggregate VaR will be lower
as it takes into account correlation among different positions
and categories.
The table above represents the VaR of the Partnership's open
positions at March 31, 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. As the Partnership's sole business
is the speculative trading of primarily futures interests, the
composition of its portfolio of open positions can change
significantly over any given time period or even within a single
trading day. Such changes in open positions could materially
impact market risk as measured by VaR either positively or
negatively.
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR as a percentage of total
net assets for the four quarterly reporting periods from April 1,
1998 through March 31, 1999.
Primary Market Risk Category High Low Average
Interest Rate (1.74)% (0.43)% (1.15)%
Currency (1.37) (0.72) (1.00)
Equity (0.91) (0.08) (0.53)
Commodity (0.93) (0.68) (0.78)
Aggregate Value at Risk (2.23)% (1.61)% (1.88)%
<PAGE>
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin require-
ments, as such margin requirements generally range between 2% and
15% of contract face value. Additionally, due to the use of
leverage, the face value of the market sector instruments held by
the Partnership is typically many times the total capitalization of
the Partnership. The financial magnitude of the Partnership's open
positions thus creates a "risk of ruin" not typically found in
other investment vehicles. Due to the relative size of the
positions held, certain market conditions may cause the Partnership
to incur losses greatly in excess of VaR within a short period of
time. The foregoing VaR tables, as well as the past performance of
the Partnership, gives no indication of such "risk of ruin". In
addition, VaR risk measures should be interpreted in light of the
methodology's limitations, which include the following: past
changes in market risk factors will not always yield accurate
predictions of the distributions and correlations of future market
movements; changes in portfolio value in response to market
movements may differ from the responses implicit in a VaR model;
published VaR results reflect past 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 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.
<PAGE>
The foregoing VaR tables present the results of the Partnership's
VaR for each of the Partnership's market risk exposures and on an
aggregate basis at March 31, 1999 and for the end of the four
quarterly reporting periods from April 1, 1998 through March 31,
1999. Since VaR is based on historical data, VaR should not be
viewed as predictive of the Partnership's future financial
performance or its ability to manage and monitor risk and there can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated or that
such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, such balances, as well as
any market risk they may represent, are immaterial. The
Partnership also maintains a substantial portion (approximately
90%) of its available assets in cash at DWR. A decline in short-
term interest rates will result in a decline in the Partnership's
cash management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and the
potential losses caused by such movements, taking into account the
leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
<PAGE>
market risk exposures - except for (i) those disclosures that are
statements of historical fact and (ii) 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 and Section 21E of the Securities Exchange Act. The
Partnership's primary market risk exposures as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such 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. 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 as of March 31, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. Interest rate risk is the principal market
exposure of the Partnership. Interest rate movements directly
affect the price of the sovereign bond futures positions held by
<PAGE>
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 is to interest rate
fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. New Zealand and
Australia.
Demeter anticipates that G-7 interest rates will remain the
primary market exposure of the Partnership for the foreseeable
future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-
term, rates. Most of the speculative futures positions held by
the Partnership are in medium-to-long term instruments.
Consequently, even a material change in short-term rates would
have little effect on the Partnership were the medium-to-long
term rates to remain steady.
Currency. 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 Partnership trades in a large number of
currencies, including cross-rates - i.e., positions between two
<PAGE>
currencies other than the U.S. dollar. However, the
Partnership's major exposures have typically been in the
dollar/yen, dollar/mark, dollar/euro and dollar/pound positions.
Demeter does not anticipate that the risk profile of the
Partnership's currency sector will change significantly in the
future, although it is difficult at this point to predict the
effect of the introduction of the Euro on the Trading Advisors'
currency trading strategies.
Equity. The Partnership's primary equity exposure is to
equity price risk in the G-7 countries. The stock index futures
traded by the Partnership are by law limited to futures on
broadly based indices. As of March 31, 1999, the Partnership's
primary exposures were in the S&P 500 and All Ordinaries
(Australia) stock indices. Demeter anticipates little, if any,
trading in non-G-7 stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in
the major U.S., European and Japanese 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).
Commodity.
Metals. The Partnership's primary metals market exposure is
to fluctuations in the price of gold and silver. Although
certain Trading Advisors will from time to time trade base metals
such as aluminum, copper, nickel and zinc, the principal market
exposures of the Partnership have consistently been in the
precious metals, gold and silver (and, to a much lesser extent,
<PAGE>
platinum and palladium). The Trading Advisors' gold trading has
been increasingly limited due to the long-lasting and mainly non-
volatile decline in the price of gold over the last 10-15 years.
However, silver prices have remained volatile over this period,
and the Trading Advisors have from time to time taken substantial
positions as they have perceived market opportunities to develop.
Demeter anticipates that gold and silver will remain the primary
metals market exposure for the Partnership.
Soft Commodities and Agriculturals. One of the Partner-
ship's primary commodities exposure is to fluctuations in the
price of agriculturals and soft commodities, which are often
directly affected by severe or unexpected weather conditions.
Soybeans, sugar and corn accounted for the substantial bulk of
the Partnership's commodities exposure at March 31, 1999. In the
past the Partnership has had material market exposure to live
cattle and lean hogs, currently does and may do so again in the
future. However, Demeter anticipates that the Trading Advisors
will maintain an emphasis on soybeans, sugar and corn, in which
the Partnership has historically taken it's largest positions.
Energy. The Partnership's primary energy market exposure is
to gas and oil price movements, often resulting from political
developments in the Middle East. Although the Trading Advisors
trade natural gas to a limited extent, oil is by far the dominant
energy market exposure of the Partnership. Oil prices are
currently depressed, but they can be volatile and substantial
profits and losses have been and are expected to continue to be
experienced in this market.
<PAGE>
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 1999.
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in euros, Swiss francs, British pounds,
Mexican pesos and Australian dollars. The Partnership controls
the non-trading risk of these balances by regularly converting
these balances back into U.S. dollars at varying intervals,
depending upon such factors as size, volatility, etc.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Advisors,
severally, attempt to manage the risk of the Partnership's open
positions are essentially the same in all market categories
traded. Demeter attempts to manage the Partnership's market
exposure by (i) diversifying the Partnership's assets among
different Trading Advisors, each of whose strategies focus on
different market sectors and trading approaches, and (ii),
monitoring the performance of the Trading Advisors on a daily
basis. In addition, the Trading Advisors establish
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market sensitive instrument. One should be aware that certain
Trading Advisors treat their risk control policies as strict
rules, whereas others treat such policies as general guidelines.
<PAGE>
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash, which is the only Partnership
investment directed by Demeter, rather than the Trading Advisors.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in Item 3. of the Partnership's 1998 Form 10-K:
On April 12, 1999, the defendants filed a motion in the
California action to oppose certification by the court of the
class in the California litigation.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Dean Witter Cornerstone Fund I ("Cornerstone I"), Dean Witter
Cornerstone Fund II ("Cornerstone II"), and the Partnership
collectively registered 250,000 Units pursuant to a Registration
Statement on Form S-1, which became effective on May 31, 1984 (the
"Registration Statement") (SEC File Numbers 2-88587; 88587-01;
88587-02). As contemplated in the Registration Statement, an
additional fund, Dean Witter Cornerstone Fund IV ("Cornerstone IV"
and, collectively with Cornerstone I, Cornerstone II and the
Partnership, the "Cornerstone Funds"), was registered pursuant to
Post-Effective Amendment No. 5 to the Registration Statement, which
became effective on February 6, 1987. The managing underwriter for
the Cornerstone Funds is DWR.
The offering for Cornerstone III originally commenced on May 31,
1984 and currently continues with 74,405.186 Units sold through
April 1, 1999. Through April 1, 1999, an aggregate of 235,422.053
<PAGE>
Units have been sold leaving 14,577.947 Units remaining available
for sale as of April 1, 1999.
The aggregate price of Units sold through April 1, 1999 with
respect to Cornerstone III is $137,132,762.
Effective September 30, 1984, Cornerstone II, Cornerstone III and
Cornerstone IV were closed to new investors; Units have been sold
since then solely in "Exchanges" with existing investors, at 100%
of Net Asset Value per Unit. DWR has been paying all expenses in
connection with the offering of Units since September 30, 1994,
without reimbursement.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits - None.
B) Reports on Form 8-K. - None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dean Witter Cornerstone Fund III
(Registrant)
By: Demeter Management Corporation
(General Partner)
May 14, 1999 By: /s/ Lewis A. Raibley, III
Lewis A. Raibley, III
Director and Chief Financial
Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Cornerstone Fund III and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 36,701,618
<SECURITIES> 0
<RECEIVABLES> 189,349<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,466,056<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,466,056<F3>
<SALES> 0
<TOTAL-REVENUES> (1,374,812)<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 942,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,317,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,317,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,317,052)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $114,342 and due from
DWR of $75,007.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $649,464 and net option
premiums of $(74,375).
<F3>Liabilities include redemptions payable of $289,838, accrued management
fees of $124,063, and accrued administrative expenses payable of $123,192.
<F4>Total revenues include realized trading revenue of $(264,935), net
change in unrealized of $(1,453,346) and interest income of $343,469.
</FN>
</TABLE>
