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 quarterly period ended June 30, 2000 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 0-23577
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERHSIP
(Exact name of registrant as specified in its charter)
Delaware 13-3461507
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 DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S>
<C>
Statements of Financial Condition June 30, 2000
(Unaudited) and December 31, 1999.....................2
Statements of Operations for the Quarters Ended
June 30, 2000 and 1999 (Unaudited)....................3
Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................4
Statements of Changes in Partners' Capital for the
Six Months ended June 30, 2000 and 1999
(Unaudited)...........................................5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................6
Notes to Financial Statements (Unaudited)..........7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..12-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ...................................21-33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..............................34-35
Item 5. Other Information..............................35-36
Item 6. Exhibits and Reports on Form 8-K..................36
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
2000 1999
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 89,056,307 92,093,924
Net unrealized gain on open contracts (MSIL)
37,535 -
Net unrealized gain (loss) on open contracts (Carr)(1,578,913) 1,601,939
Net unrealized loss on open contracts (MS & Co.)
(2,285,318) ______-____
Total net unrealized gain (loss) on open contracts (3,826,696)
1,601,939
Total Trading Equity 85,229,611 93,695,863
Interest receivable (DWR) 335,163 312,680
Total Assets 85,564,774 94,008,543
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 1,960,990 2,015,683
Accrued management fees (DWFCM) 215,320 229,326
Administrative expenses payable 116,519 114,311
Total Liabilities 2,292,829 2,359,320
Partners' Capital
Limited Partners (80,501.913 and
92,865.334 Units, respectively) 81,570,372 89,453,674
General Partner (1,679.285 and
2,279.285 Units, respectively) 1,701,573 2,195,549
Total Partners' Capital 83,271,945 91,649,223
Total Liabilities and Partners' Capital 85,564,774 94,00
8,543
NET ASSET VALUE PER UNIT 1,013.27 963.26
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 12,453,197 169,760
Net change in unrealized (9,824,031) 1,107,934
Total Trading Results 2,629,166 1,277,694
Interest Income (DWR) 994,054 980,918
Total Revenues 3,623,220 2,258,612
EXPENSES
Brokerage commissions (DWR) 1,180,558 1,924,178
Management fees (DWFCM) 650,848 841,841
Transaction fees and costs 73,713 134,760
Administrative expenses 37,000 38,000
Total Expenses 1,942,119 2,938,779
NET INCOME (LOSS) 1,681,101 (680,167)
NET INCOME (LOSS) ALLOCATION
Limited Partners 1,637,805 (663,948)
General Partner 43,296 (16,219)
NET INCOME (LOSS) PER UNIT
Limited Partners 18.99 (7.11)
General Partner 18.99 (7.11)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 12,219,727
(6,745,941) Net
change in unrealized (5,428,635) 1,089,983
Total Trading Results 6,791,092
(5,655,958)
Interest Income (DWR) 1,921,410 2,048,343
Total Revenues 8,712,502 (3,607,615)
EXPENSES
Brokerage commissions (DWR) 2,692,465 3,764,700
Management fees (DWFCM) 1,317,133 1,759,907
Transaction fees and costs 189,317 280,750
Administrative expenses 74,000 73,000
Total Expenses 4,272,915 5,878,357
NET INCOME (LOSS) 4,439,587 (9,485,972)
NET INCOME (LOSS) ALLOCATION
Limited Partners 4,325,601 (9,297,395)
General Partner 113,986 (188,577)
NET INCOME (LOSS) PER UNIT
Limited Partners 50.01 (82.73)
General Partner 50.01 (82.73)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S>
<C> <C> <C>
<C>
Partners' Capital,
December 31, 1998 117,935.784 $125,375,751 $2,470,826
$127,846,577
Net Loss
- (9,297,395) (188,577)
(9,485,972)
Redemptions (11,884.591) (12,171,511)
- (12,171,511)
Partners' Capital,
June 30, 1999 106,051.193 $103,906,845 $2,282,249
$106,189,094
Partners' Capital,
December 31, 1999 95,144.619 $89,453,674 $2,195,549
$91,649,223
Net Income
- 4,325,601 113,986
4,439,587
Redemptions (12,963.421) (12,208,903)
(607,962) (12,816,865)
Partners' Capital,
June 30, 2000 82,181.198 $81,570,372 $1,701,573
$83,271,945
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S>
<C> <C>
Net income (loss): 4,439,587 (
9,485,972)
Noncash item included in net income (loss):
Net change in unrealized 5,428,635 (
1,089,983)
(Increase) decrease in operating assets:
Interest receivable (DWR) (22,483) 66,542
Increase (decrease) in operating liabilities:
Accrued management fees (DWFCM) (14,006)
(42,857)
Administrative expenses payable 2,208
37,958
Net cash provided by (used for) operating activities 9,833,941
(10,514,312)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable(54,693) 607,715
Redemptions of Units (12,816,865)
(12,171,511)
Net cash used for financing activities (12,871,558)
(11,563,796)
Net decrease in cash (3,037,617) (
22,078,108)
Balance at beginning of period 92,093,924
127,547,473
Balance at end of period 89,056,307
105,469,365
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
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 Diversified
Futures Fund Limited Partnership (the "Partnership"). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 1999 Annual
Report on Form 10-K.
1. Organization
Dean Witter Diversified Futures Fund Limited Partnership is a
Delaware limited partnership organized to engage primarily in the
speculative trading of futures and forward contracts, physical
commodities and other commodity interests including foreign
currencies, financial instruments, metals, energy products and
agriculturals (collectively, "futures interests").
The general partner for the Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds Inc. ("DWR"). Morgan Stanley & Co., Inc.
("MS & Co.") and Morgan Stanley & Co. International Limited
("MSIL") provide clearing and execution services. Prior to May
2000, Carr Futures Inc. provided clearing and execution services.
The trading manager is Dean Witter Futures & Currency Management
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Inc. ("DWFCM" or the "Trading Manager"). Demeter, DWR, MS &
Co., MSIL and DWFCM are wholly-owned subsidiaries of Morgan
Stanley Dean Witter & Co.
2. Related Party Transactions
The Partnership's cash is on deposit with DWR, MS & Co., and MSIL
in futures interests trading accounts to meet margin requirements
as needed. DWR pays interest on these funds based on a prevailing
rate on U.S. Treasury bills. The Partnership pays brokerage
commissions to DWR. Management and incentive fees (if any)
incurred by the Partnership are paid to DWFCM.
3. Financial Instruments
The Partnership trades futures and forward contracts, physical
commodities and other commodity interests including foreign
currencies, financial instruments, metals, energy products and
agriculturals. 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.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB")
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. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133", which defers the required
implementation of SFAS No. 133 until fiscal years beginning after
June 15, 2000. However, the Partnership had previously 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 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 (loss) on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled $(3,826,696)
and $1,601,939 at June 30, 2000 and December 31, 1999,
respectively.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $3,826,696 net unrealized loss on open contracts at June
30, 2000, $1,469,530 related to exchange-traded futures contracts
and $(5,296,226) related to off-exchange-traded forward currency
contracts.
Of the $1,601,939 net unrealized gain on open contracts at
December 31, 1999, $1,280,887 related to exchange-traded futures
contracts and $321,052 related to off-exchange-traded forward
currency contracts.
Exchange-traded futures contracts held by the Partnership at June
30, 2000 and December 31, 1999 mature through December 2000 and
September 2000, respectively. Off-exchange-traded forward
currency contracts held by the Partnership at June 30, 2000 and
December 31, 1999 mature through September 2000 and March 2000,
respectively.
The Partnership has credit risk associated with counterparty
nonperformance. 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.
The Partnership also has credit risk because DWR, MS & Co., and
MSIL act as the futures commission merchants or the
counterparties
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
with respect to most of the Partnership's assets. Exchange-traded
futures contracts are marked to market on a daily basis, with
variations in value settled on a daily basis. DWR, MS & Co., and
MSIL each as a futures commission merchant for the Partnership's
exchange-traded futures 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 contracts, including an amount equal to
the net unrealized gain (loss) on all open futures contracts,
which funds, in the aggregate, totaled $90,525,837 and
$93,374,811 at June 30, 2000 and December 31, 1999, respectively.
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 (loss) 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
MS & Co., the sole counterparty on all of such contracts, to
perform. The Partnership has a netting agreement with MS & Co.
This agreement, which seeks to reduce both the Partnership's and
MS & Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of MS & Co.'s bankruptcy or insolvency.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and MS & Co. and MSIL as clearing brokers in
separate futures trading accounts established for the Trading
Manager, which assets are used as margin to engage in trading.
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. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures and forwards,
it is expected that the Partnership will continue to own such
liquid assets for margin purposes.
The Partnership's investment in futures and forwards 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 contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures contract can neither be taken nor
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
<PAGE>
prevent the Partnership from promptly liquidating its futures
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. 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 prevent the Partnership from promptly liquidating
unfavorable positions in such markets and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investment in futures
interests in subsequent periods. It is not possible to estimate
the amount and therefore, the impact of future redemptions of
Units.
Results of Operations
General. The Partnership's results depend on its Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
<PAGE>
futures and forwards markets. The following presents a summary
of the Partnership's operations for the quarter and six months
ended June 30, 2000 and 1999, respectively, and a general
discussion of its trading activities during each period. It is
important to note, however, that the Trading Manager trades 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 Manager 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
its Trading Manager's trading activities on behalf of the
Partnership as a whole and how the Partnership has performed in
the past.
For the Quarter and Six Months Ended June 30, 2000
For the quarter ended June 30, 2000, the Partnership recorded
total trading revenues including interest income of $3,623,220
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 10.2% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
fears that inventory levels would remain low and that U.S. demand
will outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during May and June from long futures positions in crude
oil and its related products as the previous upward movement in
oil prices re-emerged amid rising concerns regarding supplies and
<PAGE>
production levels. In the agricultural markets, gains of
approximately 1.1% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. Midwest. In soft commodities,
gains of approximately 0.4% were recorded primarily during June
from short coffee futures positions as prices decreased amid
continued pressure from bearish technical factors and large
warehouse supplies. These gains were partially offset by losses
of approximately 6.5% recorded throughout a majority of the
quarter primarily from long positions in U.S. interest rate
futures as prices declined on inflation fears provoked by
stronger-than-forecasted U.S. economic data. Losses were also
recorded throughout the majority of the quarter from short
positions in German bond futures as prices were pushed higher by
the rise in U.S. prices. In the global stock index futures
markets, losses of approximately 1.8% were incurred primarily
during April from long positions in S&P 500 Index futures as
fears of inflation negatively impacted domestic equity prices.
In the currency markets, losses of approximately 1.2% were
experienced primarily during April and early May from long
positions in the Japanese yen as its value weakened relative to
the U.S. dollar amid fears of an additional Bank of Japan
intervention and as Japanese consumer confidence remained
sluggish. In the metals markets, losses of approximately 0.5%
were recorded primarily during June from short aluminum futures
positions as prices increased on consumer and speculative buying.
<PAGE>
Total expenses for the three months ended June 30, 2000 were
$1,942,119, resulting in net income of $1,681,101. The value of
a Unit increased from $994.28 at March 31, 2000 to $1,013.27 at
June 30, 2000.
For the six months ended June 30, 2000, the Partnership recorded
total trading revenues including interest income of $8,712,502
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 15.1% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
fears that inventory levels would remain low and that U.S. demand
will outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during February from long positions in crude oil futures
as prices increased due to a combination of cold weather,
declining inventories and increasing demand. Oil prices also
increased during June in reaction to the dismissal by OPEC of a
price setting mechanism and a promise of a modest production
increase. In the currency markets, gains of approximately 1.2%
were recorded primarily during January from short positions in
the Swedish krona, the euro and the Swiss franc as the value of
these European currencies weakened relative to the U.S. dollar,
hurt by skepticism about Europe's economic outlook and lack of
support from European officials. During April, profits were
<PAGE>
recorded from short positions in the euro as the value of the
European common currency dropped to record lows versus the U.S.
dollar and British pound. In the agricultural markets, gains of
approximately 0.9% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. midwest. These gains were
partially offset by losses of approximately 7.6% recorded
throughout a majority of the second quarter from long positions
in U.S. interest rate futures as prices declined on inflation
fears provoked by stronger-than-forecasted U.S. economic data.
Losses were also recorded throughout the majority of the second
quarter from short positions in German bond futures as prices
were pushed higher by the rise in U.S. prices. In the global
stock index futures markets, losses of approximately 3.3% were
incurred throughout a majority of the first quarter and during
April from long positions in S&P 500 Index futures as domestic
stock prices declined due to volatility in the technology sector
and fears that the Federal Reserve will be forced to take
aggressive action to slow the economy. In the metals markets,
losses of approximately 2.0% were experienced primarily from long
positions in base metal futures as a previous upward price trend
reversed sharply lower during February in response to interest
rate hikes across the globe. During June, smaller losses were
recorded from short aluminum futures positions as prices
increased on consumer and speculative buying. Total expenses for
<PAGE>
the six months ended June 30, 2000 were $4,272,915, resulting in
net income of $4,439,587. The value of a Unit increased from
$963.26 at December 31, 1999 to $1,013.27 at June 30, 2000.
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $2,258,612
and, after expenses, posted a decrease in Net Asset Value per
Unit. The most significant net trading losses of approximately
4.0% were experienced in the metals markets primarily from long
positions in copper and aluminum futures as base metals prices
declined significantly during late May amid large supply, low
demand and the possibility of a production cut in the near future
being judged unlikely. During June, additional losses were
incurred in this market complex from short copper futures
positions as prices moved higher due to a drop in warehouse
stocks. In the global stock index futures markets, losses of
approximately 0.9% were recorded primarily during mid-April and
May from long S&P 500 Index futures positions as domestic equity
prices dropped following stronger-than-expected Consumer Price
Index data and indications by the Federal Open Market Committee
that the U.S. Federal Reserve is shifting towards a tightening
bias. In the agricultural markets, losses of approximately 0.1%
were experienced primarily from long corn futures positions as
prices regressed in early April in reaction to reports by the
USDA that the expected corn surplus will be one of the biggest in
<PAGE>
years and from declining demand in the Asian markets. These
losses were partially offset by gains of approximately 2.1%
recorded in the currency markets primarily during April and May
from short Swedish krona positions as its value weakened versus
the U.S. dollar on speculation as to when Sweden will join
Europe's Monetary Union and due to a decline in oil prices. In
the global interest rate futures markets, gains of approximately
1.1% were recorded primarily from long Japanese government bonds
as prices rallied during April after the Japanese government
proposed no new economic spending plans and on comments by a
Senior Finance Ministry official that the supply-demand balance
in the market will deteriorate. In soft commodities, gains of
approximately 0.6% were recorded primarily from short cotton
futures positions as prices dropped in late June on reports of
beneficial rainfalls across the Southeastern U.S. In the energy
markets, gains of approximately 0.6% were recorded primarily
during April from long natural gas futures positions as prices
climbed following reports of an increase in storage stocks that
was well-below market expectations. Total expenses for the three
months ended June 30, 1999 were $2,938,779, resulting in a net
loss of $680,167. The value of a Unit decreased from $1,008.42
at March 31, 1999 to $1,001.31 at June 30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading losses net of interest income of $3,607,615 and
posted a decrease in Net Asset Value per Unit. The most
<PAGE>
significant losses of approximately 4.4% were experienced in the
metals markets primarily from long positions in copper and zinc
futures as base metals prices declined significantly in late May
amid a large supply, low demand and the possibility of a
production cut in the near future being judged unlikely. During
June, additional losses were incurred in this market complex from
short copper futures positions as prices moved higher due to a
drop in warehouse stocks. In the global interest rate futures
markets, losses of approximately 3.5% were recorded primarily
from short Japanese bond futures positions throughout a majority
of the first quarter as prices increased amid growing speculation
that the Bank of Japan may underwrite Japanese government bonds.
Fears that a rise in Japanese bond yields would lead many
Japanese money managers to repatriate assets from foreign
investments to yen-denominated debt also pushed prices higher.
Additional losses were recorded during February and March from
short German government bond futures positions as prices
increased on reports that Germany's industrial production showed
a sharp increase, creating hopes that Europe's biggest economy
could be strengthening. In the currency markets, losses of
approximately 2.2% were experienced primarily from long
Australian dollar positions throughout a majority of the first
quarter as its value dropped significantly relative to the U.S.
dollar on speculation regarding potential currency devaluations
in the Asian region. Losses recorded from short British pound
positions in March offset profits recorded in February as its
value strengthened versus the
<PAGE>
U.S. dollar as the market scaled back the chances of a British
interest rate cut following an announcement of a budget that was
more generous than expected. In the global stock index futures
markets, losses of approximately 1.0% were experienced primarily
during February, mid April and May from long S&P 500 Index
futures positions as domestic equity prices moved lower on
concerns that the Federal Reserve may raise interest rates in an
effort to control inflation, following stronger-than-expected
Consumer Price Index data and on indications by the Federal Open
Market Committee that the U.S. Federal Reserve is shifting
towards a tightening bias. These losses were partially offset by
gains of approximately 2.9% recorded in the energy markets
primarily during March from long positions in crude and heating
oil futures as prices moved significantly higher on news that
both OPEC and non-OPEC countries had reached an agreement to cut
total output by approximately two million barrels a day beginning
April 1st. Total expenses for the six months ended June 30, 1999
were $5,878,357, resulting in a net loss of $9,485,972. The
value of a Unit decreased from $1,084.04 at December 31, 1998 to
$1,001.31 at June 30, 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative trading
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purposes only and, as a result, all or substantially all of the
Partnership's assets are at risk of trading loss. Unlike an
operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
The futures interests traded by the Partnership involve varying
degrees of 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.
Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
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exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
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.
The Partnership accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures interests are settled daily through variation
margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
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trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model 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, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the Partner-
ship's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Manager in their daily risk management
activities.
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The Partnership's Value at Risk in Different Market Sectors
The following tables indicate the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of June 30, 2000 and 1999. As
of June 30, 2000 and 1999, the Partnership's total capitalization
was approximately $83 million and $106 million, respectively.
Primary Market June 30, 2000 June 30,
1999
Risk Category Value at Risk Value at Risk
Currency (1.45)% (1.95)%
Interest Rate (1.65) (2.01)
Commodity (1.87) (0.51)
Equity (0.06) (0.93)
Aggregate Value at Risk (2.75)% (3.16)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market 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 June 30, 2000 and 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business is the speculative trading of futures interests, the
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composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.
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 July 1,
1999 through June 30, 2000.
Primary Market Risk Category High Low Average
Currency (1.95)% (1.45)% (1.75)%
Interest Rate (2.01) (0.89) (1.53)
Commodity (2.07) (0.93) (1.46)
Equity (1.30) (0.06) (0.66)
Aggregate Value at Risk (3.40)% (2.26)% (2.89)%
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
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 Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other
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investments. The relative size of the positions held may cause
the Partnership to incur losses greatly in excess of VaR within a
short period of time, given the effects of the leverage employed
and market volatility. The VaR tables above, as well as the past
performance of the Partnership, gives no indication of such "risk
of ruin". In addition, VaR risk measures should be viewed in
light of the methodology's limitations, which include 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 in response to market movements
may differ from those of the VaR model;
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.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at June 30, 2000 and 1999 and for the end of the
four quarterly reporting periods from July 1, 1999 through June
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30, 2000. 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 or monitor risk. There can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated above 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. At June
30, 2000 the Partnership's cash balance at DWR was approximately
97% of its total Net Asset Value. 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
market risk exposures - except for (A) those disclosures that are
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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 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 Manager 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 June 30, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The Partnership's currency exposure is to exchange
rate fluctuations, primarily fluctuations which disrupt the
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historical pricing relationships between different currencies and
currency pairs. Interest rate changes as well as political and
general economic conditions influence these fluctuations. The
Partnership trades in a large number of currencies, including
cross-rates - i.e., positions between two currencies other than
the U.S. dollar. For the second quarter of 2000, the
Partnership's major exposures were in the euro currency crosses
and outright U.S. dollar positions. Outright positions consist
of the U.S. dollar vs. other currencies. These other currencies
include the major and minor currencies. Demeter does not
anticipate that the risk profile of the Partnership's currency
sector will change significantly in the future. The currency
trading VaR figure includes foreign margin amounts converted into
U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in
expressing VaR in a functional currency other than dollars.
Interest Rate. The second largest market exposure at June 30,
2000 was in the interest rate complex. Exposure was spread
across German and Japanese interest rate sectors. Interest rate
movements directly affect the price of the sovereign bond futures
positions held by the Partnership and indirectly affect 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
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is generally to interest rate fluctuations in the United States
and the other G-7 countries. The G-7 countries consist of
France, U.S., Britain, Germany, Japan, Italy and Canada.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. Australia. Demeter
anticipates that G-7 and Australian interest rates will remain
the primary interest rate 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 interest
rate 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.
Commodity.
Energy. On June 30, 2000, the Partnership's energy exposure was
shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in this market. Natural gas has exhibited volatility
in prices resulting from weather patterns and supply and demand
factors and may continue in this choppy pattern.
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Metals. The Partnership's primary metals market exposure at
June 30, 2000 was to fluctuations in the price of Aluminum and
Nickel.
Soft Commodities and Agriculturals. On June 30, 2000, most of
the exposure to these sectors was in the corn, soybean, cotton
and coffee markets. Supply and demand inequalities, severe
weather disruption and market expectations affect price movements
in these markets.
Equity. Exposure to stock indices on June 30, 2000 was limited to
a small position in the Nikkei stock index.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 2000:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in euros and Japanese yen. The Partnership
controls the non-trading risk of these balances by regularly
converting these balances back into dollars upon liquidation of
the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially
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the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership's
assets among different market sectors and trading approaches, and
monitoring the performance of the Trading Manager daily. In
addition, the Trading Manager establishes diversification
guidelines, often set in terms of the maximum margin to be
committed to positions in any one market sector or market-
sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Manager.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-Q for the quarter ended March 31, 2000 and
Form 10-K for the year ended December 31, 1999.
On October 25, 1996, the Market Surveillance Committee (the
"Committee") of the National Association of Securities Dealers
("NASD") filed a formal complaint against MS & Co. and seven
current and former traders, alleging violations of certain NASD
rules relating to manipulative and deceptive practices, locked
and crossed markets, and failure to supervise. Hearings were
held in June and July 1997. On April 13, 1998 the Committee
ruled that MS & Co. and the seven traders had engaged in
manipulative and deceptive practices and improperly locked or
crossed markets, but not that MS & Co. had failed to supervise
its traders. The Committee levied a fine of $1,000,000 on MS &
Co., a fine of $100,000 and a 90-day suspension on one of its
former traders, and fines of $25,000 and 30-day suspensions on
each of the remaining current and former traders. On January 18,
2000 the National Adjudicatory Council, which heard the appeal,
issued a ruling which upheld the Committee's April 1998 decision,
however, the National Adjudicatory Council reduced the firm's
fine to $495,000,
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reversed all previously imposed suspensions against the traders,
reduced the fine for each of six traders to $2,500 and dismissed
all charges against the seventh trader.
On January 11, 1999, the Securities and Exchange Commission
brought an action against 28 NASDAQ market makers, including MS &
Co., and 51 individuals, including one current and one former
trader employed by MS & Co., for certain conduct during 1994.
The core of the charges against MS & Co. concerns improper or
undisclosed coordination of price quotes with other broker-
dealers and related reporting, recordkeeping and supervisory
deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Securities Exchange Act and Rules 15c1-2,
15c2-7 and 17a-3 promulgated thereunder. Without admitting or
denying the charges, MS & Co. consented to the entry of a cease
and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its
procedures to an independent consultant for review. In addition,
one current and one former trader employed by MS & Co. accepted
suspensions of less than two months each and were fined $25,000
and $30,000 respectively.
Item 5. OTHER INFORMATION
Effective July 1, 2000, Lewis A. Raibley, III resigned as Chief
Financial Officer and a Director of Demeter and DWFCM. Effective
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July 10, 2000, Raymond E. Koch replaced Lewis A. Raibley, III as
Chief Financial Officer of Demeter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.01 Amended and Restated Limited Partnership Agreement
of the Partnership, dated as of June 30, 1995
incorporated by reference to Exhibit 3.01 of the
Partnership's Registration Statement on Form S-1 (File
No. 33-90360).
10.01 Amended and Restated Management Agreement among the
Partnership, Demeter and DWFCM dated as of August 31,
1995 incorporated by reference to Exhibit 10.02 of the
Partnership's Registration Statement on Form S-1 (File
No. 33-90360).
10.02 Amended and Restated Customer Agreement, dated as
of December 1, 1997, between the Partnership and Dean
Witter Reynolds Inc incorporated by reference to Exhibit
10.02 of the Partnership's Form 10-K (File No. 0-23577) for
the year ended December 31, 1998.
10.03 Customer Agreement, dated as of December 1, 1997,
among the Partnership, Carr Futures, Inc., and Dean
Witter Reynolds Inc incorporated by reference to
Exhibit 10.03 of the Partnership's Form 10-K (File No.
0-23577) for the year ended December 31, 1998.
10.04 International Foreign Exchange Master Agreement,
dated as of August 1, 1997, between the Partnership and
Carr Futures, Inc incorporated by reference to Exhibit
10.04 of the Partnership's Form 10-K (File No. 0-23577)
for the year ended December 31, 1998.
10.05 Customer Agreement, dated as of May 1, 2000
between Morgan Stanley & Co. Incorporated, the
Partnership and Dean Witter Reynolds inc. is filed
herewith.
(B) Reports on form 8-K. - None.
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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 Diversified Futures
Fund Limited Partnership
Registrant)
By: Demeter Management Corporation
(General Partner)
August 11, 2000 By:/s/Raymond E. Koch __________
Raymond E. Koch
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.
