-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, To+G2OOXLT0f6HJGJ+kez4TgCWNGUm1PVZc2+V0dRL5b9Jv3cuytTjhSUTIcYEaB K1we0E1TukZWrURs+GP8Ng== 0000839945-99-000001.txt : 19990518 0000839945-99-000001.hdr.sgml : 19990518 ACCESSION NUMBER: 0000839945-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WITTER DEAN DIVERSIFIED FUTURES FUND II L P CENTRAL INDEX KEY: 0000839945 STANDARD INDUSTRIAL CLASSIFICATION: [6221] IRS NUMBER: 133490286 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17446 FILM NUMBER: 99625505 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER 62ND FLR STREET 2: C/O DEMETER MANAGEMENT CORP CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2123925454 MAIL ADDRESS: STREET 1: C/O DEMETER MANAGEMENT CORP STREET 2: TWO WORLD TRADE CENTER 62ND FL CITY: NEW YORK STATE: NY ZIP: 10048 10-Q 1 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 No. 0-17446 DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. (Exact name of registrant as specified in its charter) Delaware 13-3490286 (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 DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q March 31, 1999
PART I. FINANCIAL INFORMATION 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 . . . . . . . . . . . . . . . . . .18-29 Part II. OTHER INFORMATION Item 1. Legal Proceedings.............................. 30 Item 6. Exhibits and Reports on Form 8-K................. 30
PART I. FINANCIAL INFORMATION Item 1. Financial Statements DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF FINANCIAL CONDITION
March 31, December 31, 1999 1998 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Cash 9,608,814 10,606,680 Net unrealized gain on open contracts 300,541 206,564 Total Trading Equity 9,909,355 10,813,244 Interest receivable (DWR) 30,657 32,410 Due from DWR 14,624 - Total Assets 9,954,636 10,845,654 LIABILITIES AND PARTNERS' CAPITAL Liabilities Redemptions payable 495,932 239,703 Accrued management fee (DWFCM) 21,563 27,114 Incentive fees payable (DWFCM) - 3,871 Total Liabilities 517,495 270,688 Partners' Capital Limited Partners (3,453.150 and 3,640.082 Units, respectively) 9,161,228 10,281,223 General Partner (104 Units) 275,913 293,743 Total Partners' Capital 9,437,141 10,574,966 Total Liabilities and Partners' Capital 9,954,636 10,84 5,654 NET ASSET VALUE PER UNIT 2,653.01 2,824.45 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Quarters Ended March 31, 1999 1998 $ $ REVENUES Trading profit (loss): Realized (594,590) 1,517,668 Net change in unrealized 93,977 (1,956,896) Total Trading Results (500,613) (439,228) Interest Income (DWR) 89,289 109,883 Total Revenues (411,324) (329,345) EXPENSES Brokerage commissions (DWR) 149,931 168,240 Management fees (DWFCM) 75,808 83,606 Transaction fees and costs 11,868 14,564 Incentive fees (DWFCM) (7,040) - Total Expenses 230,567 266,410 NET LOSS (641,891) (595,755) NET LOSS ALLOCATION Limited Partners (624,061) (581,277) General Partner (17,830) (14,478) NET LOSS PER UNIT Limited Partners (171.44) (139.21) General Partner (171.44) (139.21) The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Quarters Ended March 31, 1999 and 1998 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total Partners' Capital, December 31, 1997 4,279.580 $11,209,045$279,181$11,488,226 Net Loss - (581,277) (14,478) ( 595,755) Redemptions (96.000) (244,341) - (244,341) Partners' Capital, March 31, 1998 4,183.580 $10,383,427$264,703$10,648, 130 Partners' Capital, December 31, 1998 3,744.082$10,281,223 $293,743$10,574,966 Net Loss - (624,061) (17,830) (641,891) Redemptions (186.932) (495,934) - (495,934) Partners' Capital, March 31, 1999 3,557.150 $9,161,228 $275,913 $9,437,141 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Quarters Ended March 31, 1999 1998 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net loss (641,891) (595,755) Noncash item included in net loss Net change in unrealized (93,977) 1 ,956,896 (Increase) decrease in operating assets: Interest receivable (DWR) 1,753 (1,423) Due from DWR (14,624) (11,523) Decrease in operating liabilities: Accrued management fee (DWFCM) (5,551) (2,204) Decrease in incentive fees payable (3,871) - - Net cash provided by (used for) operating activities (758,161) 1,345,991 CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in redemptions payable256,229 (39,102) Redemptions of units (495,934) (244,341) Net cash used for financing activities (239,705) (283,443) Net increase (decrease) in cash (997,866) 1 ,062,548 Balance at beginning of period 10,606,680 10,015,151 Balance at end of period 9,608,814 11,077,699 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. 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 II L.P. (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 Diversified Futures Fund II L.P. is a limited partnership organized to engage in the speculative trading of commodity futures and forward contracts, physical commodities, and other commodity interests (collectively, "futures interests"). The general partner for the Partnership is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Dean Witter Reynolds ("DWR") and an unaffiliated clearing commodity broker, Carr Futures Inc. ("Carr"), provides clearing and execution services. The trading manager is Dean Witter Futures & Currency Management Inc. ("DWFCM" or the "Trading Manager"). Demeter, DWR and DWFCM are wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. 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 bills. Brokerage expenses incurred by the Partnership are paid to DWR. Management fees and incentive fees (if any) are paid to DWFCM. 3. Financial Instruments The Partnership trades commodity futures and forward contracts, physical commodities, 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 DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. 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 $300,541 and $206,564 at March 31, 1999 and December 31, 1998, respectively. Of the $300,541 net unrealized gain on open contracts at March 31, 1999, $288,073 related to exchange-traded futures contracts and $12,468 related to off-exchange-traded forward currency contracts. Of the $206,564 net unrealized gain on open contracts at December 31, 1998, $596,320 related to exchange-traded futures contracts and $(389,756) related to off-exchange-traded forward currency contracts. Exchange-traded futures contracts held by the Partnership at March 31, 1999 and December 31, 1998 mature through June 1999. Off-exchange-traded forward currency contracts held by the Partnership DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) at March 31, 1999 and December 31, 1998 mature through June 1999 and April 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 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 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 on all open futures contracts, which funds, in the aggregate, totaled $9,896,887 and $11,203,000 at March 31, 1999 and December 31, 1998, 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 DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS - (CONCLUDED) 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). 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. 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 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. 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 $411,324 and posted a decrease in Net Asset Value per Unit. The most significant losses were experienced in the global interest rate futures markets throughout a majority of the quarter from short Japanese government bond futures positions 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 were recorded throughout a majority of the quarter from long Australian dollar positions 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 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 metals markets, losses were experienced during March from long silver futures positions as prices retreated after Berkshire Hathaway's annual report failed to provide any new information on the company's silver positions. In soft commodities, losses were recorded during March from short positions in coffee futures as prices in this market surged late in the month as options-related buying triggered waves of buy-stops at several key resistance levels, attracting fund short-covering. In the global stock index futures markets, losses were experienced during February 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. These losses were partially offset by gains recorded in the energy markets during March from long positions in crude and heating oil futures as prices moved significantly higher which was largely attributed to the 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. In the agricultural markets, gains were recorded during January and February from short futures positions in soybeans and soybean products as prices declined to 23-year lows in reaction to a healthy South American crop outlook, weak world demand and fears that Brazil will flood the market in an effort to support their ailing economy. Total expenses for the three months ended March 31, 1999 were $230,567, resulting in a net loss of $641,891. The value of a Unit decreased from $2,824.45 at December 31, 1998 to $2,653.01 at March 31, 1999. For the Quarter Ended March 31, 1998 For the quarter ended March 31, 1998, the Partnership recorded total trading losses net of interest income of $329,345 and posted a decrease in Net Asset Value per Unit. The most significant losses were recorded in currency markets due primarily to short-term volatility caused by the economic instability in the Far East. During January, the upward trend in the value of the U.S. dollar reversed lower in response to the Japanese government's proposed economic stimulus package. This reversal resulted in losses for previously established short Japanese yen positions. Additional currency losses were recorded in February as the value of the yen moved without consistent direction. Smaller losses were recorded from transactions involving the German mark, Australian dollar and British pound. A small portion of these losses was offset by gains in March from transactions involving the German mark, Swiss franc and Japanese yen. In metals, losses were recorded from long silver futures positions as silver prices reversed lower in February after rallying higher during January. Smaller losses were recorded from trading base metals futures during March. Additionally, trendless movement in soybean futures prices during January and March resulted in losses for the Partnership. A portion of the Partnership's overall losses for the quarter was offset by gains in financial futures trading. The most significant of these gains were recorded from long European bond futures positions, as well as from long S&P 500 Index futures positions, as prices in these markets trended higher throughout a majority of the quarter. In the soft commodities and energy markets, gains were recorded from short sugar and crude oil futures positions as prices trended lower during January and February before reversing higher during March. Total expenses for the three months ended March 31, 1998 were $266,410, resulting in a net loss of $595,755. The value of a Unit decreased from $2,684.43 at December 31, 1997 to $2,545.22 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 Trading Manager - 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 Manager throughout 1999 in their Year 2000 compliance and, where applicable, to test its external interface with Carr and the Trading Manager. 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 exist but only as a fixed denomination of the euro. Conversion to the euro prevents the Trading Manager from trading in certain currencies and thereby limits its 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. 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. 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 Manager 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 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 Manager 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 $9 million. Primary Market March 31, 1999 Risk Category Value at Risk Currency (1.94)% Interest Rate (0.80) Equity (0.74) Commodity (1.12) Aggregate Value at Risk (2.31)% 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 Currency (2.42)% (0.96)% (1.84)% Interest Rate (1.82) (0.47) (1.20) Equity (0.74) (0.18) (0.43) Commodity (1.12) (0.66) (0.98) Aggregate Value at Risk (3.35)% (1.37)% (2.44)% 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. 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 91%) 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 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 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 March 31, 1999, by market sector. It may be anticipated however, that these market exposures will vary materially over time. Currency. The primary exposure in the Partnership is in the currency complex. The Partnership's currency exposure is to exchange rate fluctuations, primarily fluctuations that disrupt the 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 first quarter of 1999, the Partnership's major exposures were in the Euro currency crosses and outright US dollar positions (outright positions consists 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 Value at Risk 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 Value at Risk in a functional currency other than dollars. Interest Rate. The second largest exposure this quarter was in the interest rate sector. Exposure was spread across the US, Swiss, Australian, 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 is generally to interest rate fluctuations in the G-7 countries and 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 and medium-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. Equity. The Partnership's equity exposure on March 31, 1999 was limited to price risk in the Nikkei index (Japan). The stock index futures traded by the Partnership are by law limited to futures on broadly based 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 U.S. 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 next largest exposure was in the base and precious metals markets. While the Partnership's primary metals market exposure was to fluctuations in the prices of base metals, exposure in the gold and silver markets impacted the portfolio as well. The Partnership aims to equally weight market exposure in the metals as much as possible, however base metals, during period of volatility, will affect performance more dramatically than the precious metals markets. Demeter anticipates that the base metals will remain the primary metals market exposure of the Partnership. Energy. On March 31, 1999 the Partnership's energy exposure was shared by futures contracts in the oil and natural gas markets. Price movements in these markets result from political developments in the Middle East, weather patterns, and other economic fundamentals. As oil prices have broken out of low price ranges achieved in 1998, it is possible that volatility will increase as well. Significant profits and losses have been and are expected to continue to be experienced in this market. Natural gas, also a primary energy market exposure, has exhibited more volatility than the oil markets on an intra day and daily basis. It is expected to continue this choppy pattern. Soft Commodities. On March 31, 1999, the Partnership had a reasonable amount of exposure in the markets that comprise these sectors. Most of the exposure however was in the grain and bean markets. Supply and demand inequalities, severe weather disruption and market expectations affect price movements in these markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership as of March 31, 1999: Foreign Currency Balances. The Partnership's foreign currency balances are in Japanese yen, British pounds, Euros, Swiss Francs and Australian dollars. 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 means by which the Partnership and the Trading Manager, 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 market sectors and trading approaches, and (ii), monitoring the performance of the Trading Manager on a daily basis. 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, which is the only Partnership investment directed by Demeter, rather than the Trading Manager. 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 6. Exhibits and Reports on Form 8-K (A) Exhibits - None. (B) Reports on Form 8-K. - None. 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 II L.P. (Registrant) By: Demeter Management Corporation (General Partner) May 17, 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. EX-27 2
5 The schedule contains summary financial information extracted from Dean Witter Diversified Futures Fund II L.P. and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 MAR-31-1999 9,608,814 0 45,281 0 0 0 0 0 9,954,636 0 0 0 0 0 0 9,954,636 0 (411,324) 0 0 230,567 0 0 (641,891) 0 (641,891) 0 0 0 (641,891) 0 0 Receivables include interest receivable of $30,657 and due from DWR of $14,624. In addition to cash and receivables, total assets include net unrealized gain on open contracts of $300,541. Liabilities include redemptions payable of $495,932 and accrued management fees of $21,563. Total revenues include realized trading revenue of $(594,590), net change in unrealized of $93,977, and interest income of $89,289.
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