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TACTICAL DIVERSIFIED FUTURES FUND L.P. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 14, 2014

Liquidity and Capital Resources

The Partnership does not engage in the sale of goods or services. Its only assets are its investment in Funds and cash. The Funds' only assets are their equity in trading accounts, consisting of cash and cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on forward contracts and commodity options purchased, if applicable, and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investments in the Funds. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the first quarter of 2014. The Partnership's capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by subscriptions, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any. For the three months ended March 31, 2014, Partnership capital decreased 15.5% from $365,376,564 to $308,687,528. This decrease was attributable to redemptions of 36,572.3790 Redeemable Units resulting in an outflow of $31,087,107, coupled with the net loss of $27,584,929, which was partially offset by the subscriptions of 2,231.8010 Redeemable Units totaling $1,983,000. Future redemptions could impact the amount of funds available for investment in funds in subsequent periods. Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership's significant accounting policies are described in detail in Note 7 of the Financial Statements. The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners' Capital. 21



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Results of Operations

During the first quarter of 2014, the Partnership's net asset value per unit decreased 7.7% from $900.28 to $830.90 as compared to an increase of 0.9% in the same period of 2013. The Partnership experienced a net trading loss before fees and expenses in the first quarter of 2014 of $20,393,685. Losses were primarily attributable to the Funds' trading in currencies, energy, softs, metals, U.S. and non-U.S. interest rates and indices and were partially offset by gains in grains and livestock. The Partnership experienced a net trading gain before fees and expenses in the first quarter of 2013 of $14,290,858. Gains were primarily attributable to the Funds' trading in currencies, livestock, metals, softs and indices and were partially offset by losses in energy, grains and U.S. and non-U.S. interest rates. In the energy markets, losses were incurred during March from long positions in crude oil and its related products as prices declined during the first half of the month on reports of higher-than-expected inventory levels in the U.S. Additional energy losses were incurred during January from long positions in crude oil and its related products as prices dropped sharply during the first half of the month due to an increase in production from Libya. Within the global stock index sector, losses were experienced primarily during January from long positions in U.S., European, and Asian equity index futures as prices declined as economic growth momentum in China weakened and the U.S. Federal Reserve announced measures to further taper its quantitative easing program. Losses within the metals complex were recorded primarily during February from short positions in gold and silver futures as precious metals prices moved higher after geo-political turmoil and concern over the strength of the U.S. economy increased demand for the precious metals. Additional losses were incurred during January from long positions in copper futures as weakening manufacturing reports from China reduced demand for the industrial metal, thus pushing prices lower. Within the global interest rate markets, losses were experienced during March from long positions in U.S. Treasury note futures as prices declined after comments made by newly appointed Federal Reserve Chair Janet Yellen indicated the Fed may raise interest rates in the future. Long futures positions in Japanese government bonds also recorded losses during March. Losses in the currency sector were recorded primarily during January from short positions in the Japanese yen as the relative value of the yen increased as investors sought out the Asian currency as a store of value. The Partnership's trading losses for the first quarter were offset by trading gains achieved within the agricultural complex during January from short positions in wheat futures as prices decreased after the release of a report by the U.S. Department of Agriculture indicated wheat stockpiles in the U.S. could reach record levels in 2014. Additional gains were recorded during February and March from long positions in lean hog futures as prices advanced over concern of limited U.S. pig herds. Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership/Funds depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations. Interest income on 80% of the average daily equity maintained in cash in the Partnership's (or the Partnership's allocable portion of a Fund's, other than Boronia I, LLC and Kaiser I, LLC) brokerage account during each month was earned at a 30-day U.S. Treasury bill yield determined weekly by CGM, based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury discount rate. MS&Co. credits Boronia I, LLC and Kaiser I, LLC on 100% of the average daily equity maintained in cash in the account of Boronia I, LLC or Kaiser I, LLC during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount less 0.15% during such month. Interest income for the three months ended March 31, 2014 decreased by $32,263, as compared to the corresponding period in 2013. The decrease in interest income is primarily due to lower average daily equity maintained in the Partnership's account and lower U.S. Treasury bill rates during the three months ended March 31, 2014, as compared to the corresponding period in 2013. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership's and the Funds' accounts and upon interest rates over which neither the Partnership/the Funds nor CGM/MS&Co. has control. 22



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Brokerage fees/ongoing selling agent fees are calculated as a percentage of the Partnership's adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage fees/ongoing selling agent fees for the three months ended March 31, 2014 decreased $2,014,090 as compared to the corresponding period in 2013. The decrease in brokerage fees/ongoing selling agent fees is due to a decrease in average net assets for the three months ended March 31, 2014, as compared to the corresponding period in 2013. Certain clearing fees are based on the number of trades executed by the Advisors for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees for the three months ended March 31, 2014 increased by $165,299 as compared to the corresponding period in 2013. The increase in clearing fees is primarily due to an increase in the number of trades during the three months ended March 31, 2014, as compared to the corresponding period in 2013. Management fees are calculated as a percentage of the Partnership's adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three months ended March 31, 2014 decreased $723,959 as compared to the corresponding period in 2013. The decrease in management fees is due to a decrease in average net assets for the three months ended March 31, 2014, as compared to the corresponding period in 2013. Incentive fees are based on the new trading profits generated by each Advisor at the end of the quarter as defined in the respective management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three months ended March 31, 2014 resulted in incentive fees of $1,418. Trading performance for the three months ended March 31, 2013 resulted in incentive fees of $77,475. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership. In allocating the assets of the Partnership among the Advisors, the General Partner considers past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time. As of March 31, 2014 and December 31, 2013, the Partnership's assets were allocated among the trading Advisors in the following approximate percentages: Advisor March 31, 2014 December 31, 2013 Drury Capital, Inc. 6 % $ 18,276,307 6 % $ 24,653,865 Graham Capital Management, L.P. 7 % $ 21,752,305 7 % $ 56,951,856 Aspect Capital Limited 18 % $ 55,697,136 18 % $ 102,310,549 Willowbridge Associates Inc. 19 % $ 60,057,410 18 % $ 88,383,660Krom River Trading AG and Krom River Investment Management (Cayman) Limited 5 % $ 14,457,211 8 % $ 42,587,060 Altis Partners (Jersey) Limited 17 % $ 51,910,612 18 % $ 92,118,163 J E Moody & Company LLC. 9 % $ 28,209,555 8 % $ 44,476,720 Boronia Capital Pty. Ltd. 11 % $ 33,603,095 9 % $ 65,220,505 Kaiser Trading Group Pty. Ltd. 8 % $ 24,723,897 8 % $ 51,718,650 23



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