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

August 13, 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 open forward contracts and commodity options purchased, if applicable. 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 second 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 six months ended June 30, 2014, Partnership capital decreased 24.8% from $365,376,564 to $274,782,889. This decrease was attributable to redemptions of 85,440.4740 Redeemable Units resulting in an outflow of $72,278,468, coupled with the net loss of $20,608,207, which was partially offset by the subscriptions of 2,603.6220 Redeemable Units totaling $2,293,000. 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 second quarter of 2014, the Partnership's net asset value per unit increased 2.4% from $830.90 to $850.69 as compared to an increase of 0.3% in the same period of 2013. The Partnership experienced a net trading gain before fees and expenses in the second quarter of 2014 of $11,645,184. Gains were primarily attributable to Funds' trading in currencies, grains, livestock, indices, U.S. and non-U.S. interest rates and were partially offset by losses in energy, metals and softs. The Partnership experienced a net trading gain before fees and expenses in the second quarter of 2013 of $12,409,651. Gains were primarily attributable to the Funds' trading in U.S. interest rates, metals, softs and indices and were partially offset by losses in currencies, energy, grains, livestock and non-U.S. interest rates. The most significant gains were achieved within the global interest rates sector during May from long positions in Australian fixed income futures as prices rallied after an austere federal budget weighed down interest rate expectations and consumer confidence in Australia. Additional gains were recorded during May from long positions in European fixed income futures as prices advanced as German unemployment unexpectedly increased and euro-area lending contracted, boosting demand for the relative "safety" of government debt. Within the global stock index markets, gains were achieved during May from long positions in U.S., European, and Asian equity index futures as prices advanced as U.S. durable goods orders climbed and investors speculated the U.S. economy was improving following a contraction in the first quarter. Additional gains in this sector were recorded during June from long positions in U.S. equity index futures as prices moved higher as indicators of higher manufacturing output signaled renewed economic strength in the U.S. Within the currency sector, gains were recorded, primarily during June, from long positions in the British pound versus the U.S. dollar as the relative value of the pound advanced after a report from the U.K. Office for National Statistics showed British business investment surged during the first quarter of the year. Long positions in the New Zealand dollar versus the U.S. dollar also recorded gains as the value of the Pacific nation's currency rallied after New Zealand's central bank increased interest rates during June. Additional gains were experienced in the agricultural markets during June from long positions in cattle futures as prices moved higher as droughts in Texas and California continued to limit U.S. herd levels. A portion of the Partnership's gains for the quarter was offset by losses incurred within the metals markets during June from short positions in silver futures as prices rose after geopolitical unrest in the Ukraine and the Middle East increased investor demand for the relative safety of precious metals. Losses in the metals sector were also experienced during April from short positions in copper and aluminum futures as prices moved higher amid speculation of increased demand for the industrial metals. Within the energy sector, losses were incurred during May from long positions in natural gas futures as prices declined amid speculation moderate spring weather in the U.S. would cut demand from power plants. During the Partnership's six months ended June 30, 2014, the net asset value per unit decreased 5.5% from $900.28 to $850.69 as compared to an increase of 1.2% in the same period of 2013. The Partnership experienced a net trading loss before fees and expenses in the six months ended June 30, 2014 of $8,748,501. Losses were primarily attributable to the Funds' trading in energy, metals, softs, indices and U.S. interest rates and were partially offset by gains in currencies, grains, livestock and non-U.S. interest rates. The Partnership experienced a net trading gain before fees and expenses in the six months ended June 30, 2013 of $26,700,509. Gains were primarily attributable to Funds' trading in currencies, U.S. interest rates, metals, softs, and indices and were partially offset by losses in energy, grains, livestock and non U.S. interest rates. The most significant losses were incurred within the energy markets 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 losses were incurred during March due to long positions in natural gas futures as prices declined after weather reports indicated warm temperatures would spread throughout large portions of the U.S. Losses in the energy sector during May were recorded from long positions in natural gas futures as prices declined amid speculation moderate spring weather in the U.S. would cut demand from power plants. Within the metals sector, losses were experienced during February from short positions in gold and silver futures as prices rallied after geo-political turmoil and concern over the strength of the U.S. economy increased demand for the precious metals as a store of value. During January, losses in the metals markets were recorded 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 stock index sector, losses were recorded 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. A portion of the Partnership's losses for the first six months of the year was offset by gains achieved within the agricultural markets during January from short positions in wheat futures as prices declined 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. Within the global interest rate markets, gains were recorded during May from long positions in Australian fixed income futures as prices rallied after an austere federal budget weighed down interest rate expectations and consumer confidence in Australia. Additional gains were recorded during May from long positions in European fixed income futures as prices advanced as German unemployment unexpectedly increased and euro-area lending contracted, boosting demand for the relative safety of government debt. Within the currency sector, gains were achieved primarily during June from long positions in the British pound versus the U.S. dollar as the relative value of the pound advanced after positive economic news indicated the British economy's recovery was gaining pace. 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, as applicable. MS&Co. credited Boronia I, LLC and Kaiser I, LLC (Prior to its redemption on June 30, 2014) on 100% of the average daily equity maintained in cash in the account of Boronia I, LLC or Kaiser I, LLC, as applicable, during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month. Interest income for the three and six months ended June 30, 2014 decreased by $11,412 and $43,675, respectively, as compared to the corresponding periods 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 and six months ended June 30, 2014, as compared to the corresponding periods 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 and six months ended June 30, 2014 decreased $4,214,015 and $6,228,105, respectively, as compared to the corresponding periods in 2013. The decrease in brokerage fees/ongoing selling agent fees is due to a decrease in average net assets and a reduction in the monthly ongoing selling agent fee rate for the three and six months ended June 30, 2014, as compared to the corresponding periods 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 periods. Clearing fees for the three months ended June 30, 2014 decreased by $63,553, as compared to the corresponding period in 2013. The decrease in clearing fees is primarily due to a decrease in the number of trades during the three months ended June 30, 2014, as compared to the corresponding period in 2013. Clearing fees for the six months ended June 30, 2014 increased by $101,746, 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 six months ended June 30, 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 and six months ended June 30, 2014 decreased $781,779 and $1,505,738, respectively, as compared to the corresponding periods in 2013. The decrease in management fees is primarily due to a decrease in average net assets for the three and six months ended June 30, 2014, as compared to the corresponding periods 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 and six months ended June 30, 2014 resulted in incentive fees of $264,946 and $266,364, respectively. Trading performance for the three and six months ended June 30, 2013 resulted in incentive fees of $1,343,427 and $1,420,902, respectively. 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 June 30, 2014 and March 31, 2014, the Partnership's assets were allocated among the trading Advisors in the following approximate percentages:

Advisor June 30, 2014 March 31, 2014 Drury Capital, Inc. 0 % $ - 6 % $ 18,276,307 Graham Capital Management, L.P. 10 % $ 23,365,800 7 % $ 21,752,305 Aspect Capital Limited 16 % $ 40,467,394 18 % $ 55,697,136 Willowbridge Associates Inc. 23 % $ 56,764,620 19 % $ 60,057,410Krom River Trading AG and Krom River Investment Management (Cayman) Limited 6 % $ 14,382,935 5 % $ 14,457,211 Altis Partners (Jersey) Limited 20 % $ 50,255,634 17 % $ 51,910,612 J E Moody & Company LLC. 11 % $ 26,949,052 9 % $ 28,209,555 Boronia Capital Pty. Ltd. 14 % $ 34,422,025 11 % $ 33,603,095 Kaiser Trading Group Pty. Ltd. 0 % $ - 8 % $ 24,723,897 23



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Source: Edgar Glimpses


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