| Summary of Significant Accounting Policies | 2. Summary of
Significant Accounting Policies
The Fund
follows accounting and reporting guidance under Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 946 “Financial Services-Investment
Companies.” The following is a summary of significant
accounting policies followed by the Fund in the preparation of its
financial statements in accordance with accounting principles
generally accepted in the United States (“U.S.
GAAP”).
The
accompanying unaudited financial statements were prepared in
accordance with U.S. GAAP for interim financial information and
with the instructions for Form 10-Q and the rules and regulations
of the SEC. In the opinion of management, all material adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair statement of the interim period financial
statements have been made. Interim period results are not
necessarily indicative of results for a full-year period. These
financial statements and the notes thereto should be read in
conjunction with the Fund’s financial statements included in
the Fund’s Annual Report on Form 10-K for the year ended
December 31, 2015.
Basis of
Accounting
The
accompanying financial statements have been prepared in conformity
with U.S. GAAP. The preparation of financial statements in
conformity with U.S. GAAP requires management to make certain
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 increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
Futures
Contracts
The Fund
invests in commodity futures contracts. Upon execution of a futures
contract, the Fund is obligated to deposit cash or eligible
securities, also known as “initial margin,” into an
account at its clearing broker. Generally investments in futures
contracts also obligate the investor and the clearing broker to
settle monies on a daily basis representing changes in the prior
day’s “mark-to-market” of the open contracts. If
the Fund has unrealized appreciation, the clearing broker would
credit the Fund’s account with an amount equal to
appreciation and conversely, if the Fund has unrealized
depreciation, the clearing broker would debit the Fund’s
account with an amount equal to depreciation. These daily cash
settlements are also known as “variation margin.” In
lieu of posting variation margin daily, the Fund has deposited cash
with the clearing broker, generally representing approximately
twice the required initial margin to cover the initial margin and
the daily changes in the market value of its futures investments.
Cash held by the clearing broker to cover both margin requirements
on open futures contracts is recognized as “Deposits with
brokers” on the Statements of Financial Condition.
During the
period the futures contract is open, changes in the value of the
contract are recognized as an unrealized gain or loss by
“marking-to-market” on a daily basis to reflect the
changes in market value of the contract, which are recognized as a
component of “Unrealized appreciation or depreciation on
futures contracts” on the Statements of Financial Condition
and “Change in net unrealized appreciation (depreciation) of
futures contracts” on the Statements of Operations. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract on the closing
date and the value of the contract when originally entered into,
which is recognized as a component of “Net realized gain
(loss) from futures contracts” on the Statements of
Operations.
Risks of
investments in commodity futures contracts include possible adverse
movement in the price of the commodities underlying the contracts,
the possibility that there may not be a liquid secondary market for
the contracts and the possibility that a change in the value of the
contract may not correlate with a change in the value of the
underlying commodities.
The average
number of long and short futures contracts outstanding during the
six months ended June 30, 2016 and the year ended December 31, 2015
was as follows:
Six Months Ended Year Ended
Average number of long and
short futures contracts outstanding* 3,974 3,782
* The average number of
contracts is calculated based on the absolute aggregate number of
contracts outstanding at the beginning of the year and at the end
of each quarter within the respective period.
Refer to Note
3—Derivative Instruments and Hedging Activities within these
Notes to Financial Statements for further details on futures
contracts activity.
Options
Contracts
The Fund may
write (sell) and purchase options on commodity futures contracts to
enhance the Fund’s risk-adjusted total return. When the Fund
writes an option, an amount equal to the premium received is
recognized as a component of “Options written, at
value” on the Statements of Financial Condition and is
subsequently adjusted to reflect the current value of the written
option until the option expires or the Fund enters into a closing
purchase transaction. The changes in value of the options written
during the reporting period are recognized as a component of
“Change in net unrealized appreciation (depreciation) of
options written” on the Statements of Operations. When an
option is exercised or expires, or the Fund enters into a closing
purchase transaction, the difference between the net premium
received and any amount paid at expiration or on executing a
closing purchase transaction is recognized as a component of
“Net realized gain (loss) from options written” on the
Statements of Operations. The Fund, as writer of an option, has no
control over whether the underlying instrument may be sold (called)
and as a result bears the risk of an unfavorable change in the
market value of the instrument underlying the written option. There
is also the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. During the six months
ended June 30, 2016 and year ended December 31, 2015, the Fund
wrote call and put options on futures contracts.
The Fund did
not purchase options on futures contracts during the six months
ended June 30, 2016 and the year ended December 31, 2015. The
purchase of options involves the risk of loss of all or part of the
cash paid for the options (the premium). The market risk associated
with purchasing options is limited to the premium paid. The
counterparty credit risk of purchasing options, however, needs to
take into account the current value of the option, as performance
is expected from the counterparty.
Transactions in
both call and put options written during the six months ended June
30, 2016 and the year ended December 31, 2015, were as
follows:
Six Months Ended June
30, 2016 Year Ended December 31, 2015
Number of Contracts Premiums Received Number of Contracts Premiums Received
Outstanding, beginning of
period 705 $ 2,323,340 597 $ 2,636,904
Options written 3,497 7,697,984 4,982 18,059,094
Options terminated in
closing purchase transactions (1,156 ) (2,248,377 ) (1,872 ) (7,032,710 )
Options expired (732 ) (1,058,526 ) (701 ) (1,206,726 )
Options
exercised (1,479 ) (4,117,135 ) (2,301 ) (10,133,222 )
Outstanding, end of
period 835 $ 2,597,286 705 $ 2,323,340
The average
number of both call and put options written outstanding during the
six months ended June 30, 2016 and the year ended December 31,
2015, was as follows:
Six Months Ended June 30,
2016 Year Ended December 31, 2015
Average number of options
written outstanding* 731 704
* The average number of
contracts is calculated based on the outstanding number of
contracts at the beginning of the year and at the end of each
quarter within the respective period.
Refer to Note
3—Derivative Instruments and Hedging Activities within these
Notes to Financial Statements for further details on options
activity.
Netting
Agreements
In the ordinary
course of business, the Fund has entered into transactions subject
to enforceable master repurchase agreements or other similar
arrangements (“netting agreements”). Generally, the
right to offset in netting agreements allows the Fund to offset any
exposure to a specific counterparty with any collateral received or
delivered to that counterparty based on the terms of the
agreements. The Fund manages its cash collateral and securities
collateral on a counterparty basis. As of June 30, 2016 and
December 31, 2015, the Fund was not invested in any portfolio
securities or derivatives, other than the repurchase agreements
further described below, that are subject to netting
agreements.
Repurchase
Agreements
In connection
with transactions in repurchase agreements, it is the Fund’s
policy that its custodian take possession of the underlying
collateral securities, the fair value of which exceeds the
principal amount of the repurchase transaction, including accrued
interest, at all times. If the counterparty defaults, and the fair
value of the collateral declines, realization of the collateral may
be delayed or limited.
The following
tables present the repurchase agreements for the Fund, presented on
the Statements of Financial Condition as of June 30, 2016 and
December 31, 2015, and recognized as a component of
“Short-term investments, at value,” that are subject to
netting agreements as of the end of the reporting period, and the
collateral delivered related to those repurchase
agreements.
June 30,
2016
Counterparty Short-Term Investments, at
Value Collateral
Pledged (From) Counterparty* Net Exposure
Repurchase
Agreements State Street Bank $ 17,373,256 $ (17,373,256 ) $ —
December 31,
2015
Counterparty Short-Term Investments, at
Value Collateral
Pledged (From) Counterparty* Net Exposure
Repurchase
Agreements State Street
Bank $ 1,293,949 $ (1,293,949 ) $ —
* As of June 30, 2016 and
December 31, 2015, the value of the collateral pledged from the
counterparty exceeded the value of the repurchase agreements. The
value of the collateral pledged from the counterparty as of June
30, 2016 and December 31, 2015 was $17,721,810 and $1,321,469,
respectively.
Collateral
Investments
Currently,
approximately 15% of the Fund’s net assets are committed to
secure the Fund’s futures contract positions. These assets
are placed in a commodity futures account maintained by the
Fund’s clearing broker, and are held in high-quality
instruments permitted under CFTC regulations.
The
Fund’s remaining assets are held in a separate collateral
investment account managed by the Collateral Sub-adviser. The
Fund’s assets held in the separate collateral account are
invested in cash equivalents, U.S. government securities and other
high-quality short-term debt securities with final terms not
exceeding one year at the time of investment. The collateral
portfolio’s debt securities (other than U.S. government
securities) are rated at the highest applicable rating as
determined by at least one nationally recognized statistical rating
organization, or if unrated, judged by the Collateral Sub-adviser
to be of comparable quality.
Investment
Valuation
Commodity
futures contracts and options on commodity futures contracts which
are traded on an exchange are valued at the final settlement price
or official closing price as determined by the principal exchange
on which the instruments are traded as supplied by independent
pricing services. These investments are generally classified as
Level 1 for fair value measurement purposes. Over-the-counter
commodity futures contracts and options on commodity futures
contracts which are not traded on an exchange are valued, in order
of hierarchy, by independent pricing services, price quotations
obtained from counterparty broker-dealers, or through fair
valuation methodologies as determined by the Manager. These
investments are generally classified as Level 2. Additionally,
events may occur after the close of the market, but prior to the
determination of the Fund’s net asset value, that may affect
the values of the Fund’s investments. In such circumstances,
the Manager determines a fair valuation for such investments that
in its opinion is reflective of fair market value. These
investments are generally classified as Level 2 or Level 3
depending on the observability of the significant
inputs.
Prices of
fixed-income securities, including, but not limited to,
highly-rated agency discount notes and U.S. Treasury bills, are
provided by a pricing service approved by the Fund’s Manager.
These securities are generally classified as Level 2. The pricing
service establishes a security’s fair value using methods
that may include consideration of the following: yields or prices
of investments of comparable quality, type of issue, coupon,
maturity and rating, market quotes or indications of value from
security dealers, general market conditions and other information
and analysis, including the obligor’s credit characteristics
considered relevant. These securities are generally classified as
Level 2 or Level 3 depending on the priority of the significant
inputs.
Repurchase
agreements are valued at contract amount plus accrued interest,
which approximates market value. These securities are generally
classified as Level 2.
Fair Value
Measurements
Fair value is
defined as the price that the Fund would receive upon selling an
investment or transferring a liability in an orderly transaction to
an independent buyer in the principal or most advantageous market
for the investment. A three-tier hierarchy is used to maximize the
use of observable market data and minimize the use of unobservable
inputs and to establish classification of fair value measurements
for disclosure purposes. Observable inputs reflect the assumptions
market participants would use in pricing the asset or liability.
Observable inputs are based on market data obtained from sources
independent of the reporting entity. Unobservable inputs reflect
the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset or liability.
Unobservable inputs are based on the best information available in
the circumstances. The following is a summary of the three-tier
hierarchy of valuation inputs.
Level 1—Inputs are unadjusted and prices are
determined by quoted prices in active markets for identical
securities.
Level 2—Prices are determined using other
significant observable inputs (including quoted prices for similar
securities, interest rates, prepayment speeds, credit risk,
etc.).
Level 3—Prices are determined using significant
unobservable inputs (including management’s assumptions in
determining the fair value of investments).
The inputs or
methodologies used for valuing securities are not an indication of
the risks associated with investing in those securities. The
following is a summary of the Fund’s fair value measurements
as of June 30, 2016 and December 31, 2015:
June 30,
2016
Level 1 Level 2 Level 3 Total
Short-Term
Investments:
U.S. Government and Agency
Obligations $ — $ 228,060,520 $ — $ 228,060,520
Repurchase
Agreements — 17,373,256 — 17,373,256
Investments in
Derivatives:
Futures
Contracts* 6,897,789 — — 6,897,789
Options Written (3,144,864 ) — — (3,144,864 )
Total $ 3,752,925 $ 245,433,776 $ — $ 249,186,701
December 31,
2015
Level 1 Level 2 Level 3 Total
Short-Term
Investments:
U.S. Government and Agency
Obligations $ — $ 228,580,099 $ — $ 228,580,099
Repurchase
Agreements — 1,293,949 — 1,293,949
Investments in
Derivatives:
Futures
Contracts* 2,551,944 — — 2,551,944
Options Written (2,283,151 ) — — (2,283,151 )
Total $ 268,793 $ 229,874,048 $ — $ 230,142,841
* Represents the net
unrealized appreciation (depreciation) on futures contracts as
reported on the Statements of Financial Condition.
The Manager is
responsible for the Fund’s valuation process and has
delegated daily oversight of the process to the Manager’s
Valuation Committee. The Valuation Committee, pursuant to its
valuation policies and procedures, is responsible for making fair
value determinations, evaluating the effectiveness of the
Fund’s pricing policies, and reporting to the Manager’s
senior management. The Valuation Committee is aided in its efforts
by the Manager’s Securities Valuation Team, which is
responsible for administering the daily valuation process and
applying fair value methodologies as approved by the Valuation
Committee. When determining the reliability of independent pricing
services for investments owned by the Fund, the Valuation
Committee, among other things, conducts due diligence reviews of
the pricing services and monitors the quality of security prices
received through various testing reports conducted by the
Securities Valuation Team.
For each
portfolio instrument that has been fair valued pursuant to the
Valuation Committee’s policies, the fair value price is
compared against the last available and next available market
quotations. The Valuation Committee reviews the results of such
testing and fair valuation occurrences are reported to the
Manager’s senior management.
Investment
Transactions
Investment
transactions are recorded on a trade date basis. Realized gains and
losses from investment transactions are determined on the specific
identification method, which is the same for federal income tax
purposes.
Investment
Income
Interest
income, which reflects the amortization of premiums and includes
accretion of discounts for financial reporting purposes, is
recorded on an accrual basis.
Brokerage
Commissions and Fees
The Fund pays
brokerage commissions, including applicable clearing costs,
exchange fees, NFA fees, give-up fees, pit brokerage fees and other
transaction-related fees and expenses, incurred in connection with
its commodity trading activities.
Income
Taxes
No provision
for federal, state, and local income taxes has been made in the
accompanying financial statements because the Fund has elected to
be classified as a partnership for U.S. federal income tax
purposes. Each owner of the Fund’s shares will be required to
take into account its allocable share of the Fund’s income,
gains, losses, deductions and other items for the Fund’s
taxable year.
For all open
tax years and all major taxing jurisdictions, the Manager of the
Fund has concluded that there are no significant uncertain tax
positions that would require recognition in the financial
statements. Open tax years are those that are open for examination
by taxing authorities (i.e., generally the last four tax year ends
and the interim tax period since then). Furthermore, the Manager of
the Fund is also not aware of any tax positions for which it is
reasonably possible that the total amounts of unrecognized tax
benefits will significantly change in the next twelve
months.
Expense
Recognition
All expenses of
the Fund are recognized on an accrual basis. The Fund pays all
costs and expenses of its operations, including brokerage expenses,
custody fees, transfer agent expenses, professional fees, expenses
of preparing, printing and distributing reports, notices,
information statements, proxy statements, reports to governmental
agencies, and taxes, if any. Occasionally, the Fund may receive a
refund or reduction for certain expenses previously incurred. When
such events occur, the Fund may suspend or reverse an expense
accrual, which in turn may result in a credit balance to that
expense account recognized on the Statements of
Operations.
In connection
with the Conversion described previously, the Fund has incurred
certain costs and expenses. Such amounts are recognized as a
component of “Accrued conversion expenses” on the
Statements of Financial Condition and “Conversion
expenses” on the Statements of Operations, when
applicable.
Calculation
of Net Asset Value
The net asset
value per share of the Fund on any given day is computed by
dividing the value of all assets of the Fund (including any accrued
interest), less all liabilities (including accrued expenses and
distributions declared but unpaid), by the total number of shares
outstanding.
Distributions
The Fund
intends to make regular monthly distributions to its shareholders
stated in terms of a fixed cents per share distribution rate. Among
other factors, the Manager seeks to establish a distribution rate
that roughly corresponds to its projections of the total return
that could reasonably be expected to be generated by the Fund over
an extended period of time. In the event that the amount of income
earned or capital gains realized by the Fund is not sufficient to
cover the Fund’s distributions, the Fund may be required to
liquidate investments to fund distributions at times or on terms
that are disadvantageous to the Fund and its shareholders. As
market conditions and portfolio performance may change, the rate of
distribution on the shares and the Fund’s distribution policy
could change. The Manager reserves the right to change the
Fund’s distribution policy and the basis for establishing the
rate of the Fund’s monthly distributions, or may temporarily
suspend or reduce distributions without a change in policy, at any
time and may do so without prior notice to shareholders.
Distributions
to shareholders are recorded on the ex-dividend date.
Commitments
and Contingencies
Under the
Fund’s organizational documents, the Manager, Wilmington
Trust Company (the Fund’s Delaware trustee) and the
Manager’s Independent Committee members are indemnified
against certain liabilities arising out of the performance of their
duties to the Fund. In addition, in the normal course of business,
the Fund enters into contracts that provide general
indemnifications to other parties. The Fund’s maximum
exposure under these arrangements is unknown, as this would involve
future claims that may be made against the Fund that have not yet
occurred. However, the Fund has not had prior claims or losses
pursuant to these contracts and believes the risk of loss to be
remote.
Financial
Instrument Risk
The Fund
utilizes commodity futures and options, whose values are based upon
an underlying asset and generally represent future commitments that
have a reasonable possibility of being settled in cash or through
physical delivery. As of June 30, 2016 and December 31, 2015, the
financial instruments held by the Fund were traded on an exchange
and are standardized contracts.
Market risk is
the potential for changes in the value of the financial instruments
traded by the Fund due to market changes, including fluctuations in
commodity prices. Investing in commodity futures contracts involves
the Fund entering into contractual commitments to purchase or sell
a particular commodity at a specified date and price. The market
risk associated with the Fund’s commitments to purchase
commodities will be limited to the gross or face amount of the
contracts held. The Fund’s exposure to market risk may be
influenced by a number of factors, including changes in
international balances of payments and trade, currency devaluations
and revaluations, changes in interest and foreign currency exchange
rates, price volatility of commodity futures contracts and market
liquidity, weather, geopolitical events and other factors. These
factors also affect the Fund’s investments in options on
commodity futures contracts. The inherent uncertainty of the
Fund’s investments as well as the development of drastic
market occurrences could ultimately lead to a loss of all, or
substantially all, of investors’ capital.
Credit risk is
the possibility that a loss may occur due to failure of a
counterparty performing according to the terms of the futures and
option contracts. The Fund may be exposed to credit risk from its
investments in commodity futures contracts and options on commodity
futures contracts resulting from the clearing house associated with
a particular exchange failing to meet its obligations to the Fund.
In general, clearing houses are backed by their corporate members
who may be required to share in the financial burden resulting from
the nonperformance of one of their members, which should
significantly reduce this credit risk. In cases where the clearing
house is not backed by the clearing members (i.e., as in some
foreign exchanges), it may be backed by a consortium of banks or
other financial institutions. There can be no assurance that any
counterparty, clearing member or clearing house will meet its
obligations to the Fund.
The Fund is
subject to short exposure when it sells short a futures contract or
writes a put option. Short sales are transactions in which the Fund
initiates a position by selling a futures contract short. A short
futures position allows the short seller to profit from declines in
the price of the underlying commodity to the extent such declines
exceed the transaction costs. In a short sale transaction, the Fund
must deliver the underlying commodity at the contract price to a
buyer of the contract who stands for delivery under the rules of
the exchange that lists the contract or must offset the contract by
entering into an opposite and offsetting transaction in the market.
Likewise, the writer of a call option is required to deliver the
underlying futures contract at the strike price or offset the
option by entering into an opposite and offsetting transaction in
the market. The price at such time may be higher or lower than the
price at which the futures contract was sold short or the strike
price of the call option when the option was written. If the
underlying price of the futures contract goes down between the time
that the Fund sells the contract short and offsets the contract,
the Fund will realize a gain on the transaction. If the price of
the underlying futures contract drops below the strike price of the
call option written, the option will expire worthless and the Fund
also will realize a gain to the extent of the option premium
received. Conversely, if the price of the underlying short futures
contract goes up during the period, the Fund will realize a loss on
the transaction. If the price of the underlying futures contract is
higher than the strike price of a call option written, the option
will become in-the-money and the Fund may realize a loss less any
premium received for writing the option. A short sale creates the
risk of an unlimited loss since the price of the underlying
commodity in a futures contract or the underlying futures contract
in a call option written could theoretically increase without
limit, thus increasing the cost of covering the short positions. In
circumstances where a market has reached its maximum price limits
imposed by the exchange, the short seller may be unable to offset
its short position until the next trading day, when prices could
increase again in rapid trading.
The commodity
markets have volatility risk. The commodity markets have
experienced periods of extreme volatility. General market
uncertainty and consequent repricing risk have led to market
imbalances of sellers and buyers, which in turn have resulted in
significant reductions in values of a variety of commodities.
Similar future market conditions may result in rapid and
substantial valuation increases or decreases in the Fund’s
holdings. In addition, volatility in the commodity and securities
markets may directly and adversely affect the setting of
distribution rates on the Fund’s shares. |
