UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2006
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
Commission File Number: 0-50316
Grant Park Futures Fund
Limited Partnership
(Exact name of registrant as specified in its charter)
Illinois | 36-3596839 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
c/o Dearborn Capital Management, L.L.C. 555 West Jackson Boulevard, Suite 600 Chicago, Illinois 60661 | ||
(Address of principal executive offices, including zip code) | ||
Registrant’s telephone number, including area code: (312) 756-4450 |
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 ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No ý
GRANT PARK FUTURES FUND LIMITED PARTNERSHIP
QUARTER ENDED September 30, 2006
INDEX
PART I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | ||
Statements of Financial Condition as of September 30, 2006 (unaudited) and December 31, 2005 (audited) | 1 | ||
Condensed Schedule of Investments as of September 30, 2006 (unaudited) | 2 | ||
Condensed Schedule of Investments as of December 31, 2005 (audited) | 3 | ||
Statements of Operations for the three months and nine months ended September 30, 2006 and 2005 (unaudited) | 4 | ||
Statements of Changes in Partners’ Capital (Net Asset Value) for the three months ended March 31 and June 30 and September 30, 2006 (unaudited) | 5 | ||
Notes to Financial Statements (unaudited) | 6 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | |
Item 4. | Controls and Procedures | 22 | |
PART II - OTHER INFORMATION | |||
Item 1A. | Risk Factors | 22 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 | |
Item 6. | Exhibits | 24 | |
SIGNATURES | 25 | ||
CERTIFICATIONS | 26 |
Grant Park Futures Fund Limited Partnership
Statements of Financial Condition
September 30, 2006 | December 31, 2005 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Equity in brokers’ trading accounts: | |||||||
U.S. Government securities, at market value | $ | 58,309,453 | $ | 56,339,226 | |||
Cash | (647,472 | ) | (2,082,929 | ) | |||
Unrealized gain on open contracts, net | 13,854,519 | 5,227,765 | |||||
Deposits with brokers | 71,516,500 | 59,484,062 | |||||
Cash and cash equivalents | 304,864,597 | 246,308,100 | |||||
Interest receivable | 1,333,298 | 853,571 | |||||
Receivable from General Partner | — | 600,000 | |||||
Total assets | $ | 377,714,395 | $ | 307,245,733 | |||
Liabilities and Partners’ Capital | |||||||
Liabilities | |||||||
Brokerage commission payable | $ | 2,271,443 | $ | 1,774,928 | |||
Accrued incentive fees | 251,419 | — | |||||
Organization and offering costs payable | 164,023 | 130,755 | |||||
Accrued operating expenses | 76,248 | 62,302 | |||||
Pending partner additions | 10,949,853 | 7,235,097 | |||||
Redemptions payable | 3,634,822 | 8,144,832 | |||||
Total liabilities | 17,347,808 | 17,347,914 | |||||
Partners’ Capital | |||||||
General Partner ( 3,245.72 and 2,839.96 units outstanding at September 30, 2006 and December 31, 2005, respectively) | 3,700,166 | 3,026,173 | |||||
Limited Partners | |||||||
Class A ( 45,571.13 and 48,216.06 units outstanding at September 30, 2006 and December 31, 2005, respectively) | 51,951,664 | 51,377,474 | |||||
Class B ( 303,566.90 and 249,391.39 units outstanding at September 30, 2006 and December 31, 2005, respectively) | 304,714,757 | 235,494,172 | |||||
Total partners’ capital | 360,366,587 | 289,897,819 | |||||
Total liabilities and partners’ capital | $ | 377,714,395 | $ | 307,245,733 |
The accompanying notes are an integral part of these financial statements.
Grant Park Futures Fund Limited Partnership
Condensed Schedule of Investments
September 30, 2006
(Unaudited)
Unrealized gain/(loss) on open long contracts | Percent of Partners’ Capital | Unrealized gain/(loss) on open short contracts | Percent of Partners’ Capital | Net Unrealized gain/(loss) on open contracts | Percent of Partners’ Capital | ||||||||||||||
Futures Contracts * | |||||||||||||||||||
U.S. Futures Positions: | |||||||||||||||||||
Currencies | $ | (197,431 | ) | (0.1 | )% | $ | 1,153,566 | 0.3 | % | $ | 956,135 | 0.2 | % | ||||||
Energy | - | ** | 1,392,104 | 0.4 | % | 1,392,104 | 0.4 | % | |||||||||||
Grains | 155,461 | ** | 1,080,468 | 0.3 | % | 1,235,929 | 0.3 | % | |||||||||||
Interest rates | 3,522,419 | 1.0 | % | - | ** | 3,522,419 | 1.0 | % | |||||||||||
Meats | (53,415 | ) | ** | (37,675 | ) | ** | (91,090 | ) | ** | ||||||||||
Metals | (132,190 | ) | ** | 11,490 | ** | (120,700 | ) | ** | |||||||||||
Soft commodities | (4,805 | ) | ** | 512,187 | 0.2 | % | 507,382 | 0.2 | % | ||||||||||
Stock indices | 901,962 | 0.3 | % | (82,114 | ) | ** | 819,848 | 0.3 | % | ||||||||||
Total U.S. Futures Positions | 4,192,001 | 4,030,026 | 8,222,027 | ||||||||||||||||
Foreign Futures Positions: | |||||||||||||||||||
Energy | (10,180 | ) | ** | 195,901 | 0.1 | % | 185,721 | 0.1 | % | ||||||||||
Interest rates | 2,478,764 | 0.7 | % | (229,362 | ) | (0.1 | )% | 2,249,402 | 0.6 | % | |||||||||
Metals | 3,177,110 | 0.9 | % | (1,948,775 | ) | (0.6 | )% | 1,228,335 | 0.3 | % | |||||||||
Soft commodities | 1,850 | ** | (6,797 | ) | ** | (4,947 | ) | ** | |||||||||||
Stock indices | 1,452,478 | 0.4 | % | (7,246 | ) | ** | 1,445,232 | 0.4 | % | ||||||||||
Total Foreign Futures Positions | 7,100,022 | (1,996,279 | ) | 5,103,743 | |||||||||||||||
Total Futures Contracts | 11,292,023 | 3.2 | % | 2,033,747 | 0.6 | % | 13,325,770 | 3.8 | % | ||||||||||
Forward Contracts * | |||||||||||||||||||
Currencies | (182,604 | ) | (0.1 | )% | 711,353 | 0.2 | % | 528,749 | 0.1 | % | |||||||||
Total Futures and Forward Contracts | $ | 11,109,419 | 3.1 | % | $ | 2,745,100 | 0.8 | % | $ | 13,854,519 | 3.9 | % |
____________________
* | No individual futures and forward contract position constituted greater than 1 percent of partners’ capital. Accordingly, the number of contracts and expiration dates are not presented. |
** | Represents less than 0.1% of partners’ capital. |
*** | Pledged as collateral for the trading of futures, forward and option contracts. |
U.S. Government Securities: ***
Face Value | Value | Percent of Partners’ Capital | ||
$58,500,000 | U.S. Treasury Bills, October 26, 2006 | $58,309,453 | 16.2% | |
Total U.S. Government Securities (cost $58,300,076) | $58,309,453 |
The accompanying notes are an integral part of these financial statements.
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Grant Park Futures Fund Limited Partnership
Condensed Schedule of Investments
December 31, 2005
Unrealized gain/(loss) on open long contracts | Percent of Partners’ Capital | Unrealized gain/(loss) on open short contracts | Percent of Partners’ Capital | Net unrealized gain/(loss) on open contracts | Percent of Partners’ Capital | ||||||||||||||
Futures Contracts * | |||||||||||||||||||
U.S. Futures Positions: | |||||||||||||||||||
Currencies | $ | (442,058 | ) | (0.2 | )% | $ | 134,786 | 0.1 | % | $ | (307,272 | ) | (0.1 | )% | |||||
Energy | 82,867 | ** | (351,494 | ) | (0.1 | )% | (268,627 | ) | (0.1 | )% | |||||||||
Grains | 109,812 | ** | (537,600 | ) | (0.2 | )% | (427,788 | ) | (0.2 | )% | |||||||||
Interest rates | 58,095 | ** | (192,668 | ) | (0.1 | )% | (134,573 | ) | (0.1 | )% | |||||||||
Meats | 67,012 | ** | 940 | ** | 67,952 | ** | |||||||||||||
Metals | 1,158,952 | 0.4 | % | - | ** | 1,158,952 | 0.4 | % | |||||||||||
Soft commodities | 1,974,357 | 0.7 | % | (101,017 | ) | ** | 1,873,340 | 0.6 | % | ||||||||||
Stock indices | (1,154,901 | ) | (0.4 | )% | 5,000 | ** | (1,149,901 | ) | (0.4 | )% | |||||||||
Total U.S. Futures Positions | 1,854,136 | (1,042,053 | ) | 812,083 | |||||||||||||||
Foreign Futures Positions: | |||||||||||||||||||
Energy | 137,381 | 0.1 | % | 13,770 | ** | 151,151 | 0.1 | % | |||||||||||
Interest rates | 1,439,877 | 0.5 | % | 355,445 | 0.1 | % | 1,795,322 | 0.6 | % | ||||||||||
Metals | 6,040,628 | 2.1 | % | (2,479,122 | ) | (0.9 | )% | 3,561,506 | 1.2 | % | |||||||||
Soft commodities | 34,454 | ** | (10,785 | ) | ** | 23,669 | ** | ||||||||||||
Stock indices | 2,433,469 | 0.8 | % | (141,720 | ) | ** | 2,291,749 | 0.8 | % | ||||||||||
Total Foreign Futures Positions | 10,085,809 | (2,262,412 | ) | 7,823,397 | |||||||||||||||
Total Futures Contracts | 11,939,945 | 4.1 | % | (3,304,465 | ) | (1.1 | )% | 8,635,480 | 3.0 | % | |||||||||
Forward Contracts * | |||||||||||||||||||
Currencies | (3,417,240 | ) | (1.2 | )% | 9,525 | ** | (3,407,715 | ) | (1.2 | )% | |||||||||
Total Futures and Forward Contracts | $ | 8,522,705 | 2.9 | % | $ | (3,294,940 | ) | (1.1 | )% | $ | 5,227,765 | 1.8 | % |
* | No individual futures and forward contract position constituted greater than 1 percent of partners’ capital. Accordingly, the number of contracts and expiration dates are not presented. |
** | Represents less than 0.1% of partners’ capital. |
*** | Pledged as collateral for the trading of futures, forward and option contracts. |
U.S. Government Securities: ***
Face Value | Value | Percent of Partners’ Capital | ||
$57,500,000 | U.S. Treasury Bills, January 26, 2006 | $56,339,226 | 19.4% | |
Total U.S. Government Securities (cost $56,346,912) | $56,339,226 |
The accompanying notes are an integral part of these financial statements.
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Grant Park Futures Fund Limited Partnership
Statements of Operations
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Income | |||||||||||||
Trading gains (losses) | |||||||||||||
Realized | $ | (12,422,929 | ) | $ | (1,477,297 | ) | $ | 22,476,898 | $ | (6,555,544 | ) | ||
Change in unrealized | 6,053,172 | 5,276,216 | 8,626,754 | 12,784,001 | |||||||||
Net gains (losses) from trading | (6,369,757 | ) | 3,798,919 | 31,103,652 | 6,228,457 | ||||||||
Interest income | 4,440,131 | 2,282,772 | 11,294,536 | 5,936,671 | |||||||||
Total income (loss) | (1,929,626 | ) | 6,081,691 | 42,398,188 | 12,165,128 | ||||||||
Expenses | |||||||||||||
Brokerage commission | 7,071,095 | 6,013,052 | 19,961,430 | 17,726,072 | |||||||||
Incentive fees | 251,419 | - | 2,608,613 | 1,643,675 | |||||||||
Operating expenses | 222,973 | 239,781 | 629,752 | 755,858 | |||||||||
Total expenses | 7,545,487 | 6,252,833 | 23,199,795 | 20,125,605 | |||||||||
Net income (loss) | $ | (9,475,113 | ) | $ | (171,142 | ) | $ | 19,198,393 | $ | (7,960,477 | ) | ||
Increase (decrease) in net asset value per unit from operations for the period: | |||||||||||||
General Partner & Class A Unit Limited Partner | $ | (30.17 | ) | $ | (0.11 | ) | $ | 76.19 | $ | (28.41 | ) | ||
Class B Unit Limited Partner | $ | (27.72 | ) | $ | (0.84 | ) | $ | 64.17 | $ | (27.34 | ) |
The accompanying notes are an integral part of these financial statements.
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Grant Park Futures Fund Limited Partnership
Statements of Changes in Partners’ Capital (Net Asset Value)
(Unaudited)
Limited Partners | Limited Partners | |||||||||||||||||||||
General Partner | Class A | Class B | ||||||||||||||||||||
Number of Units | Amount | Number of Units | Amount | Number of Units | Amount | Total Amount | ||||||||||||||||
Partners’ capital, December 31, 2005 | 2,839.96 | $ | 3,026,173 | 48,216.06 | $ | 51,377,474 | 249,391.39 | $ | 235,494,172 | $ | 289,897,819 | |||||||||||
Contributions | 27.83 | 30,000 | 482.94 | 522,993 | 22,061.05 | 21,042,641 | 21,595,634 | |||||||||||||||
Redemptions | — | — | (4,630.68 | ) | (5,055,753 | ) | (14,513.94 | ) | (14,021,812 | ) | (19,077,565 | ) | ||||||||||
Offering Costs | — | — | — | (27,420 | ) | — | (378,917 | ) | (406,337 | ) | ||||||||||||
Net income | — | 126,726 | — | 2,093,183 | — | 10,033,645 | 12,253,554 | |||||||||||||||
Partners’ capital, March 31, 2006 | 2,867.79 | 3,182,899 | 44,068.32 | 48,910,477 | 256,938.50 | 252,169,729 | 304,263,105 | |||||||||||||||
Contributions | 100.02 | 120,000 | 2,838.71 | 3,427,687 | 25,788.99 | 26,955,119 | 30,502,806 | |||||||||||||||
Redemptions | — | — | (962.46 | ) | (1,154,567 | ) | (9,402.57 | ) | (9,947,969 | ) | (11,102,536 | ) | ||||||||||
Offering Costs | — | — | — | (28,853 | ) | — | (428,534 | ) | (457,387 | ) | ||||||||||||
Net Income | — | 171,698 | — | 2,635,297 | — | 13,612,957 | 16,419,952 | |||||||||||||||
Partners’ capital, June 30, 2006 | 2,967.81 | 3,474,597 | 45,944.57 | 53,790,041 | 273,324.92 | 282,361,302 | 339,625,940 | |||||||||||||||
Contributions | 277.91 | 320,000 | 1,862.58 | 2,155,500 | 36,155.27 | 36,703,866 | 39,179,366 | |||||||||||||||
Redemptions | — | — | (2,236.02 | ) | (2,546,882 | ) | (5,913.29 | ) | (5,938,520 | ) | (8,485,402 | ) | ||||||||||
Offering Costs | — | — | — | (28,467 | ) | — | (449,737 | ) | (478,204 | ) | ||||||||||||
Net Loss | — | (94,431 | ) | — | (1,418,528 | ) | — | (7,962,154 | ) | (9,475,113 | ) | |||||||||||
Partners’ capital, September 30, 2006 | 3,245.72 | $ | 3,700,166 | 45,571.13 | $ | 51,951,664 | 303,566.90 | �� | $ | 304,714,757 | $ | 360,366,587 | ||||||||||
Net asset value per unit at January 1, 2006 | $ | 1,065.57 | $ | 944.28 | ||||||||||||||||||
Net asset value per unit at March 31, 2006 | $ | 1,109.88 | $ | 981.44 | ||||||||||||||||||
Net asset value per unit at June 30, 2006 | $ | 1,170.76 | $ | 1,033.06 | ||||||||||||||||||
Net asset value per unit at September 30, 2006 | $ | 1,140.01 | $ | 1,003.78 |
The accompanying notes are an integral part of these financial statements.
5
Grant Park Futures Fund Limited Partnership
Notes to Financial Statements
(Unaudited)
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Grant Park Futures Fund Limited Partnership (the “Partnership”) was organized as a limited partnership in Illinois in August 1988 and will continue until December 31, 2027, unless sooner terminated as provided for in its Limited Partnership Agreement. As a commodity investment pool, the Partnership is subject to the regulations of the Commodity Futures Trading Commission (“CFTC”), an agency of the United States (U.S.) government which regulates most aspects of the commodity futures industry; rules of the National Futures Association, an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Partnership executes transactions. Additionally, the Partnership is subject to the requirements of futures commission merchants (“FCMs”) and interbank and other market makers through which the Partnership trades. Effective June 30, 2003, the Partnership became registered with the Securities and Exchange Commission (“SEC”), accordingly, as a registrant, the Partnership is subject to the regulatory requirements under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934.
The Partnership is a multi-advisor pool that carries out its purpose through trading by independent professional commodity trading advisors retained by the General Partner and the Partnership. Through these trading advisors, the Partnership’s business is to trade, buy, sell, margin or otherwise acquire, hold or dispose of futures and forward contracts for commodities, financial instruments or currencies, any rights pertaining thereto and any options thereon, or on physical commodities. The Partnership may also engage in hedge, arbitrage and cash trading of commodities and futures.
The Partnership has elected not to provide statements of cash flows as permitted by Statement of Financial Accounting Standards No. 102, Statements of Cash Flows - Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.
Offerings of securities and use of proceeds: On June 30, 2003, the Securities and Exchange Commission declared effective the Partnership’s Registration Statement on Form S-1 (Reg. No. 333-104317), pursuant to which the Partnership registered for public offering $20 million in aggregate amount of Class A Limited Partnership Units and $180 million in aggregate amount of Class B Limited Partnership Units. Also as of June 30, 2003, the Partnership adopted the Third Amended and Restated Limited Partnership Agreement. The Partnership subsequently registered up to an additional $200 million in aggregate of Class A and Class B units for sale on a Registration Statement on Form S-1 (Reg. No. 333-113297) on March 30, 2004, and an additional $700 million in aggregate of Class A and Class B units for sale on a Registration Statement on Form S-1 (File No. 333-119338) on December 1, 2004 (the “Registration Statement”).
Class A Limited Partnership Units and Class B Limited Partnership Units are publicly offered at a price equal to the net asset value per unit as of the close of business on each applicable closing date, which is the last business day of each month. The proceeds of the offering are deposited in the Partnership’s bank and brokerage accounts for the purpose of engaging in trading activities in accordance with the Partnership’s trading policies and its trading advisors’ respective trading strategies.
Through February 28, 2003, the Partnership issued and sold its limited partnership interests in an offering exempt under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. Similar reliance was placed on available exemptions from securities qualification requirements under applicable state securities laws. The purchasers of units in such offering made representations as to their intention to acquire the units for investment only and not with a view to, or for sale in connection with, any distribution thereof, as to their ability to hold such units indefinitely and generally, as to their qualification as accredited investors under the Securities Act and Regulation D promulgated thereunder. Further, such units were restricted as to their transferability.
Presentation of financial information: The financial statements include the accounts of Grant Park Futures Fund Limited Partnership. In our opinion, the accompanying interim, unaudited, financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2006 and the results of operations for the three months and nine months ended September 30, 2006 and 2005.
The Partnership considered the following accounting policies as significant:
Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
6
Cash and cash equivalents: Cash and cash equivalents include cash, U.S. treasury bills and short-term investments in interest-bearing demand deposits with banks and cash managers. The Partnership maintains deposits with high quality financial institutions in amounts that are in excess of federally insured limits; however, the Partnership does not believe it is exposed to any significant credit risk.
Revenue recognition: Futures, options on futures, and forward contracts are recorded on the trade date and realized gains or losses are recognized when contracts are liquidated. Unrealized gains or losses on open contracts (the difference between contract trade price and market price) are reported in the Statement of Financial Condition as a net unrealized gain or loss, as there exists a right of offset of unrealized gains or losses in accordance with the Financial Accounting Standards Board Interpretation No. 39 — “Offsetting of Amounts Related to Certain Contracts.” Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. Market value of exchange-traded contracts is based upon exchange settlement prices. Market value of non-exchange-traded contracts is based on third party quoted dealer values on the Interbank market.
Income taxes: No provision for income taxes has been made in these financial statements as each partner is individually responsible for reporting income or loss based on its respective share of the Partnership’s income and expenses as reported for income tax purposes.
Organization and offering costs: All expenses incurred in connection with the organization and the initial and ongoing public offering of partnership interests are paid by Dearborn Capital Management, L.L.C. (“General Partner”) and are reimbursed to the General Partner by the Partnership. This reimbursement is made monthly. Class A units bear organization and offering expenses at an annual rate of 20 basis points (0.20 percent) of the adjusted net assets of the Class A units, calculated and payable monthly on the basis of month-end adjusted net assets. Through August 31, 2005, Class B units incurred these expenses at an annual rate of 90 basis points (0.90 percent). Effective August 31, 2005, the annual rate was decreased to 60 basis points (0.60 percent) of the adjusted net assets of the Class B units, calculated and payable monthly on the basis of month-end adjusted assets. “Adjusted net assets” is defined as the month-end net assets of the particular class before accruals for fees and expenses and redemptions. Amounts reimbursed by the Partnership with respect to the initial and ongoing public offering expenses are charged against partners’ capital at the time of reimbursement or accrual. Any amounts reimbursed by the Partnership with respect to organization expenses are expensed at the time the reimbursement is incurred or accrued. If the Partnership terminates prior to completion of payment of the calculated amounts to the General Partner, the General Partner will not be entitled to any additional payments, and the Partnership will have no further obligation to the General Partner. At September 30, 2006, all organization and offering costs incurred by the General Partner have been reimbursed.
Foreign Currency Transactions: The Partnership’s functional currency is the U.S. dollar, however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in income currently.
Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157, among other things, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for the Partnership on January 1, 2008. Management is currently evaluating the provisions of SFAS 157 and its potential effect on its financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, providing guidance on quantifying financial statement misstatement and implementation (e.g., restatement or cumulative effect to assets, liabilities and retained earnings) when first applying this guidance. SAB 108 is effective for the Partnership in 2007. Management does not believe the guidance provided by SAB 108 will have a material effect on the Partnership’s financial statements.
Note 2. Deposits with Brokers
The Partnership deposits assets with brokers subject to CFTC regulations and various exchange and brokers requirements. Margin requirements are satisfied by the deposit of U.S. Treasury bills and cash with such brokers. The Partnership earns interest income on its assets deposited with the brokers.
Note 3. Commodity Trading Advisors
The Partnership has entered into advisory contracts with Rabar Market Research, Inc., EMC Capital Management, Inc., Eckhardt Trading Co., Graham Capital Management, L.P., Winton Capital Management Limited, Saxon Investment Corporation and Welton Investment Corporation to act as the Partnership’s commodity trading advisors (the “Advisors”). The Advisors are paid a quarterly management fee ranging from 0 percent to 2 percent per annum of the Partnership’s month-end allocated net assets and a quarterly incentive fee ranging from 20 percent to 24 percent of the new trading profits on the allocated net assets of the Advisor.
Note 4. General Partner and Related Party Transactions
The General Partner shall at all times, so long as it remains a general partner of the Partnership, own Units in the Partnership: (i) in an amount sufficient, in the opinion of counsel for the Partnership, for the Partnership to be taxed as a partnership rather than as an association taxable as a corporation; and (ii) during such time as the Units are registered for sale to the public, in an amount at least equal to the greater of: (a) 1% of all capital contributions of all Partners to the Partnership; or (b) $25,000; or such other amount satisfying the requirements then imposed by the North American Securities Administrators Association, Inc. (NASAA) Guidelines. Further, during such time as the Units are registered for sale to the public, the General Partner shall, so long as it remains a general partner of the Partnership, maintain a net worth (as such term may be defined in the NASAA Guidelines) at least equal to the greater of: (i) 5 percent of the total capital contributions of all partners and all limited partnerships to which it is a general partner (including
7
the Partnership) plus 5 percent of the Units being offered for sale in the Partnership; or (ii) $50,000; or such other amount satisfying the requirements then imposed by the NASAA Guidelines. In no event, however, shall the General Partner be required to maintain a net worth in excess of $1,000,000 or such other maximum amount satisfying the requirements then imposed by the NASAA Guidelines.
Effective June 1, 2003, 10 percent of the General Partner limited partnership interest in the Grant Park Futures Fund Limited Partnership is characterized as a general partnership interest. Notwithstanding, the general partnership interest will continue to pay all fees associated with a limited partnership interest.
Through August 31, 2005, the Partnership paid the General Partner a monthly brokerage commission equal to one twelfth of 7.75 percent (7.75 percent annualized) and effective September 1, 2005, one twelfth of 7.55 percent (7.55 percent annualized) of month-end net assets for Class A units and one twelfth of 8.00 percent (8.00 percent annualized) of month-end net assets for Class B units. Included in the brokerage commission are amounts paid to the clearing brokers for execution and clearing costs, management fees paid to the Advisors, compensation to the selling agents and an amount to the General Partner for management services rendered.
Note 5. Operating Expenses
Operating expenses of the Partnership are paid for by the General Partner and reimbursed by the Partnership. Through August 31, 2005, operating expenses of the Partnership were limited to 0.35 percent per year of the average month-end net assets of the Partnership. Effective September 1, 2005, these expenses are limited to 0.25 percent per year of the average month-end net assets of the Partnership. To the extent operating expenses are less than 0.25 percent of the Partnership’s average month-end net assets during the year, the difference will be reimbursed pro rata to record-holders as of December 31 of each year.
Note 6. Redemptions
Limited Partners have the right to redeem units as of any month-end upon ten (10) days’ prior written notice to the Partnership. The General Partner, however, may permit earlier redemptions in its discretion. There are no redemption fees applicable to Class A Limited Partners or to Class B Limited Partners who redeem their units on or after the one-year anniversary of their subscription. Class B Limited Partners who redeem their units prior to the one-year anniversary of their subscriptions for the redeemed units will pay the applicable early redemption fee. Redemptions will be valued as of the last day of the month for an amount equal to the net assets, as defined, represented by the units to be redeemed.
In addition, the General Partner may at any time cause the redemption of all or a portion of any Limited Partner’s units upon fifteen (15) days written notice. The General Partner may also immediately redeem any Limited Partner’s units without notice if the General Partner believes that (i) the redemption is necessary to avoid having the assets of the Partnership deemed Plan Assets under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), (ii) the Limited Partner made a misrepresentation in connection with its subscription for the units, or (iii) the redemption is necessary to avoid a violation of law by the Partnership or any Partner.
Note 7. Financial Highlights
The following financial highlights reflect activity related to the Partnership. Total return is based on the change in value during the period of a theoretical investment made at the beginning of each calendar month during the period. Individual partner’s ratios may vary from these ratios based on various factors, including and among others, the timing of capital transactions.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Total return - A Units | (2.63 | )% | (0.06 | )% | 6.99 | % | (2.72 | )% | |||||
Total return - B Units | (2.83 | )% | (0.29 | )% | 6.30 | % | (3.41 | )% | |||||
Ratios as a percentage of average net assets: | |||||||||||||
Interest income * | 5.10 | % | 3.10 | % | 4.63 | % | 2.73 | % | |||||
Expenses * | 8.66 | % | 8.48 | % | 9.51 | % | 9.26 | % | |||||
Expenses, net of interest income * | 3.56 | % | 5.38 | % | 4.88 | % | 6.53 | % |
*Annualized
The interest income and expense ratios above are computed based upon the weighted average net assets of the Partnership for the three and nine months ended September 30, 2006 and 2005 (annualized).
The following per unit performance calculations reflect activity related to the Partnership for the three and nine months ended September 30, 2006 and 2005.
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Class A Units | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Per Unit Performance (for unit outstanding throughout the entire period): | |||||||||||||
Net asset value per unit at beginning of period | $ | 1,170.76 | $ | 1,074.15 | $ | 1,065.57 | $ | 1,103.53 | |||||
Income (loss) from operations: | |||||||||||||
Net realized and change in unrealized gain (loss) from trading (1) | (21.12 | ) | 13.73 | 114.41 | 22.20 | ||||||||
Expenses net of interest income (1) | (9.05 | ) | (13.84 | ) | (38.22 | ) | (50.61 | ) | |||||
Total income (loss) from operations | (30.17 | ) | (0.11 | ) | 76.19 | (28.41 | ) | ||||||
Organization and offering costs (1) | (0.57 | ) | (0.55 | ) | (1.75 | ) | (1.63 | ) | |||||
Net asset value per unit at end of period | $ | 1,140.01 | $ | 1,073.49 | $ | 1,140.01 | $ | 1,073.49 |
Class B Units | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Per Unit Performance (for unit outstanding throughout the entire period): | |||||||||||||
Net asset value per unit at beginning of period | $ | 1033.06 | $ | 955.33 | $ | 944.28 | $ | 986.17 | |||||
Income (loss) from operations: | |||||||||||||
Net realized and change in unrealized gain (loss) from trading (1) | (18.51 | ) | 12.03 | 101.52 | 19.16 | ||||||||
Expenses net of interest income (1) | (9.21 | ) | (12.87 | ) | (37.35 | ) | (46.50 | ) | |||||
Total income (loss) from operations | (27.72 | ) | (0.84 | ) | 64.17 | (27.34 | ) | ||||||
Organization and offering costs (1) | (1.56 | ) | (1.94 | ) | (4.67 | ) | (6.28 | ) | |||||
Net asset value per unit at end of period | $ | 1,003.78 | $ | 952.55 | $ | 1,003.78 | $ | 952.55 |
____________________
(1) | Expenses net of interest income per unit and organization and offering costs per unit are calculated by dividing the expenses net of interest income and organization and offering costs by the average number of units outstanding during the period. The net realized and change in unrealized gain from trading is a balancing amount necessary to reconcile the change in net asset value per unit with the other per unit information. |
Note 8. Trading Activities and Related Risks
The Partnership engages in the speculative trading of U.S. and foreign futures contracts, options on U.S. and foreign futures contracts, and forward contracts (collectively, derivatives). These derivatives include both financial and nonfinancial contracts held as part of a diversified trading strategy. The Partnership is exposed to both market risk, the risk arising from changes in the market value of the contracts; and credit risk, the risk of failure by another party to perform according to the terms of a contract.
The purchase and sale of futures and options on futures contracts require margin deposits with FCMs. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other property (for example, U.S. Treasury bills) deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited.
Net trading results from derivatives for the three and nine months ended September 30, 2006 and 2005, are reflected in the statements of operations. Such trading results reflect the net gain arising from the Partnership’s speculative trading of futures contracts, options on futures contracts, and forward contracts.
For derivatives, risks arise from changes in the market value of the contracts. Theoretically, the Partnership is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short. As both a buyer and seller of options, the Partnership pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid.
In addition to market risk, in entering into commodity contracts there is a credit risk that a counterparty will not be able to meet its obligations to the Partnership. The counterparty for futures and options on futures contracts traded in the United States and on most non-U.S. futures exchanges is the clearinghouse associated with such exchange. In general, clearinghouses are backed by the members of the clearinghouse who are required to share any financial burden resulting from the nonperformance by one of
9
their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members, like some non-U.S. exchanges, it is normally backed by a consortium of banks or other financial institutions.
In the case of forward contracts, over-the-counter options contracts or swap contracts, which are traded on the interbank or other institutional market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a clearinghouse backed by a group of financial institutions; thus, there likely will be greater counterparty credit risk. The Partnership trades only with those counterparties that it believes to be creditworthy. All positions of the Partnership are valued each day on a mark-to-market basis. There can be no assurance that any clearing member, clearinghouse or other counterparty will be able to meet its obligations to the Partnership.
The unrealized gain(loss) on open futures and forward contracts is comprised of the following:
Futures Contracts (exchange-traded) | Forward Contracts (non-exchange-traded) | Total | |||||||||||||||||
September 30, 2006 | December 31, 2005 | September 30, 2006 | December 31, 2005 | September 30, 2006 | December 31, 2005 | ||||||||||||||
Gross unrealized gains | $ | 18,778,384 | $ | 16,947,161 | $ | 3,053,364 | $ | 3,109,103 | $ | 21,831,748 | $ | 20,056,264 | |||||||
Gross unrealized (losses) | (5,452,614 | ) | (8,311,681 | ) | (2,524,615 | ) | (6,516,818 | ) | (7,977,229 | ) | (14,828,499 | ) | |||||||
Net unrealized gain (loss) | $ | 13,325,770 | $ | 8,635,480 | $ | 528,749 | $ | (3,407,715 | ) | $ | 13,854,519 | $ | 5,227,765 |
The General Partner has established procedures to actively monitor and minimize market and credit risks. The limited partners bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.
Note 9. Indemnifications
In the normal course of business, the Partnership enters into contracts and agreements that contain a variety of representations and warranties and which provide general indemnifications. The Partnership’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Partnership that have not yet occurred. The Partnership expects the risk of any future obligation under these indemnifications to be remote.
Note 10. Subsequent Event
From October 1, 2006 to November 9, 2006, there were aggregate contributions to and redemptions from the Partnership totaling approximately $21,218,000 and $4,182,000, respectively.
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Introduction
Grant Park is a multi-advisor commodity pool organized to pool assets of its investors for purposes of investing those assets in U.S. and international commodity futures and forward contracts and other commodity interests, including options contracts on futures, forwards and commodities, spot contracts, swap contracts and security futures. The commodities underlying these contracts may include stock indices, interest rates, currencies or physical commodities, such as agricultural products, energy products or metals. Grant Park has been in continuous operation since it commenced trading on January 1, 1989. Grant Park’s general partner, commodity pool operator and sponsor is Dearborn Capital Management, L.L.C., an Illinois limited liability company. The managing member of Dearborn Capital Management, L.L.C. is Dearborn Capital Management, Ltd., an Illinois corporation whose sole shareholder is David M. Kavanagh.
Grant Park invests through independent professional commodity trading advisors retained by the general partner. Rabar Market Research, Inc., EMC Capital Management, Inc., Eckhardt Trading Company, or ETC, Graham Capital Management, L.P., Winton Capital Management Limited, Saxon Investment Corporation and Welton Investment Corporation serve as Grant Park’s commodity trading advisors. Each of the trading advisors is registered as a commodity trading advisor under the Commodity Exchange Act and is a member of the NFA. As of September 30, 2006, the general partner allocated Grant Park’s net assets among the trading advisors as follows: 18% to Rabar, 21% to EMC, 7% to ETC, 7% to Graham, 21% to Winton, 8% to Saxon and 15% to Welton. The general partner may terminate or replace the trading advisors or retain additional trading advisors in its sole discretion.
On June 30, 2003, the SEC declared effective Grant Park’s Registration Statement on Form S-1 through which it registered up to $20 million in aggregate amount of Class A limited partnership units and $180 million in aggregate amount of Class B limited partnership units. Grant Park subsequently registered up to an additional $200 million in aggregate of Class A and Class B units for sale on a Registration Statement on Form S-1 on March 30, 2004, and an additional $700 million in aggregate of Class A and Class B units for sale on a Registration Statement on Form S-1 on December 1, 2004. Pursuant to the Registration Statement, Class A Limited Partnership Units and Class B Limited Partnership Units are publicly offered on a continuous basis at a price equal to the net asset value per unit as of the close of business on each applicable closing date, which is the last business day of each month. The proceeds of the offering are deposited in Grant Park’s bank and brokerage accounts for the purpose of engaging in trading activities in accordance with Grant Park’s trading policies and its trading advisors’ respective trading strategies.
Critical Accounting Policies
Grant Park’s most significant accounting policy is the valuation of its assets invested in U.S. and international futures and forward contracts, options contracts and other interests in commodities. The substantial majority of the investments are exchange-traded contracts, valued based upon exchange settlement prices. The remainder of its investments are non-exchange-traded contracts with valuation of those investments based on third-party quoted dealer values on the Interbank market. With the valuation of the investments easily obtained, there is little or no judgment or uncertainty involved in the valuation of investments, and accordingly, it is unlikely that materially different amounts would be reported under different conditions using different but reasonably plausible assumptions. Grant Park’s significant accounting policies are described in detail in Note 1 of the Financial Statements.
Capital Resources
Grant Park plans to raise additional capital only through the sale of units pursuant to the continuous offering and does not intend to raise any capital through borrowing. Due to the nature of Grant Park’s business, it does not make any capital expenditures and does not have any capital assets that are not operating capital or assets.
Liquidity
Most U.S. futures exchanges limit fluctuations in some futures and options contract prices during a single day by regulations referred to as daily price fluctuation limits or daily limits. During a single trading day, no trades may be executed at prices beyond the daily limit. Once the price of a contract has reached the daily limit for that day, positions in that contract can neither be taken nor liquidated. Futures prices have occasionally moved to the daily limit for several consecutive days with little or no trading. Similar occurrences could prevent Grant Park from promptly liquidating unfavorable positions and subject Grant Park to substantial losses that could exceed the margin initially committed to those trades. In addition, even if futures or options prices do not move to the daily limit, Grant Park may not be able to execute trades at favorable prices, if little trading in the contracts is taking place. Other than these limitations on liquidity, which are inherent in Grant Park’s futures and options trading operations, Grant Park’s assets are expected to be highly liquid.
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Results of Operations
Grant Park’s net return, which consists of Grant Park’s trading gains plus interest income less brokerage fees, performance fees, operating costs and offering costs borne by Grant Park, for the quarter ended September 30, 2006 was approximately (2.6)% for the Class A units and (2.8)% for the Class B units. The net asset value at September 30, 2006 was approximately $360.4 million, at December 31, 2005 was approximately $289.9 million and at September 30, 2005 was approximately $297.2 million.
The table below sets forth Grant Park’s trading gains or losses by sector for the three and nine month periods ended September 30, 2006 and 2005.
% Gain (Loss) | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
Sector | 2006 | 2005 | 2006 | 2005 | |||||||||
Interest Rates | (0.8 | )% | (9.0 | )% | 4.5 | % | (0.5 | )% | |||||
Currencies | (0.2 | ) | (1.2 | ) | (2.0 | ) | (3.4 | ) | |||||
Stock Indices | 0.8 | 5.9 | 2.3 | 4.6 | |||||||||
Energy | (1.3 | ) | 6.0 | (2.0 | ) | 3.7 | |||||||
Agriculturals | (0.3 | ) | (0.6 | ) | (2.4 | ) | (0.4 | ) | |||||
Metals | 0.7 | 0.1 | 10.0 | (2.0 | ) | ||||||||
Softs | (0.5 | ) | 0.4 | 0.5 | 0.2 | ||||||||
Meats | (0.3 | ) | 0.0 | (0.1 | ) | (0.1 | ) | ||||||
Miscellaneous | 0.0 | (0.3 | ) | 0.0 | (0.1 | ) | |||||||
Total | (1.9 | )% | 1.3 | % | 10.8 | % | 2.0 | % |
Three months ended September 30, 2006 compared to three months ended September 30, 2005
For the three months ended September 30, 2006, Grant Park had a negative return of approximately 2.6% for the Class A units and 2.8% for the Class B units. On a combined unit basis prior to expenses, approximately 1.9% resulted from trading losses which were offset by 0.3% of interest income. The trading losses were further increased by approximately 1.2% in brokerage fees, performance fees and operating and offering costs borne by Grant Park. For the same period in 2005, Grant Park had a negative return of approximately 0.1% for the Class A units and 0.3% for the Class B units. On a combined unit basis prior to expenses, approximately 1.3% resulted from trading gains and approximately 0.7% was due to interest income. These gains were offset by approximately 2.3% in brokerage fees, performance fees and operating and offering costs borne by Grant Park.
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
For the nine months ended September 30, 2006, Grant Park had a positive return of approximately 7.0% for the Class A units and 6.3% for the Class B units. On a combined unit basis prior to expenses, approximately 10.8% resulted from trading gains and approximately 2.4% was due to interest income. These gains were offset by approximately 6.8% in brokerage fees, performance fees and operating and offering costs borne by Grant Park. For the same period in 2005, Grant Park had a negative return of approximately 2.7% for the Class A units and 3.4% for the Class B units. On a combined unit basis prior to expenses, approximately 2.0% resulted from trading gains and approximately 2.0% was due to interest income. These gains were offset by approximately 7.3% in brokerage fees, performance fees and operating and offering costs borne by Grant Park.
Nine months ended September 30, 2006
Grant Park ended the third quarter of 2006 down 2.63% in the Class A units and down 2.83% in the Class B units. This brings the year to date performance for Class A and Class B units through September 30, 2006 to 6.99% and 6.30%, respectively. The quarter was characterized by the same themes that dominated the second quarter: choppy currency markets and strong metals and international equity markets. However, Grant Park had to contend with liquidating its long energy holdings as oil declined 20% from its high during the quarter.
Currency markets continued to be dominated by two way trading with the exception of the yen, which weakened during the quarter. Positions in the sector were light as most currencies continued to trade in a narrow range.
Both domestic and international equity indices continued their strength. Suggestions from the U.S. Federal Reserve that they may be ready to pause their rate hike cycle helped fuel higher equity prices around the globe.
Metal prices also continued their strength as low stock piles and strong demand helped send prices higher in the base metal sector. Work stoppages in China and Canada helped contribute to strong gains early in the quarter. As these labor issues were settled
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later in the quarter, base metals started to give back some of their previous gains.
Finally the dominant theme affecting Grant Park was the large correction in the energy markets. After hitting a high of $80 in early July, December ’07 oil experienced a 20% correction during the quarter. Accordingly, Grant Park was forced to liquidate all of its long positions in the energy markets at a loss.
Key trading developments for Grant Park during the first nine months of 2006 include the following:
Grant Park recorded gains for the month of January. Class A units were up 3.49% for the month while Class B units were up 3.41% for the month. Positions in the metals, stock indices, agricultural/soft commodities and energies were profitable. Losses came from positions in the interest rate and currency sectors. Long positions in gold and silver recorded gains as precious metals rallied on news that Iran had removed U.N. seals from uranium purification equipment, sparking fears of a possible military showdown. Longs in aluminum and zinc were profitable as word that China’s economy grew at a greater-than-expected pace sent prices for base metals higher. Long positions in the stock indices were profitable as a rise in German business confidence led to higher prices on the German DAX. The London FTSE-100 gained ground on strength from steel shares while the S&P Composite Index traded higher after it was reported that U.S. durable goods orders grew for a third straight month in December. Continued South American demand for sugar-based ethanol resulted in profits to long positions in the soft/agricultural commodities as sugar prices settled higher for the month. Longs in the coffee market gained as strong demand during the holiday season pushed prices higher for the month. Longs in the energy sector were profitable as the situation in Iran sparked worries over crude oil and gasoline supplies. Reports that militants had targeted Nigerian refinery operations further added to concerns, driving prices higher. Long positions in the London long gilt and British short sterling sustained losses as prices for interest rate instruments fell on news that December retail sales in the U.K. were better-than-anticipated. Losses also came from short positions in the Canadian bills. Lastly, positions in the currency sector were unprofitable as speculation regarding the direction of interest rates in the U.S. and Europe dominated the sector. Long positions in the Swiss franc lost ground as the currency fell versus the U.S. dollar. Losses also came from positions in the Australian and New Zealand dollars.
Grant Park sustained losses for the month of February. Class A units had a negative return of 3.28% for the month and Class B units had a negative return of 3.35% for the month. Positions in the metal, energy and currency sectors experienced the largest setbacks. Losses were also the result of positions in the agricultural/soft commodities and interest rate products. Profits came from positions in the stock indices. Base and precious metals prices fell during the month, resulting in losses to long positions in the sector. Lower than expected U.S. industrial production data for January sent prices for copper, zinc and aluminum lower. Analysts suggested that an expected increase in mining activity in 2006 was also responsible for the weakness in base metals. Gold and silver were weaker as the possibility of further interest rate increases in the U.S. forced precious metals prices lower. Long positions in the crude oil market led to losses in the energy sector after data showed crude inventories to be at higher levels than the same period last year. This was possibly the result of unseasonably warm weather in the Northeastern United States. Gasoline prices were also lower, causing losses to long positions. Short positions in the currency sector lost ground as the Japanese yen rallied on comments from Bank of Japan officials suggesting that the Central Bank might gradually increase short-term interest rates which have hovered near zero percent since 2001. This caused the currency to appreciate against the euro, British pound and U.S. dollar. Coffee and sugar prices were lower during the month, resulting in losses for long positions in the soft/agricultural sector. Analysts suggested that the weakness stemmed from the expectation that global production of coffee would rise, particularly in Africa, causing investors to take profits on long positions. Long positions in the foreign interest rate products reported losses as prices for the Australia Ten and Three-year bonds closed lower. Losses also came from positions in the U.S Thirty-year Treasury bond. Lastly, long positions in the stock indices made gains on the strength of utility and banking stocks. The German DAX and Spanish IBEX settled higher, benefiting long positions.
Grant Park recorded gains for the month of March. Class A units were up 4.06% for the month while Class B units were up 3.98% for the month. Positions in the interest rates, metals and stock indices posted profits; losses came from positions in the currency, soft/agricultural commodity and energy sectors. Short positions in the Eurodollars and U.S. Treasury instruments benefited as prices for fixed income products fell on the possibility of higher interest rates in the U.S. After raising short term rates for the 15th consecutive time, the Federal Open Market Committee cautioned that further increases could be needed to balance economic growth and price stability. Short positions in the Eurobund and Euribor benefited as prices fell after the European Central Bank boosted short term interest rates early in the month and then indicated that conditions remained favorable for continued economic expansion. Long positions in silver posted gains as the prospect of the U.S. Securities and Exchange Commission’s approval of a silver-based Exchange Traded Fund sent prices higher on speculation that the approval of the fund would deplete supplies of the precious metal. Long positions in the copper market profited as prices were higher on the expectation that current levels of physical demand could outpace inventories of the base metal. Favorable earnings forecasts for automobile and real estate stocks helped push foreign stock indices higher during the month, which benefited long positions in the London FTSE-100, Paris CAC and German DAX. Gains also came from long positions in the Tokyo Nikkei. Short positions in the foreign currencies recorded losses as the euro and Swiss franc appreciated against the U.S. dollar on the expectation that there might be more room for interest rate hikes in Europe as opposed to the U.S. Wet weather across the Midwestern U.S. led to losses from long positions in the soft/agricultural commodity sector as prices for Kansas City wheat fell after heavy rains blanketed the growing region. Corn prices also fell, resulting in losses for long positions.
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Finally, short positions in the energy sector reported losses as concerns over supply sent prices for heating oil and gasoline higher for the month.
Grant Park posted gains during the month of April. Class A units were up 9.46% and Class B units were up 9.38%. The majority of sectors were profitable, with the largest advances the result of positions in the metals sector, followed by gains in interest rates, energies, stock indices and currencies. Losses were confined to positions in the soft/agricultural commodity sector. Long positions in the metals markets reported gains as prices for base metals appreciated during the month. Supply concerns dominated the marketplace as reports of work stoppages at mines in Mexico sent copper prices higher. Forecasts for increased global economic growth also boosted base metals, spurring nickel and aluminum prices to higher levels for the month. Long positions in the gold market benefited as the precious metal traded above $600 per ounce after investors became concerned over claims that Iran had begun to produce enriched uranium. Short positions in the interest rate sector were rewarded as fixed income prices fell on concerns over inflation in Europe and the United States. Short positions in the U.S. Treasury bond, London long gilt and Euro bund benefited as the possibility of interest rate increases on both sides of the Atlantic pushed fixed income prices lower. Short positions in the Australian 90-day bills and ten-year bonds also posted earnings. Worries over supply led to gains in the energy complex as the news regarding Iran’s uranium enrichment program sent crude oil prices higher on concerns that a showdown with the U.S. /U.N might hamper production. Rebel attacks on petroleum facilities in Nigeria also resulted in higher prices. Gains from technology and mining stocks sent the Tokyo Nikkei and Australian Share Price Index higher, resulting in gains to long positions in the stock index sector. Long positions in the currency sector reported gains as the euro currency appreciated against the dollar after the Qatar Central Bank indicated that it would buy euros to diversify its currency holdings. The British pound and Swiss franc also appreciated against the dollar, benefiting long positions in those currencies. Finally, long positions in the sugar market resulted in losses for the soft/agricultural commodity sector as analysts attributed the weakness to liquidation of long positions by investors seeking to protect recent gains.
Grant Park experienced minor trading losses during the month of May. Class A units had a negative return of 0.81% while Class B units had a negative return of 0.88%. Stock index positions incurred the largest setbacks, followed by losses to positions in the energy and soft/agricultural commodity sectors. Positions in metals, currencies and interest rates reported gains for the month. Long positions in the stock indices sustained losses as global stock markets experienced a volatile month. Concerns over the prospect of higher inflation, rising interest rates and the possibility of slowing economic growth led to losses from long positions in the German DAX, Nasdaq-100 Index and Tokyo Nikkei. Positions in the energy sector reported setbacks after a report earlier in the month announced that U.S. gasoline inventories had experienced a weekly increase for the first time since February of this year, leading to speculation of lessened demand during the summer driving season. Long positions in the crude oil, heating oil and gasoline markets reported losses. Short positions in the soft/agricultural commodity sector resulted in losses as prices for live cattle were higher during the month on what analysts described as a technical driven rally, with investors pushing prices higher as they moved to liquidate short positions. Long positions in the sugar market also reported losses as prices there were lower for the month. Long positions in the metals sector recorded gains as reports of tight supplies combined with continued economic growth in India, China and South America sent base metals prices higher. Reports of supply disruptions in Mexico and Chile also pushed industrial metal prices higher. Long positions in the foreign currencies profited as the U.S. dollar lost ground to the euro, Swiss franc and British pound amid speculation that short term interest rates could rise faster in Europe than in the United States. Lastly, short positions in the domestic interest rate market were profitable as the Eurodollar contract traded lower after the U.S. Federal Open Market Committee raised the federal funds target rate to 5% and issued a statement saying that any additional rate hikes would depend upon economic data going forward.
Grant Park posted trading losses during the month of June. Class A units were down 2.85% while Class B units were down 2.92%. Positions in the currencies, metals, soft/agricultural commodities and stock indices accounted for the majority of losses; energy positions also sustained setbacks. Gains came from positions in the interest rate sector. Long positions in the currency sector incurred losses as the U.S. dollar moved higher during the month, buoyed by the U.S. Federal Reserve Bank’s decision to continue its series of interest rate hikes. Long positions in the euro, British pound and Swiss franc experienced the largest losses as investors were concerned that the interest rate differential between the U.S. and Europe could possibly widen despite the news that the European Central Bank boosted short term rates for the third time in the last six months. The prospect of rising global interest rates sent prices for base metals lower, resulting in losses to long positions in the nickel and copper markets. Precious metal positions also posted losses as gold and silver settled at lower levels. Positions in soybeans and wheat led to losses in the soft/agricultural sector. Long positions in soybeans lost ground during a month of volatile price action driven by technical factors, according to analysts. Long positions in the wheat market experienced losses as favorable weather permitted the U.S. harvest to proceed at a quicker rate than usual, resulting in an excess of supply coming to the market. Positions in the stock indices sustained losses as the possibility of rising interest rates pushed share prices lower. Earlier in the month, long positions in the NASDAQ and German DAX sustained setbacks in response to this downside price action. Long positions in the energy sector experienced losses as the possibility of higher interest rates worried investors that any resulting slow down in economic growth could lessen the demand for fuel, resulting in losses to crude oil positions. Long positions in heating oil also lost ground. Lastly, positions in the interest rate sector reported gains as the prospect of further interest rate hikes across the globe sent prices lower. Short positions in the Eurodollar contract and LIFFE Euribor posted the largest gains in the sector.
Grant Park sustained losses during July. Class A units were down 3.66% while Class B units were down 3.73%. Positions in the interest rates, soft agricultural commodities and energies incurred the largest setbacks, followed by losses in the currency sector.
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Gains came from the metals and stock indices. Short positions in the interest rate sector reported losses as prices for fixed income instruments rallied around the globe. Domestically, prices for Eurodollars and U.S. Ten-year notes rose after it was reported that U.S. non-farm payrolls were lower than expected during June; comments by Federal Reserve Chairman Ben Bernanke suggesting that the central bank expects moderate inflation going forward also sent prices higher. Open hostilities between Israel and Hezbollah put upward pressure on global fixed income prices as investors worried that the conflict could evolve into a wider war in the Middle East. Short positions in the corn market resulted in losses to the soft/agricultural commodity sector as prices rose in response to scorching heat in Midwestern growing regions and an increase in demand for corn mash for use in distilling gasoline additive ethanol. Long positions in crude oil and unleaded gasoline lost ground after prices fell in response to reports that showed inventories at higher than expected levels. Short positions in natural gas lost ground as soaring temperatures in the U.S. led to an increase in energy demand from gas-fueled power stations. News that the U.S. trade deficit was lower than expected in May resulted in losses to positions in the currency sector. Long positions in the Canadian dollar and euro experienced setbacks as the U.S. dollar rallied on the report. Long positions in the metals sector were profitable as a combination of high demand and waning inventories sent prices for copper and nickel higher for the month. Reports of work stoppages at mines in Chile and Canada gave investors concern that demand could further outpace supply. Lastly, long positions in the foreign stock indices were profitable for the month. Language suggesting that the U.S. Federal Reserve might consider a pause in the central bank’s rate tightening schedule sent share markets higher, particularly the Hong Kong Hang Seng which registered the largest gains in the sector.
Grant Park reported trading gains during August. Class A units were up 2.20% while Class B units were up 2.12%. Profits came from a majority of sectors, with the biggest advances stemming from positions in the currency and interest rate markets. Positions in the metals, stock indices and soft/agricultural commodities also garnered gains. Losses came solely from the energy sector. Short positions in the Japanese yen resulted in gains for the currency sector as the yen depreciated against the British pound and the euro after the Bank of England and the European Central Bank elected to tighten short term interest rates earlier in the month. Weaker than expected economic data out of Japan also benefited yen short positions. Long positions in the interest rate sector were profitable as the weak Japanese economic data pushed Japanese Government bonds higher for the month. U.S. Treasury products were higher as a slowing U.S. housing market combined with lower personal consumption data to push prices higher. Long positions in the metal sector posted gains as inventories of nickel at the London Metals Exchange sank to approximately two days of market consumption, pushing the price of the base metal considerably higher on the month. Long positions in the stock indices produced gains as global share markets were higher after the U.S. Federal Reserve Bank decided not to raise short-term interest rates for the first time in seventeen consecutive meetings. The Hong Kong Hang Seng posted material gains as analysts suggested that exporters benefited the most from the U.S. central bank’s decision. Long positions in the live stock markets resulted in gains for the soft/agricultural commodity sector. Analysts suggested that strong commercial demand sent prices for live hogs higher and the resumption of beef exports from the United States to Japan pushed prices for live cattle higher. Lastly, long positions in the energy sector sustained losses for the month. Crude oil prices fell after a plot to blow up U.S. airliners was foiled by British intelligence, resulting in speculation that worries over terrorism and strict new travel guidelines would result in less air travel and lower demand for jet fuel.
Grant Park sustained trading losses during September. Class A units were down 1.10% while Class B units were down 1.17%. Setbacks were the result of positions in the currencies, metals, soft/agricultural commodities and interest rates. Gains came from the energy and stock index sectors. Long positions in the British pound lost ground after Bank of England officials stated that they expected growth and inflation to be lower than anticipated in the coming months, an indication that the central bank may continue to hold off on any further interest rate hikes. Canadian dollar longs incurred losses as that currency weakened in response to falling energy prices. Losses were incurred to long positions in the copper and aluminum markets as investors’ concerns over a slow down in global economic growth sent prices for raw materials lower. Long positions in the livestock markets sustained losses as prices for beef fell on expectations that the number of cattle on U.S. feedlots would increase; losses to long positions in the hog market occurred after reports of increased pork production and a decrease in U.S. exports. Short positions in the LIFFE euribor contract sustained losses as prices for the short-term interest rate product rose in response to the aforementioned comments by Bank of England officials. Energy prices fell during the month, resulting in gains to short positions in the sector. An increase in U.S. commercial supplies of crude oil coupled with the perception of a lessening in geopolitical risks in the Middle East sent prices for crude, natural gas and heating oil lower for the month. Lastly, long positions in global equity markets were profitable as analysts suggested that the decision by the U.S. Federal Reserve Bank to keep short-term interest rates steady combined with benign U.S. economic data resulted in higher prices for the S&P Composite Index. Longs in the Spanish IBEX were profitable after the index traded higher on merger and acquisition activity from the utility sector.
Nine months ended September 30, 2005
The third quarter of 2005 ended with Grant Park Class A units down 0.06% on the quarter while the Class B units were down 0.29% on the quarter. This followed a second quarter in which performance was also essentially flat. The quarter was characterized by choppy sideways trading for Grant Park overall, as performance fluctuated between +2% and -2% before settling approximately unchanged for the quarter.
July started the quarter with negative performance as long positions in the long end of the yield curve were hit hard. A series of positive economic reports around the globe coupled with strong corporate earnings sent bond prices lower globally. July’s losses
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were made up in August due primarily to strength in the energy sector. Long positions in energies rallied significantly into month end as Hurricane Katrina roared through the Gulf of Mexico, shutting down refinery and distribution facilities in all of these markets which sent energy prices soaring. September ended the month on a flat note as unprofitable long positions in the long end of the yield curve were affected by profitable positions in the stock indices and metals.
Key trading developments for Grant Park during the first nine months of 2005 include the following:
Grant Park’s performance was negative for the first month of 2005. Class A units were down 5.96% for the month while Class B units were down 6.04%. Losses were sustained across most sectors, with the most significant losses sustained in the currency and stock index sectors. Short U.S. dollar/long European currency positions were hit hard as the U.S. dollar saw its largest gain against the euro since May of 2001 and finished the month up 3.8% over the euro. The U.S. dollar strengthened as economic data released throughout the month provided evidence that the U.S. economy would grow faster than its European counterparts. The dollar was further strengthened following the release of the FOMC (Federal Open Market Committee) minutes from December, which proved more hawkish than prior market expectations, suggesting that the Fed may be more aggressive in tightening interest rates. As a result, positions in the currency sector were pared back and/or reversed going in to February. U.S. stock indices retreated as the threat of higher interest rates weighed heavily on investors’ minds. Long positions in both the S&P 500 Index and the Nasdaq 100 posted losses. Long Hang Seng positions also were unprofitable as shares sold off on worries of capital outflows following the swift U.S. dollar rebound. Additional losses occurred in the metals, energy and agricultural/soft sectors, while modest profits were posted in the financial (fixed income) sector.
Grant Park was profitable for the month of February. Grant Park A units were up 3.42% for the month while the B units were up 3.34% for the month. Profits were concentrated in the stock indices and agricultural/softs sectors, with additional profits in the metals and currency sectors. Losses were attributed to the fixed income sector, while the energy sector was virtually flat. Long positions in global stock indices benefited as strong gains in oil and mining stocks dominated index returns. Net long positions in the grain markets also proved profitable as prices rose amidst forecasts of a continued hot and dry weather pattern across Brazil’s primary growing regions, which would harm crop yields. Additionally, at month’s end the USDA reported a stronger than expected export number which also contributed to higher prices. Soybeans and soybean oil led the rally, increasing more than 17% for the month. Dollar weakness helped support metal prices, adding modest gains to Grant Park’s long positions. The continued weakness in the U.S. dollar also benefited Grant Park’s currency positions, with the most notable winning positions in the sector being long the “commodity” currencies including the Mexican peso, Australian dollar and New Zealand dollar. While short-term interest rate positions were profitable, long term rate positions experienced significant losses creating net losses for the fixed income sector as a whole. The yield curve in the U.S. finally steepened after Alan Greenspan’s testimony before Congress about the “conundrum” posed by the decline in forward rates, generating losses for the Fund’s long positions in both the 30-year and 10-year bond.
March performance was slightly negative for Grant Park. Class A units were down 0.51% while the B units were down 0.59%. Grant Park’s most significant losses were in the currency sector. Long positions in foreign currencies accumulated losses as concerns over inflation sparked a massive rally in the U.S. dollar near month’s end. After the Fed raised short-term interest rates another quarter point on the 22nd of the month, the markets focused on the statements made by the Fed indicating that they are more concerned by the threat of raising inflation than was previously thought. This increased speculation that the Fed may become more aggressive and less “measured” in its approach to increasing interest rates in the near future. Long positions in stock indices also sustained losses as a result of the Fed’s comments and as higher energy prices weighed on the indices. U.S. equities were further damaged by news that General Motors’ 2005 earnings would fall short of estimates, as well as the accounting scandal being uncovered at American International Group. Additional losses were incurred in the metals markets, most notably in long positions in silver and gold as the stronger U.S. dollar made them less attractive holdings. Profits were generated in long positions in the energy sector as prices ended the month stronger. Prices were boosted on the last day of the month following comments from Goldman Sachs warning that ongoing resilient demand could push crude prices as high as $105 per barrel. Additional profits were generated in the interest rate sector, particularly in short positions in U.S short-term interest rate positions, as prices fell following the seventh consecutive interest rate hike by the Fed, as noted above.
Performance for Grant Park was negative for the month of April. Class A units were down 5.05% for the month while Class B units were down 5.12%. Grant Park sustained losses in most trading sectors for the month. Positions in the energy, stock index, currency, metals and agricultural/soft sectors posted losses, while positions in the fixed income sector helped to partially offset those losses. Long positions in the energy sector were dealt setbacks as crude, heating oil and unleaded gas prices reversed downward mid-month on weak U.S. economic data and climbing inventories. U.S. crude inventories reached their highest level since May 2002, helped in part by an increase in OPEC production. Natural gas prices were also weaker, as most of the U.S. experienced a milder-than-normal end to winter/early spring. The stock index sector suffered losses on both long and short positions across the globe. Short positions in the Hang Seng during the early part of the month were particularly hard hit as the index rallied substantially. The rally was fueled by speculation of a Chinese Yuan revaluation which encouraged inflows into stocks and eased concerns over a rapid rise in local interest rates. Long positions in the Nikkei, the German DAX and Paris CAC-40 also sustained losses as world equity prices softened on weak U.S. economic news, a reduction in economic growth forecasts for the euro-zone, and disappointing earnings reports from a number of U.S. companies. The currency sector recorded additional losses as long U.S. dollar positions against most major currencies were hurt by the aforementioned weak economic news. Long positions in both the metals and agricultural/softs sectors also posted
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losses. On the brighter side, profits were generated in long global fixed income positions. Prices benefited from the negative data on the U.S. economy as investors reasoned that any future hikes in U.S. interest rates would be kept to a minimum. Prices were further supported by a “flight to quality” premium in the wake of falling energy and equity prices.
Performance for Grant Park was positive for the month of May. Grant Park Class A units were up 3.98% for the month while the Class B units were up 3.90% for the month. Gains were attributed to the fixed income and currency sectors, while the remaining four sectors registered modest losses for the month. Long positions in domestic fixed income markets benefited from signs that U.S. economic and inflationary pressures are easing. As a result, many market participants were anticipating that interest rate increases by the Federal Reserve will come to an end soon. Long positions in European fixed income markets were also profitable as prices rose steadily amidst a “flight to quality” rally, brought on by continued weakness in the Euro currency. Prices were additionally boosted as economic growth appeared to be moderating and perhaps weakening throughout Europe, putting pressure on the European Central Bank to ease rates after a two-year rate freeze. Long U.S. dollar, short European currency positions posted solid gains as negative sentiment in Europe continued to build. European confidence fell to a 21-month low in May as high oil prices, high unemployment, and France’s rejection of the European Constitution sent the Euro to seven-month lows against the greenback. Grant Park’s short Euro position was the most profitable currency trade for the month. Short Swiss Franc positions were additionally profitable as were long U.S. dollar index positions. Losses in the remaining sectors were modest, with the most notable being in the energy sector. Short positions suffered as crude oil prices rose amidst tightening supply concerns as we headed into the summer driving season.
June was profitable for Grant Park. Class A units were up 1.89% for the month while the Class B units were up 1.81%. Profits were earned in the interest rate, currency and stock indices sectors, while losses were attributed to energies, agriculturals/softs and metals. Long positions in European interest rates proved profitable as prices advanced following a reduction in European economic growth forecasts, which raised the likelihood that the European Central Bank would cut interest rates in the near future. Additional profits were earned in long Japanese government bond positions, which rallied amid signs that that nation’s economy was continuing to struggle. Short positions in European currencies earned profits as they declined against the U.S. dollar following the rejection of the proposed E.U. constitution by French and Dutch voters. The euro, Swiss franc, and British pound all declined against the U.S. dollar. The U.S. dollar continued its rise following news that the April U.S. trade deficit was smaller than expected. Increasing speculation that the European Central Bank could cut interest rates in the near future, as noted above, also helped to push the euro lower. Long positions in European stock indices were additionally profitable, as news of continuing U.S. economic growth eased fears of a slowdown in European exports and boosted equity prices in Europe. Oil companies were particularly strong performers, as energy prices remained high. Mining stock benefited from higher metal prices as well. End of the month reversals in commodity markets, particularly in the energy complex and agricultural markets, wiped out earlier gains and generated losses for the month. Additional losses were generated in various positions in the metals sector.
July performance was negative for Grant Park. Class A units were down 1.96% for the month while Class B units were down 2.03%. Significant losses were incurred in the interest rate sector. Losses were partially offset by gains in the stock index and energy sectors. Performance for the remaining sectors was relatively flat for the month. European bonds initially rallied on flight-to-quality buying after the July 7th London terror attacks, but drifted lower as the perceived threat diminished. Long positions continued to suffer as strong French economic data lowered expectations that the European Central Bank would be cutting interest rates in the near future. Long positions in Japanese Government bonds also contributed to losses in the sector, as positive economic news and strong corporate earnings sent bond prices lower. The Japanese government reported its unemployment rate dropped to 4.2 percent, a seven-year low. Profits were generated in long positions in European equities, which rallied amid hopes that a stronger U.S. dollar would prove beneficial to exporters. Additional profits were earned in long positions in the energy sector, as prices continued to rise amidst worries of hurricane-related disruptions to production and shipping facilities in the Gulf of Mexico.
Grant Park posted profits in August. Class A units were up by 1.97% for the month and Class B units posted a 1.89% profit. Positions in the energy sector were responsible for the majority of gains while losses were experienced in the currency and fixed income sectors. Long positions in the energy sector enjoyed solid gains. Prices strengthened throughout the month, initially on concerns that the death of King Fahd of Saudi Arabia would lead to instability in the Middle East. At the end of the month, prices soared as Hurricane Katrina caused a virtual shutdown of production facilities and refineries in the affected region. Grant Park’s short positions in European currencies incurred losses. The U.S. dollar weakened amid concerns that the U.S. economy may be slowing. Speculation that the European Central Bank would refrain from lowering interest rates also caused the euro to rise. Short positions in short-term U.S. interest rate futures also incurred losses, as Eurodollar futures rallied on worries that Hurricane Katrina and higher energy prices could adversely impact U.S. economic growth.
Performance for Grant Park was relatively flat for the month of September. Class A units were down 0.04% for the month while Class B units were down 0.11%. Losses were largely attributed to the interest rate sector, while positions in stock indices, currencies, metals and the agricultural/soft commodities were profitable. Positions in the energies provided mixed results with the sector as a whole reflecting a flat month. Inflationary concerns dealt a blow to long positions in the interest rate sector as prices weakened both at home and abroad. Additionally, the initial feeling that the U.S. Federal Reserve may hold off on any rate increases until they determine the economic impact of both Hurricane Katrina and Rita proved mistaken as they raised rates another quarter point on September 20th. As a result, the sell-off in treasuries dragged bond markets down across the globe. Long positions in stock indices enjoyed a positive month, especially for positions in the Nikkei and Hang Seng. News of the landslide victory by Koizumi's
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Liberal Democratic Party in Japan spurred investors to push the index over 13,000, touching four-year highs. Modest profits were generated in the currency sector, in particular to long positions in the Canadian and Australian dollars, which rallied along side the U.S. dollar. Long positions in gold also contributed to gains for the month, with prices rallying over $34 for the month to close the December futures contract at $472.30 per ounce. Finally, long positions in the energy sector provided mixed results with long crude oil positions posting losses and long natural gas and unleaded gas positions posting gains. Supply concerns for the refined products remained the dominant factor throughout the month.
Off-Balance Sheet Risk
Off-balance sheet risk refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in future obligation or loss. Grant Park trades in futures and other commodity interest contracts and is therefore a party to financial instruments with elements of off-balance sheet market and credit risk. In entering into these contracts, Grant Park faces the market risk that these contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. If the markets should move against all of the commodity interest positions of Grant Park at the same time, and if Grant Park were unable to offset positions, Grant Park could lose all of its assets and the limited partners would realize a 100% loss. Grant Park minimizes market risk through real-time monitoring of open positions, diversification of the portfolio and maintenance of a margin-to-equity ratio that rarely exceeds 25%. All positions of Grant Park are valued each day on a mark-to-market basis.
In addition to market risk, in entering into commodity interest contracts there is a credit risk that a counterparty will not be able to meet its obligations to Grant Park. The counterparty for futures and options on futures contracts traded in the United States and on most non-U.S. futures exchanges is the clearing organization associated with such exchange. In general, clearing organizations are backed by the corporate members of the clearing organization who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing organization is not backed by the clearing members, like some non-U.S. exchanges, it is normally backed by a consortium of banks or other financial institutions.
In the case of forward contracts, over-the-counter options contracts or swap contracts, which are traded on the interbank or other institutional market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a central clearing organization backed by a group of financial institutions. As a result, there will likely be greater counterparty credit risk in these transactions. Grant Park trades only with those counterparties that it believes to be creditworthy. Nonetheless, the clearing member, clearing organization or other counterparty to these transactions may not be able to meet its obligations to Grant Park, in which case Grant Park could suffer significant losses on these contracts.
Introduction
Grant Park is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or a substantial amount of Grant Park’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 Grant Park’s business.
Market movements result in frequent changes in the fair market value of Grant Park’s open positions and, consequently, in its earnings and cash flow. Grant Park’s market risk is influenced by a wide variety of factors, including the level and volatility of exchange rates, interest rates, equity price levels, the market value of financial instruments and contracts, market prices for base and precious metals, energy complexes and other commodities, the diversification effects among Grant Park’s open positions and the liquidity of the markets in which it trades.
Grant Park rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance. Grant Park’s current trading advisors all employ trend-following strategies that rely on sustained movements in price. Erratic, choppy, sideways trading markets and sharp reversals in movements can materially and adversely affect Grant Park’s results. Grant Park’s past performance is not necessarily indicative of its future results.
Value at risk is a measure of the maximum amount that Grant Park could reasonably be expected to lose in a given market sector in a given day. However, the inherent uncertainty of Grant Park’s speculative trading and the recurrence in the markets traded by Grant Park of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated value at risk or Grant Park’s experience to date. This risk is often referred to as the risk of ruin. In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that Grant Park’s losses in any market sector will be limited to value at risk or by Grant Park’s attempts to manage its market risk. Moreover, value at risk may be defined differently as used by other commodity pools or in other contexts.
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Materiality, as used in 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, and multiplier features of Grant Park’s market sensitive instruments.
The following quantitative and qualitative disclosures regarding Grant Park’s market risk exposures contain forward-looking statements. All quantitative and qualitative disclosures in this section are deemed to be forward-looking statements, except for statements of historical fact and descriptions of how Grant Park manages its risk exposure. Grant Park’s primary market risk exposures, as well as the strategies used and to be used by its trading advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of Grant Park’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 Grant Park. Grant Park’s current market exposure and/or risk management strategies may not be effective in either the short- or long-term and may change materially.
Quantitative Market Risk
Trading Risk
Grant Park’s approximate risk exposure in the various market sectors traded by its trading advisors is quantified below in terms of value at risk. Due to Grant Park’s mark-to-market accounting, any loss in the fair value of Grant Park’s open positions is directly reflected in Grant Park’s earnings, realized or unrealized.
Exchange maintenance margin requirements have been used by Grant Park as the measure of its value at risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% to 99% of any one-day interval. The maintenance margin levels are established by brokers, dealers and exchanges using historical price studies as well as an assessment of current market volatility and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component that is not relevant to value at risk.
In the case of market sensitive instruments that are not exchange-traded, including currencies and some energy products and metals in the case of Grant Park, the margin requirements for the equivalent futures positions have been used as value at risk. In those cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
In the case of contracts denominated in foreign currencies, the value at risk figures include foreign currency margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to Grant Park, which is valued in U.S. dollars, in expressing value at risk in a functional currency other than U.S. dollars.
In quantifying Grant Park’s value at risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate value at risk. The diversification effects resulting from the fact that Grant Park’s positions are rarely, if ever, 100% positively correlated have not been reflected.
Value At Risk By Market Sectors
The following tables indicate the trading value at risk associated with Grant Park’s open positions by market category as of September 30, 2006 and December 31, 2005 and the trading gains/losses by market category for the nine months ended September 30, 2006 and the year ended December 31, 2005. All open position trading risk exposures of Grant Park have been included in calculating the figures set forth below. As of September 30, 2006, Grant Park’s net asset value was approximately $360.4 million. As of December 31, 2005, Grant Park’s net asset value was approximately $289.9 million.
September 30, 2006
Market Sector | Value at Risk | % of Total Capitalization | Trading Gain/(Loss) | |||||||
Stock Indices | $ | 13,601,274 | 3.8 | % | 2.3 | % | ||||
Interest Rates | 12,468,886 | 3.5 | 4.5 | |||||||
Currencies | 7,379,153 | 2.0 | (2.0 | ) | ||||||
Metals | 2,952,000 | 0.8 | 10.0 | |||||||
Energy | 1,489,022 | 0.4 | (2.0 | ) | ||||||
Agriculturals | 1,063,865 | 0.3 | (2.4 | ) |
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Softs | 813,249 | 0.2 | 0.5 | |||||||
Meats | 310,849 | 0.1 | (0.1 | ) | ||||||
Total | $ | 40,078,298 | 11.1 | % | 10.8 | % |
December 31, 2005
Market Sector | Value at Risk | % of Total Capitalization | Trading Gain/(Loss) | |||||||
Stock Indices | $ | 13,288,191 | 4.6 | % | 5.1 | % | ||||
Interest Rates | 8,808,384 | 3.0 | (1.0 | ) | ||||||
Currencies | 5,632,384 | 2.0 | (4.6 | ) | ||||||
Metals | 2,935,888 | 1.0 | 1.2 | |||||||
Energy | 1,631,950 | 0.6 | 1.0 | |||||||
Softs | 1,472,902 | 0.5 | 1.7 | |||||||
Agriculturals | 963,807 | 0.3 | (1.0 | ) | ||||||
Meats | 265,480 | 0.1 | (0.1 | ) | ||||||
Total | $ | 34,998,986 | 12.1 | % | 2.3 | % |
Material Limitations On Value At Risk As An Assessment Of Market Risk
The face value of the market sector instruments held by Grant Park is typically many times the applicable maintenance margin requirement, which generally ranges between approximately 1% and 10% of contract face value, as well as many times the capitalization of Grant Park. The magnitude of Grant Park’s open positions creates a risk of ruin not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause Grant Park to incur severe losses over a short period of time. The value at risk table above, as well as the past performance of Grant Park, gives no indication of this risk of ruin.
Non-Trading Risk
Grant Park has non-trading market risk on its foreign cash balances not needed for margin. However, these balances, as well as the market risk they represent, are immaterial. Grant Park also has non-trading market risk as a result of investing a substantial portion of its available assets in U.S. Treasury bills and short term investments. The market risk represented by these investments is also immaterial.
Qualitative Market Risk
Trading Risk
The following were the primary trading risk exposures of Grant Park as of September 30, 2006, by market sector.
Stock Indices
Grant Park’s primary equity exposure is due to equity price risk in the G-7 countries as well as other jurisdictions including Hong Kong, Taiwan, and Australia. The stock index futures contracts currently traded by Grant Park are generally limited to futures on broadly based indices, although Grant Park may trade narrow-based stock index futures contracts in the future. As of September 30, 2006, Grant Park had no short equity index positions on. All of the exposure in the stock index sector was held in small to medium sized positions. Grant Park is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices. Static markets would not cause major market changes but would make it difficult for Grant Park to avoid being “whipsawed” into numerous small losses.
Interest Rates
Interest rate risk is the principal market exposure of Grant Park. Interest rate movements directly affect the price of the futures positions held by Grant Park and indirectly 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 Grant Park’s profitability. Grant Park’s primary interest rate exposure is due to interest rate fluctuations in the United States and the other G-7 countries. However, Grant Park also takes futures positions on the government debt of smaller nations, such as Australia. The general partner anticipates that G-7 interest rates will remain the primary market exposure of Grant Park for the foreseeable future. As of September 30, 2006, Grant Park’s interest rate exposure was predominantly long the short and long ends of the yield curve around the globe with the exception of Europe where Grant Park was short the shorter maturities of fixed income.
Currencies
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Exchange rate risk is a significant market exposure of Grant Park. Grant Park’s currency exposure is due to exchange rate fluctuations, primarily fluctuations that disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. Grant Park trades in a large number of currencies, including cross-rates, which are positions between two currencies other than the U.S. dollar. The general partner anticipates that the currency sector will remain one of the primary market exposures for Grant Park for the foreseeable future. As of September 30, 2006, Grant Park had a variety of positions in both the dollar and the cross rates. In general, with the exception of the British pound, a stronger dollar against most currencies would benefit Grant Park.
Metals
Grant Park’s metals market exposure is due to fluctuations in the price of both precious metals, including gold and silver, as well as base metals including aluminum, copper, nickel and zinc. As of September 30, 2006, Grant Park held very little metals positions. After a substantial run up in the first half of the year, profits were taken and positions in this sector have all been liquidated for the most part.
Energy
Grant Park’s primary energy market exposure is due to gas and oil price movements, often resulting from political developments in the Middle East, Nigeria, Russia and Venezuela. As of September 30, 2006, the energy market exposure of Grant Park consisted of minor short positions in crude oil, crude products and natural gas. Oil and gas prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Agricultural / Softs
Grant Park’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Small long positions in wheat accounted for Grant Park’s long commodity exposure while cotton, soybeans, soybean oil and sugar accounted for Grant Park’s short positions as of September 30, 2006.
Non-Trading Risk Exposure
The following were the only non-trading risk exposures of Grant Park as of September 30, 2006.
Foreign Currency Balances
Grant Park’s primary foreign currency balances are in Japanese yen, British pounds, Euros and Australian dollars. The trading advisors regularly convert foreign currency balances to U.S. dollars in an attempt to control Grant Park’s non-trading risk.
Cash Management
Grant Park maintains a portion of its assets at its clearing brokers as well as at Harris N.A. and Lake Forest Bank & Trust Company. These assets, which may range from 5% to 25% of Grant Park’s value, are held in U.S. Treasury securities and/or Treasury repurchase agreements. The balance of Grant Park’s assets, which range from 75% to 95%, are invested in investment grade money market instruments purchased and managed at Middleton Dickinson Capital Management, LLC which are held in a separate, segregated account at State Street Bank and Trust Company or are purchased directly through BMO Capital Markets Corporation, a member of BMO Financial Group. Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on Grant Park’s cash management income.
Managing Risk Exposure
The general partner monitors and controls Grant Park’s risk exposure on a daily basis through financial, credit and risk management monitoring systems and, accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which Grant Park is subject.
The general partner monitors Grant Park’s performance and the concentration of its open positions and consults with the trading advisors concerning Grant Park’s overall risk profile. If the general partner felt it necessary to do so, the general partner could require the trading advisors to close out individual positions as well as enter positions traded on behalf of Grant Park. However, any intervention would be a highly unusual event. The general partner primarily relies on the trading advisors’ own risk control policies while maintaining a general supervisory overview of Grant Park’s market risk exposures. The trading advisors apply their own risk management policies to their trading. The trading advisors often follow diversification guidelines, margin limits and stop loss points to exit a position. The trading advisors’ research of risk management often suggests ongoing modifications to their trading programs.
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As part of the general partner’s risk management, the general partner periodically meets with the trading advisors to discuss their risk management and to look for any material changes to the trading advisors’ portfolio balance and trading techniques. The trading advisors are required to notify the general partner of any material changes to their programs.
General
From time to time, certain regulatory or self-regulatory organizations have proposed increased margin requirements on futures contracts. Because Grant Park generally will use a small percentage of assets as margin, Grant Park does not believe that any increase in margin requirements, as proposed, will have a material effect on Grant Park’s operations.
As of the end of the period covered by this report, the general partner carried out an evaluation, under the supervision and with the participation of the general partner’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of Grant Park’s disclosure controls and procedures as contemplated by Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based on and as of the date of that evaluation, the general partner’s principal executive officer and principal financial officer concluded that Grant Park’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to Grant Park required to be included in the reports required to be filed or submitted by Grant Park with the SEC under the Exchange Act.
There was no change in Grant Park's internal control over financial reporting in the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, Grant Park's internal control over financial reporting.
Item 1A. Risk Factors
There have been no material changes to the risk factors relating to Grant Park from those previously disclosed in Grant Park’s Form 10-K for its fiscal year ended December 31, 2005, in response to Item 1A to Part 1 of Form 10-K.
On June 30, 2003, the Securities and Exchange Commission declared effective Grant Park’s Registration Statement on Form S-1 (Reg. No. 333-104317), pursuant to which Grant Park registered for public offering $20 million in aggregate amount of Class A Limited Partnership Units and $180 million in aggregate amount of Class B Limited Partnership Units. Also as of June 30, 2003, Grant Park adopted the Third Amended and Restated Limited Partnership Agreement, which included modifications required under the Guidelines for the Registration of Commodity Pool Programs promulgated by the North American Securities Administrators Association, Inc. and requested by various state securities regulators in connection with Grant Park’s public offering. Grant Park subsequently registered up to an additional $200 million in aggregate amount of Class A and Class B Limited Partnership Units for sale on a Registration Statement on Form S-1 (Reg. No. 333-113297) on March 30, 2004, and an additional $700 million in aggregate amount of Class A and Class B Limited Partnership Units for sale on a Registration Statement on Form S-1 (File No. 333-119338) on December 1, 2004.
Class A Limited Partnership Units and Class B Limited Partnership Units are being offered on a continuous basis at subsequent closing dates at a price equal to the net asset value per unit as of the close of business on each applicable closing date, which is the last business day of each month. The close of business on July 31, 2003 marked the initial closing date of the public offering. The lead selling agents for the offering are UBS Financial Services Inc., A.G. Edwards & Sons, Inc. and Oppenheimer & Co. Inc. As of the close of business on July 1, 2006, the Class A Limited Partnership Units were offered at $1,170.76 with 913.94 units being sold, and the Class B Limited Partnership Units were offered at $1,033.06 with 13,150.77 units being sold. As of the close of business on August 1, 2006, the Class A Limited Partnership Units were offered at $1,127.92 with 336.90 units being sold, and the Class B Limited Partnership Units were offered at $994.55 with 11,683.55 units being sold. As of the close of business on September 1, 2006, the Class A Limited Partnership Units were offered at $1,152.70 with 889.65 units being sold, and the Class B Limited Partnership Units were offered at $1,015.68 with 11,320.95 units being sold. Expenses incurred in connection with the organization and offering of the units, which are paid by the general partner and then reimbursed by Grant Park on a monthly basis (with such reimbursement limited to 0.2% annually of the net asset value of the Class A Units and through August 31, 2005, 0.9% annually, and effective September 1, 2005, 0.6% annually of the Class B Units) amounted to a total of approximately $224,582 for the three months ended September 30, 2006. The proceeds of the offering are deposited in Grant Park’s bank and brokerage accounts for the purpose of engaging in trading activities in accordance with Grant Park’s trading policies and its trading advisors’ respective trading strategies.
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Issuer Purchases of Equity Securities
(e) The following table provides information regarding the total Class A and Class B units redeemed by Grant Park during the three months ended September 30, 2006.
(a) | (b) | (a) | (b) | (c) | (d) | ||||||||||||||
Period | Total Number of Class A Units Redeemed | Average Price Paid per Unit | Total Number of Class B Units Redeemed | Average Price Paid per Unit | Total Number of Units Redeemed as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Units that May Yet Be Redeemed Under the Plans/Program(1) | |||||||||||||
07/01/06 through 07/31/06 | 788.56 | $ | 1,127.92 | 1,711.10 | $ | 994.55 | 2,499.66 | (2 | ) | ||||||||||
08/01/06 through 08/31/06 | 577.56 | $ | 1,152.70 | 1,569.02 | $ | 1,015.68 | 2,146.58 | (2 | ) | ||||||||||
09/01/06 through 09/30/06 | 869.90 | $ | 1,140.01 | 2,633.17 | $ | 1,003.78 | 3,503.07 | (2 | ) | ||||||||||
Total | 2,236.02 | $ | 1,140.21 | 5,913.29 | $ | 1,004.67 | 8,149.31 | (2 | ) |
____________________
(1) As previously disclosed, pursuant to Grant Park’s Limited Partnership Agreement, investors in Grant Park may redeem their units for an amount equal to the net asset value per unit at the close of business on the last business day of any calendar month if at least 10 days prior to the redemption date, or at an earlier date if required by the investor’s selling agent, the General Partner receives a written request for redemption from the investor. The General Partner may permit earlier redemptions in its discretion.
(2) Not determinable.
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(a) | Exhibits | ||
31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | ||
31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | ||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
GRANT PARK FUTURES FUND | |||
LIMITED PARTNERSHIP | |||
Date: November 9, 2006 | by: | Dearborn Capital Management, L.L.C. | |
its general partner | |||
By: | /s/ David M. Kavanagh | ||
David M. Kavanagh | |||
President | |||
(principal executive officer) | |||
By: | /s/ Maureen O’Rourke | ||
Maureen O’Rourke | |||
Chief Financial Officer | |||
(principal financial and accounting officer) |
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