Statements of Changes in Partners’ Capital (Net Asset Value) (continued)
Three Months Ended March 31, 2009
(Unaudited)
| | | General Partner | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Number | | | | | | | |
Partners’ capital, December 31, 2008 | | | 4,348.18 | | | $ | 6,827,509 | | | | 52,408.70 | | | $ | 82,292,140 | | | | — | | | $ | — | | | | 408,160.74 | | | $ | 554,475,560 | | | $ | 643,595,209 | |
| Contributions | | | — | | | | — | | | | 1,656.55 | | | | 2,601,110 | | | | 1,978.62 | | | | 2,650,000 | | | | 199,466.15 | | | | 267,192,606 | | | | 272,443,716 | |
| Redemptions | | | — | | | | — | | | | (1,883.09 | ) | | | (2,856,298 | ) | | | — | | | | — | | | | (8,105.44 | ) | | | (10,672,187 | ) | | | (13,528,485 | ) |
| Net Income (loss) | | | — | | | | (335,375 | ) | | | — | | | | (4,125,336 | ) | | | — | | | | (99,588 | ) | | | — | | | | (38,223,165 | ) | | | (42,783,464 | ) |
Partners’ capital, March 31, 2009 | | | 4,348.18 | | | $ | 6,492,134 | | | | 52,182.16 | | | $ | 77,911,616 | | | | 1,978.62 | | | $ | 2,550,412 | | | | 599,521.45 | | | $ | 772,772,814 | | | $ | 859,726,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net asset value per unit at December 31, 2008 | | | | | | | | | | $ | 1,570.20 | | | | | | | | | | | $ | 1,358.47 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net asset value per unit at March 31, 2009 | | | | | | | | | | $ | 1,493.07 | | | | | | | | | | | $ | 1,288.98 | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated 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 under Illinois law 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. Additio nally, 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 and the Securities Exchange Act of 1934, as amended.
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 is a multi-advisor pool that carries out its purpose through trading by independent professional commodity trading advisors retained by Dearborn Capital Management, L.L.C. (the “General Partner”), the Partnership and, effective April 1, 2009, the Partnership’s subsidiary limited liability trading companies (each a “Trading Company” and collectively, the “Trading Companies”). The Trading Companies were set up to, among other things, segregate risk by commodity trading advisor. Effectively, this structure isolates one trading advisor from another and any losses from one Trading Company will not carry over to the other Trading Companies. The following is a list of the Trading Companies, for which the Partnership is the sole member and all of which were organized as Delaware limited liability companies:
| GP 1, LLC (“GP 1”) | GP 6, LLC (“GP 6”) | GP 10, LLC (“GP 10”) |
| GP 3, LLC (“GP 3”) | GP 7, LLC (“GP 7”) | GP 11, LLC (“GP 11”) |
| GP 4, LLC (“GP 4”) | GP 8, LLC (“GP 8”) | GP 12, LLC (“GP 12”) |
| GP 5, LLC (“GP 5”) | GP 9, LLC (“GP 9”) | GP 14, LLC (“GP 14”) |
Assets of Grant Park will not be invested in GP 14 until the second quarter of 2010.
Additionally, GP Cash Management, LLC was created as a Delaware limited liability company to collectively manage and invest excess cash not required to be held at clearing brokers. The members of GP Cash Management, LLC are the Trading Companies.
Presentation of financial information: The consolidated financial statements include the accounts of the Partnership and its subsidiary Trading Companies and were prepared by us without audit according to the rules and regulations of the SEC. The Partnership follows generally accepted accounting principles ("GAAP") set by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (the “Codification” or “ASC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may be omitted pursu ant to such rules and regulations. In our opinion, the accompanying interim, unaudited, consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary and adequate disclosures to present fairly the financial position as of March 31, 2010 and the results of operations for the three months ended March 31, 2010 and 2009.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2009 Annual Report on Form 10-K as filed with the SEC.
Classes of interests: The Partnership has seven classes of limited partner interests (each a “Class” and collectively, the “Interests”), Class A, Class B, Legacy 1 Class, Legacy 2 Class, Global Alternative Markets 1 (“Global 1”) Class, Global Alternative Markets 2 (“Global 2”) Class and Global Alternative Markets 3 (“Global 3”) Class units.
The Class A and Class B units are outstanding, but are no longer offered by the Partnership. Both Class A and Class B units are traded pursuant to identical trading programs and differ only in respect to the General Partner’s brokerage commission.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
The Legacy 1 Class and Legacy 2 Class units are traded pursuant to trading programs pursuing a technical trend trading philosophy, which is the same trading philosophy used for the Class A and Class B units. The Legacy 1 Class and Legacy 2 Class units differ in respect to the General Partner’s brokerage commission and organization and offering and costs. The Legacy 1 Class and Legacy 2 Class units are offered only to investors who are represented by approved selling agents who are directly compensated by the investor for services rendered in connection with an investment in the Partnership (such arrangements commonly referred to as “wrap-accounts”).
The Global 1 Class, Global 2 Class and Global 3 Class units are traded pursuant to trading programs pursuing technical trend trading philosophies, as well as pattern recognition philosophies, focused on relatively shorter timeframes than the Legacy 1 Class and Legacy 2 Class units. The Global 1 Class, Global 2 Class and Global 3 Class units differ in respect to the General Partner’s brokerage commission. The Global 1 Class and Global 2 Class units are offered only to investors in wrap-accounts.
Significant accounting policies are as follows:
Consolidation: The Partnership is the sole member of each of the Trading Companies. The Trading Companies, in turn, are the only members of GP Cash Management, LLC. The Partnership will present consolidated financial statements for the Partnership which include the accounts of the Trading Companies and GP Cash Management, LLC. All material inter-company accounts and transactions are eliminated in consolidation. Recent FASB guidance under FASB ASC 810 establishes accounting and reporting requirements for noncontrolling interests, which the Partnership previously referred to as minority interests. This guidance requires noncontrolling interests to be reported as a component of partners’ capital on the consolidated s tatement of financial condition and the amount of net income (loss) attributable to noncontrolling interests to be identified on the consolidated statement of operations.
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.
Cash and cash equivalents: Cash and cash equivalents include cash, overnight investments, U.S. treasury bills and short-term investments in interest-bearing demand deposits with banks and cash managers with maturities of three months or less at the date of acquisition. 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 a trade date basis 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 consolidated 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 FASB ASC 210-20, Balance Sheet, Offsetting. Any change in net unrealized gain or loss from the preceding period is reported in the consolidated statement of operations. Fair value of exchange-traded contracts i s based upon exchange settlement prices. Fair value of non-exchange-traded contracts is based on third party quoted dealer values on the Interbank market. U.S. Government securities, Government-sponsored enterprises, certificates of deposit and commercial paper are stated at cost plus accrued interest, which approximates fair value based on quoted prices in an active market.
Redemptions payable: Pursuant to the provisions of FASB ASC 480, Distinguishing Liabilities from Equity, redemptions approved by the General Partner prior to month end with a fixed effective date and fixed amount are recorded as redemptions payable as of month end.
Income taxes: No provision for income taxes has been made in these consolidated 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.
The Partnership follows the provisions of ASC 740, Income Taxes. The Partnership is not subject to examination by U.S. federal or state taxing authorities for tax years before 2006. As of March 31, 2010, the Partnership has no uncertain income tax positions, and accordingly, has not recorded a liability for the payment of interest or penalties.
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 the General Partner and are reimbursed to the General Partner by the Partnership. This reimbursement is made monthly. Effective April 1, 2009, Class A units bear organization and offering expenses at an annual rate of 10 basis points (0.10 percent) of the adjusted net assets of the Class A units, calculated and payable monthly on the basis of month-end adjusted net assets. Legacy 1 Class, Legacy 2 Class, Global 1 Class, Global 2 Class, Global 3 Class and, effective April 1, 2009, Class
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
B units bear these expenses at an annual rate of 30 basis points (0.30 percent) of the adjusted net assets of the Legacy 1 Class, Legacy 2 Class, Global 1 Class, Global 2 Class, Global 3 Class and Class B units, respectively, calculated and payable monthly on the basis of month-end adjusted net assets. Prior to April 1, 2009, Class A units and Class B units bore these expenses at an annual rate of 20 basis points (0.20 percent) and 60 basis points (0.60 percent), respectively, of the adjusted net assets of the Class A and Class B units, respectively, calculated and payable monthly on the basis of month-end adjusted net assets. “Adjusted net assets” is defined as the month-end net assets of the particular class before accruals for fees and expenses and redemptions. In its discretion, the General Partn er may require the Partnership to reimburse the General Partner in any subsequent calendar year for amounts that exceed these limits in any calendar year, provided that the maximum amount reimbursed by the Partnership will not exceed the overall limit. 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 March 31, 2010, 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 consolidated 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.
Reclassification: Certain amounts in the 2009 financial statements have been reclassified to conform with the 2010 presentation.
Statement of Cash Flows: The Partnership has elected not to provide statements of cash flows as permitted by FASB ASC 230, Statement of Cash Flows.
Subsequent Events: The Partnership follows the provisions of FASB ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. See Note 13.
Recent accounting pronouncements: In January 2010, FASB issued Accounting Standards update No. 2010-06 (“ASU 2010-06”) for improving disclosure about fair value measurements. ASU 2010-06 adds new disclosure requirements about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). It also clarifies existing disclosure requirements relating to the levels of disaggregation for fair value measurement and inputs and valuation techniques used to measure fair value. The amended guidance is effective for financial statements for fiscal years and interim periods beginnin g after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not materially impact the Partnership’s financial condition or results of operations.
Note 2. Fair Value Measurements
The Partnership follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement and also emphasizes that fair value is a market-based measurement, not an entity-specific measurement. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined under FASB ASC 820 as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under FASB ASC 820 are described below:
Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2. Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
Level 3. Inputs are unobservable for the asset or liability.
The following section describes the valuation techniques used by the Partnership to measure different financial instruments at fair value and includes the level within the fair value hierarchy in which the financial instrument is categorized.
Fair value of exchange-traded contracts is based upon exchange settlement prices. Fair value of non-exchange-traded contracts is based on third party quoted dealer values on the Interbank market. U.S. Government securities, Government-sponsored enterprises and commercial paper are stated at cost plus accrued interest, which approximates fair value based on quoted market prices in an active market. These financial instruments are classified in Level 1 of the fair value hierarchy.
The Partnership values the certificates of deposit at face value plus accrued interest, which approximates fair value, and these financial instruments are classified in Level 2 of the fair value hierarchy.
The following table presents the Partnership’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2010:
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity in brokers’ trading accounts | | | | | | | | | | | | |
| U.S. Government securities | | $ | 99,122,578 | | | $ | – | | | $ | – | | | $ | 99,122,578 | |
| Futures contracts | | | 29,979,900 | | | | – | | | | – | | | | 29,979,900 | |
| Forward contracts | | | 416,744 | | | | – | | | | – | | | | 416,744 | |
| Option on futures contracts | | | (4,968 | ) | | | | | | | | | | | (4,968 | ) |
| Cash and cash equivalents | | | | | | | | | | | | | | | | |
| Certificates of deposit | | | – | | | | 9,026,697 | | | | – | | | | 9,026,697 | |
| Commercial paper | | | 74,744,321 | | | | – | | | | – | | | | 74,744,321 | |
| Certificates of deposit | | | – | | | | 485,149 | | | | – | | | | 485,149 | |
| Government-sponsored enterprises | | | 554,247,941 | | | | – | | | | – | | | | 554,247,941 | |
| U.S. Government securities | | | 44,878,812 | | | | – | | | | – | | | | 44,878,812 | |
| | | | | | | | | | | | | | | | | |
Note 3. Investment in GP 1, LLC
Effective January 1, 2009, the General Partner reallocated the portion of the Partnership’s net assets allocated to Winton Capital Management Limited (“Winton”) to GP 1. GP 1 allocates the assets invested by the Partnership to Winton through one or more managed accounts, to be traded pursuant to Winton’s Diversified Program, the same trading program Winton previously traded for the Partnership. GP 1 entered into an advisory agreement with Winton with respect to the managed account which is substantially similar to the Partnership’s previous trading advisory agreement with Winton. There have been no changes to the existing clearing broker arrangements/brokerage charge and no material changes to the other fees and expenses allocated to the Partnership as a result of this r eallocation. The General Partner of the Partnership is also the Investment Manager of GP 1.
Summarized information reflecting the total assets, liabilities and capital for GP 1 is shown in the following table.
| | | | March 31, 2009 | |
| Total Assets | | $ | 143,012,998 | |
| | | | | |
| Total Liabilities | | | 409,644 | |
| | | | | |
| Total Capital | | $ | 142,603,354 | |
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
Summarized information reflecting the Partnership’s investment in, and the allocated results of the operations of, GP 1, LLC at March 31, 2009, is shown in the following table.
| % of | | | | | | | | | | | | | | | | | | | | | |
| Partnership’s | | | | | | Fair | | | Net Trading | | | Expenses | | | Net | | Investment | Liquidity |
| Net Assets | | | Cost | | | Value | | | Loss | | | Commissions | | | Other | | | Loss | | Objective | Provision |
| | | | | | | | | | | | | | | | | | | | | | |
| | 16.6 | % | | $ | 145,343,975 | | | $ | 142,603,354 | | | $ | (1,604,776 | ) | | $ | 1,135,845 | | | $ | – | | | $ | (2,740,621 | ) | Speculative trading of futures contracts, options on futures contracts, forward contracts, swaps, derivatives and synthetics | Monthly or at such other times as the Directors may agree |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective April 1, 2009, in accordance with the restructuring of the Partnership, GP 1 is consolidated with the Partnership, as explained in Note 1.
Note 4. Deposits with Brokers
The Partnership, through the Trading Companies, deposits assets with brokers subject to Commodity Futures Trading Commission regulations and various exchange and broker requirements. Margin requirements are satisfied by the deposit of U.S. Treasury bills, Government-sponsored enterprises and cash with such brokers. The Partnership earns interest income on its assets deposited with the brokers.
Note 5. Commodity Trading Advisors
In the first quarter of 2009, in addition to its investment in GP 1 through which a portion of its assets are managed by Winton Capital Management, the Partnership had entered into advisory contracts with Rabar Market Research, Inc., EMC Capital Management, Inc., Eckhardt Trading Co., Graham Capital Management, L.P., Welton Investment Corporation, Global Advisors Jersey Limited, Transtrend B.V., Quantitative Investment Management LLC, Revolution Capital Management, LLC and Sunrise Capital Partners, LLC (the “Advisors”) pursuant to which the Advisors acted as the Partnership’s commodity trading advisors. The Advisors were 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 t o 26 percent of the new trading profits on the allocated net assets of the Advisor.
Effective April 1, 2009, the Partnership reallocated the assets managed by the Advisors to the Partnership’s subsidiary Trading Companies. Each Trading Company has entered into an advisory contract with its own Advisor on the same or substantially similar terms as the Partnership to manage all or a portion of such Trading Company’s assets.
Note 6. 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 percent 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 i t 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 the Partnership) plus 5 percent of the Units being offered for sale in the Partnership; or (ii) $50,000; or such other amount satisfying
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
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.
Ten 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 March 31, 2009, the Partnership paid the General Partner a monthly brokerage commission equal to 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. Effective April 1, 2009, the Partnership pays the General Partner a monthly brokerage commission equal to one twelfth of 7.50 percent (7.50 percent annualized) of month-end net assets for Class A units, one twelfth of 7.95 percent (7.95 percent annualized) of month-end net assets for Class B units, one twelfth of 5.00 percent (5.00 percent annualized) of month-end net assets for Legacy 1 Class units, one twelfth of 5.25 (5.25 percent annualized) of month-end net assets for Legacy 2 Class units, one twelfth of 4.45 percent (4.45 pe rcent annualized) of month-end net assets for Global 1 Class units, one twelfth of 4.70 percent (4.70 percent annualized) of month-end net assets for Global 2 Class units, one twelfth of 6.45 percent (6.45 percent annualized) of month-end net assets for Global 3 Class units. Included in the total brokerage commission are amounts paid to the clearing brokers for execution and clearing costs which are reflected in the commissions line of the consolidated statements of operations, and the remaining amounts are management fees paid to the Advisors, compensation to the selling agents and an amount to the General Partner for management services rendered which are reflected in the brokerage commission line on the consolidated statements of operations.
Note 7. Operating Expenses
Operating expenses of the Partnership are paid for by the General Partner and reimbursed by the Partnership. Operating expenses of the Partnership are limited to 0.25 percent per year of the average month-end net assets of the Partnership.
Note 8. Redemptions
Class A and Class B 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 will pay the applicable early redemption fee. Legacy 1 Class, Legacy 2 Class, Global 1 Class, Global 2 Class and Global 3 Class Limited Partners are prohibited from redeeming such units for the three months following the subscription for units. There are no redemption fee s applicable to Legacy 1 Class, Legacy 2 Class, Global 1 Class and Global 2 Class Limited Partners or to Global 3 Class Limited Partners who redeem their units on or after the one-year anniversary of their subscription. Global 3 Class Limited Partners who redeem their units after the three-month lock-up, but prior to the one-year anniversary of their subscriptions for the redeemed units will pay the applicable early redemption fee. Redemptions will be made on the last day of the month for an amount equal to the net asset value per unit, as defined, represented by the units to be redeemed. The right to obtain redemption is also contingent upon the Partnership’s having property sufficient to discharge its liabilities on the redemption date and may be delayed if the General Partner determines that earlier liquidation of commodity interest positions to meet redemption payments would be detrimental to the Partnership or nonredeeming Limited Partners.
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 9. 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.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
| | | Three Months Ended March 31, | |
| | | | | | | |
| | | (Unaudited) | |
| | | | | | | |
| Total return – Class A Units | | | (3.59 | )% | | | (4.91 | )% |
| Total return – Class B Units | | | (3.74 | )% | | | (5.12 | )% |
| Total return-Legacy 1 Class Units | | | (3.15 | )% | | | N/A | |
| Total return-Legacy 2 Class Units | | | (3.21 | )% | | | N/A | |
| Total return-Global 1 Class Units | | | (3.75 | )% | | | N/A | |
| Total return-Global 2 Class Units | | | (3.87 | )% | | | N/A | |
| Total return-Global 3 Class Units | | | (4.30 | )% | | | N/A | |
| Ratios as a percentage of average net asset (1): | | | | | | | | |
| Interest income (2) | | | 0.57 | % | | | 1.16 | % |
| | | | | | | | | |
| Expenses prior to incentive fees (2) | | | 6.77 | % | | | 7.27 | % |
| Incentive fees (3) | | | 0.03 | % | | | 0.02 | % |
| Total expenses (2) | | | 6.80 | % | | | 7.29 | % |
| Net investment loss (2) (4) | | | (6.20 | )% | | | (6.11 | )% |
(1) Legacy 1 Class, Legacy 2 Class, Global 1 Class, Global 2 Class and Global 3 Class Units began trading April 1, 2009.
(2) Annualized.
(3) Not annualized.
(4) Excludes incentive fee.
The interest income and expense ratios above are computed based upon the weighted average net assets of the Partnership for the three months ended March 31, 2010 and 2009 (annualized).
The following per unit performance calculations reflect activity related to the Partnership for the three months ended March 31, 2010 and 2009.
| Class A Units | | Three Months Ended March 31, | |
| | | | | | | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period | | $ | 1,425.20 | | | $ | 1,570.20 | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (31.42 | ) | | | (56.24 | ) |
| Expenses net of interest income (1) | | | (19.70 | ) | | | (20.89 | ) |
| Total income (loss) from operations | | | (51.12 | ) | | | (77.13 | ) |
| Net asset value per unit at end of period | | $ | 1,374.08 | | | $ | 1,493.07 | |
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
| Class B Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period | | $ | 1,224.35 | | | $ | 1,358.47 | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (27.17 | ) | | | (48.60 | ) |
| Expenses net of interest income (1) | | | (18.67 | ) | | | (20.89 | ) |
| Total income (loss) from operations | | | (45.84 | ) | | | (69.49 | ) |
| Net asset value per unit at end of period | | $ | 1,178.51 | | | $ | 1,288.98 | |
| | | | | | | | | |
| Legacy 1 Class Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period (2) | | $ | 966.12 | | | $ | N/A | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (20.96 | ) | | | N/A | |
Expenses net of interest income (1) | | | (9.50 | ) | | | N/A | |
Total income (loss) from operations | | | (30.46 | ) | | | N/A | |
Net asset value per unit at end of period | | $ | 935.66 | | | | N/A | |
| | | | | | | | | |
| Legacy 2 Class Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period (2) | | $ | 964.54 | | | $ | N/A | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (20.80 | ) | | | N/A | |
Expenses net of interest income (1) | | | (10.18 | ) | | | N/A | |
Total income (loss) from operations | | | (30.98 | ) | | | N/A | |
Net asset value per unit at end of period | | $ | 933.56 | | | | N/A | |
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
| Global 1 Class Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period (2) | | $ | 956.82 | | | $ | N/A | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (26.70 | ) | | | N/A | |
Expenses net of interest income (1) | | | (9.14 | ) | | | N/A | |
Total income (loss) from operations | | | (35.84 | ) | | | N/A | |
Net asset value per unit at end of period | | $ | 920.98 | | | | N/A | |
| Global 2 Class Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period (2) | | $ | 953.60 | | | $ | N/A | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (26.13 | ) | | | N/A | |
Expenses net of interest income (1) | | | (10.80 | ) | | | N/A | |
Total income (loss) from operations | | | (36.93 | ) | | | N/A | |
Net asset value per unit at end of period | | $ | 916.67 | | | | N/A | |
| Global 3 Class Units | | Three Months Ended March 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | |
Per Unit Performance (for unit outstanding throughout the entire period): | | | | | | |
| Net asset value per unit at beginning of period (2) | | $ | 939.64 | | | $ | N/A | |
| Income (loss) from operations: | | | | | | | | |
| Net realized and change in unrealized gain (loss) from trading (1) | | | (25.25 | ) | | | N/A | |
Expenses net of interest income (1) | | | (15.18 | ) | | | N/A | |
Total income (loss) from operations | | | (40.43 | ) | | | N/A | |
Net asset value per unit at end of period | | $ | 899.21 | | | | N/A | |
| (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. |
| (2) | | Legacy 1 Class, Legacy 2 Class, Global 1 Class, Global 2 Class and Global 3 Class units began trading April 1, 2009. |
Note 10. Trading Activities and Related Risks
The Partnership, through its Advisors, 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; see Note 12). 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.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
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 months ended March 31, 2010 and 2009, are reflected in the consolidated statements of operations. Such trading results reflect the net gain arising from the Partnership’s speculative trading of futures contracts, options on futures contract, and forward contracts.
For derivatives, risks arise from changes in the fair 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 interest 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 corporate members of the clearinghouse who are required to share any financial burden resulting from the nonperformance by one of 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) | | | Option Contracts (exchange-traded) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross unrealized gains | | $ | 55,485,861 | | | $ | 51,128,960 | | | $ | 5,563,188 | | | $ | 6,513,328 | | | $ | 5,510 | | | $ | 3,955 | | | $ | 61,054,559 | | | $ | 57,646,243 | |
| Gross unrealized (losses) | | | (25,505,961 | ) | | | (37,656,493 | ) | | | (5,146,444 | ) | | | (5,971,274 | ) | | | (10,478 | ) | | | (9,085 | ) | | | (30,662,883 | ) | | | (43,636,852 | ) |
| Net unrealized gain (loss) | | $ | 29,979,900 | | | $ | 13,472,467 | | | $ | 416,744 | | | $ | 542,054 | | | $ | (4,968 | ) | | $ | (5,130 | ) | | $ | 30,391,676 | | | $ | 14,009,391 | |
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 fair value of their respective investments and, in certain specific circumstances, distributions and redemptions received.
Note 11. 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 12. Derivative Instruments
The Partnership follows the provisions of FASB ASC 815, Derivatives and Hedging, effective January 1, 2009. FASB ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
activities and their effects on the entity’s financial position, financial performance, and cash flows. FASB ASC 815 applies to all derivative instruments within the scope of FASB ASC 815-10-05. It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under FASB ASC 815-10-05. FASB ASC 815 amends the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in FASB ASC 815-10-05 and generally increases the level of disaggregation that will be required in an entity’s financial statements. FASB ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivat ive instruments, and disclosures about credit-risk related contingent features in derivative agreements.
The Partnership’s business is speculative trading. The Partnership intends to close out all futures, option on futures and forward contracts prior to their expiration. The Partnership 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, the Partnership 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. The Partnership 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%.
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 the Partnership. 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. The Partnership 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 the Partnership, in which case the Partnership could suffer significant losses on these contracts.
The Partnership does not designate any derivative instruments as hedging instruments under FASB ASC 815-10-05. For the three months ended March 31, 2010 and 2009 the monthly average futures contracts, forward contracts and option contracts bought and sold was approximately 7,898 and 4,317, respectively. The following tables summarize the quantitative information required by FASB ASC 815:
Fair Values of Derivative Instruments
| | | Asset Derivatives* 03/31/2010 | | | Liability Derivatives* 03/31/2010 | | | | | Consolidated Statement of Financial Position Location |
| | | | | | | | | | | |
| Currencies contracts | | $ | 10,168,661 | | | $ | (6,365,902 | ) | | $ | 3,802,759 | | Unrealized gain (loss) on open contracts, net |
| Energy contracts | | | 7,009,829 | | | | (1,078,755 | ) | | | 5,931,074 | | Unrealized gain (loss) on open contracts, net |
| Grains contracts | | | 4,458,684 | | | | (902,455 | ) | | | 3,556,229 | | Unrealized gain (loss) on open contracts, net |
| Interest rates contracts | | | 5,033,807 | | | | (2,225,204 | ) | | | 2,808,603 | | Unrealized gain (loss) on open contracts, net |
| Meats contracts | | | 1,536,164 | | | | (187,037 | ) | | | 1,349,127 | | Unrealized gain (loss) on open contracts, net |
| Metals contracts | | | 24,918,035 | | | | (18,615,634 | ) | | | 6,302,401 | | Unrealized gain (loss) on open contracts, net |
| Soft commodities contracts | | | 1,438,350 | | | | (501,734 | ) | | | 936,616 | | Unrealized gain (loss) on open contracts, net |
| Stock indices contracts | | | 6,491,029 | | | | (786,162 | ) | | | 5,704,867 | | Unrealized gain (loss) on open contracts, net |
| | | $ | 61,054,559 | | | $ | (30,662,883 | ) | | $ | 30,391,676 | | Unrealized gain (loss) on open contracts, net |
*The fair values of all asset and liability derivatives, including currencies, energy, grains, interest rates, meats, metals, soft commodities and stock indices contracts, are included in equity in broker trading accounts in the consolidated statement of financial condition.
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
| | | Asset Derivatives* 12/31/2009 | | | Liability Derivatives* 12/31/2009 | | | | | Consolidated Statement of Financial Position Location |
| | | | | | | | | | | |
| Currencies contracts | | $ | 9,791,450 | | | $ | (8,903,436 | ) | | $ | 888,014 | | Unrealized gain (loss) on open contracts, net |
| Energy contracts | | | 3,238,790 | | | | (2,385,037 | ) | | | 853,753 | | Unrealized gain (loss) on open contracts, net |
| Grains contracts | | | 1,318,059 | | | | (1,371,627 | ) | | | (53,568 | ) | Unrealized gain (loss) on open contracts, net |
| Interest rates contracts | | | 3,716,428 | | | | (4,670,891 | ) | | | (954,463 | ) | Unrealized gain (loss) on open contracts, net |
| Meats contracts | | | 465,512 | | | | (283,512 | ) | | | 182,000 | | Unrealized gain (loss) on open contracts, net |
| Metals contracts | | | 25,182,087 | | | | (19,533,404 | ) | | | 5,648,683 | | Unrealized gain (loss) on open contracts, net |
| Soft commodities contracts | | | 7,672,469 | | | | (5,352,643 | ) | | | 2,319,826 | | Unrealized gain (loss) on open contracts, net |
| Stock indices contracts | | | 6,261,448 | | | | (1,136,302 | ) | | | 5,125,146 | | Unrealized gain (loss) on open contracts, net |
| | | $ | 57,646,243 | | | $ | (43,636,852 | ) | | $ | 14,009,391 | | Unrealized gain (loss) on open contracts, net |
*The fair values of all asset and liability derivatives, including currencies, energy, grains, interest rates, meats, metals, soft commodities and stock indices contracts, are included in equity in broker trading accounts in the consolidated statement of financial condition.
The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ended
March 31, 2010 and 2009
| Location of Gain or Loss in Consolidated Statement of Operations | | Three Months Ended March 31, 2010 | | | Three Months Ended March 31, 2009 | |
| | | | | | | | |
| Currencies contracts | Realized and Change in unrealized gains (losses) on trading | | $ | 1,522,346 | | | $ | (16,458,615 | ) |
| Energy contracts | Realized and Change in unrealized gains (losses) on trading | | | (6,572,897 | ) | | | (674,314 | ) |
| Grains contracts | Realized and Change in unrealized gains (losses) on trading | | | (4,089,678 | ) | | | (6,139,034 | ) |
| Interest rates contracts | Realized and Change in unrealized gains (losses) on trading | | | 881,797 | | | | (2,472,760 | ) |
| Meats contracts | Realized and Change in unrealized gains (losses) on trading | | | 1,790,423 | | | | 1,227,687 | |
| Metals contracts | Realized and Change in unrealized gains (losses) on trading | | | (1,769,114 | ) | | | 2,089,808 | |
| Soft commodities contracts | Realized and Change in unrealized gains (losses) on trading | | | (1,900,048 | ) | | | 295,697 | |
| Stock indices contracts | Realized and Change in unrealized gains (losses) on trading | | | (5,807,775 | ) | | | (4,293,701 | ) |
| | Realized and Change in unrealized gains (losses) on trading | | $ | (15,944,946 | ) | | $ | (26,425,232 | ) |
Line Item in Consolidated Statement of Operations | | Three Months Ended March 31, 2010 | | | Three Months Ended March 31, 2009 | |
| | | | | | | |
| Realized | | $ | (32,327,231 | ) | | $ | (23,713,098 | ) |
| Change in unrealized | | | 16,382,285 | | | | (2,712,134 | ) |
| | | $ | (15,944,946 | ) | | $ | (26,425,232 | ) |
Grant Park Futures Fund Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
Note 13. Subsequent Events
Management of the Partnership evaluated subsequent events through the date these financial statements were issued. Subsequent to March 31, 2010, there were contributions and redemptions totaling approximately $25,859,000 and $195,000 respectively.
Effective April 1, 2010, Amplitude Capital Partners, LLC (“Amplitude”) began trading on behalf of the Partnership and will serve as a commodity trading advisor with respect to all outstanding classes of the Partnership’s units.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Grant Park Futures Fund Limited Partnership (“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, 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. &# 160;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.
Reorganization of Grant Park
As a result of recent changes in the rules and regulations of the Financial Industry Regulatory Authority (“FINRA”) affecting commodity pools, the general partner has made certain changes to the organization of Grant Park, including the creation of additional classes of units, and has terminated the offering and sale of any new Class A and Class B units as of April 1, 2009.
As part of the reorganization, Grant Park continues to invest through different commodity trading advisors retained by the general partner. However, effective April 1, 2009, instead of each trading advisor maintaining a separate account in the name of Grant Park, as was historically the case, the assets of Grant Park are invested in various trading companies, each of which is organized as a limited liability company. Each trading company will then allocate its assets to one of the commodity trading advisors retained by the general partner.
Additionally, a separate cash management multiple member limited liability company was created to collectively manage and invest excess cash not required to be held at the clearing brokers for each individual trading advisor. Effectively, this new structure segregates and isolates one trading advisor from another, reducing cross liabilities of the trading advisors. The reorganization was completed at no additional cost to the limited partners.
Through December 31, 2008 a portion of Grant Park’s net assets was allocated to the Dearborn Select Master Fund, SPC - Winton Segregated Portfolio - Class GP (the “GP Class”). Dearborn Select Master Fund, SPC (“Dearborn Select”) was incorporated under the laws of the Cayman Islands on April 7, 2006 as a private investment fund organized as a segregated portfolio company with limited liability. The GP Class allocated the assets invested by Grant Park to Winton Capital Management Limited (“Winton”) through one or more managed accounts, traded pursuant to Winton’s Diversified Program. Grant Park owned all of the outstanding Class GP units of the GP Class. The general partner of Grant Park was also the Investment Manager of Dearborn Sel ect. As of December 31, 2008, the investment in the GP Class was redeemed and is shown on the statement of financial condition as a redemption receivable. Effective January 1, 2009, the portion of Grant Park’s net assets allocated to the GP Class was reallocated to one of Grant Park’s trading companies, GP 1, LLC (“GP 1”), a Delaware limited liability company. GP 1’s assets allocated to Winton are traded pursuant to Winton’s Diversified Program. There have been no changes to the existing clearing broker arrangements or brokerage charge and no material changes to the other fees and expenses allocated to Grant Park as a result of this reallocation.
Effective April 1, 2009, in addition to the assets allocated by Grant Park to GP 1, Grant Park allocates assets to each of its following subsidiary limited liability trading companies (each a “Trading Company” and collectively, the “Trading Companies”):
| GP 3, LLC (“GP 3”) | GP 7, LLC (“GP 7”) | GP 11, LLC (“GP 11”) |
| GP 4, LLC (“GP 4”) | GP 8, LLC (“GP 8”) | GP 12, LLC (“GP 12”) |
| GP 5, LLC (“GP 5”) | GP 9, LLC (“GP 9”) | GP 14, LLC (“GP 14”) |
| GP 6, LLC (“GP 6”) | GP 10, LLC (“GP 10”) | |
Assets of Grant Park will not be invested in GP 14 until the second quarter of 2010.
Grant Park invests through the Trading Companies with independent professional commodity trading advisors retained by the general partner. Rabar Market Research, Inc. (“Rabar”), EMC Capital Management, Inc. (“EMC”), Eckhardt Trading Company (“Eckhardt”), Graham Capital Management, L.P. (“Graham”), Winton, Welton Investment Corporation (“Welton”), Global Advisors Jersey Limited (“Global Advisors”), Transtrend B.V. (“Transtrend”), Quantitative Investment Management LLC (“QIM”), Revolution Capital Management, LLC (“RCM”) and Sunrise Capital Partners, LLC (“Sunrise”), serve as Grant Park’s commodity trading advisors. Effective April 1, 2010, Amplitude Capital International Limited (“Amplitu de”) through its Trading Company, began trading on behalf of Grant Park and will serve as a commodity trading advisor with respect to all outstanding classes of Grant Park’s units. Amplitude will be allocated less than 10 percent of Grant Park’s net assets to manage. 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 March 31, 2010, the general
partner allocated Grant Park’s net assets through the respective Trading Companies among its core trading advisors EMC, Winton and Welton and non-core trading advisors Rabar, Eckhardt, Graham, Global Advisors, Transtrend, QIM, RCM and Sunrise. No more than twenty percent of Grant Park’s assets are allocated to any one Trading Company and, in turn, any one trading advisor. The general partner may terminate or replace the trading advisors or retain additional trading advisors in its sole discretion.
Critical Accounting Policies
Grant Park’s most significant accounting policy is the valuation of its assets invested in other commodity investment pools and in U.S. and international futures and forward contracts, options contracts and other interests in commodities. The substantial majority of these 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 reas onably plausible assumptions.
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. Grant Park’s significant accounting policies are described in detail in Note 1 of the financial statements.
Effective January 1, 2009, Grant Park has changed its accounting policy with respect to organization and offering costs. Prior to that date, Grant Park charged organization and offering costs directly to partners’ capital. Grant Park charges organization and offering costs to expense from operations as opposed to taking a direct charge to partners’ capital. This change was done on a prospective basis starting January 1, 2009.
Grant Park is the sole member of each of the Trading Companies. The Trading Companies, in turn, are the only members of GP Cash Management, LLC. Grant Park presents consolidated financial statements for the Partnership which include the accounts of the Trading Companies and GP Cash Management, LLC. All material inter-company accounts and transactions are eliminated in consolidation. Recent FASB guidance under FASB ASC 810 establishes accounting and reporting requirements for noncontrolling interests, which Grant Park previously referred to as minority interests. This guidance requires noncontrolling interests to be reported as a component of partners’ capital on the consolidated statement of financial condition and the amount of net income (loss) attributable to noncontrolling interests t o be identified on the consolidated statement of operations.
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 t rades 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.
Results of Operations
Grant Park’s returns, which are Grant Park’s trading gains plus interest income less brokerage fees, performance fees, operating costs and offering costs borne by Grant Park, for the three months ended March 31, 2010, are set forth in the table below:
| | | Three months Ended March 31, 2010 | |
Total return – Class A units | | | (3.6 | )% |
Total return – Class B units | | | (3.7 | )% |
| Total return – Legacy 1 Class units | | | (3.2 | )% |
| Total return – Legacy 2 Class units | | | (3.2 | )% |
| Total return – Global 1 Class units | | | (3.8 | )% |
| Total return – Global 2 Class units | | | (3.9 | )% |
| Total return – Global 3 Class units | | | (4.3 | )% |
Grant Park’s net asset value at March 31, 2010 was approximately $812.3 million, at December 31, 2009 was approximately $831.3 million and at March 31, 2009 was approximately $859.7 million.
The table below sets forth Grant Park’s trading gains or losses by sector for the three month periods ended March 31, 2010 and 2009.
| | | % Gain (Loss) | |
| | | Three Months Ended March 31, | |
| Sector | | 2010 | | | 2009 | |
| Interest Rates | | | 0.1 | % | | | (0.7 | )% |
| Currencies | | | 0.2 | | | | (1.2 | ) |
| Stock Indices | | | (0.6 | ) | | | (0.1 | ) |
| Energy | | | (0.8 | ) | | | 0.1 | |
| Agriculturals | | | – | | | | – | |
| Metals | | | (0.2 | ) | | | (0.3 | ) |
| Softs | | | (0.5 | ) | | | (1.0 | ) |
| Meats | | | – | | | | – | |
| Total | | | (1.8 | ) % | | | (3.2 | )% |
Three months ended March 31, 2010 compared to three months ended March 31, 2009
For the three months ended March 31, 2010, Grant Park had a negative return of approximately 3.6% for the Class A units, 3.7% for the Class B units, 3.2% for the Legacy 1 Class units, 3.2% for the Legacy 2 Class units, 3.8% for the Global 1 Class units, 3.9% for the Global 2 Class units and 4.3% for the Global 3 Class units. On a combined unit basis prior to expenses, approximately 1.8% resulted from trading losses which were offset by 0.1% of interest income. The trading losses were further increased by approximately 2.1% in brokerage fees, performance fees and operating and offering costs borne by Grant Park. For the same period in 2009, Grant Park had a negative return of approximately 4.9% for the Class A units and 5.1% for the Class B units. On a combined unit basis prior to expenses, appr oximately 3.2% resulted from trading losses which were offset by 0.3% interest income. These traded losses were further increased by approximately 2.2% in brokerage fees, performance fees and operating and offering costs borne by Grant Park.
Three months ended March 31, 2010
A combination of elevated inventories and weaker demand pushed grains prices sharply downward in the first quarter of 2010. Mild weather in the Midwest, which allowed optimal planting conditions, drove corn and wheat prices lower. Sugar reversed from its recent uptrend as supply forecasts from India and Brazil improved. Heavy liquidations and weak demand due to elevated prices also weighed on sugar prices.
A more optimistic outlook for the future of the U.S. economy spurred gains in the U.S. dollar. Better-than-expected U.S. unemployment and industrial production data were the main drivers behind the dollar’s moves. In Europe, questions surrounding the financial stability of several smaller European nations put pressure on the euro, moving it lower against its peers. The Australian and
New Zealand dollars posted strong gains in the first quarter, as improved economic indicators from Australasia drove investors into higher-yielding currencies.
Crude oil prices increased as a bullish demand forecasts stemming from reports from the Energy Information Agency supported prices. Improved industrial production data also benefited prices. Natural gas continued its downtrend into the first quarter of 2010 as elevated supplies and unseasonably warm weather in the U.S. caused speculators to liquidate positions.
Positive economic data in the U.S. bode well for the North American equity markets. In Europe, concerns over the financial stability of several smaller EU nations led to declines in several key benchmark equity indices. The Hong Kong Hang Seng dropped in excess of 3% for the quarter as uncertainty regarding changing Chinese lending policies put pressure on investor risk appetite.
U.S. fixed-income markets moved higher in the first quarter as an unexpected rise in jobless claims boosted demand for safer debt instruments. Decreased demand for European sovereign debt caused by the ailing financial situation in Greece and other smaller European also drove the U.S. debt markets up.
Ongoing uncertainty regarding the European economy and short-term dips in the U.S. dollar moved precious metals prices higher. In the base metals markets, copper moved steadily higher as gains in the global equity markets supported higher demand forecasts. Nickel prices showed a sharp increase as production disruptions in Canada and Australia fostered supply concerns.
Key trading developments for Grant Park during the first three months of 2010 include the following:
Grant Park recorded losses in the month of January. Class A units were down 7.95%, Class B units were down 8.00%, Legacy 1 Class units were down 7.77%, Legacy 2 Class units were down 7.79%, Global 1 Class units were down 7.80%, Global 2 Class units were down 7.82% and Global 3 Class units were down 7.95%. Grains markets predominantly fell as turmoil in the financial markets and record U.S. grains supplies weighed on prices. In the softs markets, sugar continued its recent uptrend due to weak supply forecasts from Brazil and ongoing strong demand from Southeast Asia. The Japanese yen posted solid gains for January following short-term weakness in the U.S. dollar. Despite intra-month volatility, the U.S. dollar finished the month hi gher as several changes in Chinese banking regulations increased investor risk aversion. Crude oil markets declined due to weak industrial demand forecasts resulting from poor economic data and depressed crude production estimates from U.S. refiners. In the natural gas markets, prices increased slightly as a cold front in the U.S. supported demand. Share price declines in several large European financial firms sent most benchmark indices sharply lower. The Eurostoxx 50 and the German Dax indices, which both declined in excess of 5%, were among the most affected. In the U.S., concerns over changes to Chinese lending policies spurred liquidations in the U.S. equity markets, moving prices lower. U.S. Treasury prices rallied in January as a number of weaker-than-expected economic indicators, including unemployment estimates and U.S. retail sales in December, supported demand for more risk-averse U.S. debt instruments. German Bunds also moved higher due to decreased demand for sovereign debt following financial trouble in Greece and other smaller EU nations. Gold and silver prices underwent several intra-month price swings to finish nearly unchanged for January. The flat performance in the precious metals markets was due to the effects of short-term dollar weakness being offset by lower-than-expected Consumer Price Index data and weak demand forecasts. Industrial metals generally declined as a result of bearish Chinese demand and elevated global base metals inventories.
Grant Park recorded gains in February. Class A units were up 0.63%, Class B units were up 0.57%, Legacy 1 Class units were up 0.82%, Legacy 2 Class units were up 0.80%, Global 1 Class units were up 0.71%, Global 2 Class units were up 0.69% and Global 3 Class units were up 0.54%. Grains markets rallied as strong sales data and downward revisions to inventory estimates bolstered prices. Moving contrary to its recent uptrend, sugar prices declined following liquidations from large commodity funds. In the livestock markets, prices rose as gains in the equity markets supported bullish demand forecasts. Ongoing concerns over several smaller EU nations led to a decline in major currencies across Europe. The Swiss franc, euro, and Great British pound all declined against the U.S. dollar as investors sought safer assets. Strong Australian unemployment data led to gains in the Australian dollar over most major currencies. Bullish demand forecasts from the Energy Information Administration and positive U.S. industrial production data led to gains in the crude oil markets. Elevated U.S. natural gas inventories put substantial pressure on the natural gas markets, moving prices nearly 7% lower for the month. Optimistic economic data in the U.S. propelled North American equity markets higher in February. Ailing economies in several European nations drove European equity markets down. Ongoing fears in Asia regarding changes to Chinese lending polices resulted in declines in Hong Kong’s Hang Seng Index. Weak demand for European sovereign debt resulted in strong gains in the U.S. Treasury markets. An unexpected jump in U.S. jobless claims added to the rally in the U.S. debt markets. & #160;In Europe, short-term gains in the European equity markets put pressure on the Bund market. Concern over the economic state of the European Union and short-term U.S. dollar weakness propelled the gold markets higher in February. In the base metals markets, bullish demand forecasts spurred by strong economic data led to gains in a number of industrial metals, including copper, aluminum, and tin.
Grant Park recorded gains in March. Class A units were up 4.08%, Class B units were up 4.03%, Legacy 1 Class units were up 4.15%, Legacy 2 Class units were up 4.13%, Global 1 Class units were up 3.65%, Global 2 Class units were up 3.56% and Global 3 Class units were up 3.40%. Sugar prices fell nearly 30% in March as elevated supply forecasts from India and Brazil weighed on
prices. Higher prices also reduced demand, causing prices to fall further. In the grains markets, corn and wheat prices declined as a result of mild weather conditions in the Midwest and on the strength in the U.S. dollar. Improving economic indicators, including better-than-expected payroll estimates and U.S. industrial production, led to gains in the U.S. dollar. The euro fell as concerns regarding the economic stability of Greece and Portugal caused investors to liquidate European holdings. The New Zealand dollar moved higher against its counterparts due to speculation about a narrowing interest rate gap between New Zealand and Australia. Natural gas prices fell sharply in March because of elevated U.S. inventories. Unusually warm weather also put pressure on the natural gas markets. Crude oil markets moved lower due to ongoing we ak demand forecasts and uncertainty following the pace of the economic recovery in the U.S. Equity markets rallied as improving economic indicators fostered optimism in the global economy. Bullish forecasts for Japanese exports, caused by weakness in the Japanese yen, drove the Nikkei 225 index higher. Eurozone equity markets rallied following strong German consumer sentiment data. Decreased demand for safe-haven debt instruments led to a decline in the U.S. fixed-income markets. Increased demand for riskier assets led to price declines in the U.S. debt markets, as evidenced by poor results in recent Treasury auctions. In the Eurozone, concerns regarding sovereign debt of several ailing European nations weighed on the debt markets. Gold markets declined in March under pressure from a stronger U.S. dollar. Base metals generally rose following reports that industrial production in the U.S. had improved during February. Nick el made especially big gains as production disruptions in Canada and Australia prompted supply concerns.
Three months ended March 31, 2009
Volatility in the currency markets resulted in setbacks for Grant Park in the first quarter of 2009. Uncertainty regarding the future of the global economy failed to produce sustainable trends in the established currency markets and resulted in a difficult trading environment for the portfolio.
Signs of economic recovery caused a rally in grains markets and moved prices higher against short positions. Speculators drove up prices on beliefs that an improved economic outlook would improve demand for commodities. Disputes between the Argentine government and local farmers caused supply concerns in the soybean markets and was a factor in rising prices.
Grant Park registered losses in the fixed-income markets as prices declined against long positions. Increased government activity in the debt markets caused by stimulus initiatives and quantitative easing resulted in over-supply in the fixed-income markets and put pressure on prices.
Increased prices in the North American and European equity markets resulted in losses for Grant Park’s short positions. The announcement of the U.S. Treasury’s plan to aid ailing financial institutions boosted investor confidence, which prompted many sidelined investors to re-enter the markets. Long equity positions in the Asian markets partially offset losses as improved risk appetite among Asian investors fueled rallies in the Hong Kong Hang Seng and Japanese Nikkei 225 indices.
Prices rose in the metals markets and resulted in losses for Grant Park’s short positions. Speculators drove prices up in the aluminum, lead, and copper markets, anticipating increased demand from the recovering global economy.
Grant Park was profitable in the energy markets because of short positions in natural gas. Elevated natural gas inventories, caused by reduced industrial demand, prompted speculators to liquidate positions and moved prices lower.
Key trading developments for Grant Park during the first three months of 2009 include the following:
Grant Park recorded losses in the month of January. Class A units were down 0.91% and Class B units were down 0.98%. The bulk of setbacks came from long positions in the fixed income markets. Uncertainty regarding the details of President Obama’s stimulus package caused a sector wide downtrend in the U.S. debt markets impacting performance. Long positions in the international fixed income markets also registered setbacks for Grant Park. These losses resulted from speculation of future increased debt supply in the Asian and European markets caused by government bailout activity. Setbacks in the agricultural markets stemmed from adverse price moves in the softs markets. Increased buying in the coffee markets by large commodity funds drove prices up in excess of 5% against positions. Short positions in the grains markets, however, were able to partially offset sector losses. Short corn and soybean positions registered gains as a drought in Argentina’s key farming region put pressure on prices. Positions in the Australasian currency markets accounted for the bulk of sector losses during January. Early in the month, long positions in the Australian dollar experienced setbacks as poor economic data from the region weakened the currency. Declines in the New Zealand dollar further drew on performance. After a reduction of New Zealand’s foreign currency rating by Standard and Poors, investors began to liquidate New Zealand based holdings driving the currency downwards. The portfolio returned modest profits in the metals markets this past month. Short positions in the aluminum markets performed well as slowing industrial production caused a decline in demand, driving pri ces lower. Also adding to profits was a 5% increase in the price of gold which moved alongside Grant Park’s long positions. Gains in the energy markets predominantly came from short positions in the natural gas markets. The price of natural gas fell steadily throughout January, despite cold weather across the U.S. Historically, cold weather has driven the price of natural gas higher. However last month, the demand for natural gas diminished due to the global economic slowdown. Grant Park performed particularly well in the equity indices markets throughout January. Short positions made gains as prices across the global equity markets declined.
Uncertainty about government bailouts, both domestically and abroad, coupled with poor earnings reports from a number of large financial institutions put substantial pressure on the markets driving share prices lower. Among the top performers in the sector were short positions in the S&P 500, S&P Canada, and Italian MIB indices.
Grant Park recorded losses in February. Class A units were down 0.80% and Class B units were down 0.88%. The losses in Grant Park were predominantly in the currency sector. Long positions in the Japanese yen created losses as the currency dipped against the U.S. dollar. The decline in the value of the yen was probably caused by sharp declines in the Japanese stock market and by a decrease in demand for Japanese exports. Long positions in the fixed income markets also had minor losses this month and were primarily attributed to Grant Park’s positions in the short-term domestic and international interest rate markets. U.S. Government stimulus activity increased the debt supply and caused price s to fall, against Grant Park’s positions. The long positions in the eurodollar, short sterling, and Australian bills markets were among the least profitable positions. Mixed positions in the metals sector registered setbacks for February. Gold prices nearly reached all-time highs early in February but declined sharply against Grant Park’s long positions at month-end. Increased strength in the U.S. dollar and profit-taking by traders were the likely causes of the sell off. Performance in the energy market was slightly positive in February. Short positions in the natural gas markets made gains as a 9% price decrease moved alongside Grant Park’s positions. Those gains were partially offset by losses on short positions in unleaded gas and crude oil. Solid gains in the equity indices markets helped offset losses during February. Grant Park’s short positions in the S&P 500 posted profits as investors liquidated equity positions, partially driven by data showing a contraction in the U.S. economy and by ongoing turmoil in the banking sector. In the Asian markets, short positions in the Japanese Nikkei 225 and Hong Kong Hang Seng indices benefited from price declines caused by weak export data and the region’s ailing financial sector. Grant Park’s short agricultural positions finished positive for February. Short positions in corn and lean hogs earned profits as the global recession weighed on demand and prices. Short positions in the cotton markets were profitable, as cotton prices fell because of reduced demand for cotton in the U.S. textile sector.
Grant Park recorded losses in March. Class A units were down 3.26% and Class B units were down 3.33%. Global equity indices rallied against short positions, posting setbacks for the portfolio. Improved investor confidence resulted in price increases in nearly all North American, European, and Asian equity indices. The unveiling of the U.S. Treasury’s initiative to buy toxic assets from ailing institutions was a major driver in boosting investor sentiment. Prices in the grains and softs markets moved upwards against Grant Park’s short positions, resulting in losses. Soybean prices moved higher as tensions between the Argentine government and local soybean farmers fostered supply concerns. In the softs markets, speculators drove prices upwards against positions on beliefs that increased U.S. government activity in the Treasury markets would put pressure on the U. S. dollar. Sharp price movements in the currency markets hindered performance throughout March. A strong uptrend in the euro moved against our short positions early in the month as a result of a weakening dollar. As Grant Park’s euro positions reversed to long near month-end, the euro underwent a sharp decline, resulting in losses. An improved outlook on the global economy drove base metals prices upwards against short positions. Speculators bid up industrial metals on beliefs that a more stable global marketplace would result in increased industrial production. Short positions in copper, aluminum, and lead had the biggest impact on performance. Our positions in the energy markets posted mixed results, but still finished slightly lower last month. A steady rally in crude oil was supported by supply decre ases in the sector and moved against Grant Park’s short positions. Losses in the energy markets were partially offset by short positions in natural gas. An announced surplus of natural gas spurred speculative selling, moving the price of natural gas 11% lower for March. Grant Park registered solid gains in the fixed income markets. Long eurodollar and euribor positions accounted for the bulk of gains. Decreased lending in the financial sector put pressure on short-term yields, which supported prices in the short-term debt markets. Our positions in the longer-term markets also added to profits. Long UK gilt and German Bund positions made gains as European governments bid up the fixed income markets with quantitative easing initiatives.
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 ri sk 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.
In the normal course of business, Grant Park enters into contracts and agreements that contain a variety of representations and warranties and which provide general indemnifications. Grant Park’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against Grant Park that have not yet occurred. Grant Park expects the risk of any future obligation under these indemnifications to be remote.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 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 fair 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 valu e 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.
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 fundamen tal 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 com ponent 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 the GP Class and Grant Park’s open positions by market category as of March 31, 2010 and December 31, 2009 and the trading gains/losses by market category for the three months ended March 31, 2010 and the year ended December 31, 2009. All open position trading risk exposures of GP 1, LLC and Grant Park have been included in calculating the figures set forth below. As of March 31, 2010, Grant Park’s net asset value was approximately $812.3 million. As of December 31, 2009, Grant Park’s net asset value was approximately $831.3 million.
March 31, 2010
| Market Sector | | Value at Risk | | | % of Total Capitalization | | | Trading Gain/(Loss) | |
| Stock Indices | | $ | 28,213,881 | | | | 3.5 | % | | | (0.6 | )% |
| Interest Rates | | | 17,406,778 | | | | 2.1 | | | | 0.1 | |
| Currencies | | | 15,314,806 | | | | 1.9 | | | | 0.2 | |
| Metals | | | 10,944,425 | | | | 1.4 | | | | (0.2 | ) |
| Energy | | | 7,755,277 | | | | 0.9 | | | | (0.8 | ) |
| Agriculturals | | | 4,023,941 | | | | 0.5 | | | | — | |
| Softs | | | 2,739,506 | | | | 0.3 | | | | (0.5 | ) |
| Meats | | | 1,420,850 | | | | 0.2 | | | | — | |
| Total | | $ | 87,819,464 | | | | 10.8 | % | | | (1.8 | )% |
December 31, 2009
| Market Sector | | Value at Risk | | | % of Total Capitalization | | | Trading Gain/(Loss) | |
| Stock Indices | | $ | 25,520,439 | | | | 3.1 | % | | | 3.6 | % |
| Interest Rates | | | 17,130,191 | | | | 2.0 | | | | (4.1 | ) |
| Currencies | | | 16,432,426 | | | | 2.0 | | | | (0.7 | ) |
| Metals | | | 12,236,815 | | | | 1.5 | | | | 2.5 | |
| Energy | | | 7,154,450 | | | | 0.9 | | | | (3.2 | ) |
| Softs | | | 5,200,402 | | | | 0.6 | | | | (0.1 | ) |
| Agriculturals | | | 4,119,283 | | | | 0.5 | | | | — | |
| Meats | | | 742,017 | | | | 0.1 | | | | — | |
| Total | | $ | 88,536,023 | | | | 10.7 | % | | | (2.0 | )% |
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 we ll 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 March 31, 2010, 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, Africa, India, Singapore, South Korea, and Australia. The stock index futures contracts currently traded by Grant Park are generally futures on broadly based indices, although Grant Park also trades narrow-based stock index or single-stock futures contracts. As of March 31, 2010, Grant Park was predominantly long indices in Australia, South Africa, Europe, the U.S., U.K., South Korea, Mexico, India, Japan, and Singapore. The portfolio does maintain a few short positions in several select Taiwan, Eurozone, U.S. and Japanese equity markets. Grant Park is primarily exposed to the risk of adverse price trends or static markets in the major North Ame rican, 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 a 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. Grant Park also takes futures positions on the government debt of smaller nations, such as Australia, New Zealand, and Mexico. The general partner anticipates that G-7 interest rates will remain the primary market exposure of Grant Park for the foreseeable future. A s of March 31, 2010, Grant Park was predominantly long interest rate instruments in the New Zealand, Mexico, the Eurozone, the U.S., UK, and Japan. The portfolio had short positions in U.S., Australian, Canadian, Swiss, and U.K. interest rate products.
Currencies
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 March 31, 2010, Grant
Park was short the U.S. dollar against various major currencies including the Australian dollar, Canadian dollar, Swiss franc, Mexican peso, and New Zealand dollar, but was long the U.S. dollar against the British pound, euro, and Japanese yen. In general, with the exception of the British pound, euro, and Japanese yen, a weaker U.S. dollar against most major 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 March 31, 2010, in the precious metals sector Grant Park had long positions in gold, silver, palladium, and platinum. In the base metals markets, Grant Park was long aluminum, copper, tin, and nickel, but had short positions in lead and zinc.
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 South America. As of March 31, 2010, the energy market exposure of Grant Park was predominantly long in the crude oil, Brent crude oil, gasoline, heating oil, kerosene, gas oil, and unleaded gasoline markets, and short the natural gas markets. 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/Meat/Softs
Grant Park’s primary commodities exposure is due to agricultural price movements, which are often directly affected by severe or unexpected weather conditions as well as other factors. As of March 31, 2010, in the grains markets, Grant Park had long positions in the soybean meal and soybean markets, and short positions in the corn, wheat, oats, rough rice, and canola markets. In the livestock markets, Grant Park was long feeder cattle, live cattle and lean hogs. In the softs/industrials sectors, Grant Park was short sugar, cocoa, cotton, coffee, orange juice, and lumber, and long cotton and rubber.
Non-Trading Risk Exposure
The following were the only non-trading risk exposures of Grant Park as of March 31, 2010.
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 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 Government-sponsored enterprises. 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. Violent fluctuations in prevailing interest rates or changes in other economic conditions could cause 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 manag ement 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.
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.
Item 4. Controls and Procedures
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 sub mitted 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 March 31, 2010 that has materially affected, or is reasonably likely to materially affect, Grant Park's internal control over financial reporting.
PART II - OTHER INFORMATION
There have been no material changes to the risk factors relating to Grant Park from those previously disclosed in Grant Park’s Annual Report on Form 10-K for its fiscal year ended December 31, 2009, in response to Item 1A to Part 1 of Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
