Derivative Instruments | 6 Months Ended |
Jun. 30, 2014 |
Derivative Instruments [Abstract] | ' |
Derivative Instruments | ' |
3. DERIVATIVE INSTRUMENTS |
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The Derivatives and Hedging topic of the Codification requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. |
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The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions, and the liquidity of the markets in which it trades. |
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The Partnership engages in the speculative trading of futures and forward contracts on currencies, energies, grains, interest rates, livestock, metals, softs and stock indices. The following were the primary trading risk exposures of the Partnership at June 30, 2014, by market sector: |
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Agricultural (grains, livestock and softs) – The Partnership’s primary exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions as well as supply and demand factors. |
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Currencies – Exchange rate risk is a principal market exposure of the Partnership. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. The fluctuations are influenced by interest rate changes, as well as political and general economic conditions. The Partnership trades in a large number of currencies, including cross-rates—e.g., positions between two currencies other than the U.S. dollar. |
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Energies – The Partnership’s primary energy market exposure is to gas and oil price movements often resulting from political developments in the oil producing countries and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market. |
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Interest rates – Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership 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, may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in countries or regions, including Australia, Canada, Japan, Switzerland, the United Kingdom, the U.S. and the Eurozone. However, the Partnership also may take positions in futures contracts on the government debt of other nations. The General Partner anticipates that interest rates in these industrialized countries or areas, both long-term and short-term, will remain the primary interest rate market exposure of the Partnership for the foreseeable future. |
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Metals – The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, platinum, silver, tin and zinc. |
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Stock indices – The Partnership’s equity exposure, through stock index futures, is to equity price risk in the major industrialized countries, as well as other countries. |
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The Derivatives and Hedging topic of the Codification requires entities to recognize in the Statements of Financial Condition all derivative contracts as assets or liabilities. Fair values of futures and forward currency contracts in an asset position by counterparty are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair values of futures and forward currency contracts in a liability position by counterparty are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.” The Partnership’s policy regarding fair value measurement is discussed in the Fair Value and Disclosures note, contained herein. |
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Since the derivatives held or sold by the Partnership are for speculative trading purposes, the derivative instruments are not designated as hedging instruments under the provisions of the Derivatives and Hedging guidance. Accordingly, all realized gains and losses, as well as any change in net unrealized gains or losses on open positions from the preceding period, are recognized as part of the Partnership’s trading gains and losses in the Statements of Operations. |
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The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at June 30, 2014 and December 31, 2013. Fair value is presented on a gross basis even though the contracts are subject to master netting agreements and qualify for net presentation in the Statements of Financial Condition. |
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Fair Value of Futures and Forward Currency Contracts at June 30, 2014 |
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| | | | | | | | | | | | | | Net Unrealized |
| | Fair Value - Long Positions | | | Fair Value - Short Positions | | | Gain (Loss) on |
Sector | | Gains | | | Losses | | | Gains | | | Losses | | | Open Positions |
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Futures contracts: | | | | | | | | | | | | | | |
Energies | $ | 272,004 | | $ | -342,252 | | $ | 178,937 | | $ | -36,299 | | $ | 72,390 |
Grains | | 70 | | | -255,634 | | | 329,261 | | | -215 | | | 73,482 |
Interest rates | | 2,331,886 | | | -150,645 | | | - | | | -1,347 | | | 2,179,894 |
Livestock | | 184,760 | | | -220 | | | - | | | -65,620 | | | 118,920 |
Metals | | 306,783 | | | -15,634 | | | 2,719 | | | -307,615 | | | -13,747 |
Softs | | 36,056 | | | -5,144 | | | 38,378 | | | -25,938 | | | 43,352 |
Stock indices | | 564,268 | | | -570,941 | | | 64,409 | | | -149 | | | 57,587 |
Total futures contracts | | 3,695,827 | | | -1,340,470 | | | 613,704 | | | -437,183 | | | 2,531,878 |
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Forward currency contracts | | 1,853,397 | | | -256,477 | | | 34,253 | | | -566,168 | | | 1,065,005 |
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Total futures and | | | | | | | | | | | | | | |
forward currency contracts | $ | 5,549,224 | | $ | -1,596,947 | | $ | 647,957 | | $ | -1,003,351 | | $ | 3,596,883 |
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Fair Value of Futures and Forward Currency Contracts at December 31, 2013 |
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| | | | | | | | | | | | | | Net Unrealized |
| | Fair Value - Long Positions | | | Fair Value - Short Positions | | | Gain (Loss) on |
Sector | | Gains | | | Losses | | | Gains | | | Losses | | | Open Positions |
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Futures contracts: | | | | | | | | | | | | | | |
Energies | $ | 156,261 | | $ | -230,029 | | $ | 56,410 | | $ | -119,378 | | $ | -136,736 |
Grains | | 4,673 | | | -345,640 | | | 283,023 | | | -4,999 | | | -62,943 |
Interest rates | | 148,106 | | | -1,074,306 | | | 44,116 | | | -92,969 | | | -975,053 |
Livestock | | 22,330 | | | -1,890 | | | 3,780 | | | -10,030 | | | 14,190 |
Metals | | 1,644,571 | | | -134,297 | | | 58,546 | | | -580,051 | | | 988,769 |
Softs | | 5,479 | | | -33,991 | | | 53,863 | | | -12,135 | | | 13,216 |
Stock indices | | 3,010,177 | | | -17,219 | | | 72,260 | | | -9,600 | | | 3,055,618 |
Total futures contracts | | 4,991,597 | | | -1,837,372 | | | 571,998 | | | -829,162 | | | 2,897,061 |
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Forward currency contracts | | 936,496 | | | -1,042,664 | | | 371,418 | | | -242,751 | | | 22,499 |
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Total futures and | | | | | | | | | | | | | | |
forward currency contracts | $ | 5,928,093 | | $ | -2,880,036 | | $ | 943,416 | | $ | -1,071,913 | | $ | 2,919,560 |
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The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the three and six months ended June 30, 2014 and 2013 as “Net realized gains (losses) on closed positions: Futures and forward currency contracts” and “Net change in unrealized: Futures and forward currency contracts.” These trading gains and losses are detailed below. | | | | | | | | | | | | | | |
Trading gains (losses) of futures and forward currency contracts for the three and six months ended June 30, 2014 and 2013 |
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Sector | | Three months ended: June 30, 2014 | | Three months ended: June 30, 2013 | | Six months ended: June 30, 2014 | | Six months ended: June 30, 2013 | | |
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Futures contracts: | | | | | | | | | | | | | | |
Energies | | $ | 769,317 | | $ | -1,467,346 | | $ | 1,105,694 | | $ | -2,442,342 | | |
Grains | | | -594,232 | | | 379,190 | | | 228,221 | | | 162,306 | | |
Interest rates | | | 5,056,773 | | | -6,362,619 | | | 8,059,681 | | | -7,515,018 | | |
Livestock | | | 175,460 | | | -28,480 | | | 398,690 | | | 3,200 | | |
Metals | | | 10,959 | | | 2,350,224 | | | -1,439,866 | | | 1,559,992 | | |
Softs | | | -16,418 | | | 3,176 | | | 135,642 | | | 532,036 | | |
Stock indices | | | 3,470,255 | | | -1,672,700 | | | 3,134,082 | | | 5,215,032 | | |
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Total futures contracts | | | 8,872,114 | | | -6,798,555 | | | 11,622,144 | | | -2,484,794 | | |
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Forward currency contracts | | | 1,911,784 | | | -5,337,997 | | | 2,051,366 | | | -5,023,749 | | |
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Total futures and | | | | | | | | | | | | | | |
forward currency contracts | | $ | 10,783,898 | | $ | -12,136,552 | | $ | 13,673,510 | | $ | -7,508,543 | | |
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The following table presents average notional value by sector of open futures and forward currency contracts for the six months ended June 30, 2014 and 2013 in U.S. dollars. The Partnership’s average net asset value for the six months ended June 30, 2014 and 2013 was approximately $119,000,000 and $142,000,000, respectively. |
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Average notional value by sector of futures and forward currency contracts for the six months ended June 30, 2014 and 2013 |
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| | | 2014 | | | 2013 | | |
Sector | | | Long positions | | | Short positions | | | Long positions | | | Short positions | | |
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Futures contracts: | | | | | | | | | | | | | | |
Energies | | $ | 43,187,540 | | $ | 16,434,889 | | $ | 17,410,549 | | $ | 20,557,149 | | |
Grains | | | 12,834,349 | | | 10,423,528 | | | 8,169,015 | | | 10,682,996 | | |
Interest rates | | | 336,815,868 | | | 16,597,615 | | | 280,198,782 | | | 40,909,316 | | |
Livestock | | | 3,825,823 | | | 1,863,333 | | | 450,827 | | | 3,425,623 | | |
Metals | | | 19,597,600 | | | 6,694,788 | | | 6,822,280 | | | 18,127,180 | | |
Softs | | | 3,518,628 | | | 3,285,744 | | | 2,945,474 | | | 7,801,894 | | |
Stock indices | | | 127,966,284 | | | 1,038,173 | | | 116,919,212 | | | 1,781,133 | | |
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Total futures contracts | | | 547,746,092 | | | 56,338,070 | | | 432,916,139 | | | 103,285,291 | | |
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Forward currency contracts | | | 149,971,988 | | | 12,659,725 | | | 141,448,915 | | | 70,579,501 | | |
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Total futures and | | | | | | | | | | | | | | |
forward currency contracts | | $ | 697,718,080 | | $ | 68,997,795 | | $ | 574,365,054 | | $ | 173,864,792 | | |
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Notional values in the interest rate sector were calculated by converting the notional value in local currency of open interest rate futures positions with maturities less than 10 years to 10-year equivalent fixed income instruments and translated to U.S. dollars at June 30, 2014 and 2013. The 10-year note is often used as a benchmark for many types of fixed-income instruments and the General Partner believes it is a more meaningful representation of notional values of the Partnership’s open interest rate positions. |
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The customer agreements between the Partnership, the futures clearing brokers, including Deutsche Bank Securities Inc. (a wholly-owned subsidiary of Deutsche Bank AG), and J.P. Morgan Securities LLC., as well as the FX prime brokers including Barclays Bank PLC, Deutsche Bank AG and Morgan Stanley & Co., LLC, gives the Partnership the legal right to net unrealized gains and losses on open futures and foreign currency contracts. The Partnership netted, for financial reporting purposes, the unrealized gains and losses on open futures and forward currency contracts on the Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” were met. The Partnership ceased clearing trades through Barclays Capital Inc. during June 2014. |
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On January 1, 2013, the Partnership adopted Accounting Standard Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 created a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments, while ASU 2013-01 clarified the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the Statement of Financial Position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of the International Financial Reporting Standards. The new guidance did not have a significant impact on the Partnership’s financial statements. |
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Effective January 1, 2014, the Partnership adopted ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 changes the approach to the investment company assessment, requires non-controlling ownership interests in other investment companies to be measured at fair value, and requires additional disclosures about the investment company’s status as an investment company. ASU 2013-08 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on the Partnership’s financial statements. Based on management’s assessment, the Partnership has been deemed to be an investment company since inception. It has all of the fundamental characteristics of an investment company. Although the Partnership does not possess all of the typical characteristics of an investment company, its activities are consistent with those of an investment company. |
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Offsetting derivative assets at June 30, 2014 | | | | | | |
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Assets | | Gross amounts of | | | Gross amounts | | | Net amounts of | | | | | | |
recognized assets | offset in the | assets presented in | | | | | | |
| Statement of | the Statement of | | | | | | |
| Financial Condition | Financial Condition | | | | | | |
Futures contracts | | | | | | | | | | | | | | |
Counterparty C | $ | 2,773,417 | | $ | -909,820 | | $ | 1,863,597 | | | | | | |
Counterparty D | | 1,536,114 | | | -867,833 | | | 668,281 | | | | | | |
Total futures contracts | | 4,309,531 | | | -1,777,653 | | | 2,531,878 | | | | | | |
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Forward currency contracts | | | | | | | | | | | | | | |
Counterparty F | | 1,029,380 | | | -66,251 | | | 963,129 | | | | | | |
Counterparty H | | 846,206 | | | -627,784 | | | 218,422 | | | | | | |
Total forward currency contracts | | 1,875,586 | | | -694,035 | | | 1,181,551 | | | | | | |
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Total assets | $ | 6,185,117 | | $ | -2,471,688 | | $ | 3,713,429 | | | | | | |
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Liabilities | | Gross amounts of | | | Gross amounts | | | Net amounts of | | | | | | |
recognized liabilities | offset in the | liabilities presented in | | | | | | |
| Statement of | the Statement of | | | | | | |
| Financial Condition | Financial Condition | | | | | | |
Forward currency contracts | | | | | | | | | | | | | | |
Counterparty G | $ | 128,610 | | $ | -12,064 | | $ | 116,546 | | | | | | |
Total liabilities | $ | 128,610 | | $ | -12,064 | | $ | 116,546 | | | | | | |
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| | | | | | Amounts Not Offset in the Statement of Financial Condition | | | | | |
Counterparty | | | Net amounts of Assets | | | Financial Instruments | | | Collateral Received(1)(2) | | | Net Amount(3)(4) | | |
presented in the Statement | | |
of Financial Condition | | |
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Counterparty C | | $ | 1,863,597 | | $ | - | | $ | -1,863,597 | | $ | - | | |
Counterparty D | | | 668,281 | | | - | | | -668,281 | | | - | | |
Counterparty F | | | 963,129 | | | - | | | -963,129 | | | - | | |
Counterparty H | | | 218,422 | | | - | | | -218,422 | | | - | | |
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Total | | $ | 3,713,429 | | $ | - | | $ | -3,713,429 | | $ | - | | |
| | | | | | Amounts Not Offset in the Statement of Financial Condition | | | | | |
Counterparty | | | Net amounts of Liabilities | | | Financial Instruments | | | Collateral Pledged(1)(2) | | | Net Amount(3)(4) | | |
presented in the Statement | | |
of Financial Condition | | |
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Counterparty G | | $ | 116,546 | | $ | - | | $ | -116,546 | | $ | - | | |
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Total | | $ | 116,546 | | $ | - | | $ | -116,546 | | $ | - | | |
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(1) Collateral received and pledged includes both cash and U.S. Treasury notes held at each respective broker. | | |
(2) Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in | | |
the Statement of Financial Condition, for each respective counterparty. | | |
(3) Net amount represents the amount that is subject to loss in the event of a counterparty failure as of June 30, 2014. | | |
(4) Net amount represents the amounts owed by the Partnership to each counterparty as of June 30, 2014. | | |
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Offsetting derivative assets and liabilities at December 31, 2013 | | | | | | |
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Assets | | Gross amounts of | | | Gross amounts | | | Net amounts of | | | | | | |
recognized assets | offset in the | assets presented in | | | | | | |
| Statement of | the Statement of | | | | | | |
| Financial Condition | Financial Condition | | | | | | |
Futures contracts | | | | | | | | | | | | | | |
Counterparty A | $ | 1,439,459 | | $ | -509,651 | | $ | 929,808 | | | | | | |
Counterparty C | | 2,721,786 | | | -1,302,169 | | | 1,419,617 | | | | | | |
Counterparty D | | 1,402,350 | | | -854,714 | | | 547,636 | | | | | | |
Total futures contracts | | 5,563,595 | | | -2,666,534 | | | 2,897,061 | | | | | | |
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Forward currency contracts | | | | | | | | | | | | | | |
Counterparty F | | 428,000 | | | -277,225 | | | 150,775 | | | | | | |
Counterparty G | | 194,464 | | | -107,368 | | | 87,096 | | | | | | |
Total forward currency contracts | | 622,464 | | | -384,593 | | | 237,871 | | | | | | |
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Total assets | $ | 6,186,059 | | $ | -3,051,127 | | $ | 3,134,932 | | | | | | |
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Liabilities | | Gross amounts of | | | Gross amounts | | | Net amounts of | | | | | | |
recognized liabilities | offset in the | liabilities presented in | | | | | | |
| Statement of | the Statement of | | | | | | |
| Financial Condition | Financial Condition | | | | | | |
Forward currency contracts | | | | | | | | | | | | | | |
Counterparty H | $ | 900,822 | | $ | -685,450 | | $ | 215,372 | | | | | | |
Total liabilities | $ | 900,822 | | $ | -685,450 | | $ | 215,372 | | | | | | |
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| | | | | | Amounts Not Offset in the Statement of Financial Condition | | | | | |
Counterparty | | | Net amounts of Assets | | | Financial Instruments | | | Collateral Received(1)(2) | | | Net Amount(3)(4) | | |
presented in the Statement | | |
of Financial Condition | | |
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Counterparty A | | $ | 929,808 | | $ | - | | $ | -929,808 | | $ | - | | |
Counterparty C | | | 1,419,617 | | | - | | | -1,419,617 | | | - | | |
Counterparty D | | | 547,636 | | | - | | | -547,636 | | | - | | |
Counterparty F | | | 150,775 | | | - | | | -150,775 | | | - | | |
Counterparty G | | | 87,096 | | | - | | | -87,096 | | | - | | |
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Total | | $ | 3,134,932 | | $ | - | | $ | -3,134,932 | | $ | - | | |
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| | | | | | Amounts Not Offset in the Statement of Financial Condition | | | | | |
Counterparty | | | Net amounts of Liabilities | | | Financial Instruments | | | Collateral Pledged(1)(2) | | | Net Amount(3)(4) | | |
presented in the Statement | | |
of Financial Condition | | |
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Counterparty H | | $ | 215,372 | | $ | - | | $ | -215,372 | | $ | - | | |
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Total | | $ | 215,372 | | $ | - | | $ | -215,372 | | $ | - | | |
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(1) Collateral received and pledged includes both cash and U.S. Treasury notes held at each respective broker. | | |
(2) Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in | | |
the Statement of Financial Condition, for each respective counterparty. | | |
(3) Net amount represents the amount that is subject to loss in the event of a counterparty failure as of December 31, 2013. | | |
(4) Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2013. | | |
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CONCENTRATION OF CREDIT RISK |
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Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk is normally reduced to the extent that an exchange or clearing organization acts as a counterparty to futures transactions since typically the collective credit of the members of the exchange is pledged to support the financial integrity of the exchange. |
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The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and trading counterparties which the General Partner believes to be creditworthy. In addition, for OTC forward currency contracts, the Partnership enters into master netting agreements with its counterparties. Collateral posted at the various counterparties for trading of futures and forward currency contracts includes cash and U.S. Treasury notes. |
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The Partnership’s forward currency trading activities are cleared by Barclays Bank PLC (“BB”), Deutsche Bank AG (“DB”) and Morgan Stanley & Co. LLC (“MS”). The Partnership’s concentration of credit risk associated with BB, DB or MS nonperformance includes unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition plus the value of margin or collateral held by BB, DB and MS. The amount of such credit risk was $10,667,286 and $9,139,654 at June 30, 2014 and December 31, 2013, respectively. |
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