Derivative Instruments | 7. DERIVATIVE INSTRUMENTS The Partnership is party to derivative financial instruments in the normal course of its business. These financial instruments include futures and forward currency contracts which may be traded on an exchange or OTC. The Partnership records its derivative activities on a mark-to-market basis as described in Note 2. For OTC contracts, the Partnership enters into master netting agreements with its counterparties. Therefore, assets represent the Partnership’s unrealized gains less unrealized losses for OTC contracts in which the Partnership has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties on OTC contracts. Futures contracts are agreements to buy or sell an underlying asset or index for a set price in the future. Initial margin deposits are made upon entering into futures contracts and can be either in cash or treasury securities. Open futures contracts are revalued on a daily basis to reflect the market value of the contracts at the end of each trading day. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed. The Partnership bears the market risk that arises from changes in the value of these financial instruments. Forward currency contracts entered into by the Partnership represent a firm commitment to buy or sell an underlying currency at a specified value and point in time based upon an agreed or contracted quantity. The ultimate gain or loss is equal to the difference between the value of the contract at the onset and the value of the contract at settlement date. Each of these financial instruments is subject to various risks similar to those related to the underlying financial instruments including market risk, credit risk and sovereign risk. Market risk is the potential change in the value of the instruments traded by the Partnership due to market changes including interest and foreign exchange rate movements and fluctuations in futures or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The financial instruments traded by the Partnership contain varying degrees of off-balance sheet risk whereby changes in the market values of the futures and forward currency contracts and the Partnership’s satisfaction of its obligations related to such market value changes may exceed the amount recognized in the Statements of Financial Condition. 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. In the case of OTC transactions, the Partnership must rely solely on the credit of the individual counterparties. The contract amounts of the forward currency and futures contracts do not represent the Partnership’s risk of loss due to counterparty nonperformance. The Partnership’s exposure to credit risk associated with counterparty nonperformance of these forward currency contracts is limited to the unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition, plus the value of margin or collateral held in cash and U.S. Treasury Notes by the counterparty. The amount of such credit risk was $ 10,489,098 and $ 8,359,643 at December 31, 2022 and 2021, respectively. The General Partner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will in fact succeed in doing so. The General Partner’s market risk control procedures include diversification of the Partnership’s portfolio and continuously monitoring the portfolio’s open positions, historical volatility and maximum historical loss. The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and brokers which the General Partner believes to be creditworthy. The Partnership’s trading activities are primarily with brokers and other financial institutions located in North America, Europe and Asia. All futures transactions of the Partnership are cleared by major securities firms, pursuant to customer agreements, including Deutsche Bank Securities Inc. (a wholly owned subsidiary of Deutsche Bank AG), Goldman Sachs & Co. and BofA Securities, Inc., collectively the “Futures Clearing Brokers.” For all forward currency transactions, the Partnership utilizes two prime brokers, Deutsche Bank AG, and Bank of America, N.A. The Partnership is subject to sovereign risk such as the risk of restrictions being imposed by foreign governments on the repatriation of cash and the effects of political or economic uncertainties. Net unrealized appreciation (depreciation) on futures and forward currency contracts are denominated in the Partnership’s functional currency (U.S. Dollar). Cash settlement of futures and forward currency contracts is made in the local currency (settlement currency) and then translated to U.S. Dollars. Net unrealized appreciation (depreciation) on futures and forward currency contracts by settlement currency type, denominated in U.S. Dollars, is detailed below: As of December 31, 2022 2021 Total Net Total Net Unrealized Unrealized Appreciation Percent of Appreciation Percent of Currency type (Depreciation) Total (Depreciation) Total Australian dollar $ 155,483 2.37 % $ ( 70,609 ) 24.77 % Brazilian real ( 3,051 ) ( 0.05 ) 2,054 ( 0.72 ) British pound 104,633 1.59 ( 389,866 ) 136.77 Canadian dollar 156,398 2.38 184,561 ( 64.75 ) Euro 3,047,469 46.42 ( 109,931 ) 38.57 Hong Kong dollar ( 7,145 ) ( 0.11 ) ( 7,163 ) 2.51 Japanese yen 277,498 4.23 ( 129,898 ) 45.57 Korean won 19,140 0.29 12,165 ( 4.27 ) Malaysian ringgit ( 261 ) ( 0.00 ) 7,837 ( 2.75 ) Norwegian krone 40,130 0.61 27,410 ( 9.62 ) Polish zloty 30,845 0.47 37,847 ( 13.28 ) Singapore dollar 4,356 0.07 8,030 ( 2.82 ) South African rand ( 1,708 ) ( 0.03 ) ( 53,740 ) 18.85 Swedish krona 29,427 0.45 145,312 ( 50.98 ) Thai baht 20,085 0.31 ( 760 ) 0.27 U.S. dollar 2,691,337 41.00 51,705 ( 18.12 ) Total $ 6,564,636 100.00 % $ ( 285,046 ) 100.00 % Derivatives and Hedging (Topic 815) 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. 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. The Partnership engages in the speculative trading of futures and forward contracts on agricultural commodities, currencies, energies, interest rates, metals and stock indices. The following were the primary trading risk exposures of the Partnership at December 31, 2022 and 2021 by market sector: 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. 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 — for example, positions between two currencies other than the U.S. dollar. Energies — The Partnership’s primary energy market exposure is to gas and oil price movements often resulting from political developments in the Middle East 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. 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, both long-term and short-term, will remain the primary interest rate market exposure of the Partnership for the foreseeable future. Metals — The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, palladium, platinum, silver, tin and zinc. 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. Derivatives and Hedging (Topic 815) 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 a net asset position are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair value of futures and forward currency contracts in a net liability position are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.” 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 Codification. 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. The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at December 31, 2022 and 2021. Fair value, below, 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. Fair Value of Futures and Forward Currency Contracts at December 31, 2022 Net Unrealized Fair Value - Long Positions Fair Value - Short Positions Gain (Loss) on Sector Gains Losses Gains Losses Open Positions Futures contracts: Currencies $ 26,865 $ ( 12,626 ) $ - $ ( 5,951 ) $ 8,288 Energies 1,236,350 ( 40,150 ) 880,935 ( 1,450 ) 2,075,685 Grains 160,870 ( 49,077 ) - ( 28,225 ) 83,568 Interest rates - ( 52,481 ) 3,942,928 ( 95,331 ) 3,795,116 Livestock 290 ( 7,420 ) - - ( 7,130 ) Metals 397,429 ( 154,966 ) 151,995 ( 348,297 ) 46,161 Softs 90 ( 26,566 ) 14,759 ( 23,879 ) ( 35,596 ) Stock indices 30,433 ( 105,691 ) 135,763 ( 98,910 ) ( 38,405 ) Total futures contracts 1,852,327 ( 448,977 ) 5,126,380 ( 602,043 ) 5,927,687 Forward currency contracts 2,048,622 ( 655,648 ) 386,777 ( 1,142,802 ) 636,949 Total futures and forward currency contracts $ 3,900,949 $ ( 1,104,625 ) $ 5,513,157 $ ( 1,744,845 ) $ 6,564,636 Fair Value of Futures and Forward Currency Contracts at December 31, 2021 Net Unrealized Fair Value - Long Positions Fair Value - Short Positions Gain (Loss) on Sector Gains Losses Gains Losses Open Positions Futures contracts: Currencies $ 3,688 $ - $ 4,631 $ ( 3,233 ) $ 5,086 Energies 616,692 ( 124,087 ) 102,240 ( 36,791 ) 558,054 Grains 87,400 ( 74,738 ) 63,535 ( 57,386 ) 18,811 Interest rates 198,306 ( 1,137,749 ) 55,062 ( 5,601 ) ( 889,982 ) Livestock - ( 5,370 ) 5,220 ( 50 ) ( 200 ) Metals 1,260,221 ( 63,208 ) 39,297 ( 1,087,245 ) 149,065 Softs 5,098 ( 20,945 ) 21,123 ( 14,213 ) ( 8,937 ) Stock indices 471,298 ( 246,776 ) 181,224 ( 142,260 ) 263,486 Total futures contracts 2,642,703 ( 1,672,873 ) 472,332 ( 1,346,779 ) 95,383 Forward currency contracts 2,370,139 ( 681,922 ) 698,770 ( 2,767,416 ) ( 380,429 ) Total futures and forward currency contracts $ 5,012,842 $ ( 2,354,795 ) $ 1,171,102 $ ( 4,114,195 ) $ ( 285,046 ) The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the years ended December 31, 2022 and 2021, 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 years ended December 31, 2022 and 2021 Sector 2022 2021 Futures contracts: Currencies $ 765,719 $ 65,585 Energies 10,046,228 6,247,941 Grains ( 1,178,601 ) ( 457,141 ) Interest rates 5,698,356 2,792,953 Livestock 26,490 ( 63,640 ) Metals ( 826,778 ) 189,873 Softs 63,739 ( 809,809 ) Stock indices 4,321,705 9,314,970 Total futures contracts 18,916,858 17,280,732 Forward currency contracts 5,155,420 ( 5,695,061 ) Total futures and forward currency contracts $ 24,072,278 $ 11,585,671 The following table presents the average notional value by sector of open futures and forward currency contracts in U.S. dollars for the years ended December 31, 2022 and 2021. The Partnership’s average net asset value during 2022 and 2021 was approximately $ 129,000,000 and $ 122,000,000 , respectively. 2022 2021 Sector Long positions Short positions Long positions Short positions Futures contracts: Currencies $ 1,659,606 $ 4,439,080 $ 591,981 $ 1,769,110 Energies 18,008,439 3,307,292 23,071,750 1,758,221 Grains 6,912,137 6,895,454 6,082,996 8,401,994 Interest rates 85,050,910 104,577,330 241,959,967 39,006,895 Livestock 560,348 397,778 407,116 453,276 Metals 5,103,581 6,248,335 16,029,509 1,433,054 Softs 1,836,254 2,167,069 1,488,507 1,711,024 Stock indices 27,675,299 44,339,216 68,188,391 20,713,327 Total futures contracts 146,806,574 172,371,554 357,820,217 75,246,901 Forward currency contracts 31,544,735 51,293,908 48,928,868 47,564,077 Total futures and forward currency contracts $ 178,351,309 $ 223,665,462 $ 406,749,085 $ 122,810,978 Notional values in the interest rate sector were calculated by converting the notional value in local currency of all open interest rate futures positions to 10 -year equivalent fixed income instruments, translated to U.S. Dollars at each quarter end during 2022 and 2021. 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. The following tables summarize the valuation of the Partnership’s investments by counterparty as of December 31, 2022 and 2021. Offsetting derivative assets and liabilities at December 31, 2022 Assets Gross amounts of recognized Assets Gross amounts offset in the Statement of Financial Condition Net amounts of Assets presented in the Statement of Financial Condition Futures contracts Counterparty C $ 3,008,522 $ ( 203,651 ) $ 2,804,871 Counterparty J 1,806,867 ( 159,073 ) 1,647,794 Counterparty L 2,163,318 ( 688,296 ) 1,475,022 Total futures contracts $ 6,978,707 $ ( 1,051,020 ) $ 5,927,687 Forward currency contracts Counterparty G 884,233 ( 632,742 ) 251,491 Counterparty K 1,551,166 ( 1,165,708 ) 385,458 Total forward currency contracts $ 2,435,399 $ ( 1,798,450 ) $ 636,949 Total assets $ 9,414,106 $ ( 2,849,470 ) $ 6,564,636 Amounts Not Offset in the Statement of Financial Condition Counterparty Net amounts of Assets presented in the Statement of Financial Condition Financial Instruments Collateral Received (1)(2) Net Amount (3) Counterparty C $ 2,804,871 $ - $ ( 2,804,871 ) $ - Counterparty G 251,491 - - 251,491 Counterparty J 1,647,794 - ( 1,647,794 ) - Counterparty K 385,458 - - 385,458 Counterparty L 1,475,022 - ( 1,475,022 ) - Total $ 6,564,636 $ - $ ( 5,927,687 ) $ 636,949 (1) Collateral received includes trades made on exchanges. These trades are subject to central counterparty clearing where settlement is guaranteed by the exchange. (2) Collateral disclosed is limited to an amount not to exceed 100 % of the net amount of assets presented in the Statements 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, 2022. Offsetting derivative assets and liabilities at December 31, 2021 Assets Gross amounts of recognized Assets Gross amounts offset in the Statement of Financial Condition Net amounts of Assets presented in the Statement of Financial Condition Futures contracts Counterparty J $ 767,838 $ ( 354,289 ) $ 413,549 Counterparty L 1,859,710 ( 1,792,099 ) 67,611 Total assets $ 2,627,548 $ ( 2,146,388 ) $ 481,160 Liabilities Gross amounts of recognized Liabilities Gross amounts offset in the Statement of Financial Condition Net amounts of Liabilities presented in the Statement of Financial Condition Futures contracts Counterparty C $ 873,264 $ ( 487,487 ) $ 385,777 Total futures contracts 873,264 ( 487,487 ) 385,777 Forward currency contracts Counterparty G 1,536,772 ( 1,191,819 ) 344,953 Counterparty K 1,912,566 ( 1,877,090 ) 35,476 Total forward currency contracts 3,449,338 ( 3,068,909 ) 380,429 Total liabilities $ 4,322,602 $ ( 3,556,396 ) $ 766,206 Amounts Not Offset in the Statement of Financial Condition Counterparty Net amounts of Assets presented in the Statement of Financial Condition Financial Instruments Collateral Received (1)(2) Net Amount (3) Counterparty J $ 413,549 $ - $ ( 413,549 ) $ - Counterparty L 67,611 - ( 67,611 ) - Total $ 481,160 $ - $ ( 481,160 ) $ - Amounts Not Offset in the Statement of Financial Condition Counterparty Net amounts of Liabilities presented in the Statement of Financial Condition Financial Instruments Collateral Pledged (1)(2) Net Amount (4) Counterparty C $ 385,777 $ - $ ( 385,777 ) $ - Counterparty G 344,953 - ( 344,953 ) - Counterparty K $ 35,476 $ - $ ( 35,476 ) $ - Total $ 766,206 $ - $ ( 766,206 ) $ - (1) Collateral received includes trades made on exchanges. These trades are subject to central counterparty clearing where settlement is guaranteed by the exchange. Collateral pledged includes both cash and U.S. Treasury notes held at each respective counterparty. (2) Collateral disclosed is limited to an amount not to exceed 100 % of the net amount of assets presented in the Statements 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, 2021. (4) Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2021. |