(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not have, nor does it expect to have, any capital assets. The Partnership does not engage in sales of goods or services. Its assets are
The Partnership's investment in Futures Interests may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price fluctuation limits" or "daily limits." Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or option contract has increased or decreased by an amount equal to the daily limit, positions in that futures or option contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating their futures or option contracts and result in restrictions on redemptions.
There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership's assets.
Other than the risks inherent in Futures Interests trading and U.S. Treasury bills and money market mutual fund securities, the Partnership knows of no trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way.
The Partnership's capital consists of the capital contributions of the partners as increased or decreased by net realized and/or unrealized gains or losses on trading and by expenses, interest income, redemptions of Units and distributions of profits, if any.
For the nine months ended September 30, 2019, the Partnership capital decreased 2.4% from $31,998,067 to $31,225,734. This decrease was attributable to redemptions of 241,865.544 limited partner Units totaling $5,259,991 and redemptions of 5,409.307 General Partner Units totaling $118,000, coupled with a net income of $4,605,658. Future redemptions can impact the amount of funds available for investment in subsequent periods.
Other than as discussed above, there are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership's capital resource arrangements at the present time.
Off-Balance Sheet Arrangements and Contractual Obligations
The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting periods. The General Partner believes that the estimates utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership's significant accounting policies are described in detail in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," of the Financial Statements.
The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and net change in unrealized gains (losses) in the Statements of Income and Expenses. The General Partner estimates that, at any given time, approximately 20.3% to 27.0% of the Partnership's contracts are traded over-the-counter.
Results of Operations
General: The Partnership's results depend on the Trading Advisors and the ability of each Trading Advisor's trading program to take advantage of price movements in the Futures Interests markets.
Graham currently trades its allocated portion of the Partnership's assets pursuant to Graham's Global Diversified Program, as described below, at 150% Leverage. The Global Diversified Program features the first trend system that Graham developed, which began trading client accounts in 1995. It utilizes multiple computerized trading models and offers broad diversification in both financial and non-financial markets, trading in approximately 65 global markets. The Global Diversified Program's trend system is primarily long-term in nature and is intended to generate significant returns over time with an acceptable degree of risk and volatility. The computer models analyze on a daily basis the recent price action, the relative strength and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market.
EMC currently trades its Classic Program for the Partnership. EMC's investment strategies are technical rather than fundamental in nature. In other words, they are developed from analysis of patterns of actual monthly, weekly, and daily price movements and are not based on analysis of fundamental supply and demand factors, general economic factors, or anticipated world events. EMC relies on historical analysis of these price patterns to interpret current market behavior and to evaluate technical indicators for trade initiations and liquidations. EMC's investment strategies used in its program are trend-following. This means that initiation and liquidation of positions in a particular market are generally in the direction of the price trend in that market, although at times counter-trend elements also may be employed. EMC employs an investment strategy which utilizes a blend of systems (or, stated another way, a number of systems simultaneously). The strategies are diversified in that its program follows a number of Futures Interests and often invests in more than ten different interests at one time.
The General Partner is not aware of any material changes to the trading programs discussed above for the fiscal quarter ended September 30, 2019.
The following chart sets forth the percentage and the amount of the Partnership's net assets allocated to each Trading Advisor for the periods ended September 30, 2019 and June 30, 2019, respectively.
September 30, 2019 June 30, 2019 (percentage of (percentage of Trading Advisor September 30, 2019 Partners' Capital) June 30, 2019 Partners' Capital) Graham $ 17,450,351 56 % $ 17,180,381 56 % EMC $ 13,775,383 44 % $ 13,444,204 44 %
The following presents a summary of the Partnership's operations for the three and nine months ended September 30, 2019, and a general discussion of its trading activities during the period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors' trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.
The Partnership's results of operations set forth in the financial statements are prepared in accordance with GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and market value is recorded in the Statements of Income and Expenses as "Net change in unrealized gains (losses) on open contracts," and recorded as "Net realized gains (losses) on closed contracts" when open positions are closed out. The sum of these amounts constitutes the Partnership's trading results. The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.), the close of the business day. Interest income, as well as management fees, incentive fees, General Partner fees and ongoing placement agent fees of the Partnership are recorded on an accrual basis, as applicable.
The General Partner believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.
During the Partnership's third quarter of 2019, the net asset value per Unit increased 8.0% from $21.95 to $23.70 as compared to an increase of 3.3% in the third quarter of 2018. The Partnership experienced a net trading gain before fees and expenses in the third quarter of 2019 of $2,742,742. Gains were primarily attributable to the Partnership's trading of Futures Interests in currencies, equity and interest rates and were partially offset by losses in commodity. The Partnership experienced a net trading loss before fees and expenses in the third quarter of 2018 of $1,606,415. Gains were primarily attributable to the Partnership's trading of Futures Interests in the commodity and equity sectors and were partially offset by losses in the currencies and interest rate sector.
The most notable gains were recorded within the currency sector during July from short positions in the British pound and euro versus the U.S. dollar as the relative value of the dollar appreciated as the U.S. economy outperformed the economies of other regions. Within the global interest rate markets, gains were experienced primarily during August from long positions in U.S., European, and Asian fixed income futures as prices benefited from mounting global growth concerns, escalating fears over a "hard" United Kingdom departure from the European Union, and ongoing uncertainty over the US-Chinese trade war. Within the metals sector, gains were recorded during August from positions in both precious and industrial metals. Additional gains were recorded within the global stock index sector during September from long positions in U.S. and European equity index futures on speculation central banks across the globe would issue stimulus measures to spur the sputtering global economy. A portion of the Partnership's gains for the quarter was offset by losses incurred within the energy sector primarily during August from long positions in crude oil and its refined products as prices moved lower due to fears for a global economic slowdown fueled by ongoing trade battles between the U.S and China. Further losses were experienced within the agricultural markets during September from short positions in the grains and soft commodities as an outlook for tightening global commodity supplies spurred prices higher.
During the Partnership's nine months ended September 30, 2019, the net asset value per Unit increased 15.9% from $20.45 to $23.70 as compared to a decrease of 3.4% for the nine months ended September 30, 2018. The Partnership experienced a net trading gain before fees and expenses for the nine months ended September 30, 2019 of $5,454,452. Gains were primarily attributable to the Partnership's trading of Futures Interests in currencies, equity and interest rates and were partially offset by losses in commodity. The Partnership experienced a net trading loss before fees and expenses for the nine months ended September 30, 2018 of $221,011. Losses were primarily attributable to the Partnership's trading of Futures Interests in the currencies and interest rates sectors and were partially offset by gains in the commodity and equity sectors.
The most significant gains were achieve within the global interest rates during January, March, May, June, July, and August from long positions in non-U.S. and U.S. fixed income futures as prices rose as global economic concerns pushed central banks to looser monetary policy global. Within the global stock index markets, gains were primarily recorded throughout the first nine months of the year, with the exception of January, May and August, from long positions in European, U.S., and Asian equity index futures as positive consumer sentiment and the promise of dovish monetary policy pushed stock prices higher. In the currencies, gains were recorded during July from short positions in the British pound and euro versus the U.S. dollar as the relative value of the dollar appreciated as the U.S. economy outperformed the economies of other regions. Further gains in the currency sector were achieved during February, April, and August. A portion of the Partnership's gains for the first nine months of the year was offset by trading losses within the energy sector during May and August from long positions in crude oil and its refined products as prices declined amid concern a weakening global economy would limit energy demand. Additional losses in the crude oil complex were experienced during January and February. Losses in the agriculturals were experienced during May from short positions in corn, wheat, and soybean futures as flooding in the Midwest threatened U.S. grain crops. Within the metals sector, losses were incurred during January from short positions in copper futures as industrial metals prices rebounded on signs of a potential resolution to the U.S. versus China trade battles. Additional losses were incurred in the metals during September from futures positions in both precious and industrial metals.
Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase not only the risks involved in commodity trading, but also the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Trading Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Trading Advisors are able to identify them, the Partnership expect to increase capital through operations.
The Partnership receives monthly interest on 100% of its average daily equity maintained in cash in the Partnership's account during each month at a rate equal to 80% of the monthly average of the 4-week U.S. Treasury bill discount rate. For the avoidance of doubt, the Partnership will not receive interest on amounts in the futures brokerage account that are committed to margin. Any interest earned on the Partnership's cash account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership, as applicable. Interest income for the three and nine months ended September 30, 2019 decreased by $11,182 and $14,721, respectively, as compared to the corresponding periods in 2018. The decrease in interest income was primarily due to lower average daily equity during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership's accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and (3) interest rates over which none of the Partnership or MS&Co. has control.
Ongoing placement agent fees are calculated as a percentage of the Partnership's adjusted net asset value on the first day of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Ongoing placement agent fees for the three and nine months ended September 30, 2019 decreased by $30,680 and $162,220, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership. General Partner fees are calculated as a percentage of the Partnership's adjusted net asset value as of the beginning of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. General Partner fees for the three and nine months ended September 30, 2019 decreased by $30,680 and $162,220, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
Management fees are calculated as a percentage of the Partnership's adjusted net asset value as of the beginning of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three and nine months ended September 30, 2019 decreased by $42,785 and $171,842, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
Incentive fees are based on the new trading profits generated by each Trading Advisor at the end of the month or year, as applicable, as defined in the respective management agreements between the Partnership, the General Partner and each Trading Advisor. Trading performance for the three and nine months ended September 30, 2019 and 2018 did not result in incentive fees. To the extent a Trading Advisor incurs a loss for the Partnership, the Trading Advisor will not be paid incentive fees until such Trading Advisor recovers any net loss incurred by the Trading Advisor and earns additional new trading profits for the Partnership.
In allocating the assets of the Partnership among the Trading Advisors, the General Partner considers, among other factors, each Trading Advisor's past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Trading Advisors and may allocate assets to additional advisors at any time.
Nov 07, 2019
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