Derivative Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments

Derivative Instruments

Note 10. Derivative Instruments

The Partnership follows the provisions of FASB ASC 815, Derivatives and Hedging. FASB ASC 815 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging 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 derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements (see Trading Activities and Related Risks, Note 8).

The Partnership’s business is speculative trading. The Partnership intends to close out all futures, options 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 counter party 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 in which 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. The monthly average futures contracts, forward contracts and options on futures contracts bought and sold was approximately 6,401 and 6,695, respectively, for three and six months ended June 30, 2013 and 9,273 and 8,363, respectively, for three and six months ended June 30, 2012. The following tables summarize the quantitative information required by FASB ASC 815:

Fair Values of Derivative Instruments June 30, 2013 and December 31, 2012

	Asset		Liability
	Derivatives*		Derivatives*
	6/30/2013		6/30/2013			Fair Value
Agricultural contracts	$	1,530,399	$	(1,158,760	)	$	371,639
Currencies contracts	6,101,506		(5,096,404		)	1,005,102
Energy contracts	723,192		(1,113,068		)	(389,876		)
Interest rates contracts	2,542,602		(2,084,372		)	458,230
Meats contracts	161,464		(92,240		)	69,224
Metals contracts	12,909,763		(7,895,353		)	5,014,410
Soft commodities contracts	263,079		(328,655		)	(65,576		)
Stock indices contracts	920,213		(2,839,381		)	(1,919,168		)
	$	25,152,218	$	(20,608,233	)	$	4,543,985

* The fair values of all asset and liability derivatives, including agriculturals, currencies, energy, interest rates, meats, metals, soft commodities and stock indices contracts, are included in unrealized gain (loss) on open contracts within equity in broker trading accounts in the consolidated statement of financial condition.

	Asset		Liability
	Derivatives*		Derivatives*
	12/31/2012		12/31/2012			Fair Value
Agricultural contracts	$	1,010,073	$	(846,892	)	$	163,181
Currencies contracts	12,045,469		(7,703,776		)	4,341,693
Energy contracts	1,028,505		(400,364		)	628,141
Interest rates contracts	2,816,093		(2,237,432		)	578,661
Meats contracts	11,264		(73,450		)	(62,186		)
Metals contracts	4,252,379		(6,777,973		)	(2,525,594		)
Soft commodities contracts	745,230		(333,162		)	412,068
Stock indices contracts	2,679,422		(2,534,167		)	145,255
	$	24,588,435	$	(20,907,216	)	$	3,681,219

* The fair values of all asset and liability derivatives, including agriculturals, currencies, energy, interest rates, meats, metals, soft commodities and stock indices contracts, are included in unrealized gain (loss) on open contracts within 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 and Six Months Ended June 30, 2013 and 2012

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
Type of Contract	June 30, 2013*			June 30, 2012*			June 30, 2013*			June 30, 2012*
Agriculturals contracts	$	1,298,274		$	(1,707,697	)	$	(1,477,013	)	$	(5,347,854	)
Currencies contracts	(10,146,933		)	(98,876		)	(4,853,407		)	(15,409,354		)
Energy contracts	(13,322,470		)	(8,170,645		)	(16,662,161		)	8,312,452
Interest rates contracts	(9,170,129		)	43,835,597			(15,046,385		)	27,840,667
Meats contracts	1,203,369			(482,758		)	1,232,878			(377,806		)
Metals contracts	13,357,594			2,045,251			12,038,152			(3,670,013		)
Soft commodities contracts	(1,086,681		)	4,261,334			1,253,762			3,462,588
Stock indices	353,796			(12,904,602		)	16,981,353			18,118,924
	$	(17,513,180	)	$	26,777,604		$	(6,532,821	)	$	32,929,604

* The gains or losses on derivatives, including agriculturals, currencies, energy, interest rates, meats, metals, soft commodities and stock indices contracts are included in the realized and change in unrealized gains (loss) from futures and forward trading in the consolidated statement of operations.

Line Item in Consolidated Statement of	Three Months Ended						Six Months Ended
Operations	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Net gain (loss) from futures and forward trading
Realized	$	(15,812,188	)	$	27,684,339		$	(7,305,220	)	$	41,476,447
Change in unrealized	(1,700,992		)	(906,735		)	772,399			(8,546,843		)
Total realized and changed in unrealized net gain (loss) from futures and forward trading	$	(17,513,180	)	$	26,777,604		(6,532,821		)	32,929,604

The tables below show the gross and net information related to derivatives eligible for offset in the Consolidated Statement of Financial Condition as of June 30, 2013 and December 31, 2013.

Offsetting of Derivative Assets

As of June 30, 2013

						Net amount of
			Gross Amounts			Unrealized Gain
			Offset in the			Presented in
	Gross Amount of		Consolidated			the Consolidated
	Recognized		Statement of			Statement of
Type of Instrument	Assets		Financial Condition			Financial Condition
U.S. and foreign futures contracts	$	21,171,155	$	(16,780,675	)	$	4,390,480
Forward contracts	3,871,540		(3,586,158		)	285,382
Options on futures and forward contracts	109,523		(241,400		)	(131,877		)
Total derivatives	$	25,152,218	$	(20,608,233	)	$	4,543,985

Derivatives Assets and Collateral Received by Counterparty

As of June 30, 2013

	Net amount of
	Unrealized Gain
	Presented in			Gross Amounts Not Offset in the Consolidated
	the Consolidated			Statement of Financial Condition
	Statement of			Financial		Cash Collateral
Counterparty	Financial Condition			Instruments		Received		Net Amount
Bank of America N.A.	$	169,273		$	—	$	—	$	169,273
Deutsche Bank AG	(90,004		)	—		—		(90,004		)
Jefferies Bache, LLC	116,301			—		—		116,301
Newedge USA, LLC	1,106,192			—		—		1,106,192
R.J. O’Brien & Associates, LLC	834,300			—		—		834,300
UBS Securities LLC	2,407,923			—		—		2,407,923
Total	$	4,543,985		$	—	$	—	$	4,543,985

Offsetting of Derivative Assets

As of December 31, 2012

						Net amount of
			Gross Amounts			Unrealized Gain
			Offset in the			Presented in
	Gross Amount of		Consolidated			the Consolidated
	Recognized		Statement of			Statement of
Type of Instrument	Assets		Financial Condition			Financial Condition
U.S. and foreign futures contracts	$	17,323,529	$	(15,097,793	)	$	2,225,736
Forward contracts	7,254,268		(5,809,423		)	1,444,845
Options on futures and forward contracts	10,638		—			10,638
Total derivatives	$	24,588,435	$	(20,907,216	)	$	3,681,219

Derivatives Assets and Collateral Received by Counterparty

As of December 31, 2013

	Net amount of
	Unrealized Gain
	Presented in			Gross Amounts Not Offset in the Consolidated
	the Consolidated			Statement of Financial Condition
	Statement of			Financial		Cash Collateral
Counterparty	Financial Condition			Instruments		Received		Net Amount
Bank of America N.A.	$	1,327,621		$	—	$	—	$	1,327,621
Deutsche Bank AG	(178,677		)	—		—		(178,677		)
Jefferies Bache, LLC	724,791			—		—		724,791
Newedge USA, LLC	1,098,091			—		—		1,098,091
R.J. O’Brien & Associates, LLC	1,714,310			—		—		1,714,310
UBS Securities LLC	(1,004,917		)	—		—		(1,004,917		)
Total	$	3,681,219		$	—	$	—	$	3,681,219