Grant Parkis a multi-advisor commodity pool organized to pool assets of its investors for the purpose of trading in the U.S. and international spot and derivatives markets for currencies, interest rates, stock indices, agricultural and energy products, precious and base metals and other commodities and underliers. The Partnership also engages in equity securities, listed options, broad-based exchange traded funds, hedge, arbitrage and cash trading of commodities and futures. Grant Parkhas been in continuous operation since it commenced trading on January 1, 1989. Grant Park'sgeneral partner, commodity pool operator and sponsor is Dearborn Capital Management, L.L.C., an Illinoislimited liability company. The manager of Dearborn Capital Management, L.L.C.is David M. Kavanagh, its President. Organization of Grant Park Grant Parkinvests through different commodity trading advisors retained by the general partner. However, instead of each trading advisor maintaining a separate account in the name of Grant Park, the assets of Grant Parkare invested in various Trading Companies, each of which is organized as a limited liability company. Each Trading Companyallocates those assets to one of the commodity trading advisors retained by the general partner. The following is a list of the Trading Companies, for which Grant Parkis the sole member and all of which were organized as Delawarelimited liability companies: GP 1, LLC ("GP 1") GP 6, LLC ("GP 6") GP 10, LLC ("GP 10") GP 15, LLC ("GP 15") GP 3, LLC ("GP 3") GP 7, LLC ("GP 7") GP 11, LLC ("GP 11") GP 16, LLC ("GP 16") GP 4, LLC ("GP 4") GP 8, LLC ("GP 8") GP 12, LLC ("GP 12") GP 17, LLC ("GP 17") GP 5, LLC ("GP 5") GP 9, LLC ("GP 9") GP 14, LLC ("GP 14") GP 18, LLC ("GP 18") 27
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There were no assets allocated to GP 5, GP 7, GP 10, GP 11 and GP 12 as of
Grant Parkinvests through the Trading Companies with independent professional commodity trading advisors retained by the general partner. Alder Capital Limited, Amplitude Capital International Limited, Denali Asset Management, LLLP, EMC Capital Advisors LLC, Eckhardt Trading Co., Eagle Trading Systems Inc., Lynx Asset Management AB, Quantica Capital AG, Rabar Market Research, Inc., Transtrend B.V.and Winton Capital Management Limitedserve as Grant Park'scommodity trading advisors. Each of the trading advisors is registered as a commodity trading advisor under the Commodity Exchange Act and is a member of the NFA. EMC Capital Advisors LLCis an Illinoislimited liability company formed in August 2013. From January 1989until September 2013, EMC Capital Management, Inc.was allocated and traded a portion of Grant Park'sassets. On October 1, 2013, EMC Capital Management, Inc.assigned its obligations, rights and interests to EMC Capital Advisors LLC, including the trading agreement under which EMC Capital Management, Inc.had previously traded on behalf of Grant Park. As of December 31, 2013, the general partner allocated between 5% to 25% of Grant Park'snet assets through the respective Trading Companies among its trading advisors Alder, Amplitude, Denali, EMC, ETC, Eagle, Lynx, Quantica, Rabar, Transtrend and Winton. No more than 25% of Grant Park'sassets are allocated to any one Trading Companyand, 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.
The table below illustrates the trading advisors for each class of
Alder Amplitude Denali EMC ETC Eagle Lynx Quantica Rabar Transtrend Winton Class A X X X X X X X X X X X Class B X X X X X X X X X X X Legacy 1 X X X X X X X X X X X Legacy 2 X X X X X X X X X X X Global 1 X X X X X X X X X X X Global 2 X X X X X X X X X X X Global 3 X X X X X X X X X X X The trading advisors for the Legacy 1 Class and Legacy 2 Class units pursue a technical trend trading philosophy, which is the same trading philosophy the trading advisors have historically used for the Class A and Class B units. The trading advisors for the Global 1 Class, Global 2 Class and Global 3 Class units pursue technical trend trading philosophies, as well as pattern recognition. The general partner may, in its sole discretion, reallocate assets among the trading advisors upon termination of a trading advisor or retention of any new trading advisors, or at the commencement of any month.
Critical Accounting Policies
Grant Park'smost significant accounting policy is the valuation of its assets invested in U.S. and international futures and forward contracts, options contracts, other interests in commodities, and fixed income products. The 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 quoted forward spot prices and fixed income products, including securities of U.S. Government-sponsored enterprises, corporate bonds and commercial paper, which are stated at cost plus accrued interest, which approximates fair value based on quoted market prices in an active 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 reasonably 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 28 --------------------------------------------------------------------------------
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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'ssignificant accounting policies are described in detail in Note 1 of the consolidated financial statements. Grant Parkis the sole member of each of the Trading Companies. The Trading Companies, in turn, are the only members of GP Cash Management, LLC. Grant Parkpresents consolidated financial statements which include the accounts of the Trading Companies and GP Cash Management, LLC. All material inter-company accounts and transactions are eliminated in consolidation.
Valuation of Financial Instruments
Grant Parkfollows 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. Grant Parkrecords all investments at fair value in the financial statements. Changes in fair value from the prior period are recorded as unrealized gain or losses and are reported in the consolidated statement of operations. Fair value of exchange-traded futures contracts and options on futures contracts are based upon exchange settlement prices. Grant Parkvalues forward contracts and options on forward contracts based on the average bid and ask price of quoted forward spot prices obtained. U.S. Governmentsecurities, securities of U.S. Government-sponsored enterprises, corporate bonds and commercial paper are stated at cost plus accrued interest, which approximates fair value based on quoted market prices in an active market. Grant Parkcompares market prices quoted by dealers to the cost plus accrued interest to ensure a reasonable approximation of fair value. Grant Parkvalues bank deposits at face value plus accrued interest, which approximates fair value. Results of Operations Grant Park'sreturns, which are Grant Park'strading gains plus interest income less brokerage fees, performance fees, operating costs and offering costs borne by Grant Park, for the years ended December 31, 2013, 2012 and 2011, are set forth in the table below: 2013 2012 2011
Total return - Class A Units (3.8 )% (6.1 )% (13.0 )% Total return - Class
Grant Park'stotal net asset value at December 31, 2013, 2012 and 2011 was $447.4 million, $636.7 millionand $798.8 million, respectively. Results from past periods are not indicative of results that may be expected for any future period. 29
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The table below sets forth
% Gain (Loss) Years Ended December 31, Sector 2013 2012 2011 Agriculturals 1.0 % (0.6 )% - % Currencies 0.5 (0.8 ) (4.2 ) Energy (5.2 ) (0.6 ) (0.6 ) Interest rates (5.4 ) 2.3 7.3 Meats 0.2 (0.2 ) 0.2 Metals 1.1 (2.0 ) (0.5 ) Soft commodities 0.1 0.1 (2.9 ) Stock indices 11.8 5.3 (5.1 ) Total 4.1 % 3.5 % (5.8 )% Year ended
December 31, 20132013 was characterized by widespread uncertainty across the global markets The year began with a resolution of the U.S. government's stalemate concerning the extension of the debt limit for the balance of 2013, an action that helped drive the global equity markets higher. Positive economic data about the U.S., German, and Chinese economies reinforced investors' bullish sentiments. Grant Parkwas well positioned and profited from the run up. Japanelected a new Prime Minister who was determined to expand the balance sheet of the country's Central Bankin an attempt to strengthen Japan'sstruggling export industries. Mr. Abe'sconfirmation sent the yen lower in anticipation of a massive monetary expansion. This movement coincided with Grant Park'sexpanding short yen positions and provided considerable gains for the portfolio. Global investors began to execute "risk off" tendencies near the end of February, after elections in Italyfailed to elect a national leader and Eurozone countries reported mixed economic data. Prices for precious metals increased and overall demand for crude oil and its products declined, each of which was against Grant Park'sexisting positions. Central bank announcements drove markets in both directions throughout the second quarter. In April, the European Commissionand the IMF attempted to force Cypriot officials to sell a portion of the country's gold reserves in order to fund a bailout of one of the largest banks in Cyprus. Precious metal markets sold off on this news and Grant Parkprofited from it short exposure to gold and silver. Grant Parkalso benefited from favorable price movement for U.S. 10-Year Notes and German Bunds. These profits were lost in May, however, following positive data for the U.S. and Europewas reported for housing, manufacturing, and consumer confidence. An announcement from the European Central Bankregarding a potential interest rate cut added to European equity market gains. This announcement sent the euro and Swiss franc higher against counterpart currencies and was against Grant Park'sshort positions. During June, the U.S. Federal Reserve announced its intention to taper its bond buying program at the end of the summer. Investors swiftly reacted to this news by reverting to their "risk-off" tendencies of the first quarter. Equities gains which followed the European Central Bankannouncement were quickly removed as investors reacted to the Federal Reserve's statement and Grant Park'sexposure to equities was reduced by nearly 50% in reaction to the abrupt sell-off. Losses were partially offset by gains from short wheat and long soybean trades.
The geopolitical landscape drove investor sentiment throughout the summer, marked by public rallies across
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information that showed U.S. domestic crude inventories had fallen. Equity markets, however, reversed their bullish trends and moved against
Grant Park'slong positions as the Syrian conflict continued to escalate and weaker-than-expected earnings reports were released in the U.S. Positive earnings reports from Australian companies moved in concert with Grant Park'slong positions and helped mitigate losses within the sector. Grains markets moved consistently during the summer months as growing conditions around the world proved to be ideal and sent yield estimates higher. Short exposure to corn and wheat markets helped curb losses from adverse movements in the currency and fixed-income sectors. By the quarter's end, the failure of the U.S. Federal Government to resolve the budget and debt-management impasse created the prospect of an extended government shutdown. This caused investors to seek non-U.S., safe-haven treasuries and the Grant Parksuffered losses due to its short exposure to the German Bund. The U.S. Governmentshutdown lasted 16 days and its effects on markets were short-lived, as equities in the U.S. and Europerallies to all-time highs following the government's reopening. The Federal Reserve's decision to delay the tapering of its monetary expansion reinforced the rally and Grant Parkregistered profits as a result. Long exposure was increased and economic data out of Europeand Japangave investors reason to believe the European Central Bankand Bank of Japan would continue to support their respective economies with capital injections. German and Japanese Government bond prices rallied in reaction and the Grant Parkprofited. In November, the Bank of Japan announced plans to increase the intensity of its bond buying program. This announcement caused the yen and the Australian dollar to depreciate substantially against their U.S. counterpart, supporting Grant Park'sshort exposure to the yen and Aussie dollar. The Nikkei 225 experienced an intense rally and ended the year up more than 50%. Energymarkets exhibited a sector-wide rally towards the end of the quarter as demand prospects for natural gas and crude oil strengthened, which initially resulted in losses for the portfolio's short exposure. The extended rally caused Grant Park'sexposure to transition from net short to net long, which helped offset the bulk of setbacks. Precious metal markets continued to suffer losses as investors demonstrated "risk-on" tendencies and Grant Park'sshort gold and silver exposure took advantage of the price declines. Gains were partially offset by rising base metal prices, which did not coincide with the Grant Park'sshort exposure. Grant Parkbenefited from prolonged short exposure to grains markets as prices sustained their downtrends in reaction to strong supply data, a weakening ethanol mandate, and decreased overall demand. Sector exposure was increased by 10% as a result. For the year ended December 31, 2013, Grant Parkhad a negative return of 3.8% for the Class A units, a negative return of 4.4% for the Class B units, a negative return of 1.8% for the Legacy 1 Class units, a negative return of 2.0% for the Legacy 2 Class units, a negative return of 1.2% for the Global 1 Class units, a negative return of 1.4% for the Global 2 Class units, and a negative return of 3.1% for the Global 3 Class units. On a combined unit basis prior to expenses, approximately 4.1% resulted from trading gains which were further increased by gains of approximately 0.3% of interest income. These trading gains were offset by approximately 8.1% in combined total brokerage fees, performance fees and operating and offering costs borne by Grant Park. An analysis of the 4.1% trading gains by sector is as follows: Sector % Gain (Loss) Agriculturals 1.0 % Currencies 0.5 Energy(5.2 ) Interest rates (5.4 ) Meats 0.2 Metals 1.1 Soft commodities 0.1 Stock indices 11.8 Total 4.1 % 31
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December 31, 2012Concerns regarding the financial stability of the Eurozone dictated investor sentiment throughout the first quarter of 2012. Day-to-day developments regarding potential bailouts, credit rating downgrades and economic data in the region created intraday inflection points for some of the markets traded within Grant Park'sportfolio, making it especially difficult to trade global currency and fixed income markets. The euro fell intramonth in January, which coincided with Grant Park'snet short exposure. As February approached, the downtrend quickly reversed as Eurozone officials announced an apparent Greek bailout resolution, resulting in losses for the portfolio. Grant Parkwas able to profit from discernible trends in the energy and equities markets. Short natural gas positions fared well as prices plummeted 29% in the first quarter due to weak demand stemming from unseasonably warm weather in the U.S. and elevated supplies that were approaching historic levels. Short exposure increased throughout the quarter as the downward trend persisted, resulting in augmented profits. Grant Parkwas also well positioned to benefit from a near 12% and 19% rally in the S&P 500 and Nikkei 225, respectively. The S&P 500 rallied after the outlook for the global economy became more optimistic due to bullish data, while the Nikkei 225 rallied due to the yen's depreciation throughout the quarter, which raised hopes for the country's struggling export industries. Performance in the second quarter was driven by the "risk-on, risk-off" tendencies of investors. Shifting sentiment was generally driven by reactions to developments regarding the bailout prospects of struggling European economies and the weekly jobs reports in the U.S. Grant Park'selevated long exposure to the fixed income markets saw strong returns as prices in the U.S. Treasury and German Bund markets rose sharply, supported by pessimism concerning Greece. Soybean markets also drove profitable performance in the second quarter as supply disruptions caused by droughts in South Americaand the U.S. moved prices nearly 8% higher. Grant Parkincreased its long exposure as the uptrend persisted. May was the best month of performance for Grant Parkin 2012. Grant Park'sshort euro exposure benefitted from weak economic data from the Eurozone, and was the main contributor to the aggregate 3% gain in the sector for the month. However, performance in the currency and equities markets was overall negative for the quarter. The strengthening of the Japanese yen in June worked against Grant Park'sshort positions and accounted for losses to the portfolio. The S&P 500 and Nikkei 225 experienced sharp reversals to the downside towards the end of the second quarter as investors fled equities for safe haven debt and less risky currencies. As the summer wore on the drought in the Central U.S. turned from moderate to severe, causing fears of record low crop yields, which drove prices up sharply. Grant Parkwas well positioned to profit and expanded long exposure to corn, wheat, and soybeans as upward trends were sustained through August. However, the grains/foods sector turned unprofitable in September following the USDA'sforecasts for better-than-expected corn and soybean crop yields, which caused prices to fall against Grant Park'sbuilt up long positions. Grant Parkreduced exposure to equities at the beginning of the third quarter as global stock markets temporarily fell against our long positions because of pessimistic news regarding Europe. Downtrends ceased following news of extended economic stimulus in the U.S. and an announcement from Mario Draghiregarding the extent to which the ECB would go to support the EU's struggling members. The portfolio experienced setbacks in the currency markets due to strength in the euro, which moved contrary to Grant Park'sshort positions. Exposure to metals produced flat performance in the third quarter as setbacks from short base metals positions were offset by gains from long exposure to precious metals in September. Uncertainty reigned supreme as the end of the year approached. Fueling uncertainty was a lack of a clear resolution to the European debt crisis and fears U.S. policy makers would be unable to agree on a deal to keep from going over the "Fiscal Cliff", a combination of tax increases and spending cuts that were scheduled to go into effect at the beginning of 2013. In addition, Japanannounced plans to make a 32
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concerted effort to devalue the yen significantly in hopes of boosting their debilitated export industries. These headlines heavily influenced investor sentiment and caused markets to shift directions as press conferences concerning the issues unfolded. This market environment produced few trends and made it very difficult for
Grant Park'strend-following strategies. All six sectors produced negative performance in October with fixed income serving as the biggest detractor. Mid-month regional economic data out of Europewas disheartening and led to increased austerity-driven unrest in Greece, Spain and Italy. This drove investors to liquidate risk-assets, driving prices lower against Grant Park'slong positions. As the conflict between Israeland Hamascontinued into November, crude oil and its products rallied in opposition to Grant Park'sshort positions. The hectic year ended on a strong note as Grant Parkended December with positive returns. Performance was predominantly driven by trades in the currency and equities markets. The yen fell alongside Grant Park'sshort positions and the S&P 500 finished the year bullishly coinciding with Grant Park'slong exposure. For the year ended December 31, 2012, Grant Parkhad a negative return of 6.1% for the Class A units, a negative return of 6.7% for the Class B units, a negative return of 4.0% for the Legacy 1 Class units, a negative return of 4.3% for the Legacy 2 Class units, a negative return of 3.3% for the Global 1 Class units, a negative return of 3.6% for the Global 2 Class units, and a negative return of 5.2% for the Global 3 Class units. On a combined unit basis prior to expenses, approximately 3.5% resulted from trading gains which were further increased by gains of approximately 0.3% of interest income. These trading gains were offset by approximately 9.8% in combined total brokerage fees, performance fees and operating and offering costs borne by Grant Park. An analysis of the 3.5% trading gains by sector is as follows: Sector % Gain (Loss) Agriculturals (0.6 )% Currencies (0.8 ) Energy(0.6 ) Interest rates 2.3 Meats (0.2 ) Metals (2.0 ) Soft commodities 0.1 Stock indices 5.3 Total 3.5 %
The start of 2011 was met with newly found hopes European officials were getting close to a resolution to the ongoing instability of the Eurozone sovereign debt markets. Reports early in the quarter stating key French and German officials were nearing an agreement served as a bullish driver for global investor sentiment. The boost in sentiment weighed heavily on safe-haven demand driving fixed-income prices lower against
Grant Park'slong positions, resulting in losses. Grant Park'slong base metals positions also endured setbacks, driven lower by weak industrial demand forecasts amid the ailing global economy and the effects of the devastating Japanese earthquake in March. The effects of the Japanese earthquake were also felt in the equity markets, driving the Japanese Nikkei 225 down in excess of 10% against Grant Park'slong positions. In the energy markets, civil unrest in the Middle East, namely Libya, buoyed crude oil prices due to concerns of supply disruptions. Grant Park'slong crude oil positions earned profits as crude rallied nearly 17% in the first quarter. Steadily declining investor confidence regarding the global economy led to losses in the equities portion of Grant Park'sportfolio in the second quarter. With long equity positions in place, the portfolio registered losses as China'sdecision to raise borrowing rates and rising U.S. unemployment caused investors to liquidate equity positions causing downward price pressure. The portfolio's long euro and 33
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Swiss franc positions profited early in the quarter as poor economic data in the U.S. supported beliefs U.S. economic tightening would lag foreign nations, driving the dollar lower. In June, the same markets quickly moved against
Grant Parkas an upward revision to the U.S. trade deficit and renewed fears regarding a Greek debt collapse sent the euro lower. Long gold positions finished the quarter slightly down as investors liquidated dollar-hedging gold positions due to dollar strength. U.S. grains markets rose sharply alongside positions in April because poor weather conditions in the U.S. kept farmers out of their fields and delayed plantings. Despite early quarter-gains the portfolio's long grains positions finished the quarter down as easing U.S. weather and the lifting of a Russian grains export ban pushed prices downward. Long positions in the European currency markets did not bode well for Grant Parkin the third quarter. The inability of European officials to agree on a new plan to restructure Greek debt caused the euro to fall against Grant Park'slong positions early in the quarter. In September, as Grant Parkshifted its exposure to the short side of the euro, it was again met with losses as the euro strengthened due to comments from the European Central Banks stating they were considering buying Spanish Italian and Spanish debt. The lack of bullish fundamentals and weak investor confidence caused investors to liquidate positions in risk-assets and adopt a more risk-averse portfolio in the third quarter. As a result, equity and industrial metals prices declined sharply against Grant Park'slong positions. The portfolio was able to offset losses through its long exposure to the fixed income markets. Long exposure to both the U.S. Treasury and German Bund markets registered gains as investors shifted their focus to lower risk safe-haven debt instruments. Elevated risk-aversion also led to a steep uptrend in the Swiss franc as investors increased safe-haven holdings. Grant Park'slong positions were able to profit from the early stages of the Swiss franc's strengthening, but were met with losses in August following a sharp reversal caused by the Swiss National Bank's direct intervention to devalue the currency. The outlook for the global economy took on a more optimistic tone at the onset of the fourth quarter as Eurozone officials announced a new plan to help aid the ailing Greek economy. On speculation this new plan could prevent a Greek default, investors resumed buying riskier assets driving up prices in the equity and industrial metals markets. The portfolio experienced setbacks early in the fourth quarter due to its short equity exposure, but was able to partially recoup losses after positions flipped to the long side of the market. Renewed optimism supported demand for the euro and higher-yielding currencies, resulting in losses for Grant Park'slong U.S. dollar exposure. Speculators drove up crude oil prices because of stronger industrial demand forecasts supported by a more optimistic global economic outlook. In response to the bullish market drivers, Grant Park'spositions began to turn in favor of riskier assets. Going into November and December the portfolio was long the equity, industrial metals, and commodities markets. As was the case throughout 2011, the portfolio was again met with a sharp reversal in global investor sentiment. Despite the announcement of a new Greek debt bailout plan early in the quarter, the lack of defined action by Eurozone officials weighed on investor confidence causing a sharp upwards reversal in safe-haven demand. As a result, Grant Park'sequity positions registered setbacks as investors liquidated share price exposures to invest in safer assets. Among the bright spots in the portfolio was Grant Park'sshort euro and long U.S. Treasury exposure, which made profits due to speculation Standard & Poor's was considering downgrading the sovereign debt of several European nations. Grant Parkwas also able to offset a portion of the portfolio's losses as long positions in U.S. grains profited from a strong rally caused by supply concerns from South America. For the year ended December 31, 2011, Grant Parkhad a negative return of 13.0% for the Class A units, a negative return of 13.5% for the Class B units, a negative return of 11.0% for the Legacy 1 Class units, a negative return of 11.5% for the Legacy 2 Class units, a negative return of 11.2% for the Global 1 Class units, a negative return of 11.4% for the Global 2 Class units, and a negative return of 13.1% for the Global 3 Class units. On a combined unit basis prior to expenses, approximately 5.8% resulted from trading losses which were offset by approximately 0.3% of interest income. The trading losses were further increased by approximately 7.7% in combined total brokerage fees, performance fees 34
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and operating and offering costs borne by
Sector % Gain (Loss) Agriculturals - % Currencies (4.2 )
Energy(0.6 ) Interest rates 7.3 Meats 0.2 Metals (0.5 ) Soft commodities (2.9 ) Stock indices (5.1 ) Total (5.8 )% Capital Resources Grant Parkplans 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'sbusiness, it does not make any capital expenditures and does not have any capital assets that are not operating capital or assets. Grant Parkmaintains 65% to 95% of its net asset value in cash, cash equivalents or other liquid positions over and above that needed to post as collateral for trading. These funds are available to meet redemptions each month. 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 Parkfrom promptly liquidating unfavorable positions and subject Grant Parkto 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 Parkmay not be able to execute trades at favorable prices, if little trading in the contracts is taking place. Other than these limitations on liquidity, which are inherent in Grant Park'sfutures and options trading operations, Grant Park'sassets are expected to be highly liquid.
A portion of each
Grant Parkmaintains 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 35% of Grant Park'svalue, are held in cash, U.S. Treasury securities, commercial paper and/or securities of Government-sponsored enterprises. The balance of Grant Park'sassets, which range from 65% to 95%, are invested in investment grade money market instruments purchased and managed by Middleton Dickinson Capital Management, LLCwhich are held in a separate, segregated account at State Street Bankand Trust Company. Violent fluctuations in prevailing interest rates or changes in other economic conditions could cause mark-to-market losses on Grant Park'scash management income. 35 --------------------------------------------------------------------------------
Table of Contents 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 Parktrades 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 Parkfaces 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 Parkat the same time, and if Grant Parkwere unable to offset positions, Grant Parkcould lose all of its assets and the limited partners would realize a 100% loss. Grant Parkminimizes 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%. All positions of Grant Parkare valued each day on a mark-to-market basis. In addition to market risk, when 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 Statesand 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 nonperformance 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 likely will be greater counterparty credit risk in these transactions. Grant Parktrades 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 Parkcould suffer significant losses on these contracts. In the normal course of business, Grant Parkenters into contracts and agreements that contain a variety of representations and warranties and which provide general indemnifications. Grant Park'smaximum exposure under these arrangements is unknown, as this would involve future claims that may be made against Grant Parkthat have not yet occurred. Grant Parkexpects the risk of any future obligation under these indemnifications to be remote. Contractual Obligations None. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction
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subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to
Market movements result in frequent changes in the fair market value of
Grant Park'sopen positions and, consequently, in its earnings and cash flow. Grant Park'smarket risk is influenced by a wide variety of factors, including the level and volatility of exchange rates, interest rates, equity price levels, the market value of financial instruments and contracts, market prices for base and precious metals, energy complexes and other commodities, the diversification effects among Grant Park'sopen positions and the liquidity of the markets in which it trades. Grant Parkrapidly 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. Erratic, choppy, sideways trading markets and sharp reversals in movements can materially and adversely affect Grant Park'sresults. Likewise, markets in which a potential price trend may start to develop but reverses before an actual trend is realized may result in unprofitable transactions. Grant Park'spast performance is not necessarily indicative of its future results. 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'smarket sensitive instruments. The following quantitative and qualitative disclosures regarding Grant Park'smarket risk exposures contain forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). 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 Parkmanages its risk exposure. Grant Park'sprimary 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'srisk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental 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'scurrent 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'sapproximate risk exposure in the various market sectors traded by its trading advisors is quantified below in terms of Value at Risk (VaR). Due to Grant Park'smark-to-market accounting, any loss in the fair value of Grant Park'sopen positions is directly reflected in Grant Park'searnings, realized or unrealized. Grant Parkuses an Aggregate Returns Volatility method to calculate VaR for the portfolio. The method consists of creating a historical price time series for each instrument or its proxy instrument for the past 200 days, and then measuring the standard deviation of that return history. Then, using a normal distribution (a normal distribution curve has a mean of zero and a standard deviation of one), the standard deviation measurement is scaled up in order to achieve a result in line with the 95% degree of confidence, which corresponds to a scaling factor of approximately 1.645 times of standard deviations. 37 --------------------------------------------------------------------------------
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The VaR for each market sector represents the one day risk of loss for the aggregate exposures associated with that sector. The current methodology used to calculate VaR represents the VaR of
Grant Park'sVaR methodology and computation is based on the underlying risk of each contract or instrument in the portfolio and does not distinguish between exchange and non-exchange traded contracts. It is also not based on exchange maintenance margin requirements. VaR does not typically represent the worst case outcome. VaR is a measure of the maximum amount that Grant Parkcould reasonably be expected to lose in a given market sector in a given day; however, VaR does not typically represent the worst case outcome. The inherent uncertainty of Grant Park'sspeculative trading and the recurrence in the markets traded by Grant Parkof market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated value at risk or Grant Park'sexperience to date. This risk is often referred to as the risk of ruin. In light of the preceding information, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that Grant Park'slosses in any market sector will be limited to VaR or by Grant Park'sattempts to manage its market risk. VaR models, including Grant Park's, are continually evolving as trading portfolios become more diverse and modeling systems and techniques continue to evolve. Moreover, value at risk may be defined differently as used by other commodity pools or in other contexts. The composition of Grant Park'strading portfolio, based on the nature of its business of speculative trading of futures, forwards and options, can change significantly, over any period of time, including a single day of trading. These changes can have a positive or negative material impact on the market risk as measured by VaR.
Value at Risk by Market Sectors
The following tables indicate the trading value at risk associated with
Grant Park'sopen positions by market category as of December 31, 2013and December 31, 2012and the trading gains/losses by market category for the year ended December 31, 2013and the year ended December 31, 2012. All open position trading risk exposures of Grant Parkhave been included in calculating the figures set forth below. As of December 31, 2013, Grant Park'snet asset value was approximately $447.4 million. As of December 31, 2012, Grant Park'snet asset value was approximately $636.7 million. December 31, 2013 Trading Market Sector Value at Risk* Gain/(Loss) Stock indices 0.7 % 11.8 % Currencies 0.5 0.5 Metals 0.3 1.1 Interest rates 0.3 (5.4 ) Agriculturals/softs/meats 0.2 1.3 Energy 0.2 (5.2 ) Aggregate/Total 1.1 % 4.1 % 38
Table of Contents December 31, 2012 Trading Market Sector Value at Risk* Gain/(Loss) Currencies 0.5 % (0.8 )% Interest rates 0.3 2.3 Stock indices 0.3 5.3 Energy 0.1 (0.6 ) Metals 0.1 (2.0 ) Agriculturals/softs/meats 0.1 (0.7 ) Aggregate/Total 0.6 % 3.5 %
-------------------------------------------------------------------------------- * The VaR for a market sector represents the one day risk of loss for the aggregate exposure for that particular sector. The aggregate VaR represents the VaR of
Grant Park'sopen positions across all market sectors and is less than the sum of the VaR of the individual market sectors due to the diversification benefit across all market sectors combined.
Material Limitations of Value at Risk as an Assessment of Market Risk
Past market risk factors will not always result in an accurate prediction of future distributions and correlations of future market movements. Changes in the portfolio value caused by market movements may differ from those measured by the VaR model. The VaR model reflects past trading positions, while future risk depends on future trading positions. VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated within one day. The historical market risk data for the VaR model may provide only limited insight into the losses that could be incurred under unusual market movements. The magnitude of
Grant Park'sopen 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 Parkto incur severe losses over a short period of time. The value at risk table above, as well as the past performance of Grant Park, gives no indication of this risk of ruin. Non-Trading Risk Grant Parkhas 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 Parkalso has non-trading market risk as a result of investing a portion of its available assets in U.S. Treasury bills. 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'sprimary equity exposure is due to equity price risk in the G-7 countries as well as other jurisdictions including Hong Kong, China, Taiwan, South Africa, India, Turkey, Singapore, South Korea, and Australia. The stock index futures contracts currently traded by Grant Parkare generally 39 --------------------------------------------------------------------------------
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futures on broadly based indices, although
Grant Parkalso trades narrow-based stock index or single-stock futures contracts. As of December 31, 2013, Grant Parkwas predominantly long equities in the U.S., Eurozone, Japan, Taiwan, Canada, Hong Kong, U.K. Australia, India, South Africa, Singapore, and Mexicoand short equities in China, Thailand, and Turkey. Currencies Exchange rate risk is a significant market exposure of Grant Park. Grant Park'scurrency 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 Parktrades 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 Parkfor the foreseeable future. As of December 31, 2013, Grant Parkwas long the U.S. dollar against the Japanese yen, Australian dollar, and Canadian dollar and short the U.S. dollar against the British pound, Swiss franc, euro, Mexican peso, and New Zealanddollar. Metals Grant Park'smetals market exposure is due to fluctuations in the price of both precious metals, including gold and silver, as well as base metals including aluminum, lead, copper, tin, nickel, and zinc. As of December 31, 2013, in the precious metals sector Grant Parkhad short positions in gold, silver, platinum, and palladium. In the base metals markets Grant Parkhad long positions in zinc, copper, and lead and short positions in aluminum and nickel. 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 Parkand indirectly affect 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'sprofitability. Grant Park'sprimary interest rate exposure is due to interest rate fluctuations in the United Statesand the other G-7 countries. Grant Parkalso takes futures positions on the government debt of smaller nations, such as Australia, New Zealand, Singapore, and Mexico. The general partner anticipates that G-7 interest rates will remain the primary market exposure of Grant Parkfor the foreseeable future. As of December 31, 2013, Grant Parkwas predominantly long interest rate instruments in Canada, Singapore and Japan, and short interest rate instruments in the U.K., Australia, Eurozone, U.S. and New Zealand. Agriculturals/Softs/Meats Grant Park'sprimary 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 December 31, 2013, in the grains markets, Grant Parkhad long positions in soybeans, soybean meal, milling wheat, and oats and short positions in corn, wheat, soybean oil, canola, and rapeseed. In the livestock markets Grant Parkwas long live cattle and feeder cattle and short lean hogs. In the foods/industrials markets, Grant Parkwas long cocoa, cotton, orange juice, lumber, and crude palm oil and short sugar, coffee, rough rice, and rubber. 40
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Energy Grant Park'sprimary 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 December 31, 2013, the energy market exposure of Grant Parkwas predominantly long Brent crude oil, natural gas, gasoline blendstock, gas oil, heating oil, crude oil, WTI Crude oil, kerosene, new crude oil, and Omancrude oil, and short Phelix Baseload quarterly and carbon emission futures. Energyprices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in these markets. Non-Trading Risk Exposure
The following were the only non-trading risk exposures of
Foreign Currency Balances
Grant Park'sprimary 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'snon-trading risk. Managing Risk Exposure
The general partner monitors and controls
The general partner monitors
Grant Park'sperformance and the concentration of its open positions and consults with the trading advisors concerning Grant Park'soverall 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'smarket risk exposures. The trading advisors apply their own risk management 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 Parkgenerally will use a small percentage of assets as margin, Grant Parkdoes not believe that any increase in margin requirements, as proposed, will have a material effect on Grant Park'soperations. 41 --------------------------------------------------------------------------------
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