TRADING ACTIVITIES AND RELATED RISKS | Note 11. TRADING ACTIVITIES AND RELATED RISKS The Fund engages in the speculative trading of U.S. and foreign futures contracts, forward currency contracts and centrally cleared swap contracts (collectively, “derivatives”). Specifically, the Fund trades a portfolio focused on futures, forward, credit default swap and interest rate swap contracts, which are instruments designed to hedge changes in interest rates, currency exchange rates, stock index values, metals, energy, agriculture values, and credit risks. The Fund is exposed to both market risk, the risk arising from changes in the fair value of the contracts, and credit risk, the risk of failure by another party to perform according to the terms of a contract. In February 2020, the Fund transferred all futures contracts held with UBS Securities LLC to Goldman, Sachs & Co., and all forward currency contracts held with UBS to NatWest. Goldman, Sachs & Co and NatWest serve as the sole futures broker and interbank market maker, respectively, for the Fund’s ongoing trading. In July 2020, the Fund began trading centrally cleared swap contracts. Market Risk For derivatives, risks arise from changes in the fair value of the contracts. Market movements result in frequent changes in the fair value of the Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’s market risk is influenced by a wide variety of factors, including the level and volatility of exchange rates, interest rates, equity price levels, the fair value of financial instruments and contracts, the diversification effects among the Fund’s open positions and the liquidity of the markets in which it trades. Theoretically, the Fund is exposed to a market risk equal to the notional contract value of futures and forward currency contracts purchased and unlimited liability on such contracts sold short. The value of an interest rate swap will change as market interest rates rise and fall in conjunction with whether the contract is to receive or pay a fixed interest rate. As a purchaser of credit default swaps, the Fund’s risk of loss is limited to any cash payments required under the swap contracts. Written credit default contracts (i.e., sell protection) expose the Fund to a market risk equal to the notional value of such swap contracts and any cash payments required under the swap contracts. See Note 1.C. for an explanation of how the Fund determines its valuation for derivatives as well as the netting of derivatives. The Fund adopted the provisions of ASC 815, Derivatives and Hedging, (“ASC 815”). ASC 815 provides enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments are accounted for, and how derivative instruments affect an entity’s financial position, financial performance and cash flows. The following tables summarize quantitative information required by ASC 815. The fair value of the Fund’s derivatives by instrument type, as well as the location of those instruments on the Statements of Financial Condition, as of September 30, 2020 and December 31, 2019 is as follows: Type of Instrument * Statements of Financial Condition Location Asset Derivatives at September 30, 2020 Fair Value Liability Derivatives at September 30, 2020 Fair Value Net Agriculture Contracts Net unrealized gain (loss) on open futures contracts $ 791,997 $ (180,405 ) $ 611,592 Energy Contracts Net unrealized gain (loss) on open futures contracts 893,450 (51,791 ) 841,659 Metal Contracts Net unrealized gain (loss) on open futures contracts 2,046,401 (1,497,746 ) 548,655 Stock Indices Contracts Net unrealized gain (loss) on open futures contracts 397,537 (736,840 ) (339,303 ) Short-Term Interest Rate Contracts Net unrealized gain (loss) on open futures contracts 88,205 (17,379 ) 70,826 Long-Term Interest Rate Contracts Net unrealized gain (loss) on open futures contracts 800,888 (272,547 ) 528,341 Forward Currency Contracts Net unrealized gain (loss) on open forward currency contracts 6,967,462 (7,673,098 ) (705,636 ) Credit Default Index Swap Contracts Credit default index swaps 785,077 (372,863 ) 412,214 Interest Rate Swap Contracts Interest rate swaps 536,868 (85,669 ) 451,199 Totals $ 13,307,885 $ (10,888,338 ) $ 2,419,547 * Derivatives not designated as hedging instruments under ASC 815 Type of Instrument * Statements of Financial Condition Location Asset Derivatives at December 31, 2019 Fair Value Liability Derivatives at December 31, 2019 Fair Value Net Agriculture Contracts Net unrealized gain (loss) on open futures contracts $ 100,996 $ (1,568,839 ) $ (1,467,843 ) Energy Contracts Net unrealized gain (loss) on open futures contracts 976,245 (135,657 ) 840,588 Metal Contracts Net unrealized gain (loss) on open futures contracts 2,891,613 (4,116,917 ) (1,225,304 ) Stock Indices Contracts Net unrealized gain (loss) on open futures contracts 780,153 (609,690 ) 170,463 Short-Term Interest Rate Contracts Net unrealized gain (loss) on open futures contracts 168,765 (578,590 ) (409,825 ) Long-Term Interest Rate Contracts Net unrealized gain (loss) on open futures contracts 768,719 (2,845,651 ) (2,076,932 ) Forward Currency Contracts Net unrealized gain (loss) on open forward currency contracts 12,443,080 (13,865,438 ) (1,422,358 ) Totals $ 18,129,571 $ (23,720,782 ) $ (5,591,211 ) * Derivatives not designated as hedging instruments under ASC 815 The trading gains and losses of the Fund’s derivatives by instrument type, as well as the location of those gains and losses on the Statements of Operations, for the three months and nine months ended September 30, 2020 and 2019 is as follows: Type of Instrument Trading Gains/(Losses) for the Three Months Ended September 30, 2020 Trading Gains/(Losses) for the Three Months Ended September 30, 2019 Agriculture Contracts $ (3,073,722 ) $ 2,124,808 Energy Contracts (1,513,552 ) (1,818,401 ) Metal Contracts 3,955,446 401,967 Stock Indices Contracts (3,577,912 ) 2,882,175 Short-Term Interest Rate Contracts (25,885 ) (95,220 ) Long-Term Interest Rate Contracts (1,444,211 ) 7,782,216 Forward Currency Contracts (2,310,796 ) 2,732,398 Credit Default Index Swap Contracts 80,147 0 Interest Rate Swap Contracts 276,707 0 Total $ (7,633,778 ) $ 14,009,943 Type of Instrument Trading Gains/(Losses) for the Nine Months Ended September 30, 2020 Trading Gains/(Losses) for the Nine Months Ended September 30, 2019 Agriculture Contracts $ (2,898,476 ) $ (268,701 ) Energy Contracts 2,928,834 (3,919,817 ) Metal Contracts 7,742,156 (2,319,442 ) Stock Indices Contracts (26,754,257 ) 12,922,892 Short-Term Interest Rate Contracts 8,422,469 8,730,474 Long-Term Interest Rate Contracts 1,091,904 19,966,020 Forward Currency Contracts 3,922,557 (964,801 ) Credit Default Index Swap Contracts 80,147 0 Interest Rate Swap Contracts 276,707 0 Total $ (5,187,959 ) $ 34,146,625 Line Item in the Statements of Operations Trading Gains/(Losses) for the Three Months Ended September 30, 2020 Trading Gains/(Losses) for the Three Months Ended September 30, 2019 Futures trading gains (losses): Realized** $ (7,166,326 ) $ 16,955,842 Change in unrealized 1,486,490 (5,678,297 ) Forward currency trading gains (losses): Realized** (3,501,984 ) (301,828 ) Change in unrealized 1,191,188 3,034,226 Swap trading gains (losses): Realized 266,524 0 Change in unrealized 90,330 0 Total $ (7,633,778 ) $ 14,009,943 Line Item in the Statements of Operations Trading Gains/(Losses) for the Nine Months Ended September 30, 2020 Trading Gains/(Losses) for the Nine Months Ended September 30, 2019 Futures trading gains (losses): Realized*** $ (15,897,993 ) $ 38,453,492 Change in unrealized 6,430,623 (3,342,066 ) Forward currency trading gains (losses): Realized*** 3,205,835 2,165,363 Change in unrealized 716,722 (3,130,164 ) Swap trading gains (losses): Realized 266,524 0 Change in unrealized 90,330 0 Total $ (5,187,959 ) $ 34,146,625 ** For the three months ended September 30, 2020 and 2019, the amounts above include gains/(losses) on foreign currency cash balances at the futures brokers of $5,148 and $(58,728), respectively, and gains/(losses) on spot trades in connection with forward currency trading at the interbank market makers of $593,508 and $549,760, respectively. *** For the nine months ended September 30, 2020 and 2019, the amounts above include gains/(losses) on foreign currency cash balances at the futures brokers of $126,152 and $90,585, respectively, and gains/(losses) on spot trades in connection with forward currency trading at the interbank market makers of $(204,238) and $591,152, respectively. For the three months ended September 30, 2020 and 2019, the monthly average of futures contracts bought and sold was approximately 29,800 and 25,100, respectively; the monthly average of notional value of centrally cleared swap contracts was approximately $269,300,000 and $0, respectively; and the monthly average of notional value of forward currency contracts was $1,246,900,000 and $1,597,300,000, respectively. For the nine months ended September 30, 2020 and 2019, the monthly average of futures contracts bought and sold was approximately 26,800 and 25,800, respectively; the monthly average of notional value of centrally cleared swap contracts was approximately $269,300,000 and $0, respectively; and the monthly average of notional value of forward currency contracts was $1,120,000,000 and $1,862,700,000, respectively. Open contracts generally mature within three months; as of September 30, 2020, the latest maturity date for open futures contracts is December 2021 and the latest maturity date for open forward currency contracts is December 2020. However, the Fund intends to close all futures and offset all forward currency contracts prior to maturity. The latest termination date for centrally cleared swap contracts is December 2025. Credit Risk The Fund trades futures contracts on exchanges that require margin deposits with the futures brokers and centrally cleared swap contracts that require margin deposits with the swaps broker. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires a futures broker or swaps broker to segregate all customer transactions and assets from such futures broker’s or swaps broker’s proprietary activities. A customer’s cash and other property (for example, U.S. Treasury Bills) deposited with a futures broker or swaps broker are considered commingled with all other customer funds subject to the futures broker’s or swaps broker’s segregation requirements. In the event of a futures broker’s or swaps broker’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than total cash and other property deposited. The Fund trades forward currency contracts in unregulated markets between principals and assumes the risk of loss from counterparty nonperformance. Accordingly, the risks associated with forward currency contracts are generally greater than those associated with exchange traded contracts because of the greater risk of counterparty default. Additionally, the trading of forward currency contracts typically involves delayed cash settlement. The Fund has a portion of its assets on deposit with PNC Bank. In the event of a financial institution’s insolvency, recovery of the Fund’s assets on deposit may be limited to account insurance or other protection afforded such deposits. The Fund has entered into ISDA Agreements with UBS AG and NatWest. Under the terms of each ISDA Agreement, upon the designation of an Event of Default, as defined in each ISDA Agreement, the non-defaulting party may set-off any sum or obligation owed by the defaulting party to the non-defaulting party against any sum or obligation owed by the non-defaulting party to the defaulting party. If any sum or obligation is unascertained, the non-defaulting party may in good faith estimate that sum or obligation and set-off in respect to that estimate, accounting to the other party when such sum or obligation is ascertained. Under the terms of each master netting agreement with UBS Securities and Goldman, upon occurrence of a default by the Fund, as defined in respective account documents, UBS Securities and Goldman have the right to close out any or all open contracts held in the Fund’s account; sell any or all of the securities held; and borrow or buy any securities, contracts or other property for the Fund’s account. The Fund would be liable for any deficiency in its account resulting from such transactions. The amount of required margin and good faith deposits with the futures brokers, swaps broker, and interbank market makers usually range from 10% to 30% of Net Asset Value. The fair value of securities held to satisfy such requirements at September 30, 2020 and December 31, 2019 was $19,891,790 and $38,712,533, respectively, which equals approximately 15% and 24% of Net Asset Value, respectively. Included in cash deposits with the futures brokers, swaps broker and interbank market makers at September 30, 2020 and December 31, 2019 was restricted cash for margin requirements of $16,866,069 and $10,274,725, respectively, which equals approximately 13% and 6% of Net Asset Value, respectively. Set forth below are tables which disclose both gross information and net information about instruments and transactions eligible for offset in the Statements of Financial Condition and instruments and transactions that are subject to a master netting agreement as well as amounts related to financial collateral (including U.S. Treasury Bills and cash collateral) held at clearing brokers and counterparties. Margin reflected in the collateral tables is limited to the net amount of unrealized 1oss at each counterparty. Actual margin amounts required at each counterparty are based on the notional amounts or the number of contracts outstanding and may exceed the margin presented in the collateral tables. Offsetting of Derivative Assets by Counterparty As of September 30, 2020 Type of Instrument Counterparty Gross Amounts of Recognized Assets Gross Amounts Offset in the Statements of Financial Condition Net Amounts of Unrealized Gain Presented in the Statements of Financial Condition Futures contracts Goldman Sachs & Co. $ 5,018,478 $ (2,756,708 ) $ 2,261,770 Forward currency contracts NatWest Markets Plc 6,967,462 (6,967,462 ) 0 Centrally cleared swap contracts Centrally Cleared 1,321,945 (458,532 ) 863,413 Total derivatives $ 13,307,885 $ (10,182,702 ) $ 3,125,183 Derivative Assets and Collateral Received by Counterparty As of September 30, 2020 Counterparty Net Amounts of Unrealized Gain in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition Net Amount Financial Instruments Cash Collateral Received Goldman Sachs $ 2,261,770 $ 0 $ 0 $ 2,261,770 NatWest Markets Plc 0 0 0 0 Centrally Cleared 863,413 0 0 863,413 Total $ 3,125,183 $ 0 $ 0 $ 3,125,183 Offsetting of Derivative Liabilities by Counterparty As of September 30, 2020 Type of Instrument Counterparty Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statements of Financial Condition Net Amounts of Unrealized Loss Presented in the Statements of Financial Condition Futures contracts Goldman Sachs & Co. $ 2,756,708 $ (2,756,708 ) $ 0 Forward currency contracts NatWest Markets Plc 7,673,098 (6,967,462 ) 705,636 Centrally cleared swap contracts Centrally Cleared 458,532 (458,532 ) 0 Total derivatives $ 10,888,338 $ (10,182,702 ) $ 705,636 Derivative Liabilities and Collateral Pledged by Counterparty As of September 30, 2020 Counterparty Net Amounts of Unrealized Loss in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition Net Amount Financial Instruments Cash Collateral Pledged Goldman Sachs & Co. $ 0 $ 0 $ 0 $ 0 NatWest Markets Plc 705,636 0 (705,636 ) 0 Centrally Cleared 0 0 0 0 Total $ 705,636 $ 0 $ (705,636 ) $ 0 Offsetting of Derivative Assets by Counterparty As of December 31, 2019 Type of Instrument Counterparty Gross Amounts of Recognized Assets Gross Amounts Offset in the Statements of Financial Condition Net Amounts of Unrealized Gain Presented in the Statements of Financial Condition Futures contracts UBS Securities LLC $ 2,834,912 $ (2,834,912 ) $ 0 Futures contracts Goldman Sachs & Co. 2,851,579 (2,851,579 ) 0 Total futures contracts 5,686,491 (5,686,491 ) 0 Forward currency contracts UBS AG 6,221,540 (6,221,540 ) 0 Forward currency contracts NatWest Markets Plc 6,221,540 (6,221,540 ) 0 Total forward currency contracts 12,443,080 (12,443,080 ) 0 Total derivatives $ 18,129,571 $ (18,129,571 ) $ 0 Derivative Assets and Collateral Received by Counterparty As of December 31, 2019 Counterparty Net Amounts of Unrealized Gain in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition Net Amount Financial Instruments Cash Collateral Received UBS Securities LLC $ 0 $ 0 $ 0 $ 0 Goldman Sachs & Co. 0 0 0 0 UBS AG 0 0 0 0 NatWest Markets Plc 0 0 0 0 Total $ 0 $ 0 $ 0 $ 0 Offsetting of Derivative Liabilities by Counterparty As of December 31, 2019 Type of Instrument Counterparty Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statements of Financial Condition Net Amounts of Unrealized Loss Presented in the Statements of Financial Condition Futures contracts UBS Securities LLC $ 4,929,967 $ (2,834,912 ) $ 2,095,055 Futures contracts Goldman Sachs & Co. 4,925,377 (2,851,579 ) 2,073,798 Total futures contracts 9,855,344 (5,686,491 ) 4,168,853 Forward currency contracts UBS AG 6,932,719 (6,221,540 ) 711,179 Forward currency contracts NatWest Markets Plc 6,932,719 (6,221,540 ) 711,179 Total forward currency contracts 13,865,438 (12,443,080 ) 1,422,358 Total derivatives $ 23,720,782 $ (18,129,571 ) $ 5,591,211 Derivative Liabilities and Collateral Pledged by Counterparty As of December 31, 2019 Counterparty Net Amounts of Unrealized Loss in the Statements of Financial Condition Gross Amounts Not Offset in the Statements of Financial Condition Net Amount Financial Instruments Cash Collateral Pledged UBS Securities LLC $ 2,095,055 $ 0 $ (2,095,055 ) $ 0 Goldman Sachs & Co. 2,073,798 0 (2,073,798 ) 0 UBS AG 711,179 (711,179 )* 0 0 NatWest Markets Plc 711,179 0 (711,179 ) 0 Total $ 5,591,211 $ (711,179 ) $ (4,880,032 ) $ 0 * Represents a portion of the $9,926,880 fair value in U.S. Treasury Bills held at the interbank market makers. Campbell & Company 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. Campbell & Company’s basic market risk control procedures consist of continuously monitoring open positions, diversification of the portfolio and maintenance of a margin-to-equity ratio that rarely exceeds 30%. Campbell & Company’s attempt to manage the risk of the Fund’s open positions is essentially the same in all market categories traded. Campbell & Company applies risk management policies to its trading which generally limit the total exposure that may be taken per “risk unit” of assets under management. In addition, Campbell & Company follows diversification guidelines (often formulated in terms of the balanced volatility between markets and correlated groups), as well as reducing position sizes dynamically in response to trading losses. Campbell & Company controls the risk of the Fund’s non-trading fixed income instruments by limiting the duration of such instruments and requiring a minimum credit quality of the issuers of those instruments. Campbell & Company seeks to minimize credit risk primarily by depositing and maintaining the Fund’s assets at financial institutions and brokers which Campbell & Company believes to be credit worthy. The limited partners bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received. |