Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The offering of its Units of Limited Partnership Interest commenced on January 12, 1994. The initial offering terminated on April 15, 1994 and the Fund commenced operations on April 18, 1994. The continuing offering period commenced at the termination of the initial offering period and terminated on January 6, 2012.
The Fund will be terminated and dissolved promptly thereafter upon the happening of the earlier of: (a) the expiration of the Fund’s stated term of December 31, 2023; (b) an election to dissolve the Fund at any time by Limited Partners owning more than 50% of the Units then outstanding; (c) the withdrawal of Campbell & Company, unless one or more new general partners have been elected or appointed pursuant to the Agreement of Limited Partnership, as amended; (d) Campbell & Company determines that the purpose of the Fund cannot be fulfilled; or (e) any event which shall make unlawful the continuing existence of the Fund.
Investors who do not redeem prior to December 31, 2023 should expect to receive a distribution of the proportionate share of the Fund’s net asset value as promptly as reasonably practicable after December 31, 2023, but in no event later than January 31, 2024, with a true-up distribution, if any, to follow after completion of the Fund’s final audit.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 period. Management believes that the estimates utilized in preparing the financial statements are reasonable and prudent; however, actual results could differ from those estimates. The Fund’s significant accounting policies are described in detail in Note 1 of the Financial Statements.
The Fund records all investments at fair value in its financial statements, with changes in fair value reported as a component of realized and change in unrealized trading gains (losses) in the Statements of Operations. Generally, fair values are based on market prices; however, in certain circumstances, estimates are involved in determining fair value in the absence of an active market closing price (i.e., forward contracts which are traded in the interbank market).
Capital Resources
Effective January 6, 2012, units in the Fund were no longer offered for sale. For existing investors in the Fund, business has been and will be conducted as usual. There will be no change in trading, operations or monthly statements, etc., and redemptions will continue to be offered on a monthly basis.
The Fund does not intend to raise any capital through borrowing. Due to the nature of the Fund’s business, it will make no capital expenditures and will have no capital assets, which are not operating capital or assets.
The Fund generally maintains 60 to 75% of its net asset value in cash, cash equivalents or other liquid positions in its cash management program over and above that needed to post as collateral for trading. These funds are available to meet redemptions each month. After redemptions are taken into account each month, the trade level of the Fund is adjusted and positions in the instruments the Fund trades are liquidated, if necessary, on a pro-rata basis to meet those increases or decreases in trade levels.
Liquidity
Most United States commodity exchanges limit fluctuations in the prices of futures contracts 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 futures 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 the Fund from promptly liquidating unfavorable positions and subject the Fund to substantial losses which could exceed the margin initially committed to such trades. In addition, even if futures prices have not moved the daily limit, the Fund may not be able to execute futures trades at favorable prices, if little trading in such contracts is taking place. Other than these limitations on liquidity, which are inherent in the Fund’s futures trading operations, the Fund’s assets are expected to be highly liquid.
The entire offering proceeds, without deductions, were credited to the Fund’s bank, custodial and/or cash management accounts. The Fund meets margin requirements for its trading activities by depositing cash or U.S. government securities with the futures brokers and the over-the-counter counterparties. This does not reduce the risk of loss from trading futures, forward and swap contracts. The Fund receives all interest earned on its assets. No other person shall receive any interest or other economic benefits from the deposit of Fund assets.
Approximately 10% to 30% of the Fund’s assets normally are committed as required margin for futures contracts and held by the futures brokers, although the amount committed may vary significantly. Such assets are maintained in the form of cash or U.S. Treasury bills in segregated accounts with the futures brokers pursuant to the Commodity Exchange Act and regulations thereunder. Approximately 5% to 15% of the Fund’s assets are deposited with over-the-counter counterparties or centrally cleared in order to initiate and maintain forward or contracts. Such assets are not held in segregation or otherwise regulated under the Commodity Exchange Act, unless such over-the-counter counterparty is registered as a futures commission merchant. These assets are held either in U.S. government securities or short-term time deposits with U.S.-regulated bank affiliates of the over-the-counter counterparties.
The general partner deposits the majority of those assets of the Fund that are not required to be deposited as margin with the futures brokers and over-the-counter counterparties in a custodial account with Northern Trust Company. The assets deposited in the custodial account with Northern Trust Company are segregated. Such custodial account constitutes approximately 60% to 75% of the Fund’s assets and are invested directly by PNC Capital Advisors, LLC (“PNC”). PNC is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. PNC does not guarantee any interest or profits will accrue on the Fund’s assets in the custodial account. PNC invests the assets according to agreed upon investment guidelines that first preserve capital, second allow for sufficient liquidity, and third provide a yield beyond the risk-free rate. Investments can include, but are not limited to, (i) U.S. government, agency, or municipal securities; (ii) banker acceptances or certificates of deposits; (iii) commercial paper or money market securities; (iv) short-term, investment-grade corporate debt securities; or (v) investment-grade, asset backed securities.
The Fund occasionally receives margin calls (requests to post more collateral) from its futures brokers or over-the-counter counterparties, which are met by moving the required portion of the assets held in the custody accounts at Northern Trust Company to the margin accounts. In the past three years, the Fund has not needed to liquidate any position as a result of a margin call.
The Fund’s assets are not and will not be, directly or indirectly, commingled with the property of any other person in violation of law or invested in or loaned to Campbell & Company or any affiliated entities.
Off-Balance Sheet Risk
The term “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. The Fund trades in futures, forward and swap contracts and is therefore a party to financial instruments with elements of off-balance sheet market and credit risk. In entering into these contracts there exists a risk to the Fund, market risk, that such 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 futures interests positions of the Fund at the same time, and if the Fund’s trading advisor was unable to offset futures interest positions of the Fund, the Fund could lose all of its assets and the Limited Partners would realize a 100% loss. Campbell & Company, the general partner (who also acts as trading advisor), 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 30% however, these precautions may not be effective in limiting the risk of loss.
In addition to market risk, in entering into futures, forward and swap contracts there is a credit risk that a counterparty will not be able to meet its obligations to the Fund. The counterparty for futures contracts and centrally cleared swap contracts traded in the United States and on most foreign exchanges is the clearinghouse associated with such exchange. In general, clearinghouses are backed by the corporate members of the clearinghouse 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 where the clearinghouse is not backed by the clearing members, like some foreign exchanges, it is normally backed by a consortium of banks or other financial institutions.
In the case of forward contracts, which are traded on the interbank market rather than on exchanges, the counterparty is generally a single bank or other financial institution, rather than a group of financial institutions; thus there may be a greater counterparty credit risk. Campbell & Company trades for the Fund only with those counterparties which it believes to be creditworthy. All positions of the Fund are valued each day at fair value. There can be no assurance that any clearing member, clearinghouse or other counterparty will be able to meet its obligations to the Fund.
Disclosures About Certain Trading Activities that Include Non-Exchange Traded Contracts Accounted for at Fair Value
The Fund invests in futures, forward currency, and centrally cleared swap contracts. The fair value of futures (exchange-traded) contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of the last business day of the reporting period. The fair value of forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices quoted as of 3:00 P.M. (E.T.) of the last business day of the reporting period. The fair value of centrally cleared swap contracts is determined by using currency market quotations provided by an independent external pricing source.
Results of Operations
The returns for the six months ended June 30, 2023 and 2022 were 2.80% and 36.15%, respectively. During the six months ended June 30, 2023 and 2022, the Fund accrued brokerage fees in the amount of $5,878,833 and $5,441,976, respectively, and paid brokerage fees in the amount of $5,900,716 and $5,220,106, respectively. No performance fees were accrued or paid during these periods.
2023 (For the Six Months Ended June 30)
Of the 2.80% year to date return, approximately 4.35% was due to trading gains (before commissions), approximately 2.41% due to investment income and approximately (3.96)% due to brokerage fees, operating expenses and offering costs borne by the Fund. An analysis of the 4.35% trading gains by sector is as follows:
| Sector | | % Gain (Loss) | |
| Credit | | | 1.18 | % |
| Commodities | | | 0.94 | % |
| Foreign Exchange | | | 0.54 | % |
| Interest Rates | | | 0.35 | % |
| Equity Indices | | | 1.34 | % |
| | | | 4.35 | % |
The Fund showed a profit in January. Gains came from stock index, commodity, foreign exchange (FX), and credit positions, while interest rate holdings produced some partially offsetting losses. Global stock indexes generated the largest gains for the Fund in January. Net long positioning on a variety of equity holdings gained as most major global stock indexes finished the month in the green. The general risk-on sentiment was fueled by China reopening optimism and the hopes that the world’s Central Banks ease off their aggressive rate-hike cycle. A slew of mixed Q4 earnings reports and continued layoff announcements were largely ignored as money flowed into riskier assets. Commodity trading also provided gains for the Fund to start the year. Long coffee and sugar holdings generated the biggest wins within the softs sub-sector as those prices rallied on supply concerns. Industrial metals generated additional gains for the Fund spearheaded by a long LME copper position. The base metals complex experienced a significant monthly rally on back of the weak US dollar, ongoing China reopening optimism, and increasing concern over dwindling stockpiles. Foreign exchange trading produced additional Fund profits. The US dollar experienced a sell-off in January and the gains on long Emerging Market (EM) positions, versus short the USD, more than offset the losses incurred in the short Developed Market (DM) currencies. Longs in Latin American currencies were the main EM gainers as risky assets and carry trades were bought in the risk-on environment. Interest rate positions generated partially offsetting losses on the month. US Treasuries advanced (yields fell) after easing US inflation data strengthened the case for the Fed to turn less aggressive, hurting short positioning along the curve. In Europe, short positioning on German bonds added to Fund losses as prices followed Treasuries higher despite hawkish rhetoric from Lagarde and other European Central Bankers. Long positioning on UK gilts and the Aussie 10-year bond generated partially offsetting gains.Short protection positions in the credit indices which narrowed sharply alongside the broader rally in risk assets generated gains for the Fund.
The Fund showed a robust profit in February. Gains came from fixed income, foreign exchange (FX), and commodity positions, while stock indices produced some partially offsetting losses. Credit holdings had limited P&L impact on the month. Interest rate positions dominated Fund gains in February with long-dated and short-dated instruments equally contributing to profits. US Treasury prices fell (yields rose) as hotter-than-expected inflation data and an extraordinary jump in payrolls elicited increasingly hawkish commentary from Fed members throughout the month, benefiting short positioning. Euro-area core inflation accelerated to a record, prompting money markets to price in a higher ECB terminal rate, which created gains for short German bond positioning. Interest rate swap holdings were also additive, led by a payer position in Mexican rates as yields moved higher after a larger-than-expected rate hike from Mexico’s Central Bank. Foreign exchange trading produced additional Fund returns. The US dollar rallied over the course of the month and the Fund’s short positions in the Developed Market (DM), versus long the US dollar, drove sector gains. A short Norwegian krone holding (against long USD) was a major P&L contributor in the FX sector as the krone continued to be susceptible to weakness in energies, ultimately ending the month as the worst performing G-10 currency in 2023. Commodities provided additional profits for the Fund in February. Short holdings across the industrial and precious metal sub-sectors profited as increasing expectations for further Fed policy tightening and a stronger US dollar weighed on metals prices. Net long global stock index positioning generated some offsetting losses during the month. After a strong start to the year, February saw equity markets retrace in North America and Asia. In the US, stronger-than-expected economic releases, which included labor and inflation data, spurred a meaningful repricing of FOMC rate expectations. In the APAC region, strained US-China geopolitical relations and weaker near-term demand outlooks for China further weighed on risk sentiment. Long positioning on European equities provided some offsetting gains as markets proved more resilient to higher rates in the region.
The Fund realized a loss in March. Losses came from interest rate, stock, commodity, and credit holdings, while foreign exchange (FX) produced some partially offsetting gains during the month. Interest rate positions dominated Fund losses on the month, with both long-dated and short-dated instruments suffering in the wake of the banking crisis that drove global bond prices higher (yields lower). The negative impact on the financial sector from the US Fed’s policy tightening campaign prompted traders to scale back rate hike bets, hurting short US Treasury positioning across most tenors. Partially offsetting gains came from long UK Gilt and Aussie 10-year bond positioning, both of which benefited from the rapid shift to less risky assets. Stock holdings also weighed on Fund performance amid a volatile month of trading. Predominantly long stock positioning was negatively impacted after the collapse of Silicon Valley Bank and the ensuing fears of contagion. Some stock P&L losses were recovered with prices rallying off mid-month lows as the banking sector stabilized and investors weighed the possibility of the Fed pausing its rate increases. Commodity positions added to Fund losses in March. Short precious metal holdings generated the largest sub-sector losses as bullion prices rose amid the banking sector turmoil, diminished expectations for further Fed tightening, and a softer US dollar. Credit trading generated additional losses as a short protection position in the iTraxx Senior Financial index suffered after credit spreads widened sharply in the wake of the Silicon Valley Bank and Credit Suisse fiascos. Foreign exchange trading provided some partially offsetting Fund gains. While the DXY index traded lower during the month on back of the shift to a more dovish outlook on the US Federal Reserve, a few of the so-called commodity currencies were the exceptions. The Fund profited from short-positions on the Aussie dollar and Norwegian krone, which both traded softer on back of weakness in oil markets.
The Fund was close to unchanged in April. Commodity and foreign exchange (FX) positions produced gains, while fixed income holdings generated offsetting losses. Credit and stock holdings had little effect on the Fund. The commodity sector was additive for the Fund during the month. A long sugar holding produced a significant gain as the soft commodity rallied to an 11-year high on Brazilian supply concerns following above-average rainfall in the region. Some long energy holdings generated partially offsetting losses amid a mid-month sector-wide selloff that was spurred by recession worries and potentially tighter financial conditions which clouded the outlook for fuel demand. FX trading contributed modest gains in April. Varied performance in the global FX markets (versus the dollar), coupled with mixed positioning led to negligible sector P&L. Short positions on the Norwegian krone and Australian dollar, which continued their 2023 weakening trends, resulted in gains for the Fund. Partially offsetting losses were realized in certain emerging market currencies, where long positioning was a detractor in the risk-off environment. Mixed credit positions produced de minimis gains for the Fund as credit spreads widened alongside the sell-off in other risky assets. Interest rate positions added modest losses to the Fund over the month. UK Gilts underperformed after data showed inflation remained in the double digits, prompting traders to raise bets on the peak BOE rate, hurting long positioning. Aussie bonds also contributed to losses after minutes showed the RBA discussed a quarter-point hike before deciding on a pause in April. Short US Treasury positions generated some partially offsetting gains. Stocks indexes trading was flat for the Fund in April. Gains were seen from Asian and European stock holdings while US index positions generated offsetting losses as markets weighed the potential higher-for-longer dynamic, the debt ceiling stalemate, renewed banking sector turmoil, and a pickup in growth worries with better than feared earnings and guidance.
The Fund produced a gain during May. Profits came from commodity and foreign exchange (FX) positions, while stock index and interest rates produced some partially offsetting losses. Credit holdings had little impact on the Fund. The commodity sector led Fund gains during the month of May. Short copper positions generated the best sector gains with prices falling to 6-month lows as sentiment soured on the back of China’s disappointing economic recovery and on the stronger US dollar. Additionally, copper stockpiles rebounded from multi-year lows. A short natural gas position also provided gains as the energy dropped amid ample supplies following persistent milder weather in the US. Foreign exchange trading generated additional Fund profits. Despite debt-ceiling concerns in the United States, the US dollar rallied during the month and the Fund’s gains on short Developed Market (DM) positions (versus long the USD) marginally offset the losses incurred in some long Emerging Market (EM) currencies. Shorts in commodity-linked currencies like the Norwegian krone and Australian dollar were the big DM gainers with those FX markets depreciating as oil prices sold off and as China growth concerns increased. Global stock index trading resulted in losses to the Fund. Net-long positioning for much of the month generated losses as recession fears, a ‘higher-for-longer’ stance from many Central Banks, US debt ceiling concerns, and China’s lackluster recovery weighed on sentiment. A strong AI-driven rally following Nvidia’s upbeat earnings and blow-out guidance at month-end capped losses. Interest rate positions were also a negative contributor in May. Long positioning on the UK Gilt led losses as a higher-than-expected UK inflation print put pressure on the Bank of England to continue hiking and caused Gilts to weaken (yields higher). Partially offsetting gains came from Canadian and New Zealand interest rate instruments. Canada’s inflation also came in hotter-than-expected which proved beneficial to short CGB positioning as prices declined. Payer NZD IRS positioning (which is profitable with higher yields) experienced monthly gains as Kiwi yields pushed higher prior to the late May RBNZ meeting.
The Fund produced a loss in June. Losses came from commodity and foreign exchange holdings while interest rate, stock index, and credit positions produced some partially offsetting gains during the month. The commodity sector led Fund losses during the month of June. Energy positions generated the largest sub-sector loss, namely from a short natural gas holding. Futures on natural gas rallied throughout the month as warmer temperatures continued to drive up cooling demand. A short on cocoa futures added to monthly losses as the soft commodity surged on fears heavy rains in major producing countries will disrupt harvests. Foreign exchange trading generated additional Fund losses as short positions in the Developed Market currencies (versus long the USD) more than offset the gains experienced in the Emerging Markets. The dominant story for the USD and monetary policy was that the Fed “skipped” a rate hike at its June meeting while other central banks like the ECB remained focused on tightening. This divergence resulted in the dollar index trading weaker on the month, hurting our net long USD position. Interest rate positions resulted in some offsetting gains in June with the positive P&L being led by short-dated instruments. With the exception of the Federal Reserve, major central banks continued raising rates with several delivering larger-than-expected hikes against a backdrop of better-than-expected economic data and persistent inflation. Short positioning on Euribor and German 2-year bonds benefited as yields rallied (prices fell) in the wake of a 25bps ECB hike and ongoing hawkish commentary from ECB President Lagarde. Short protection positions on the credit indices generated additional gains for the Fund. Credit spreads narrowed amid the broader rally in risk and the Fund benefited as a result. Global stock indexes generated profits for the Fund. Net long positioning on a variety of equity holdings benefited as most major indices finished the month in positive territory. Despite aggressive monetary policy tightening and geopolitical tensions, risk-on sentiment prevailed on optimistic soft-landing expectations and AI sector growth tailwinds.
2022 (For the Six Months Ended June 30)
Of the 36.15% year to date return, approximately 40.45% was due to trading gains (before commissions) and offset by approximately (0.07)% due to investment loss and approximately (4.23)% due to brokerage fees, operating expenses and offering costs borne by the Fund. An analysis of the 40.45% trading gains by sector is as follows:
| Sector | | % Gain (Loss) | |
| Credit | | | 0.48 | % |
| Commodities | | | 12.77 | % |
| Foreign Exchange | | | 15.26 | % |
| Interest Rates | | | 10.87 | % |
| Equity Indices | | | 1.07 | % |
| | | | 40.45 | % |
The Fund showed a gain in January with gains coming from interest rate, commodity, and foreign exchange (FX) positions, while stock index and credit holdings produced some partially offsetting losses. Interest rate positions produced the largest gains for the Fund during January, with profits most pronounced in long-dated instruments. Global yields jumped (prices fell) as persistent, rising inflation prompted central banks to increase efforts in tightening monetary policy. Short UK gilt positioning contributed the most sizable gains after UK inflation hit its highest reading since 1992 on surging demand, higher energy costs, and supply chain disruptions. Commodity trading provided additional profits for the Fund during the month. Long positioning on the petroleum complex generated the best sector gains. Energy markets advanced as supply constraints and heightened geopolitical tensions coincided with a recovery in demand amid easing concerns surrounding the severity of the Omicron variant. Longs on soy products also produced gains as soy markets advanced on tight supply expectations amid persistent South American weather concerns. Foreign exchange trading produced additional gains for the Fund with long US dollar positions (versus short foreign currency) benefiting. The greenback rallied during the second half of January with the DXY dollar index reaching a multi-year high on back of the decidedly hawkish approach from the Federal Reserve. At the January FOMC meeting, the Fed signaled they intend to raise interest rates as early as March and the market subsequently priced in five hikes during 2022. Largely long positioning on global stock indices produced losses for the Fund in January, with most major benchmarks posting large losses for the month. Investor worries about inflation, persistent supply chain issues, and the upcoming rate hikes from the Federal Reserve fueled the risk-off trading. In credit trading, short protection positions generated further offsetting losses as US and European credit spreads widened sharply alongside the unwind of risky assets.
The Fund showed a modest loss in February with losses came from foreign exchange, credit, fixed income, and stock index positions as commodity holdings produced some partially offsetting gains. Foreign exchange trading produced losses for the Fund. Short positions in developed market currencies (against long USD) were overwhelmed as the recent strength in the greenback was countered by this month’s demand for commodity currencies like the Australian and New Zealand dollars. Short positions in some Eastern European currencies (against long USD) provided partially offsetting gains as Russian contagion fears drove weakness in Polish and Hungarian assets. In credit trading, short protection positions generated further losses as US and European credit spreads widened sharply alongside the unwind of risky assets. Interest rate positions caused additional losses in February. A late month flight-to-safety rally sparked by the intensifying Russia/Ukraine conflict reversed earlier weakness. Losses in German and Australian 10-year bonds overwhelmed gains made in UK Gilts and US Treasuries. Global stock indices also detracted from the Fund amid mixed positioning during the month. February began with most major indexes fluctuating as investors focused on hotter than expected inflation and assessed prospects for rate hikes and quantitative tightening. By mid-month sentiment turned negative as the focus shifted from monetary policy to geopolitical concerns and the unprecedented Russian sanctions. Commodity trading provided positive returns for the Fund during the month. Long positioning on the petroleum complex generated the best sector gains as energy markets advanced amid continued supply constraints and elevated risk premiums stemming from geopolitical tensions between Russia and Ukraine. Some long grain holdings also generated gains as grain markets rallied sharply across the board on supply concerns following Russia’s attack on Ukraine.
The Fund showed a strong gain in March with gains coming from commodity, foreign exchange, fixed income, stock index, and credit positions. Commodity trading provided the strongest returns for the Fund during the month. Long positioning across the energy complex resulted in the best sub-sector gains as global demand continued to recover from the pandemic while the war in Europe further squeezed an already tight market. Base metal holdings also contributed gains as long positioning profited from a sharp rally across the complex as Russia’s invasion of Ukraine coincided with a historic supply shortage. Nickel dominated industrial metal returns following outperformance on the back of a short-squeeze that saw prices leap 85% over two days, a move that ultimately resulted in an unprecedented 6-day trading halt on the LME. Foreign exchange trading produced additional profits for the Fund with both the developed market (DM) and emerging market (EM) currencies contributing. A short position on the Japanese yen drove the largest DM gains as the JPY weakened on the continued ultra-loose monetary policy in Japan relative to rising yields in the US. A long position on the Brazilian real was also profitable as the BRL benefited from price increases in Brazilian exports as well as general demand for higher yielding currencies. Interest rate positions also contributed gains with short positioning on Treasuries leading profits. The Federal Reserve’s policy normalization began in March and leaned more hawkish than expected which proved profitable for short 2-year and 10-year UST positions. Global stock indices further added to profits as momentum and short-term strategies were able to navigate the significant mid-month reversal in equities. Short positions to start the month were profitable as stocks traded lower on geopolitical concerns, an FOMC rate hike, and hawkish Fed commentary. However, risk sentiment turned positive on war de-escalation prospects during the latter half of the month and a shift in model positioning captured additional gains. In credit trading, short protection positions generated nominal gains as US and European credit spreads tightened alongside stock indices and other risky assets.
The Fund produced a gain during April. Profits came from foreign exchange, interest rate, and commodity holdings, while credit positions and stock index trading had little P&L impact. Foreign exchange trading produced the largest Fund returns in April. Long US dollar exposure proved profitable as the greenback saw a sharp rally over the month. The USD gained on the increasingly aggressive US monetary policy and the significant rise in longer dated interest rate yields. The greenback also benefited from global growth concerns as Europe continues to struggle with the fallout from Russia’s invasion of Ukraine, and China enacted lockdowns in a bid to curtail the spread of the latest Covid-19 variant. Interest rate positions produced additional profits during April, with gains concentrated in long-dated instruments. Short positioning on US Treasuries produced the greatest profits for the sector as the Fed prepares the double act of rate hikes with quantitative tightening. The prospect of tighter monetary policy coupled with concerns over surging inflation around the world sent bond prices lower and real yields higher.
Commodity positions also generated gains during the month. Long holdings on the energy complex generated the best commodity sub-sector returns as energy markets advanced on continued supply concerns, although gains were capped as China’s extended coronavirus lockdowns curbed demand for energies. Grain holdings provided additional returns for the Fund as the war in Ukraine, drought concerns, and increased biofuel demand lifted prices higher. Credit trading was relatively flat as short protection positions generated additional offsetting losses as US and European credit spreads widened amid the risk-off environment. Mixed positioning in global stock indices had little impact on the Fund in April, with nearly all major benchmarks logging losses for the month. The risk-off trading was fueled by the hawkish shift in global monetary policy, demand destruction from China’s Covid lockdowns, and continued geopolitical uncertainty centered on Ukraine.
The Fund produced a loss during May. Losses came from foreign exchange, stock index, and commodity positions. Fixed income and credit index trading had little P&L impact on the month. Foreign exchange trading produced the largest losses for the Fund during May. Long US dollar positions (versus short the foreign currency) experienced losses amid the broader weakness in the USD. While the greenback remains stronger on the year, the DXY dollar index experienced a reversal during May. The foreign exchange market is reconsidering whether US policy makers might slow or potentially pause the tightening cycle in the latter half of 2022, which limited the demand for the US currency. Additionally, data over the course of the month showed the potential of a weaker US consumer which also contributed to the weakness in the buck. Stock index positioning generated additional losses over the course of the month. Global equity returns were mixed during May amid volatility across the global indices as markets weighed accelerating inflation concerns in Europe with easing Covid restrictions in China and some investor expectations of a possible slowdown in US monetary tightening. Commodity holdings generated modest losses during the month. Net long positioning on the grain complex incurred losses for the Fund as grain markets plummeted into month-end on the possibility that Russia will allow exports of Ukrainian grain through the Black Sea. Long holdings on energies generated partially offsetting gains as those markets advanced on continued fallout from the war in Ukraine, in addition to easing Covid restrictions in Asia, a busy travel season, and low inventories. Mixed positioning in fixed income had little impact on the Fund in May. Longs on European interest rate instruments produced losses as those markets declined (yields rose) as record inflation prints increased bets the BoE and ECB will have to quicken the pace of rate hikes to quell surging prices. Canadian Government Bonds produced some offsetting gains amid a hawkish approach from the BoC. Finally in credit trading, short protection positions also had little impact on the Fund during the month.
The Fund produced a gain during June. Profits came from foreign exchange (FX), interest rate, and stock index holdings. The commodity sector and credit positions had little P&L impact. Foreign exchange trading generated the largest gains for the Fund during the month. Long USD positions (versus short the foreign currency) benefited from the broad-based rally in the greenback. Dominating the market narrative, inflation remains stubbornly high and the Federal Reserve continues to lead the hawkish charge. Following the hotter US CPI print early in the month, the Fed indicated that slowing inflation is more important than the possibility of slower economic growth as a result of higher rates, which helped drive the wide-reaching appreciation in the dollar. Fixed income positions produced additional returns with gains concentrated in long-dated instruments. Persistent inflation prompted central banks to take more aggressive action in their hiking cycles, leading to several greater-than-expected rate increases. Short positioning on Australia and US 10-year instruments profited as yields rose (prices fell) in reaction to the RBA and Fed both delivering rate hikes that exceeded expectations. A fifth consecutive rate hike from the Bank of England, accompanied by hawkish guidance, pushed UK yields higher (prices lower) to the benefit of short Gilt positioning. Net short stock index positioning provided additional gains during the month. Global stock indices sold-off sharply as investors became increasingly convinced that the pace of rising interest rates will trigger a recession. Comments from global central bank speakers throughout the month remained hawkish and Fed Chair Powell even conceded that a soft landing could be “very challenging.” In credit trading, short protection positions were relative flat as US and European credit spreads widened sharply alongside the selloff in risky assets. The models flipped to long protection at the end of June and recovered some of their earlier losses. Commodity trading had little impact on the Fund during the month as gains made from short wheat holdings were offset by losses generated from energy positions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Introduction
Past Results Not Necessarily Indicative of Future Performance
The Fund is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or a substantial amount of the Fund’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund’s main line of business.
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 market 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.
The Fund rapidly 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, and the Fund’s past performance is not necessarily indicative of its future results.
Standard of Materiality
Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” 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 the Fund’s market sensitive instruments.
Quantifying the Fund’s Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s market 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 disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period).
The Fund’s risk exposure in the various market sectors traded is estimated in terms of Value at Risk (VaR). The Fund estimates VaR using a model based upon historical simulation (with a confidence level of 97.5%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risks, including equity and commodity prices, interest rates, foreign exchange rates, credit, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors to which the portfolio is sensitive. The Fund’s VaR at a one day 97.5% confidence level corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 40 trading days or one day in 40. VaR typically does not represent the worst case outcome.
The Fund uses approximately one quarter of daily market data and revalues its portfolio for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily “simulated profit and loss” outcomes. The VaR is the 2.5 percentile of this distribution.
The VaR for a sector represents the 2.5 percentile of outcomes for the aggregate exposures associated with that sector alone. The current methodology used to calculate the aggregate VaR represents the VaR of the Fund’s open positions across all market sectors, and is less than the sum of the VaRs for all such market sectors due to the diversification benefit across asset classes.
The Fund’s VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and does not distinguish between exchange and non-exchange dealer-based instruments. It is also not based on exchange and/or dealer-based maintenance margin requirements.
VaR models, including the Fund’s, are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by the Fund in its daily risk management activities. Please further note that VaR as described above may not be comparable to similarly titled measures used by other entities.
Because the business of the Fund is the speculative trading of futures, forwards, and swaps, the composition of the Fund’s trading portfolio can change significantly over any given time period, or even within a single trading day, which could positively or negatively materially impact market risk as measured by VaR.
The Fund’s Trading Value at Risk in Different Market Sectors
The following tables indicate the trading Value at Risk associated with the Fund’s open positions by market category as of June 30, 2023 and December 31, 2022 and the trading gains/losses by market category for the six months ended June 30, 2023 and the year ended December 31, 2022.
| | | June 30, 2023 | |
| Market Sector | | Value at Risk* | | | Trading Gain/(Loss)** | |
| Credit | | | 0.19 | % | | | 1.18 | % |
| Commodities | | | 0.73 | % | | | 0.94 | % |
| Foreign Exchange | | | 0.69 | % | | | 0.54 | % |
| Interest Rates | | | 0.79 | % | | | 0.35 | % |
| Equity Indices | | | 0.61 | % | | | 1.34 | % |
| Aggregate/Total | | | 1.18 | % | | | 4.35 | % |
| * | The VaR for a sector represents the 2.5 percentile of outcomes for the aggregate exposures associated with that sector alone. The aggregate VaR represents the VaR of the Fund’s open positions across all market sectors, and is less than the sum of the VaRs for all such market sectors due to the diversification benefit across asset classes. |
| ** | Of the 2.80% year to date return, approximately 4.35% was due to trading gains (before commissions), approximately 2.41% due to investment income and approximately (3.96)% due to brokerage fees, operating expenses and offering costs borne by the Fund. |
| | | December 31, 2022 | |
| Market Sector | | Value at Risk* | | | Trading Gain/(Loss)** | |
| Credit | | | 0.09 | % | | | 1.52 | % |
| Commodities | | | 0.54 | % | | | 9.43 | % |
| Foreign Exchange | | | 1.15 | % | | | 20.25 | % |
| Interest Rates | | | 0.98 | % | | | 16.46 | % |
| Equity Indices | | | 0.53 | % | | | 1.06 | % |
| Aggregate/Total | | | 1.66 | % | | | 48.72 | % |
| * | The VaR for a sector represents the 2.5 percentile of outcomes for the aggregate exposures associated with that sector alone. The aggregate VaR represents the VaR of the Fund’s open positions across all market sectors, and is less than the sum of the VaRs for all such market sectors due to the diversification benefit across asset classes. |
| ** | Of the 41.83% year to date return, approximately 48.72% was due to trading gains (before commissions) and approximately 1.42% due to investment income, offset by approximately (8.31)% due to brokerage fees, operating expenses and offering costs borne by the Fund. |
Material Limitations of Value at Risk as an Assessment of Market Risk
The following limitations of VaR as an assessment of market risk should be noted:
| 1) | Past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; |
| 2) | Changes in portfolio value caused by market movements may differ from those of the VaR model; |
| 3) | VaR results reflect past trading positions while future risk depends on future positions; |
| 4) | VaR using a one day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and |
| 5) | The historical market risk factor data for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. |
VaR is not necessarily representative of historic risk nor should it be used to predict the Fund’s future financial performance or its ability to manage and monitor risk. There can be no assurance that the Fund’s actual losses on a particular day will not exceed the VaR amounts indicated or that such losses will not occur more than once in 40 trading days.
Non-Trading Risk
The Fund has 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. The Fund also has non-trading market risk as a result of investing a portion of its available assets in U.S. Treasury Bills held at the broker and over-the-counter counterparty. The market risk represented by these investments is minimal. Finally, the Fund has non-trading market risk on fixed income securities held as part of its cash management program. The cash manager will use its best endeavors in the management of the assets of the Fund but provide no guarantee that any profit or interest will accrue to the Fund as a result of such management.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Fund’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Fund manages its primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Fund’s primary market risk exposures as well as the strategies used and to be used by Campbell & Company for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Fund’s risk 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 the Fund. There can be no assurance that the Fund’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in the Fund.
The following were the primary trading risk exposures of the Fund as of June 30, 2023, by market sector.
Foreign Exchange
The Fund’s currency exposure is to foreign exchange rate fluctuations, primarily fluctuations which 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. The Fund trades in a large number of currencies, including cross-rates — i.e., positions between two currencies other than the U.S. Dollar. Campbell & Company does not anticipate that the risk profile of the Fund’s currency sector will change significantly in the future.
Interest Rates
Interest rate movements directly affect the price of the sovereign bond positions and interest rate swap contracts held by the Fund and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Fund’s profitability. Campbell & Company does not anticipate that the risk profile of the Fund’s interest rate sector will change significantly in the future.
Equity Indices
The Fund’s primary equity exposure is to equity price risk in the G-7 countries as well as Australia, Hong Kong, Singapore, Spain, Taiwan, Netherlands, India, South Africa and Sweden. The stock index futures traded by the Fund are by law limited to futures on broadly based indices. The Fund is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices. Markets that trade in a narrow range could result in the Fund’s positions being “whipsawed” into numerous small losses.
Credit
The Fund’s primary credit exposure is through fluctuations in the credit worthiness of a particular reference entity, basket of reference entities, or an index.
Energy
The Fund’s primary energy market exposure is to natural gas, crude oil and derivative product price movements, often resulting from international political developments and ongoing conflicts in the Middle East and the perceived outcome. Oil and gas prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Metals
The Fund’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, palladium, platinum, silver and zinc.
Agricultural
The Fund’s agricultural exposure is to the fluctuations of the price of cattle, cocoa, coffee, corn, cotton, hogs, soy, sugar, and wheat.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the non-trading risk exposures of the Fund as of June 30, 2023.
Foreign Currency Balances
The Fund’s primary foreign currency balances are in Australian Dollar, British Pound, Canadian Dollar, Euros, Hong Kong Dollar, Japanese Yen, Singapore Dollar, South African Rand and Swedish Krona. The Fund controls the non-trading risk of these balances by regularly converting these balances back into dollars (no less frequently than twice a month, and more frequently if a particular foreign currency balance becomes unusually large).
Fixed Income Securities and Short Term Investments
The Fund’s primary market exposure in instruments (other than treasury positions described in the subsequent section) held other than for trading is in its fixed income portfolio. The cash manager, PNC, has authority to make certain investments on behalf of the Fund. All securities purchased by the cash manager on behalf of the Fund will be held in the Fund’s custody account at the custodian. The cash manager will use its best endeavors in the management of the assets of the Fund but provides no guarantee that any profit or interest will accrue to the Fund as a result of such management.
U.S. Treasury Bill Positions for Margin Purposes
The Fund also has market exposure in its U.S. Treasury Bill portfolio. The Fund holds U.S. Treasury Bills with maturities no longer than six months. Violent fluctuations in prevailing interest rates could cause minimal mark-to-market losses on the Fund’s U.S. Treasury Bills, although substantially all of these short-term investments are held to maturity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Fund and Campbell & Company, severally, 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.
General
The Fund is unaware of any (i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations. From time to time, certain regulatory agencies have proposed increased margin requirements on futures contracts. Because the Fund generally will use a small percentage of assets as margin, the Fund does not believe that any increase in margin requirements, as proposed, will have a material effect on the Fund’s operations.
Item 4. Controls and Procedures.
Campbell & Company, the general partner of the Fund, with the participation of the general partner’s chief executive officer and chief operating officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) with respect to the Fund as of the end of the period covered by this annual report. Based on their evaluation, the chief executive officer and chief operating officer have concluded that these disclosure controls and procedures are effective. There were no changes in the general partner’s internal control over financial reporting applicable to the Fund identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the last fiscal quarter that have materially affected, or is reasonably likely to materially affect, internal control over financial reporting applicable to the Fund.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
None
There are no material changes from the risk factors as previously disclosed in Form 10-K, filed March 24, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None
| Exhibit Number | | Description of Document |
| | | |
| 3.01 | | |
| | | |
| 3.02 | | |
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| 4.01 | | |
| | | |
| 10.01 | | |
| | | |
| 10.02 | | |
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| 10.03 | | |
| | | |
| | Certification of Kevin D. Cole, Chief Executive Officer & Chief Investment Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
| | | |
| | Certification of John R. Radle, Chief Operating Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
| | | |
| | Certification of Kevin D. Cole, Chief Executive Officer & Chief Investment Officer, pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of The Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of John R. Radle, Chief Operating Officer, pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of The Sarbanes-Oxley Act of 2002. |
| | | |
| 101 | | Interactive data file pursuant to Rule 405 of Regulation S-T: (i) Condensed Schedules of Investments As of June 30, 2023 and December 31, 2022, (ii) Statements of Financial Condition As of June 30, 2023 and December 31, 2022, (iii) Statements of Operations For the Three Months and Six Months Ended June 30, 2023 and 2022, (iv) Statements of Cash Flows For the Six Months Ended June 30, 2023 and 2022, (v) Statements of Changes in Unitholders’ Capital (Net Asset Value) For the Six Months Ended June 30, 2023 and 2022, (vi) Financial Highlights For the Three Months and Six Months Ended June 30, 2023 and 2022, (vii) Notes to Financial Statements. |
| | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| (1) | Incorporated by reference to the respective exhibit to the Registrant’s Registration Statement on Form S-1 on April 27, 2010. |
| (2) | Incorporated by reference to the respective exhibit to Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 on April 7, 2011. |
| (3) | Incorporated by reference to the respective exhibit to the Quarterly Report on Form 10-Q on November 14, 2017. |
| (4) | Incorporated by reference to the respective exhibit to the Quarterly Report on Form 10-Q on May 15, 2014. |
EXHIBIT INDEX
| | Certification of Kevin D. Cole, Chief Executive Officer & Chief Investment Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
| | | |
| | Certification of John R. Radle, Chief Operating Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
| | | |
| | Certification of Kevin D. Cole, Chief Executive Officer & Chief Investment Officer, pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of The Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of John R. Radle, Chief Operating Officer, pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of The Sarbanes-Oxley Act of 2002. |
| | | |
| 101 | | Interactive data file pursuant to Rule 405 of Regulation S-T: (i) Condensed Schedules of Investments As of June 30, 2023 and December 31, 2022, (ii) Statements of Financial Condition As of June 30, 2023 and December 31, 2022, (iii) Statements of Operations For the Three Months and Six Months Ended June 30, 2023 and 2022, (iv) Statements of Cash Flows For the Six Months Ended June 30, 2023 and 2022, (v) Statements of Changes in Unitholders’ Capital (Net Asset Value) For the Six Months Ended June 30, 2023 and 2022, (vi) Financial Highlights For the Three Months and Six Months Ended June 30, 2023 and 2022, (vii) Notes to Financial Statements. |
| | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | CAMPBELL STRATEGIC ALLOCATION FUND, L.P. |
| | (Registrant) |
| | | | |
| | By: | Campbell & Company, LP | |
| | | General Partner | |
| | | |
| Date: August 14, 2023 | By: | /s/ Kevin D. Cole | |
| | | Kevin D. Cole | |
| | | Chief Executive Officer & Chief Investment Officer | |
