UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 000-22887
RJO GLOBAL TRUST
(Exact name of registrant as specified in its charter)
| Delaware | 36-4113382 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
222 S Riverside Plaza
Suite 900
Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
(312) 373-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Beneficial Interest
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨No
Indicate by check mark where the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large-accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x No
State the aggregate market value of the units of the trust held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which units were sold as of the last business day of the registrant’s most recently completed second fiscal quarter: $38,097,931 as of June 30, 2011.
TABLE OF CONTENTS
| Part I | 1 |
| Item 1. Business | 1 |
| Item 1A. Risk Factors. | 5 |
| Item 2. Properties | 13 |
| Item 3. Legal Proceedings | 13 |
| Part II | 13 |
| Item 5. Market for the Registrant’s Units and Related Security Holder Matters and Issuer Purchases of Equity Securities | 13 |
| Item 6. Selected Financial Data | 13 |
| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Qualitative Disclosures Regarding Means of Managing Risk Exposure | 26 |
| Risk Management | 27 |
| Item 8. Financial Statements and Supplementary Data | 29 |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 30 |
| Item 9A. Controls and Procedures | 30 |
| Item 9B. Other Information | 31 |
| Part III | 31 |
| Item 10. Directors, Executive Officers and Corporate Governance | 31 |
| Item 11. Executive Compensation | 32 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters | 32 |
| Item 13. Certain Relationships and Related Transactions and Director Independence. | 32 |
| Item 14. Principal Accounting Fees and Services. | 32 |
| Part IV | 33 |
| Item 15. Exhibits, Financial Statements Schedules. | 33 |
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Part I
Item 1. Business
General Development of Business: Narrative Description of Business
RJO Global Trust (the “Trust”), is a Delaware statutory trust organized on November 12, 1996 under the Delaware Statutory Trust Act. The business of the Trust is the speculative trading of commodity interests, including futures contracts on currencies, interest rates, energy and agricultural products, metals, commodity indices and stock indices, spot and forward contracts on currencies and precious metals and exchanges for physicals (“Commodity Interests”) pursuant to the trading instructions of multiple independent commodity trading advisors (“CTAs”). R.J. O’Brien Fund Management, LLC (“RJOFM” or the “Managing Owner”) acquired the managing owner interest in the Trust from Refco Commodity Management, Inc (“RCMI”) on November 30, 2006. The Managing Owner of the Trust was initially formed as an Illinois corporation in November 2006, and became a Delaware Limited Liability Company in July of 2007. The Managing Owner is registered as a commodity pool operator under the Commodity Exchange Act, as amended (“CE Act”), and is responsible for administering the business and affairs of the Trust. The Managing Owner is an affiliate of R.J. O’Brien & Associates LLC, the clearing broker for the Trust (“RJO” or the “Clearing Broker”). The Managing Owner is responsible for selecting, monitoring, and replacing the CTAs to the Trust. As of December 31, 2011, trading decisions for the Trust have been delegated to eight independent CTAs: John W. Henry & Company, Inc. (“JWH”), Abraham Trading Corp. (“ATC”), Global Advisors (Jersey) Limited (“GAJL”), Conquest Capital Group (“CCG”), NuWave Investment Management (“NW”), Haar Capital Management (“HCM”), Trigon Investment Management (“TIM”), and Dominion Capital Management (“DCM”) (each an “Advisor” and collectively the “Advisors”), pursuant to advisory agreements executed between the Trust and, as applicable, each Advisor (each an “Advisory Agreement” and collectively the “Advisory Agreements”). The Trust has no officers, directors or employees. The Managing Owner may change the allocation to each Advisor, or add, remove, or replace any Advisor without the consent of or advance notice to investors. Investors will be notified of any material change in the basic investment policies or structure of the Trust.
RJO is a “futures commission merchant,” the Managing Owner is a “commodity pool operator” and the Advisors to the Trust are “commodity trading advisors,” as those terms are used in the CE Act. As such, they are registered with and subject to regulation by the Commodity Futures Trading Commission (“CFTC”) and are each a member of the National Futures Association (“NFA”). R.J. O’Brien Securities, LLC, an affiliate of RJOFM and the lead selling agent for the Trust, is registered as a broker-dealer with the U.S. Securities and Exchange Commission (the “SEC”), and is a member of the Financial Industry Regulatory Authority (“FINRA”).
JWH, ATC, GAJL, CCG, NW, and DCM are technical traders, and as such, their programs do not predict price movements. No fundamental economic supply or demand analysis is used in attempting to identify mispricing in the market, and no macroeconomic assessments of the relative strengths of different national economies or economic sectors are made. However, there are frequent periods during which fundamental factors external to the market dominate prices. For the discretionary Advisors, HCM and TIM, economic fundamentals and macroeconomic assessments are made.
Units of beneficial ownership of the Trust (“units”) commenced selling on April 3, 1997. Effective July 1, 2011, the Managing Owner discontinued the public offering of the units and begin offering the units on a private placement basis only. The Trust filed a Post-Effective Amendment to its Registration Statement on Form S-1 with the SEC on July 5, 2011 to deregister the remaining units that were unsold under the public offering. The Post-Effective Amendment was declared effective by the SEC on July 8, 2011.
The Managing Owner is responsible for the preparation of monthly and annual reports to the beneficial owners of the Trust (the “Beneficial Owners”), filing reports required by the CFTC, the NFA, the SEC and certain state agencies having jurisdiction over the Trust; calculation of the Trust’s net asset value (“NAV”) (meaning the total assets less total liabilities of the Trust) and directing payment of the management and incentive fees payable to the Advisors under the Advisory Agreements.
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The Managing Owner provides suitable facilities and procedures for handling redemptions, transfers, distributions of profits (if any) and, if necessary, the orderly liquidation of the Trust. Although RJO acts as the Trust’s clearing broker, the Managing Owner is responsible for selecting another clearing broker in the event RJO is unable or unwilling to continue in that capacity. The Managing Owner is further authorized, on behalf of the Trust (i) to enter into a brokerage clearing agreement and related customer agreements with other brokers, pursuant to which other brokers will render clearing services to the Trust; (ii) to cause the Trust to pay brokerage commissions at the rates provided for in the Trust’s Confidential Private Placement Memorandum and Disclosure Document, as amended or supplemented from time to time (the “Memorandum”); (iii) to pay delivery, insurance, storage, service and other fees and charges incidental to the Trust’s trading. For the year ended December 31, 2011, $114,267 of ongoing offering costs were paid or accrued in connection with the offering of the units.
The Advisory Agreements between the Trust and the Advisors provide that each Advisor has discretion in and responsibility for the selection of the Trust’s commodity transactions with respect to that portion of the Trust’s assets allocated to it. As of December 31, 2011, prior to quarter-end reallocation, JWH was managing 8.27%, ATC 17.02%, GAJL 17.28%, CCG 15.18%, HCM 8.67%, NW 16.57%, TIM 8.37% and DCM 8.64% of the Trust’s assets. The Advisory Agreements with JWH, ATC, and GALP commenced on November 1, 2008. The Advisory Agreements with NW commenced on February 1, 2009. The Advisory Agreement with Global Advisors, LP (“GALP”) was substituted for an Advisory Agreement with GAJL on June 1, 2009. The Advisory Agreements with CCG and HCM commenced on July 1, 2009, and the Advisory Agreements with TIM and DCM commenced on October 1, 2010.
Pursuant to the Advisory Agreements, the Trust pays each Advisor a management fee of up to 0.16666% of the month-end net assets allocated to each Advisor (up to 2.0% annually) and a quarterly incentive fee of up to 20% of new trading profits, if any, attributable to assets under its management (both fees are calculated after deduction of actual brokerage commissions and incentive fee paid after deduction of management fees also).
The Advisory Agreements terminate automatically in the event that the Trust is terminated in accordance with the Ninth Amended and Restated Declaration and Agreement of Trust, as amended (the “Trust Agreement”). The Advisory Agreements may be terminated by the Trust or the Managing Owner at any month end upon five days’ prior written notice to the Advisors. In addition, the Advisory Agreements may be terminated by the Trust or the Managing Owner at any time, upon written notice to an Advisor, in the event that (A) any person1 described as a “principal” of the Advisor in the Trust’s offering document ceases for any reason to be an active “principal” of the Advisor; (B) an Advisor becomes bankrupt or insolvent; (C) an Advisor is unable to use its trading systems or methods as in effect on the date of its respective Advisory Agreement and as modified for the benefit of the Trust; (D) the registration, as a CTA, of the Advisor with the Financial Services Authority (“FSA”), (as applicable), the CFTC or its membership in the NFA is revoked, suspended, terminated, or not renewed, or limited or qualified in any respect; (E) except as otherwise provided in its Advisory Agreement, an Advisor merges or consolidates with, or sells or otherwise transfers its advisory business, or all or a substantial portion of its assets, any portion of its futures interest trading systems or methods, or its goodwill to, any individual or entity; (F) if, at any time, the Advisor violates2 any trading policy (as defined in the Advisory Agreements) or administrative policy, except with the prior express written consent of the Managing Owner; or (G) an Advisor fails in a material manner to perform any of its obligations under its respective Advisory Agreement.
The Advisors have the right to terminate their respective Advisory Agreement at any time, upon 30 days’ written notice to the Trust in the event that (A) the Managing Owner imposes additional trading limitation(s) in the form of one or more trading policies (as defined in the Advisory Agreements) or administrative policies that an Advisor does not consent to, such consent not to be unreasonably withheld; (B) the Managing Owner objects to an Advisor implementing a proposed material change to its respective trading program and the Advisor certifies to the Managing Owner in writing that it believes such change is in the best interests of the Trust; (C) the Managing Owner or the Trust materially breaches an Advisory Agreement and does not correct the breach within ten days of receipt of a written notice of such breach from the counterparty Advisor; (D) the total Trust funds allocated to the Advisors’ management falls below a certain amount3 (after adding back certain losses as specified in the Advisory Agreements) at any time; (E) the Trust becomes bankrupt or insolvent, (F) the registration of the Managing Owner with the CFTC as a commodity pool operator or its membership in the NFA is revoked, suspended, terminated or not renewed, or limited or qualified in any respect.4 If the Managing Owner or Trust merges, consolidates or sells a substantial portion of its assets pursuant to an Advisory Agreement, the counterparty Advisor may terminate the Advisory Agreement upon prior written notice to the Managing Owner and Trust. The Advisors may also terminate the Advisory Agreement on 60 days’ written notice to the Managing Owner during any renewal term.
1 Under this provision in JWH’s Advisory Agreement, the Trust and the Managing Owner may terminate the Advisory Agreement only if John W. Henry, rather than “any person,” ceases to be a “principal.”
2 CCG (but not the other Advisors) is entitled to terminate its Advisory Agreement upon 30 days’ notice if CCG deems one or more of the commodity brokers selected by the Managing Owner materially deficient in its ability to process trades in accordance with CCG’s trading program, and the parties cannot agree to a substitute commodity broker.
3 The Trust has requested Confidential Treatment by the SEC with respect to this information in the publicly-filed copies of the Advisory Agreements.
4 JWH (but not the other Advisors) is entitled to terminate its Advisory Agreement upon thirty days’ notice if the Managing Owner
overrides a trading instruction other than as specified in Section 2(a) of JWH’s Advisory Agreement.
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The Advisors and their principals, affiliates and employees are free to trade for their own accounts and manage other commodity accounts during the term of the Advisory Agreements and to use the same information and trading strategy which the Advisor obtains, produces or utilizes in the performance of services for the Trust. To the extent that an Advisor recommends similar or identical trades to the Trust and other accounts, which it manages, the Trust may compete with those accounts for the execution of the same or similar trades.
The Trust will be terminated on December 31, 2026, unless terminated earlier upon the occurrence of one of the following: (1) beneficial owners holding more than 50% of the outstanding units notify the Managing Owner to dissolve the Trust as of a specific date; (2) 120 days after the filing of a bankruptcy petition by or against the Managing Owner, unless the bankruptcy court approves the sale and assignment of the interests of the Managing Owner to a purchaser/assignor that assumes the duties of the Managing Owner; (3) 120 days after the notice of the retirement, resignation, or withdrawal of the Managing Owner, unless beneficial owners holding more than 50% of the outstanding units appoint a successor; (4) 90 days after the insolvency of the Managing Owner or any other event that would cause the Managing Owner to cease being managing owner of the Trust, unless beneficial owners holding more than 50% of the outstanding units appoint a successor; (5) dissolution of the Managing Owner; (6) insolvency or bankruptcy of the Trust; (7) a decrease in the net asset value to less than $2,500,000; (8) a decline in the net asset value per unit to $50 or less; (9) dissolution of the Trust; or (10) any event that would make it unlawful for the existence of the Trust to be continued or require dissolution of the Trust.
A portion of the Trust’s net assets are deposited in the Trust’s accounts with RJO, the Trust’s clearing broker and currency dealer. For U.S. dollar deposits, 100% of interest earned on the Trust’s assets, calculated by the average four-week Treasury bill rate, is paid to the Trust. For non-U.S. dollar deposits, the current rate of interest is equal to a rate of one-month LIBOR less 100 basis points. Any amounts received by RJO in excess of amounts paid to the Trust are retained by RJO. On October 6, 2010, approximately 60% of the Trust’s assets were deposited in custody of Wells Fargo Bank, N.A. Also on October 6, 2010, the Managing Owner appointed RJO Investment Management LLC (“RJOIM”) to manage the Trust’s cash deposited with Wells Fargo Bank, N.A. To the extent excess cash is not invested in securities, such cash will be subject to the creditworthiness of the institution where such funds are deposited.
As of December 31, 2011, accounting services for the Trust are provided by SS&C Technologies and transfer agency services are provided by ACS Securities, Inc. Effective January 1, 2012, NAV Consulting, Inc. provides accounting and transfer agency services to the Trust.
Refco-related Matter
In 2005, certain assets held by the Trust’s prior clearing broker, Refco Capital Markets, LTD (“RCM”), were determined to be illiquid. On October 31, 2005, $57,544,206 of equity was moved to a separate non-trading account (the “Non-Trading Account”) and 2,273,288 in substitute units were issued to the unitholders at that time, pro rata to their share in the Trust. At December 31, 2005, the illiquid assets were determined to be impaired and were reduced by $39,580,944 for impairment, based on management’s estimate at that time.
Through 2006, the Trust received $10,319,318 from the prior clearing broker in bankruptcy court and distributed $9,335,669 to unitholders in the manner as described in (a) and (b) below.
Effective January 1, 2007, JWH Special Circumstance LLC (the “LLC”), a limited liability company, was established to pursue additional claims against RCM, and all Non-Trading Accounts were transferred to the LLC. Any new funds received from RCM by the LLC will be distributed to unitholders who were investors in the Trust at the time of the bankruptcy of RCM and Refco, Inc. U.S. Bank National Association (“US Bank”) is the manager of the LLC. US Bank may make distributions to the unitholders, as defined above, upon collection, sale, settlement or other disposition of the bankruptcy claim and after payment of all fees and expenses pro rata to the unitholders, as explained above, as follows:
| (a) | Any unitholder who had redeemed their entire interest in the Trust prior to distribution shall receive cash. |
| (b) | Any unitholder who had continued to own units in the Trust shall receive additional units in the Trust at the then Net Asset Value of the Trust. |
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The unitholders have no rights to request redemptions from the LLC.
The LLC agreed to compensate US Bank, as manager, the following: (1) an initial acceptance fee of $120,000, (2) an annual fee of $25,000, (3) a distribution fee of $25,000 per distribution, (4) out-of-pocket expenses, and (5) an hourly fee for all personnel at the then expected hourly rate ($350 per hour at the time the agreement was executed).
Recoveries by and distributions from the LLC are detailed in the chart below:
| Recoveries from RCM, Distributions paid by US Bank from the LLC, and effect on impaired value of assets held at RCM | ||||||||||||||||||||||||
| Amounts | Collections in | Cash Distributions to | Additional Units in Trust for | |||||||||||||||||||||
| Received from | Balance of | Excess of | Non-Participating | Participating Owners | ||||||||||||||||||||
| Date | RCM | Impaired Value | Impaired Value | Owners | Units | Dollars | ||||||||||||||||||
| 12/29/06 | $ | 10,319,318 | $ | 6,643,944 | $ | - | $ | 4,180,958 | 54,914 | $ | 5,154,711 | |||||||||||||
| 04/20/07 | 2,787,629 | 3,856,315 | - | - | - | - | ||||||||||||||||||
| 06/07/07 | 265,758 | 3,590,557 | - | - | - | - | ||||||||||||||||||
| 06/28/07 | 4,783,640 | - | 1,193,083 | - | - | - | ||||||||||||||||||
| 07/03/07 | 5,654 | - | 5,654 | - | - | - | ||||||||||||||||||
| 08/29/07 | - | - | - | 2,787,947 | 23,183 | 1,758,626 | ||||||||||||||||||
| 09/19/07 | 2,584,070 | - | 2,584,070 | - | - | - | ||||||||||||||||||
| 12/31/07 | 2,708,467 | - | 2,708,467 | - | - | - | ||||||||||||||||||
| 03/28/08 | 1,046,068 | - | 1,046,068 | - | - | - | ||||||||||||||||||
| 04/29/08 | - | - | - | 2,241,680 | 10,736 | 1,053,815 | ||||||||||||||||||
| 06/26/08 | 701,148 | - | 701,148 | - | - | - | ||||||||||||||||||
| 12/31/08 | 769,001 | - | 769,001 | - | - | - | ||||||||||||||||||
| 06/29/09 | 2,748,048 | - | 2,748,048 | - | - | - | ||||||||||||||||||
| 12/30/09 | 1,102,612 | - | 1,102,612 | - | - | - | ||||||||||||||||||
| 05/19/10 | 1,695,150 | - | 1,695,150 | - | - | - | ||||||||||||||||||
| 06/04/10 | 14,329,450 | * | - | 14,329,450 | * | - | - | - | ||||||||||||||||
| 08/01/10 | - | - | - | 16,076,112 | 40,839 | 3,928,806 | ||||||||||||||||||
| 10/15/10 | 282,790 | * | - | 282,790 | * | - | - | - | ||||||||||||||||
| 12/30/10 | 563,163 | * | - | 563,163 | * | - | - | - | ||||||||||||||||
| 06/02/11 | 343,664 | * | - | 343,664 | * | - | - | - | ||||||||||||||||
| 08/30/11 | 1,328,832 | * | - | 1,328,832 | * | - | - | - | ||||||||||||||||
| 12/01/11 | - | - | - | 3,689,555 | 6,168 | 561,489 | ||||||||||||||||||
| Totals | $ | 48,364,462 | $ | - | $ | 31,401,200 | $ | 28,976,252 | 135,840 | $ | 12,457,447 | |||||||||||||
*The collections on June 4, 2010 were from a settlement agreement reached with Cargill, Inc. and Cargill Investors Services, Inc. (together, "Cargill"). The gross collections of $15,300,000 on June 4, 2010, were reduced by $970,550, which represented Cargill's percentage of distributions, as defined in the Settlement Agreement. All subsequent collections are shown net and were reduced by Cargill's percentage of distributions at 57.25% of the gross collections.
Financial Information about Segments
The Trust’s business constitutes only one segment for financial reporting purposes; it is a Delaware statutory trust whose purpose is to trade, buy, sell, spread or otherwise acquire, hold or dispose of commodity interests including futures contracts on currencies, interest rates, energy and agricultural products, metals and stock indices, spot and forward contracts on currencies and precious metals and exchanges for physicals. The Trust does not engage in the production or sale of any goods or services. The objective of the Trust business is appreciation of its assets through speculative trading in such commodity interests. Financial information about the Trust’s business, as of December 31, 2011, is set forth under Items 6, 7, and 8 herein.
Financial Information about Geographic Areas
Although the Trust trades in the global futures and forward markets, it does not have operations outside of the United States.
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Available Information
The Trust files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the SEC. You may read and copy any document filed by the Trust at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 a.m. to 3:00 p.m. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The Trust does not maintain an internet website; however, links to certain of the Trust’s public filings may be found on the Managing Owner’s website at http://www.rjobrien.com/FundManagement. Additionally, the SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other information that issuers (including the Trust) file electronically with the SEC. The SEC’s website address is http://www.sec.gov.
The Trust will provide paper copies of such reports and amendments to its investors free of charge upon written request.
Item 1A. Risk Factors.
Possible Total Loss of an Investment in the Trust
Investors could lose all or substantially all of their investment in the Trust. Neither the Trust nor the Advisors have any ability to control or predict market conditions. The investment approach utilized on behalf of the Trust may not be successful, and there is no guarantee that the strategies employed by the Advisors on behalf of the Trust will be successful.
Specific Risks Associated with a Multi-Advisor Commodity Pool
The Trust is a multi-advisor commodity pool. Each of the Advisors makes trading decisions independent of the other Advisors for the Trust. Thus, it is possible that the Trust could hold opposite positions in the same or similar futures, forwards, and options, thereby offsetting any potential for profit from these positions.
Investing in the Units Might Not Diversify an Overall Portfolio
One of the objectives of the Trust is to add an element of diversification to a traditional securities or debt portfolio. While the Trust may perform in a manner largely independent from the general equity and debt markets, there is no assurance it will do so. An investment in the Trust could increase, rather than reduce, the overall portfolio losses of an investor during periods when the Trust, as well as equities and debt markets, decline in value. There is no way of predicting whether the Trust will lose more or less than stocks and bonds in declining markets. Investors must not rely on the Trust as any form of protection against losses in their securities or debt portfolios.
Investors Must Not Rely on the Past Performance of the Advisors or the Trust in Deciding Whether to Buy Units
The performance of the Trust is entirely unpredictable, and the past performance of the Trust, as well as of the Advisors, is not necessarily indicative of their future results.
An influx of new market participants, changes in market regulation, international political developments, demographic changes and numerous other factors can contribute to once-successful strategies becoming outdated. Not all of these factors can be identified, much less quantified. There can be no assurance that the Advisors will trade the Trust’s assets in a profitable manner.
Volatile Performance History
The performance of the Trust to date has been volatile. As of December 31, 2012, the Trust has been experiencing a drawdown for the last 103 months for Class A units, which stood at (32.00)% and for the last 36 months for Class B units, which stood at (8.77)%. Past performance of the Trust is not necessarily indicative of future results.
The Trust’s Substantial Expenses Will Cause Losses for the Trust Unless Offset by Profits and Interest Income
The Trust pays annual expenses of approximately 5.57% (for Class B units) to 7.57% (for Class A units) after taking into account estimated interest income of its average month-end assets. In addition to this annual expense level, the Trust is subject to quarterly incentive fees of up to 20% on any new trading profits. Because these incentive fees are calculated quarterly, they could represent a substantial expense to the Trust even in a breakeven or unprofitable year. Additionally, investors who redeem units within the first eleven months after the units are issued will pay their prorated portion of the Trust’s annual expenses as well as the 1.5% redemption fee.
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The Trust’s expenses could, over time, result in significant losses. Except for the incentive fee, these expenses are not contingent and are payable whether or not the Trust is profitable. Furthermore, some of the strategies and techniques employed by the Advisors may require frequent trades to take place and, as a consequence, portfolio turnover and brokerage commissions may be greater than for other investment entities of similar size. Investors will sustain these losses if the Trust is unable to generate sufficient trading profits to offset its fees and expenses.
Incentive Fees May be Paid Even Though Trading Losses are Sustained
The Trust pays the Advisors incentive fees based on the new trading profits they each generate for the Trust with respect to the assets traded by such advisor. These new trading profits include unrealized appreciation on open positions. Accordingly, it is possible that the Trust will pay an incentive fee on new trading profits that do not become realized. Also, each Advisor will retain all incentive fees paid to it, even if it incurs a subsequent loss after payment of an incentive fee. Due to the fact that incentive fees are paid quarterly, it is possible that an incentive fee may be paid to an Advisor during a year in which the assets allocated to the Advisor suffer a loss for the year. Because each Advisor receives an incentive fee based on the new net trading profits earned by the Advisor, the Advisors may have an incentive to make investments that are riskier than would be the case in the absence of such incentive fee being paid to the Advisors based on new trading profits. In addition, as incentive fees are calculated on a trading-advisor-by-trading-advisor basis, it is possible that one or more Advisors could receive incentive fees during periods when the Trust has a negative return as a whole.
An Investment in the Trust is Not Liquid
The units are not a liquid investment. There is no secondary market for the units. Investors may redeem units only as of the last day of each calendar month on five business days’ written notice. Partial redemptions must be in the amount of at least $1,000 of units and investors must maintain a balance of $1,000 of units. A redemption fee equal to 1.5% will apply to units redeemed within the first eleven months after their issuance.
The Trust is Subject to Market Fluctuations
Managed futures trading involves trading in various commodity interests. The market prices of futures contracts fluctuate rapidly. Prices of futures contracts traded by the Advisors are affected generally, among other things, by (1) changing supply and demand relationships, (2) weather, agricultural, trade, fiscal, monetary and exchange control programs, (3) policies of governments and national and international political and economic events; and (4) changes in interest rates. The profitability of the Trust depends entirely on capitalizing on fluctuations in market prices. If an Advisor incorrectly predicts the direction of prices in futures, forwards, and options, large losses may occur. Often, the most unprofitable market conditions for the Trust are those in which prices “whipsaw,” moving quickly upward, then reversing, then moving upward again, then reversing again.
Options Trading Can be More Volatile and Expensive Than Futures Trading
The Trust may also trade options which, although options trading requires many of the same skills, has different risks than futures trading. Successful options trading requires a trader to assess accurately near-term market volatility because that volatility is immediately reflected in the price of outstanding options. Correct assessment of market volatility can therefore be of much greater significance in trading options than it is in many long-term futures strategies where volatility does not have as great an effect on the price of a futures contract.
Options Are Volatile and Inherently Leveraged, and Sharp Movements in Prices Could Cause the Trust to Incur Large losses
Certain Advisors may use options on futures contracts, forward contracts or commodities to generate premium income or speculative gains. Options involve risks similar to futures, because options are subject to sudden price movements and are highly leveraged, in that payment of a relatively small purchase price, called a premium, gives the buyer the right to acquire an underlying futures contract, forward contract or commodity that has a face value substantially greater than the premium paid. The buyer of an option risks losing the entire purchase price of the option. The writer, or seller, of an option risks losing the difference between the purchase price received for the option and the price of the futures contract, forward contract or commodity underlying the option that the writer must purchase or deliver upon exercise of the option. There is no limit on the potential loss. Specific market movements of the futures contracts, forward contracts or commodities underlying an option cannot accurately be predicted.
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Cash Flow Needs May Cause Positions to be Closed which May Cause Substantial Losses
Certain Advisors may trade options on futures. Futures contract gains and losses are marked-to-market daily for purposes of determining margin requirements. Option positions generally are not marked-to-market daily, although short option positions will require additional margin if the market moves against the position. Due to these differences in margin treatment between futures and options, there may be periods in which positions on both sides must be closed down prematurely due to short-term cash flow needs of the Trust. If this occurs during an adverse move in a spread or straddle relationship, then a substantial loss could occur.
The Large Size of the Trust’s Trading Positions Increases the Risk of Sudden, Major Losses
The Trust takes positions with face values up to as much as approximately fifteen times its total equity. Consequently, even small price movements can cause major losses.
As a Result of Leverage, Small Changes in the Price of the Advisors’ Positions May Result in Substantial Losses
Commodity interest contracts are typically traded on margin. This means that a small amount of capital can be used to invest in contracts of much greater total value. The resulting leverage means that a relatively small change in the market price of a contract can produce a substantial loss. Like other leveraged investments, any purchase or sale of a contract may result in losses in excess of the amount invested in that contract, which includes the initial margin deposit.
The Advisors’ Trading is Subject to Execution Risks
Market conditions may make it impossible for the Advisors to execute a buy or sell order at the desired price, or to close out an open position. Daily price fluctuation limits are established by the exchanges and approved by the CFTC. When the market price of a contract reaches its daily price fluctuation limit, no trades can be executed outside the limit. The holder of a contract may therefore be locked into an adverse price movement for several days or more and lose considerably more than the initial margin put up to establish the position. Thinly-traded or illiquid markets also can make it difficult or impossible to execute trades.
Unit Values are Unpredictable and Vary Significantly Month-to-Month
The net asset value per unit can vary significantly month-to-month. Investors cannot know at the time they submit a subscription or a redemption request what the subscription price or redemption value of their units will be.
The only way to take money out of the Trust is to redeem units. Investors can only redeem units at month-end on five business days’ advance notice and subject to possible redemption charges and minimum balance and redemption request amounts. The restrictions imposed on redemptions limit investors’ ability to protect themselves against major losses by redeeming units.
Transfers of units are subject to limitations as well, such as advance written notice of any intent to transfer and the consent of the Managing Owner prior to the acceptance of a substitute unitholder.
In addition, investors are unable to know whether they are subscribing for units after a significant upswing in the net asset value per unit — often a time when the Trust has an increased probability of entering into a losing period.
Possible Effect of Redemptions on the Value of Units
Substantial redemptions of units could require the Trust to liquidate investments more rapidly than otherwise desirable in order to raise the necessary cash to fund the redemptions and, at the same time, achieve a market position appropriately reflecting a smaller equity base. This could make it more difficult to recover losses or generate profits. Illiquidity in the markets could make it difficult to liquidate positions on favorable terms, and may result in losses.
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Incentive-Based Compensation May Affect the Advisors’ Trading
The Advisors are entitled to compensation based upon net trading gain in the value of the assets they manage. Incentive-based arrangements may give them incentives to engage in transactions that are more risky or speculative than they might otherwise make because speculative investments might result in higher profits in which the Advisor would participate, resulting in higher incentive fees to them, while resulting in larger losses to the Trust. The Advisors will not return an incentive fee for a period in which there is net trading gain if, in a subsequent period, the investments under their management suffer a net trading loss. In addition, because the incentive fee for each Advisor is based solely on its performance, and not the overall performance of the Trust, the Trust may indirectly pay an incentive fee to one or more Advisors during periods when the Trust is not profitable on an overall basis.
Disadvantages of Replacing or Switching Trading Advisors
An Advisor generally is required to recoup previous trading losses before it can earn performance-based competition. However, the Managing Owner may elect to replace an Advisor that has a “loss carry-forward.” In that case, the Trust would lose the “free ride” of any potential recoupment of the prior losses of such Advisor. In addition, the new or replacement Advisor would earn performance-based compensation on the first dollars of investment profits. The effect of the replacement of or the reallocation of assets away from an Advisor, therefore, could be significant.
The Opportunity Costs of Rebalancing the Trading Programs
The quarterly rebalancing of the Trust’s assets among its Advisors and their trading programs may result in the liquidation of profitable positions, thereby foregoing greater profits which the Trust would otherwise have realized, and the establishment of unprofitable positions, thereby incurring losses which the Trust would otherwise have avoided had rebalancing not occurred.
Alteration of Trading Systems and Contracts and Markets Traded
The Advisors may, in their discretion, change and adjust the trading programs, as well as the contracts and markets traded. These adjustments may result in foregoing profits which the trading programs would otherwise have captured, as well as incurring losses which they would otherwise have avoided. Neither the Managing Owner nor the unitholders are likely to be informed of any non-material changes in the trading programs.
Increased Competition from Other Trend-Following Traders Could Reduce the Trust’s Profitability
There has been a dramatic increase over the past 25 years in the amount of assets managed by trend-following trading systems like JWH’s and ATC’s trading programs. In 1980, the amount of assets in the managed futures industry was estimated at approximately $300 million; by 2011 this estimate was approximately $291 billion. It is also estimated that over half of all managed futures trading advisors rely primarily on trend-following systems. Although the amount of trading in the futures industry as a whole has increased significantly during the same period of time, the increase in managed money increases trading competition. The more competition there is for the same positions, the more costly and harder they are to acquire.
Systematic Strategies Do Not Consider Fundamental Types of Data, or Minimally Consider Fundamental Types of Data, and Do Not Have the Benefit of Discretionary Decision Making
Portfolio managers like JWH, ATC, and GAJL rely primarily on technical, systematic strategies that do not take into account factors external to the market itself (although certain of these strategies may have minor discretionary elements incorporated into their system strategy). The widespread use of technical trading systems frequently results in numerous managers attempting to execute similar trades at or about the same time, altering trading patterns and affecting market liquidity. Furthermore, the profit potential of trend-following systems may be diminished by the changing character of the markets, which may make historical price data (on which technical programs are based) only marginally relevant to future market patterns. Systematic strategies are developed on the basis of a statistical analysis of market prices. Consequently, any factor external to the market itself that dominates prices that a discretionary decision-maker may take into account may cause major losses for a systematic strategy. For example, a pending political or economic event may be very likely to cause a major price movement, but a systematic strategy may continue to maintain positions indicated by its trading method that might incur major losses if the event proved to be adverse.
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The Trust is Subject to Speculative Position Limits
The CFTC and U.S. futures exchanges have established speculative position limits on the maximum position in certain futures interests contracts that may be held or controlled by any one person or group. Therefore, the Trust may have to reduce the size of its position in one or more futures contracts in order to avoid exceeding such position limits, which could adversely affect its profitability. In fall 2011, the CFTC adopted new position limits with respect to certain metal, energy, and agriculture contracts. The CFTC or the futures exchanges may amend or adjust these position limits or the interpretation of how such limits are applied, adversely affecting the profitability of the Trust.
Increasing the Level of Equity under a Trading Advisor’s Management Could Lead to Diminished Returns
The rates of returns achieved by a trading advisor often diminish as the assets under its management increases. This can occur for many reasons, including the inability of the trading advisor to execute larger position sizes at desired prices and because of the need to adjust the trading advisor’s trading program to avoid exceeding speculative position limits. These are limits established by the CFTC and the exchanges on the number of speculative futures and options contracts in a commodity that one trader may own or control. The Advisors have not agreed to limit the amount of additional assets that they will manage.
Illiquid Markets Could Make It Impossible for the Trust to Realize Profits or Limit Losses
In illiquid markets, the Advisors could be unable to capitalize on the opportunities identified by them or to close out positions against which the market is moving. There are numerous factors which can contribute to market illiquidity, far too many for the Advisors to predict when or where illiquid markets may occur. The Trust attempts to limit its trading to highly liquid markets, but there can be no assurance that a market which has been highly liquid in the past will not experience periods of unexpected illiquidity.
Unexpected market illiquidity has caused major losses in recent years in such sectors as emerging markets, fixed income relative value strategies and mortgage-backed securities. There can be no assurance that the same will not happen to the Trust at any time or from time to time. The large size of the positions which the Advisors acquire for the Trust increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.
The Trust Trades in Foreign Markets; These Markets are Less Regulated than U.S. Markets and are Subject to Exchange Rate, Market Practices and Political Risks
Some of the trading programs used for the Trust trade outside the U.S. From time to time, as much as 20%–40% of the Trust’s overall market exposure could involve positions taken on foreign markets. Foreign trading involves risks, including exchange-rate exposure, possible governmental intervention and lack of regulation, which U.S. trading does not. In addition, the Trust may not have the same access to certain positions on foreign exchanges as do local traders, and the historical market data on which the Advisors base their strategies may not be as reliable or accessible as it is in the United States. Certain foreign exchanges may also be in a more or less developmental stage so that prior price histories may not be indicative of current price dynamics. The rights of traders or investors in the event of the insolvency or bankruptcy of a non-U.S. market or broker are also likely to be more limited than in the case of U.S. markets or brokers. Additionally, trading on U.S. exchanges is subject to CFTC regulation and oversight, including, for example, minimum capital requirements for commodity brokers, regulation of trading practices on the exchanges, prohibitions against trading ahead of customer orders, prohibitions against filling orders off exchanges, prescribed risk disclosure statements, testing and licensing of industry sales personnel and other industry professionals and record keeping requirements. Trading on non-U.S. exchanges is not regulated by the CFTC or any other U.S. governmental agency or instrumentality and may be subject to regulations that are different from those to which U.S. exchanges trading is subject, provide fewer protections to investors than trading on U.S. exchanges, and may be less vigorously enforced than regulations in the U.S.
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Unregulated Markets, Particularly the Trading of Spot and Forward Contracts in Currency, Lack Regulatory Protections of Exchanges
A substantial portion of the Trust’s trading — primarily it’s trading of spot and forward contracts in currencies — takes place in unregulated markets. It is impossible to determine fair pricing, prevent abuses such as “front-running” or impose other effective forms of control over such markets. The absence of regulation could expose the Trust in certain circumstances to significant losses which it might otherwise have avoided. Because these contracts are not traded on an exchange, the performance of them is not guaranteed by an exchange or its clearinghouse, and the Trust is at risk with respect to the ability of the counterparty to perform on the contract. Additionally, see the Risk Factor entitled “The Trust Trades in Foreign Markets; These Markets Are Less Regulated Than U.S. Markets and Are Subject to Exchange Rate, Market Practices and Political Risks” directly above.
Electronic Trading
The Advisors may from time to time trade on electronic markets and use electronic order routing systems, which differ from traditional open outcry pit trading and manual order routing methods. Characteristics of electronic trading and order routing systems vary widely among the different electronic systems with respect to order matching procedures, opening and closing procedures and prices, error trade policies and trading limitations or requirements. There are also differences regarding qualifications for access and grounds for termination and limitations on the types of orders that may be entered into the system. Each of these matters may present different risk factors with respect to trading on or using a particular system. Each system may also present risks related to system access, varying response times and security. Trading through an electronic trading or order routing system also entails risks associated with system or component failure. In the event of system or component failure, it is possible that for a certain time period, it might not be possible to enter new orders, execute existing orders or modify or cancel orders that were previously entered. System or component failure may also result in loss of orders or order priority. Some contracts offered on an electronic trading system may be traded electronically and through open outcry during the same trading hours. Exchanges offering an electronic trading or order routing system and/or listing the contract may have adopted rules to limit their liability, the liability of futures brokers and software and communication system vendors and the amount that may be collected for system failures and delays. These limitations of liability provisions vary among the exchanges.
The Trust Could Lose All of Its Assets and Have Its Trading Disrupted Due to the Bankruptcy of the Managing Owner, the Trust’s Commodity Broker or Others
The Trust is subject to the risk of insolvency of an exchange, clearinghouse, commodity broker, and counterparties with whom the Advisors trade. Trust assets could be lost or impounded in such an insolvency during lengthy bankruptcy proceedings. Were a substantial portion of the Trust’s capital tied up in a bankruptcy, the Managing Owner might suspend or limit trading, perhaps causing the Trust to miss significant profit opportunities. The Trust is subject to the risk of the inability or refusal to perform on the part of the counterparties with whom contracts are traded. In the event that the clearing broker is unable to perform its obligations, the Trust’s assets are at risk and investors may only recover a pro rata share of their investment, or nothing at all.
Exchange-traded futures and futures-styled option contracts are measured at fair value on a daily basis, with variations in value credited or charged to the Trust’s account on a daily basis. The Trust’s clearing broker, as futures commission merchant for the Trust’s exchange-traded contracts, is required, pursuant to CFTC regulations, to segregate from its own assets, and for the sole benefit of its commodity customers, all funds held by such clients with respect to exchange-traded futures and futures-styled options contracts, including an amount equal to the net unrealized gain on all open futures and futures-styled options contracts. Bankruptcy law applicable to all U.S. futures brokers requires that, in the event of the bankruptcy of such a broker, all property held by the broker, including certain property specifically traceable to the Trust, will be returned, transferred, or distributed to the broker's customers only to the extent of each customer’s pro rata share of the assets held by such futures broker.
With respect to transactions the Trust enters into that are not traded on an exchange, there are no daily settlements of variations in value and there is no requirement to segregate funds held with respect to such accounts. Thus, the funds the Trust invests in such transactions may not have the same protections as funds used as margin or to guarantee exchange-traded futures and options contracts. If the counterparty becomes insolvent and the Trust has a claim for amounts deposited or profits earned on transactions with the counterparty, the Trust’s claim may not receive a priority. Without a priority, the Trust is a general creditor and its claim will be paid, along with the claims of other general creditors, from any monies still available after priority claims are paid. Even funds of the Trust that the counterparty keeps separate from its own operating funds may not be safe from the claims of other general and priority creditors. There are no limitations on the amount of allocated assets a portfolio manager can trade on foreign exchanges or in forward contracts.
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Special Redemption in Event of 50% Decline in Net Assets; Limitation on Redemption Payments
If the Trust experiences a decline in net asset value per unit as of the close of business on any business day to less than 50% of the net asset value per unit on the prior highest month-end net asset value, or to $50 or less, the Managing Owner will liquidate all open positions and suspend trading. Within ten days of such event, the Managing Owner shall declare a special redemption date and mail notice of such event to each unitholder. The right of a unitholder to receive a redemption payment, including in connection with this special notice, depends on the Trust’s ability to obtain the necessary funds by liquidating commodity positions and obtaining payments from its commodity brokers, banks, or other persons or entities.
Possibility of Termination of the Trust Before Expiration of Its Stated Term
The Managing Owner may withdraw from managing the Trust upon 120 days’ notice, which would cause the Trust to terminate unless a substitute managing owner were obtained. Other events, such as a substantial decline in the aggregate net assets of the Trust or the net asset value per unit, as described in the Trust Agreement, could also cause the Trust to terminate before the expiration of its stated term. This could cause investors to liquidate their investments and upset the overall maturity and timing of their investment portfolio. If the registrations with the CFTC or memberships in the NFA of the Managing Owner or the Advisors were revoked or suspended, such entity would no longer be able to provide services to the Trust, which would cause the Trust to terminate in 90 days unless a substitute managing owner were obtained.
Trading Swaps Creates Distinctive Risks
Certain of the Advisors may trade swaps. Currently, swaps are not traded on exchanges and are not subject to the same type of government regulation as exchange markets. As a result, many of the protections afforded to participants on organized exchanges and in a regulated environment are not available in connection with these transactions. The swap markets are “principals’ markets,” in which performance with respect to a swap is the responsibility only of the counterparty to the contract, and not of any exchange or clearinghouse. The Trust is subject to the risk of the inability or refusal to perform with respect to swaps on the part of the counterparties. There are no limitations on daily price movements in swaps. Speculative position limits are not applicable to swaps. Participants in the swap markets are not required to make continuous markets in the swaps they trade.
However, the regulation of swaps may be subject to substantial change under recently-enacted legislation and pending regulatory action. It is not known exactly how such changes will impact existing swaps positions. These new requirements, however, will alter the manner in which swaps will be traded. Under recently-enacted legislation, many commodity swaps will be required to be cleared through clearing houses and executed on designated contract markets or swap execution facilities. Security-based swaps will be subject to similar requirements as will apply to commodity swaps. Additional regulatory requirements will apply to all swaps, whether subject to mandatory clearing, or not. These include margin, collateral and capital requirements, reporting obligations, and for certain swaps, speculative position limits, and other regulatory requirements. Swaps which are not offered for clearing by a clearing house will continue to be able to be traded bi-laterally. Such bi-lateral transactions will remain subject to many of the risks discussed in the preceding paragraph.
Stop-loss Orders May not Prevent Large Losses
Certain of the Advisors may use stop-loss orders. Such stop-loss orders may not effectively prevent substantial losses, and depending on market factors at the time, may not be able to be executed at such stop-loss levels. No risk control technique can assure that large losses will be avoided.
Off-exchange Foreign Currency Futures and Options
The Advisors may engage in the trading of off-exchange foreign currency contracts on behalf of the Trust. Currently, such contracts are not traded on exchanges and are not guaranteed by a clearing house; rather, banks and dealers act as principals in these markets. Neither the CFTC nor any banking authority regulates trading in such off-exchange foreign currency contracts. In addition, there is no limitation on the daily price movements of off-exchange foreign currency contracts. Principals in the off-exchange foreign currency markets have no obligation to continue to make markets in the off-exchange foreign currency contracts traded. There have been periods during which certain banks or dealers have refused to quote prices for off-exchange foreign currency contracts or have quoted prices with an unusually wide spread between the price at which they are prepared to buy and that at which they are prepared to sell. The imposition of credit controls by governmental authorities might limit such off-exchange foreign currency trading to less than that which an Advisor would otherwise recommend, to the possible detriment of the Trust.
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If an Advisor engages in off-exchange foreign currency trading, the Trust will be subject to the risk of the failure of, or the inability to perform with respect to its off-exchange foreign currency contracts by, the principals with which the Trust trades. Trust funds on deposit with such principals will also generally not be protected by the same segregation requirements imposed on CFTC-regulated futures brokers with respect to customer funds on deposit with them. However, the Trust intends to engage in off-exchange foreign currency trading only with large, well-capitalized banks and dealers. In addition, an Advisor may order trades for the Trust in such markets through agents. Accordingly, the insolvency or bankruptcy of such parties could also subject the Trust to the risk of loss.
Under recently-enacted legislation, unless otherwise decided by the Secretary of the Treasury, foreign exchange swaps and forwards will be subject to the same regulatory requirements that apply to swaps generally. These include the mandatory clearing provision, required execution on a designated contract market or swaps execution facility, and the other provisions discussed above in the Risk Factor entitled, “Trading Swaps Creates Distinctive Risks.” Foreign currency swaps and forwards that are not offered for clearing by a clearing house will continue to be traded bi-laterally. In that case, the risks discussed in the preceding two paragraphs will apply to such transactions.
Investors are Taxed Every Year on Their Share of the Trust’s Profits Regardless of Whether They Receive Any Cash from the Trust
The Managing Owner does not intend to make distributions to the unitholders, but intends to re-invest substantially all of the Trust’s income and gains for the foreseeable future. As long as the Trust is treated as a partnership for U.S. federal income tax purposes and is not treated as a publicly-traded partnership that is taxable as a corporation, taxable U.S. investors are subject to U.S. federal income tax (and applicable state income taxes) each year on their shares of any income and gain of the Trust, even if they receive no distributions and redeem no units. Investors may therefore need to use other sources of funds or redeem units from the Trust to satisfy their tax liability.
The Trust Generates Short-Term Capital Gains That are Not Eligible for a Preferential Tax Rate
Investors are taxed on their share of any gains of the Trust at both short- and long-term capital gain rates depending on the mix of Section 1256 contracts and non-Section 1256 contracts traded. The term “Section 1256 Contracts” generally includes futures, futures options traded on U.S. exchanges, certain foreign currency contracts, and stock index options. These tax rates are determined irrespective of how long an investor holds units. Consequently, an investor’s tax rate on his or her investment in the units may be higher than the rate applicable to other investments held by an investor for a comparable period.
Tax Could Be Due from Investors on Their Share of the Trust’s Interest Income Despite Overall Losses
Investors will be required to include in their incomes their share of the Trust’s interest income, even if the Trust realizes overall losses. Trading losses generally will be capital losses that can be used by individuals only to offset capital gains and $3,000 of ordinary income, such as interest income, each year. Consequently, if an investor were allocated $5,000 of interest income and $10,000 of net trading losses, the investor would generally owe tax on $2,000 of interest income even though the investor would have a $5,000 economic loss for the year attributable to his or her investment in the Trust. The $7,000 capital loss would carry forward or back to other taxable years, but subject to the same limitation on its deductibility against ordinary income.
Deductibility of Trust Expenses May Be Limited if Characterized as Investment Advisory Fees
The Managing Owner does not intend to treat the operating expenses of the Trust, including management fees and incentive fees, as “investment advisory fees” for U.S. federal income tax purposes. However, were the operating expenses of the Trust characterized as investment advisory fees, non-corporate taxpayers would be subject to substantial restrictions on the deductibility of those expenses (including a complete disallowance of any deduction for any expense so characterized), would pay increased taxes in respect of an investment in the Trust, and may be required to recognize net taxable income from their investment in units despite having incurred a financial loss.
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Item 2. Properties
The Trust does not utilize any physical properties in the conduct of its business. The Managing Owner uses the offices of RJO at no additional charge to the Trust, to perform its administration functions, and the Trust uses the offices of RJO at no additional charge to the Trust, as its principal administrative offices.
Item 3. Legal Proceedings
The Trust is not a party to any material pending legal proceedings.
Part II
Item 5. Market for the Registrant’s Units and Related Security Holder Matters and Issuer Purchases of Equity Securities
| (a) | (i) There is no established public market for the units and none is expected to develop. |
(ii) As of December 31, 2011, there were 368,555 units held in the trading account by Beneficial Owners for an investment of $33,728,686 and 535 units held in the trading account by the Managing Owner for an investment of $48,857. A total of 147,351 units had been redeemed by Beneficial Owners and 11,144 units were redeemed by the Managing Owner during the period of January 1, 2011 to December 31, 2011. The Trust Agreement contains a full description of redemption and distribution procedures.
(iii) To date no distributions have been made to Beneficial Owners in the trading account of the Trust. The Trust Agreement does not provide for regular or periodic cash distributions, but gives the Managing Owner sole discretion of determining what distributions, if any, the Trust will make to its Beneficial Owners. The Managing Owner has not declared any such distributions to date, and does not currently intend to declare such distribution.
(iv) The Trust does not authorize the issuance of units under any employee compensation plan (including any individual compensation arrangements).
| (b) | The Trust did not repurchase any units registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the period January 1, 2011 through December 31, 2011. |
Effective July 1, 2011, the Managing Owner determined to discontinue the public offering of the Units and begin offering the Units on a private offering basis only. As such, effective July 1, 2011, units of the Trust are sold only to persons and entities who are accredited investors as the term is defined in Rule 501(a) of Regulation D.
The aggregate proceeds of securities sold in all share classes to the unitholders for the period of July 1, 2011 through December 31, 2011, was $561,489.
Item 6. Selected Financial Data
The following Selected Financial Data is presented for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 and is derived from the financial statements for such fiscal years.
| 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||
| 1 Revenues (000) | $ | (4,425 | ) | $ | 38,321 | $ | (4,721 | ) | $ | 3,533 | $ | (257 | ) | |||||||
| 2 Net Income (Loss) From Continuing Operations (000) | (12,427 | ) | 27,889 | (10,233 | ) | (1,101 | ) | (4,188 | ) | |||||||||||
| 3 Net Income (Loss) Non-Trading (000) | 5,510 | 1,807 | 1,303 | 15,550 | 1,312 | |||||||||||||||
| 4 Net Income (Loss) Per Unit | (9 | ) | 34 | (17 | ) | (2 | ) | (9 | ) | |||||||||||
| 5 Total Assets (000) | 83,423 | 92,007 | 69,523 | 59,412 | 36,392 | |||||||||||||||
| 6 Net Asset Value per Unit - Trading | 85 | 119 | 103 | 101 | 91 | |||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(a) Capital Resources
The Trust’s capital resources fluctuate based upon the purchase and redemption of units and the gains and losses of the Trust’s trading activities. During 2011, 10,039 Class A units for $943,530 and 2,169 Class B units for $219,959 were purchased by the Beneficial Owners. The Managing Owner purchased no units during this time. For the fiscal year ended December 31, 2011, the Beneficial Owners redeemed a total of 147,351 units for $14,093,256. For the fiscal year ended December 31, 2011, the Beneficial Owners redeemed a total of 144,459 Class A units for $13,802,983, and 2,892 Class B units for $290,273. The Managing Owner redeemed 11,144 units for $1,026,827 during the fiscal year ended December 31, 2011.
The Trust’s involvement in the futures and forward markets exposes the Trust to both market risk — the risk arising from changes in the market value of the futures and forward contracts held by the Trust — and credit risk — the risk that another party to a contract will fail to perform its obligations according to the terms of the contract. The Trust is exposed to a market risk equal to the value of the futures and forward contracts purchased and theoretically unlimited risk of loss on contracts sold short. The Trading Advisors monitor the Trust’s trading activities and attempt to control the Trust’s exposure to market risk by, among other things, refining their respective trading strategies, adjusting position sizes of the Trust’s futures and forward contracts and re-allocating Trust assets to different market sectors. The Trust’s primary exposure to credit risk is its exposure to the non-performance of the Trust’s forward currency broker. The forward currency broker generally enters into forward contracts with large, well-capitalized institutions and then enters into a back-to-back contract with the Trust. The Trust also may trade on exchanges that do not have associated clearing houses whose credit supports the obligations of its members and that operate as principals markets, in which case the Trust will be exposed to the credit risk of the other party to such trades.
The Trust’s trading activities involve varying degrees of off-balance sheet risk whereby changes in the market values of the futures and forward contracts underlying the financial instruments or the Trust’s satisfaction of the obligations may exceed the amount recognized in the statement of financial condition of the Trust.
The amount of assets invested in the Trust generally does not affect its performance, as typically this amount is not a limiting factor on the positions acquired by the Advisors, and the Trust’s expenses are primarily charged as a fixed percentage of its asset base, however large, or by number of investors. To a lesser extent, some expenses are incurred as minimums regardless of the size of the asset base, such as audit and legal fees.
The Trust borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Trust’s dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency and have been immaterial to the Trust’s operation to date and are expected to continue to be so.
During the fiscal year ended December 31, 2011, the Trust had no credit exposure to a counterparty which is a foreign commodities exchange which was material.
There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes, to the Trust’s capital resource arrangements at the present time.
(b) Liquidity
The Trust’s net assets are held in brokerage accounts with RJO. Such assets are used as margin to engage in trading and may be used as margin solely for the Trust’s trading. Except in very unusual circumstances, the Trust should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices. This should permit the Advisors to limit losses as well as reduce market exposure on short notice should their programs indicate reducing market exposure.
The Trust earns interest on 100% of the Trust’s average daily balances on deposit with RJO during each month at 100% of the average four-week Treasury bill rate for that month in respect of deposits denominated in dollars. For deposits denominated in other currencies, the Trust earns interest at a rate of one-month LIBOR less 100 basis points. For the calendar year ended December 31, 2011, RJO had paid or accrued to pay interest of $6,509 to the Trust. For the calendar year ended December 31, 2010, the clearing broker paid or accrued to pay interest of $69,977 to the Trust.
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Additionally, effective October 6, 2010, the Managing Owner retained RJOIM, an affiliate of the Managing Owner, to serve as a cash manager to the Trust. The Trust’s assets which are managed by the cash manager are held by Wells Fargo Bank, N.A. as custodian. As of December 31, 2011, Wells Fargo Bank, N.A. held approximately $31.5 million of the Trust’s assets. For the calendar year ended December 31, 2011, the assets held in this account earned $285,632 of interest income.
Most United States commodity exchanges limit the amount of fluctuation in commodity futures contract prices during a single trading day by regulations. These regulations specify what are referred to as “daily price fluctuation limits” or “daily limits.” The daily limits establish the maximum amount the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular commodity, no trades may be made at a price beyond the limit. Positions in the commodity could then be taken or liquidated only if traders are willing to effect trades at or within the limit during the period for trading on such day. Because the “daily limit” rule only governs price movement for a particular trading day, it does not limit losses. In the past, futures prices have moved the daily limit for numerous consecutive trading days and thereby prevented prompt liquidation of futures positions on one side of the market, subjecting commodity futures traders holding such positions to substantial losses for those days.
It is also possible for an exchange or the CFTC to suspend trading in a particular contract, order immediate settlement of a particular contract, or direct that trading in a particular contract be for liquidation only.
There are no known material trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Trust’s liquidity increasing or decreasing in any material way, and there are no material unused sources of liquid assets.
| (c) | Results of Operations |
The Trust’s success depends on the Advisors’ ability to recognize and capitalize on major price movements and other profit opportunities in different sectors of the world economy. Because of the speculative nature of its trading, operational or economic trends have little relevance to the Trust’s results, and its past performance is not necessarily indicative of its future results. The Managing Owner believes, however, that there are certain market conditions — for example, markets with major price movements — in which the Trust has a better opportunity of being profitable than in others.
JWH, ATC, GAJL, CCG, NW, and DCM are technical traders, and as such, their programs do not predict price movements. No fundamental economic supply or demand analysis is used in attempting to identify mispricings in the market, and no macroeconomic assessments of the relative strengths of different national economies or economic sectors are made. However, there are frequent periods during which fundamental factors external to the market dominate prices. For the discretionary Advisors, HCM and TIM, economic fundamentals and macroeconomic assessments are made.
The performance summaries set forth below outline certain major price trends which JWH’s programs have identified for the Trust during the last three fiscal years, until October 31, 2008, and for JWH, ATC, and GALP (the predecessor of GAJL) from January 1, 2009 through January 31, 2009; for JWH, ATC, GAJL and NW from February 1, 2009 through June 30 of 2009; and for JWH, ATC, GAJL, CCG and NW from June 1, 2009 through December 31, 2009. January of 2009 through March also reflect the opportunities captured on a fundamental basis by AIS Futures Management (“AIS”) and Peninsula, L.P. (“PLP”) and January through June reflect the opportunities captured by AIS. The fact that certain trends or market movements were captured does not imply that others, perhaps larger and potentially more profitable trends or market movements, were not missed or that the Advisors will be able to capture similar trends or movements in the future. Moreover, the fact that the programs were profitable in certain market sectors in the past does not mean that they will be so in the future.
The summaries below also reflect the performance of the technical strategies employed by JWH, GAJL, CCG, ATC and NW and discretionary strategy employed by HCM from January 1 of 2010 to September 30 of 2010. Performance from October 1 of 2010 through December 31 of 2011 reflects technical strategies employed by ATC, GAJL, ATC, CCG, NW and DCM and discretionary strategies employed by HCM and TIM.
The performance summaries are an outline description of how the Trust performed in the past, not necessarily any indication of how it will perform in the future. Furthermore, the general causes to which certain trends or market movements are attributed may or may not in fact have caused such trends or movements, as opposed to simply having occurred at about the same time.
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2011
The RJO Global Trust Class A units posted a loss of (9.26%) for 2011, Class B units posted a loss of (7.42%). The NAV per unit for Class A at year-end was $91.32 and for Class B at year end was $96.98 (please see Note (1) and Note (9) in the notes to financial statements for more information with respect to the calculation of Net Asset Value) compared to $100.64 per Class A unit at the beginning of the year and $104.75 per unit for Class B. Beneficial Owners purchased $943,530 worth of Class A units and $219,959 worth of Class B units in the Trust during 2011.
The stock market started the year with a solid gain. U.S. treasuries and the U.S. dollar were slightly weaker. Precious metals were decidedly weaker during the month but other commodities, lead higher by grains, allowed the Dow Jones-UBS Commodity Index to post a gain of 1%. The stock market benefitted from low interest rates and strong corporate earnings. The U.S. bond market has not responded to signs of inflation that have begun to surface in the emerging economies of China, India, and Brazil. In particular the economies of several Northern African countries have shown stress over food prices. The political stress in Egypt and Tunisia added significant support to grain and energy prices. Near month end, market participants saw evidence of those governments beginning to hoard food to make sure supplies are adequate at any cost. Concern over access to the Suez Canal and the flow of oil exports from the region were reasons given for strength in oil prices. Stocks kept climbing higher quietly during the month of February. The rally was disrupted in the latter part of February as violence erupted in Libya. Stress in the Middle East sparked a renewed rally in the petroleum markets. In an odd turn of events, market participants identified climbing fuel prices, which on their own might be considered inflationary and negative for fixed income markets, as a reason that global economies might slow and therefore lessen inflationary pressures. With this as a backdrop, U.S. treasuries posted a modest gain. Commodity indices led higher by energy and metals markets posted all-time highs. Domestically, the House and Senate have undertaken a project to revise and pass a budget that will reign in the country’s ballooning budget deficit. Negotiations do not appear to be going well. This all adds up to a volatile market outlook. In March, an earthquake in Japan and the tsunami that followed unleashed a series of events that will change that country forever. Stocks and commodities plunged following the disaster but recovered during the latter part of the month to finish unchanged. A coalition of foreign forces decided to intervene in Libya to support the rebel groups battling against Gaddafi. Unemployment in the U.S. was reported to be improving with the best number since 2008. The United States Department of Agriculture (“USDA”), reports the lowest corn inventories in years.
In April stocks scored another gain in what has been a near perfect environment for the market over the last 12 months. The S&P 500 has doubled since March 2009 and remains just 13% below an all time high. Interest rates have remained at near historic lows and economic activity has been quietly improving. Still, there is a certain uneasiness surrounding the current situation, as many prudent market watchers are concerned that the Federal Reserve Bank’s accommodative monetary policy is the only support underlying the market. If the Fed were unable to maintain accommodative monetary policy, the market would have to deal quickly with inflationary evidence and questions of currency stability. Commodities remain in a steady uptrend and, although experiencing some brief pullbacks, have been led higher by food, metal, and energy markets. Stocks lost just over 1% during May while commodities lost just over 5%. The markets seemed concerned that domestic global economic growth was slowing. Concerns over the European Union’s situation with Greece and its debt situation have brought credit market tensions to the forefront. As a result, U.S. treasuries showed strength again this month with the benchmark 10-year note closing out the month with its yield hovering near 3%. Given the markets concern over budget deficits and commodity led inflation, it is remarkable that the yield on the 10-year note is trading so low. The markets appear to be very nervous about the potential of a U.S. budget impasse and a double dip recession. Stocks staged a strong rally during the last few days of June but still finished the month down almost 2%. Commodities lost 5% during the month as crude oil and grains sold off dramatically from recent highs. On the energy front, the International Energy Agency orchestrated the release of 60 million barrels of oil to help loosen the oil market and to keep prices below $100 per barrel. The USDA reported that farmers have planted a record amount of corn. In fact, planted acreage is 9% higher than ever before. Greece avoided a financial default by approving an austerity package despite a series of violent domestic protests. Allowing Greece to solve its debt problem by creating more debt from within the European Community in a global environment that includes the U.S. fighting its own rising debt problems, finally got the attention of treasury markets around the world. The unfolding events caused rates to creep up slightly during the month. July was interesting as politicians position themselves in the effort to increase the U.S. debt ceiling or face our own credit default.
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Stocks continued their losing streak in July finishing with a lackluster 2% loss. The market continues to struggle with anemic economic data and a stressful political climate related to debt management both here in the U.S. and in Europe. While the European community avoided an immediate crisis in Greece, problems remain critical in Italy and in Spain. For the first time our country’s history, our government flirted with default as our leaders could not agree on a plan to increase our debt limit or a long term plan to balance the U.S. budget. With this environment as a backdrop and investors looking for safe havens to protect value, gold and the Swiss franc each made new highs. Interest rates remain at or near record lows. Many commodities began climbing back to higher price levels seen earlier this spring. As a result, the Dow Jones-UBS Commodity Index returned to positive territory at month end for the year to date. At one point during August, stocks were down almost 12%. The S&P rallied five straight days to finish the month with a loss of 5.43%. The final monthly result masks the fear that was present in early August. As stocks were in free fall, gold rocketed to an all time high nominal price of over $1,900 per ounce. The Swiss franc rose to an all time high against the U.S. dollar and against the Euro as global investors worried over the viability of the European Union and the ability of the U.S. economy to avoid another recession. Ten-year note yields dipped below 2% for a few days for the first time since 1960 seeming to signal desperation on the part of investors seeking to avoid stock exposure and market risk. With no evidence of a solution to numerous global economic and political problems, it was somewhat surprising to see that stocks and commodities finished the month on a positive note. The market seems to have embraced the Federal Reserve Bank’s plan to leave interest rates at or near zero until 2013. It seems that something would have to give between weakening global economies and increasing global debt problems. Global stock markets continued their slide during September and posted their worst quarterly performance since the fall of 2008. Concerns over slumping global demand for commodities caused a 15% drop in the Dow Jones-UBS Commodity Index, its second worst month ever and the worst month since October 2008. After making new highs earlier this summer gold and corn are each almost 25% below their peaks. Crude oil, coffee, and copper have fallen between 15 and 20%. It would appear that the markets are pricing in a Greek default and the impact such a default might have on the European Union. While the direct economic impact of such a problem is uncertain, the thought of it has created a lack of confidence that has been pervasive across many markets and has been reflected in many recent consumer and business reports. Consumers appear reluctant to spend and businesses are hesitant to hire new employees and invest in new projects. Not a good combination for economic growth.
After posting the worst quarterly performance since the fall of 2008, the stock market responded in October with a gain of 13%, its best single month since 1987. It is interesting to note the market’s increased volatility. For a record 68 consecutive days the S&P had an intraday trading range of over 1%. The string was interrupted on Friday, October 28 as the market seemed to pause to consider the announced European debt restructuring plan. A new string began on October 31 with the market losing 2.5%. Commodities, which had been tracking stocks closely for the last two years, decoupled and continued their losing streak. The Dow Jones-UBS Commodity Index rebounded gaining over 6% during the month. The Index has lost 7.9% for the year to date. Interest rates experienced a reversal with the 10-year note yield rising 50 basis points from its early October low. This reversal was attributed to problems in Europe, inflationary concerns, and poor demand for treasuries at recent U.S. government debt auctions. At the close on the day before Thanksgiving, the S&P 500 had lost 8.5% during November. The market staged an amazing turn around to finish slightly positive for the month. This helped crude oil and gold but other commodities slumped and caused the Dow Jones-UBS Commodity Index to post another negative month. Corn and natural gas for example both lost over 6% during the month. The market continues to be sensitive to and influenced by developments surrounding the European debt crisis. Every morning, it seems, the market reacts positively or negatively to overnight headlines coming out of Europe. United government central bank intervention to create additional liquidity for European financial institutions, in fact, caused the market to surge almost 4% on the last day of November. Market rallies based on government intervention do not usually signify a stable foundation for economic growth. In addition to the rally in stocks, the concerted central bank intervention caused foreign currencies to surge against the dollar and interest rates on longer duration treasuries to increase. There seems to be plenty of turmoil in the market to create trading opportunities. For a year that contained historically high periods of volatility, blistering sell offs, short covering rallies, and ranges from low to high of over 27%; it was interesting to see the stock market close the year with a very slight 2% gain. Commodities as an asset class lost over 13% and were lead lower by grains, softs, base metals, and some energy markets. Fixed income markets confounded experts, who expected a rising interest rate environment earlier in the year, by finishing with the best performance of the year. The U.S. Government’s 10-year note, for example, finished with a total return of more than 15%. As we begin 2012, the European debt situation remains unsolved, there is plenty of tension in the Middle East and on the Korean peninsula, China’s economic development continues to dominate global trade issues, and an already deadlocked partisan U.S. political system is entering a Presidential election year. Basically, it’s business as usual. The market turmoil can represent opportunities for our traders as we look forward to the year ahead.
2010
The RJO Global Trust Class A units posted a loss of (2.14%) for 2010, Class B units posted a loss of (0.15%). The NAV per unit for Class A at year-end was $100.64 and for Class B at year end was $104.75 (please see Note (1) and Note (9) in the notes to financial statements for more information with respect to the calculation of Net Asset Value) compared to $102.84 per Class A unit at the beginning of the year and $104.91 per unit for Class B. Beneficial Owners purchased $5,337,442 worth of Class A units and $658,669 worth of Class B units in the Trust during 2010.
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An overall sell off in stocks and commodities was the most notable event during January. The U.S. dollar strengthened during January despite some poor economic reports. The U.S. dollar rally seemed to catch a number of market participants off guard. The stock market started the year strongly, but fell 8% from its intra month high to finish with a loss of 3.6% for the month. Crude oil fell 13% and gold fell 7% from their respective intra month highs. This paralleled the problems experienced by other commodity markets which had been hoping to see signs of improving domestic and international demand. The Trust fought through another difficult month. It has been one of the most difficult periods on record for managed futures strategies. Our managers remain committed to research and to improving their risk adjusted performance. During the month, half of the managers made money. Those who did had less exposure to long-term trend following. The three profitable managers focused on shorter time frames or fundamental economic conditions of a few specific underlying markets. After selling off aggressively in early February, the stock market rebounded to finish with a modest gain. Commodity markets, lead by crude oil and gold, also gained ground during the month. Commodities and stocks continue to move with an uncharacteristically high degree of positive correlation. For example, the charts for gold, crude oil, and the S&P 500 look very similar. Each of the three markets finds itself in the middle of a wide trading range bordered by November 2009 highs and early February lows. The only market that appears to be trending is the U.S. dollar. It has strengthened 11% or more against the euro, the British pound, and the Swiss franc. The U.S. dollar however, has not strengthened against the Aussie dollar, Japanese yen, or Canadian dollar. The situation highlights European weakness as opposed to U.S. strength. During the month NW and CCG made money. GAJL and HCM were frustrated by choppy commodity markets. JWH and ATC were also frustrated by a lack of follow through in downside moves that had begun developing in several sectors. The stock market rose steadily during March and finished with a gain of almost 6%. The U.S. dollar strengthened against the euro as European financial problems appear to be worse than our own in terms of budget deficits and burgeoning government debt. The U.S. dollar lost ground, however, against the Aussie dollar and Canadian dollar which both stand to strengthen from rising demand for their abundant natural resources. Gold was weaker most of the month but a late rally leveled it for the month and for the year to date. Crude oil was up almost 8% during March leaving it near the top of a $75 – $85 trading range that has persisted since November of last year. Weakness in natural gas and the grain markets, due to concerns about oversupply, have created a drag on the commodity indices which remain in negative territory for the year to date. During the month HCM and NW lost a modest amount of money but each of the other four Advisors were profitable. GAJL had the best month. Their models had long positions in the petroleum based energy markets and short positions in the natural gas and grain markets. There was consensus among our Advisors related to long-term interest rates with each Advisor registering short positions. It should be noted that trading volume has begun to increase steadily over the last few months. This should help our managers with the execution of their trading strategies.
The stock market sold off aggressively on the last day of April but still managed a small gain for the month. Weakness was tied to an evolving story with Goldman Sachs as the SEC announced a criminal investigation into the firm’s sales tactics. European markets were weak for much of the month as debt issues in Greece have brought much focus on the economies and financial situations of other EU countries. Note that the EAFE Index is negative for the year while the S&P 500 is up over 7%. After creeping higher during much of March, long-term interest rates moved lower during the month. The U.S. dollar remains a mixed story. It has not kept pace with the strength in gold, the Australian dollar, or the Canadian dollar but it remains strong against the euro. Gold and crude oil are both up about 5% for the year and actually made new highs for the year in April, while natural gas and grain markets remain in negative territory and are near their lows for the year. The markets remained difficult for our managers to navigate. Four of the managers had small profits but ATC and HCM lost a modest amount of money and that caused the Trust to turn in a negative month. NW and CCG are profitable for the year to date. The other four managers are down just slightly. The split between the euro and other currencies is also a common theme among the managers. At April 30, the majority are short the euro and long other currencies against the U.S. dollar. After an April that saw mixed performance in the underlying equity markets, May was ruled by volatility and negative returns. By some measures, the U.S. markets posted their worst May since 1940 and the markets had some of their largest intraday swings in history. This volatility, as represented by the VIX, came into May at 22.05 and left the month at 32.07, while spiking to over 48 mid-month. Crude oil lost 20% of its value during May and long-term interest rates fell to 50-year lows. The U.S. dollar gained against the euro, rising almost 10% during the month. Needless to say, the markets are very fluid and active at this point. Three of our managers posted positive results during May. The strong performance by CCG and NW was enough to lead the Trust to a positive month. CCG was helped by a short position in the S&P. NW was helped by quickly reversing its April stance to take short stock and energy positions in early May. Our advisors held long positions in long-term interest rates which was a positive for much of the month as long-term rates moved lower. The stock market remained under pressure during June losing just over 5%. The market is down almost 7% for the year at the midway point of 2010. The market sell-off was attributed to concerns over a possible double dip recession in the U.S. The recovery in Europe seems to have stalled and concerns over the European Union members’ debt situations cast a favorable light on U.S debt markets where demand for U.S. treasuries drove yields to record lows for the 2 and 5-year notes. The yield on the 10-year U.S. Treasury, while not a record low, finished the month at 2.9%, a level not seen since the dark days in the spring of 2009. The dollar weakened a bit but the US Dollar Index remains up over 10% for the year. Gold made a new high for the year at $1,270 per ounce, which was an all time high in nominal dollar terms, but settled back to finish the month with a small gain. Crude oil behaved in a similar pattern by firming early in the month then trailing off at month end in sympathy to the stock market’s weakness. June was another tough month for the managed futures industry. June also completed the 4th losing calendar quarter out of the last six quarters for the Barclay Top 50 CTA Index. The index historically has been profitable in 63% of calendar quarters. None of the managers in the Trust posted a profit during June. NW and CCG remain positive on the year while the others are weathering the various markets’ gyrations.
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The stock market rebounded during July rising just over 7%. This left the market flat on the year. U.S. Interest rates made new record lows with the 2-year note reaching a yield of 0.55%. The yield on the 10-year note approached 2.80%. Several other markets reversed recent trends. Grains for example, which had been trending lower for most of the year, reversed dramatically and served as a catalyst for a rally in the commodity sector. The U.S. dollar, which had been stronger against European currencies for most of the year, lost about 6.5% against the euro during the month. Base metals also reversed course and posted gains during the month. Congress passed a financial reform act during the month which removed some regulatory uncertainty from the markets. This combined with improving economic data out of Europe and Asia appeared to trigger a short covering rally in stock markets around the world. Many of these markets have now rallied back to the top of recent trading ranges. A review of the individual markets traded by the Advisors in the Trust’s portfolio reveals the problems our Advisors have faced. July was a month of frustrating reversals. Grains, metals, stocks, energy markets, and currencies had all moved sufficiently lower to cause the traders to take positions in favor of the downward price trends. These trends took shape for many reasons and across multiple time frames. Each of the sectors finished June near their lows, then reversed course early in July to finish near their highs for the month. Some managers have reversed positions along with the markets while some remain positioned to the contrary. The stock market had its worst August since 2001 with the S&P 500 losing just over 4.5%. This left the market down almost 5% for the year. In a repeat of the previous month, U.S. interest rates made new record lows with the 2-year note reaching a yield of less than 0.50%. The low yield on the 10-year note approached 2.45%. Commodities were weaker in general as market pundits began to debate openly about a double dip recession and the possibility of deflation. The Dow Jones-UBS Commodity Index, a broad based basket of commodity markets, lost 2.55% during August and is down almost 10% for the year-to-date. While corn and gold traded higher for the month, crude oil edged lower, along with soybeans, wheat, coffee, cocoa, and base metals markets. Natural gas was by far the weakest market, establishing new life of contract lows. Currency markets remain puzzling: The U.S. dollar was stronger overall against the euro but continued to weaken against the Japanese yen. The Japanese Government intervened in the market to try to stem the rise of the yen but the intervention had little or no effect as the yen closed out August at its highest point of the year. The trend following strategies employed to different degrees by our managers were successful during the month. Interest rates trended lower as did the S&P 500 and natural gas. Profits were also captured during the upward move by gold and the yen. CCG, our short-term specialist, had the best month by profiting from trades in stocks, currencies and interest rates. The only losing manager was GAJL whose systematic commodity-only portfolio was under more pressure than our other more diversified managers.
The stock market had its best September in over 50 years rising almost 9%. With interest rates hovering at all time lows, the dollar weakening, and the stock market showing signs of life, commodities turned in their strongest month in over a year. The Dow Jones-UBS Commodity Index was up over 7% during the month. Cotton, corn, and sugar turned in a stellar month with gains of over 15%. The common theme behind their upward moves was increasing Chinese demand. Crude oil rallied back above $80 per barrel and gold made a new high just above $1,300 per ounce. Those two markets appeared to benefit the most from a 5% slide in the U.S. dollar that took place during the month. The U.S. Congress passed a bill denouncing Chinese currency policy in what seems to be a global chorus among countries who trade with China seeking an end to the artificial suppression of the Chinese currency. The trend following strategies employed to different degrees by the Trust’s managers were successful again during September. The S&P and base metals sector reversed course and joined an otherwise upward trend across commodities, currencies, and bonds. Four of the six managers were profitable. ATC, HCM, and GAJL posted the strongest results thanks to a heavy allocation to commodity trades. JWH was also profitable. CCG lost money due to a longer-term short position on the stock market.
The stock market and most commodity markets continued to grind higher during October. The Fed signaled that it would continue to operate an accommodative monetary policy and outlined its ideas for a second round of quantitative easing. This kept interest rates steady to lower during the month and allowed the U.S. dollar to continue edging lower. Low interest rates and reports showing Republicans poised to regain the U.S. House of Representatives seemed to lift stock prices during the month. While the Fed’s moves have kept a lid on short-term interest rates, longer-term rates edged slightly higher during the latter part of the month as inflation concerns crept into the market equation. Cotton was the most remarkable market during the month rising another 28% from September’s record high levels. Poor crops in Pakistan and China coupled with increasing Chinese demand have pushed cotton prices to their highest levels since the Civil War era at $1.28 per pound. Corn prices also rose 20% during the month when a USDA crop report showed poor yields across the U.S. farm belt reducing U.S. crop forecasts. Natural gas prices, on the other hand, made new life of contract lows during the month as the market has struggled with excess supplies and softer than expected demand.
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The S&P 500 and the Dow Jones-UBS Commodity Index finished the month up 0.01% and down 0.35% respectively. From those results, one might conclude that this was a slow and uneventful month. Hardly. Commodities, lead by grains and metals, marched ahead in early November adding on to the sector’s October gains. The commodity index peaked in early November and then lost over 8% from the 9th through the 17th. During that time sugar and cotton lost over 25% of their value (worst sell off in 30 years). The S&P 500 lost 5% and the U.S. dollar strengthened 8.45% against the euro. Several situations served as a back drop for these reversals. First, the Republicans took control of Congress in the midterm elections. While this had been widely anticipated, the markets sold off after the fact. Ireland’s financial position continued to erode, further pressuring the EU. This caused the euro to weaken against the U.S. dollar. North Korea then chimed in with an attack on South Korean territory which caused more flight to the U.S. dollar. Finally, the Fed released minutes showing an intensifying debate between Governors who think inflation is becoming a serious threat and those who feel the economy continues to need an accommodative monetary policy. In all, it was a very busy month.
The S&P 500 and the Dow Jones-UBS Commodity Index finished the month at or near their highs for the year. Stocks continue to operate in a near perfect environment with improving earnings and the lowest interest rates in a generation. It is interesting to note, however, that stocks are still 20% below their 2007 high marks. Commodities have benefitted from growing global demand and the perception that most developed countries seem to be operating under an unannounced policy aimed at devaluing their currencies. Commodities therefore represent not only an economic play but a relative value opportunity. Fixed income markets continued to struggle during the month. Long-treasury market instruments finished the year with a gain of almost 10% but lost almost 4% during the month as continued concern over the inflationary impact of international monetary policies came to the forefront. Looking ahead, looming issues related to the U.S. budget deficit and debt limits, an unstable diplomatic situation on the Korean peninsula, an expanding Chinese economy, and uncertainty related to the sovereign debt of several European Community members will keep markets on edge as the first quarter of 2011 unfolds.
2009
The RJO Global Trust Class A units posted a loss of (13.86%) for 2009. Class B units posted a loss of (12.13%). The NAV per unit for Class A at year-end was $102.84 and for Class B at year end was $104.91 (please see Note (1) and Note (9) in the notes to financial statements for more information with respect to the calculation of Net Asset Value) compared to $119.39 per unit at the beginning of the year. Beneficial Owners purchased $1,627,869 worth of Class A units and $45,000 worth of Class B units in the Trust during 2009.
The first quarter of 2009 began much as the fourth quarter of 2008 ended, with continued broad market volatility. Stock markets and commodity markets remained under pressure and declined in lock step during January, February, and early March. Prices reversed and began climbing during the first week of March as negative sentiment on the part of investors appeared to be at its highest. Correlation between commodity prices and stock prices, with few exceptions, remained unusually high during the quarter. The U.S. dollar had an almost exact inverse relationship to stock and commodity prices during the quarter. It actually strengthened against most major foreign currencies as stocks and commodities sold off and then began to weaken after stocks and commodities bottomed out. The results of fixed income markets during the quarter told two stories. Short-term rates remained low and in choppy markets as the Federal Reserve left Fed Fund targets in the 0% to 0.25% range. Long-term rates, however, edged higher in January and February as concerns over the inflationary impact of the government’s stimulus packages drove down note and bond prices. Bond and note holders received a big boost, however, in late March when the Fed signaled that it would buy an enormous amount of medium and long-term notes in an effort to keep mortgage rates low and to maintain a high level of liquidity in the markets. The traders in the Trust who employ rule-based or systematic approaches managed the volatility well and the performance was down slightly until the sharp market reversals in March caused some slightly larger losses. These managers employ methods that vary widely in terms of investment time horizons. Those with shorter-term outlooks did a little worse during January and February while the long-term down trends established during the fall of 2008 remained in place, but managed the March reversals better than the managers with longer-term styles. The managers of the Trust who employ a more discretionary approach continued to struggle with the unprecedented volatility and uncertainty that surrounded the markets during the quarter. They posted small losses for the quarter as well. It was a difficult quarter in general for the managed futures industry. The Barclay Commodity Trading Advisor Index, a broad measure of managed futures performance, lost ground each month during the quarter. Approximately 8 out of every 10 managers in the industry were showing negative year to date performance at quarter end. This difficult period follows a strong performance period for the industry in 2008. Periods like this are to be expected from time to time and the first quarter profile was consistent with other losing periods from the past. The objective of the Trust’s portfolio of managers is to conserve capital during difficult periods like this using disciplined risk management and a broad diversification of asset exposure, investment style, and investment time frame.
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In April, stocks climbed a wall of worry, as the old axiom states about bull markets, by posting a gain for a fourth consecutive month. Stocks rallied 42% from their low in early March. This has been their best three month showing since the 1930’s. To put the magnitude of the losses sustained by the market over the last year and a half in perspective, the S&P would have to gain another 62% from current levels to match the market high reached in October of 2007. This seems like a tough task in light of long-term interest rates, which continued to rise during the quarter due to concerns over the expanding budget deficit, and its potential long-term inflationary implications. Interest rates fell back at the end June, however, as markets digested tepid growth related statistics, and inflationary fears subsided. This reversal took place after Treasury bond yields had risen more than 60% in five months. Commodity markets began to firm in late April and were able to mount a rally during most of May. Market worries over the inflationary implications of the government’s massive stimulus plan and other spending programs began to weaken the long-term treasury markets. With rates rising and the dollar weakening against major foreign currencies, commodities began to look like a good place to invest. Historically commodities, during times of inflation or currency depreciation, have been a good store of value. In June, however, commodities sold off and evidence is beginning to appear that would indicate that the lock step relationship between commodities and the stock market that has existed for the last year or so is beginning to break up. In other words, commodity markets are beginning to respond to the economics effecting their own specific situation rather than moving in tandem with stock prices. This would create more diverse market movements and would be a good thing for our strategies. The second quarter continued to present a difficult environment as a whole for the managed futures industry. The Barclay B Top 50 CTA Index, representing the performance of the top 50 CTAs in the industry in terms of assets under management, was down in two of the three months and lost approximately 2% during the quarter. The index lost for consecutive quarters for only the third time since its creation in 1987. The index has lost approximately 3.5% for the year to date. The performance problem seems to lie in the unstable nature of the market environment from a time frame perspective. Short-term systems focusing on moves lasting less than a week have struggled. Long-term strategies focused on price moves that take months to evolve have refused to reverse. This may pay off over time but for now it has created small losses. Only intermediate term strategies focused on 4-6 week price movements have been able to adapt appropriately and capture profits. The first eight months of the Trust transferring to multi-CTA format has been challenging. The Trust’s evolution to a multi-manager format came just after a very profitable period for many different types of CTA strategies, particularly long-term trend following. The charged markets of late 2008 and early 2009 exposed problems with our initial discretionary managers and the trend following strategies experienced a pull back that was to be expected. The Trust’s risk control policies enabled the Trust to manage this risk effectively. Today, the Trust’s portfolio is strongly positioned from a diversification standpoint among sectors traded, investment styles, and investment time horizons.
Economic data was weak on an absolute basis during July, but on a relative basis there was reason for hope. Housing data appeared to show signs of stabilization. Corporate earnings showed some life. The stock market posted strong gains for the month. Some commodities lead by the grain and base metal sectors also showed strength later in the month. The U.S. dollar was weaker across the board. The short-term manager, CCG, performed best during the month capturing profits in stock, interest rate, and currency markets. The longer-term strategies provided mixed results: JWH, who employs only long-term trend following strategies, was positive for the month. NW and ATC were negative for the month reflecting the difficult conditions being dealt with by other leading multi-strategy CTAs in the industry this year. HCM, the discretionary manager, was about even on the month after a cautious start. GAJL, the commodity only manager, was slightly negative for the month but was starting to gain ground as the month drew to a close. During August, auto sales improved dramatically thanks to the Government’s “Cash for Clunkers” program. Housing sales also improved. The President re-nominated Federal Reserve Chairman Bernanke based on his handling of the crisis that unfolded last year. IPO activity increased and two large corporate acquisitions took place at month end. These situations taken together seem to reflect a market and economy returning to more solid footing. This allowed stocks to turn in their most positive August since 2000. Bond prices rose as well during the month as inflation remained in check. Natural gas and corn were the weakest among commodities. Action in the crude oil and the foreign currency markets looked very similar during the month. Each traded in a range during the month finishing on the low side. The short-term advisor, CCG, posted negative returns for the month. Their short-term trading strategy was frustrated by the range bound trading that persisted during the month. JWH, NW, and ATC were all positive for the month. This was due to the longer-term nature of their systems. HCM, the new discretionary manager, was also positive for the month capturing returns from a stronger sugar market. GAJL, the commodity only manager, was also positive for the month on the back of stronger metals markets. By September 30, the stock market finished its strongest quarter since Q4 1998 and was up almost 20% for the year. It was up almost 50% from its low in March of this year. It is interesting to note that since World War II, the average size of stimulus packages implemented by the government and the Federal Reserve to revive the economy has been 2.9% of our Gross Domestic Product. This has come from the government chipping in an average of 2.4% and the Fed has added 0.5% through easier monetary policy. Thus far, to battle this recession, the government has provided 10% in stimulus activity through fiscal measures while the Fed has pumped in 9.5% for a total of 19.5% of assistance. That is more than the average stimulus package by a factor of 6. No wonder the market has rallied. The fact that the stimulus package has been delivered on borrowed money has yet to trigger a response from the market. With the stock market drifting higher and with other markets, particularly grains and energy, mired in trading ranges, the Advisors did not have many opportunities during the month. Four of the six managers were up slightly during the month with two managers losing money. JWH, ATC, NW, and HCM were profitable. GAJL and CCG lost money.
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During October, the stock market had its first losing month since March. An odd result considering the market received its first bit of evidence that the economy is turning around. Third quarter Gross Domestic Product was reported to have grown at a 3.2% annualized pace. Much of the gain was attributed to the government’s stimulus projects. For example, the “Cash for Clunkers” program boosted auto sales while tax credits for home buyers revived housing sales. For the fiscal year ended September 30, the government reported a $1.4 trillion budget deficit, a record which represents roughly 10% of our GDP. The budget deficit has kept pressure on the U.S. dollar. The weaker U.S. dollar continues to help our export sector whose goods and services are cheaper in the global market place. Our traders have shifted positions in several key areas. Across the board in multiple time frames our managers have turned positive on most commodities. Grain, metals, and petroleum markets have lead the way. Our managers also favor a weaker U.S. dollar. HCM was our only profitable manager during the month. Each of the others had small losses.
The stock market climbed higher during the month of November as interest rates remained at or near historic lows. The U.S. dollar edged lower and sits near its lows for the year against major currencies. Gold made a new historical high during the month just above $1,175 per ounce. It should be noted that, on an inflation adjusted basis, gold traded at an equivalent of $2,300 per ounce in 1980. Other commodities drifted higher, supported by the weaker U.S. dollar. Grains and metals markets seem to be the leaders while crude oil struggled to break out of a trading range capped above $80 per barrel. The Trust turned in a positive month during November. Four of the six managers made money. Across the board, in multiple time frames, our managers remain positive on most commodities. Grain, metals, and soft commodity markets have led the way. Our managers hold mixed positions mixed in the energy complex with a slightly negative bias due to the trading range in crude related markets and the negative performance by natural gas. Our managers favor a weaker U.S. dollar and remain positioned for lower interest rates. A major reversal took place early in December when the government released an employment report that showed unexpected improvement in that area. Gold fell 5% that same day and interest rates instruments began a month long slide (rates turned higher). Gold fell 12% during the month and the total return on ten-year U.S. Treasuries was a negative 5.15%. The U.S. dollar also staged an impressive 7% rally reversing a 7-month trend of weakness. Several commodity sectors sold off in sympathy to gold early in the month, but crawled higher as the year drew to a close. Grains, crude markets, and industrial metals all recovered to close near recent highs. The Managed futures industry turned in its first losing year since 1994 and its worst year overall since the inception of the Barclay Top 50 CTA Index in 1987. The Trust turned in a losing performance during December. Despite our diverse group of managers and their diverse strategies, the Trust’s aggregate positions at the beginning of the month were aligned for a weaker U.S. dollar, lower interest rates, and stronger gold and commodity markets. The reversal of those trends early in the month created problems for most of the managers. HCM, our discretionary manager, made money by hanging on to sugar and cocoa positions and dumping a falling silver position early in the month. CCG was the most disappointing as their short-term strategy was whipsawed during the month.
| (d) | Inflation |
Inflation does have an effect on commodity prices and the volatility of commodity markets; however, continued inflation is not expected to have a material adverse effect on the Trust’s operations or assets.
| (e) | Off-Balance-Sheet Arrangements |
The Trust does not have any off-balance-sheet arrangements (as defined in Regulation S-K 303(a)(4)(ii)) that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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| (f) | Tabular Disclosure of Contractual Obligations |
The business of the Trust is the speculative trading of commodity interests, including futures contracts on currencies, interest rates, energy and agricultural products, metals, commodity indices and stock indices, spot and forward contracts on currencies and precious metals and exchanges for physicals. The majority of the Trust’s futures and forward positions, which may be categorized as “purchase obligations” under Item 303 of Regulation S-K, are short-term. That is, they are held for less than one year. Because the Trust does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations or other long-term liabilities that would otherwise be reflected on the Trust’s Statement of Financial Condition, a table of contractual obligations has not been presented.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
Past Results Are Not Necessarily Indicative of Future Performance
The Trust is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Trust’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 Trust’s main line of business. Market movements result in frequent changes in the fair market value of the Trust’s open positions and, consequently, in its earnings and cash flow. The Trust’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Trust’s open positions and the liquidity of the markets in which it trades.
The Trust can acquire and/or liquidate 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 Trust’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, optionality and multiplier features of the Trust’s market sensitive instruments.
Quantifying the Trust’s Trading Value at Risk
“Value at Risk” is a measure of the maximum amount which the Trust could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Trust’s speculative trading and the recurrence in the markets traded by the Trust of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Trust’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Trust’s losses in any market sector will be limited to Value at Risk or by the Trust’s attempts to manage its market risk.
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Trust’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, as amended (the “Securities Act”) and Section 21E of the Exchange Act). 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.
The Trust’s risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Trust’s mark-to-market accounting, any loss in the fair value of the Trust’s open positions is directly reflected in the Trust’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
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Exchange maintenance margin requirements have been used by the Trust as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day intervals. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.
In the case of market sensitive instruments, which are not exchange traded (almost exclusively currencies in the case of the Trust), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
The fair value of the Trust’s futures and forward positions does not have any optionality component.
In quantifying the Trust’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Trust’s positions are rarely, if ever, 100% positively correlated have not been reflected.
The Trust’s Trading Value at Risk in Different Market Sectors
The following tables indicate the average, highest and lowest amounts of trading Value at Risk associated with the Trust’s open positions by market category for fiscal years 2011 and 2010. All open position trading risk exposures of the Trust have been included in calculating the figures set forth below. During fiscal year 2011, the Trust’s average total capitalization was approximately $40.0 million, and during fiscal year 2010, the Trust’s average total capitalization was approximately $54.2 million.
| FISCAL YEAR 2011 | ||||||||||||||||
| Market Sector | Highest Value at Risk* | Lowest Value at Risk* | Average Value at Risk | % of Average Capitalization** | ||||||||||||
| Agriculture | $ | 1.1 | $ | 0.2 | $ | 0.6 | 1.4 | % | ||||||||
| Currencies | 1.7 | 0.3 | 0.7 | 1.8 | % | |||||||||||
| Energies | 0.8 | 0.1 | 0.3 | 0.8 | % | |||||||||||
| Indices | 1.5 | 0.2 | 0.7 | 1.8 | % | |||||||||||
| Interest Rates | 1.0 | 0.2 | 0.5 | 1.3 | % | |||||||||||
| Metals | 0.9 | 0.1 | 0.3 | 0.8 | % | |||||||||||
| Total | $ | 7.0 | $ | 1.1 | $ | 3.1 | 7.9 | % | ||||||||
| FISCAL YEAR 2010 | ||||||||||||||||
| Market Sector | Highest Value at Risk* | Lowest Value at Risk* | Average Value at Risk | % of Average Capitalization** | ||||||||||||
| Agriculture | $ | 2.0 | $ | 0.7 | $ | 1.3 | 2.4 | % | ||||||||
| Currencies | 2.2 | 0.4 | 1.4 | 2.7 | % | |||||||||||
| Energies | 1.5 | 0.5 | 1.0 | 1.8 | % | |||||||||||
| Indices | 1.9 | 0.2 | 0.9 | 1.6 | % | |||||||||||
| Interest Rates | 1.9 | 0.3 | 0.9 | 1.6 | % | |||||||||||
| Metals | 1.8 | 0.5 | 1.0 | 2.0 | % | |||||||||||
| Total | $ | 11.3 | $ | 2.6 | $ | 6.5 | 12.1 | % | ||||||||
* Average, highest and lowest Value at Risk amounts relate to the month-end amounts for each calendar month-end during the fiscal year. All amounts represent millions of dollars committed to margin.
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** Average Capitalization is the average of the Trust’s capitalization at the end of each fiscal month during the relevant fiscal year.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Trust is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Trust. The magnitude of the Trust’s open 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 the Trust to incur severe losses over a short period of time. The foregoing Value at Risk table, as well as the past performance of the Trust, gives no indication of this “risk of ruin.”
Non-Trading Risk
The Trust has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial. The Trust holds a significant portion of its assets in cash on deposit with RJO. The Trust has cash flow risk on these cash deposits because if interest rates decline, so will the interest paid out by RJO at 100% of the four-week Treasury bill rate. As of December 31, 2011 and December 31, 2010, the Trust had approximately $2.7 million and $22.4 million, respectively, in cash on deposit with RJO. Additionally, effective October 6, 2010, the Managing Owner retained RJOIM, an affiliate of the Managing Owner, to serve as a cash manager to the Trust. The Trust’s assets which are managed by the cash manager are held by Wells Fargo Bank, N.A. as custodian. As of December 31, 2011, Wells Fargo Bank, N.A. held approximately $31.5 million of the Trust’s assets. To the extent excess cash is not invested in securities by the cash manager, such cash will be subject to the creditworthiness of the institution where such funds are deposited.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Trust’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Trust and its Advisors manage the Trust’s primary market risk exposures, constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Trust’s primary market risk exposures as well as the strategies used and to be used by the Trust’s Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Trust’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 Trust. There can be no assurance that the Trust’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 Trust.
The Trust may purchase exchange listed options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract.
The following were the primary trading risk exposures of the Trust as of December 31, 2011, by market sector.
Currencies. The Trust’s currency exposure is to exchange rate fluctuations. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Trust trades in a number of currencies, including cross-rates (i.e., positions between two currencies other than the U.S. dollar). The Trust’s major exposures have typically been in the dollar/yen, dollar/euro, dollar/Swiss franc, dollar/pound, dollar/Canadian dollar positions, and recently dollar/Australian dollar, dollar/Mexican peso and exposure to cross-rates positions such as euro/yen and euro/pound positions.
Interest Rates. Interest rate risk is a major market exposure of the Trust. Interest rate movements directly affect the price of the sovereign bond positions held by the Trust 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 Trust’s profitability. The Trust’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Trust also takes positions in the government debt of smaller nations such as Australia. The Managing Owner anticipates that G-7 interest rates will remain the primary market exposure of the Trust in this sector for the foreseeable future.
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Stock Indices. The Trust’s primary equity exposure is to equity price risk in the G-7 countries including the U.S. The stock index futures traded by the Trust are by law limited to futures on broadly based indices. As of December 31, 2011, the Trust’s primary exposure was in the Mini-NASDAQ (U.S.) and the EURO-STOXX 50 (Germany). The Trust is primarily exposed to the risk of adverse price trends or trendless markets in the major U.S., European and Japanese indices. (Trendless markets would not cause major market changes but could make it difficult for the Trust to avoid being “whipsawed” into numerous small losses.)
Metals. The programs currently used for the Trust trade mainly precious and base metals. The Trust’s primary metals market exposure is to price fluctuations.
Agricultural. The Trust’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Cocoa, sugar, coffee, soybeans, live cattle and cotton accounted for the substantial bulk of the Trust’s agricultural exposure as of December 31, 2011. To a lesser extent and in the past, the Trust has had market exposure to wheat, orange juice, milk and hogs.
Energy. The Trust’s primary energy market exposure is to gas and oil price movements, which sometimes result from political developments in the Middle East. Oil prices can be volatile and substantial profits and losses have been and may continue to be experienced in this market.
Fixed Income Securities. The Trust’s primary exposure to fixed income securities are defined by the CFTC guidelines of acceptable securities for investment of segregated assets. The scope of the acceptable securities by the CTFC are defined further by the RJOIM agreement with the Trust to include but not limited to, U.S. Treasury and government agencies’ securities, purchase agreements collateralized by U.S. Treasury and government agencies, corporate debt securities, and bank debt securities. Note that total investment in corporate debt securities, bank deposit securities, and certificate of deposits combined cannot exceed 40% of the Trust’s total assets. Fixed income securities are recorded at fair market value with changes in fair value recorded in the statement of operations. Premiums and discounts on securities purchased are amortized over the life of the instrument. Interest income is accrued and recorded when paid in the statement of operations.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Trust as of December 31, 2011 and December 31, 2010.
Foreign Currency Balances. The Trust’s primary foreign currency balances are in Japanese yen, British pounds and Canadian dollar.
Cash Position. The Trust holds assets in cash at RJO, earning interest at 100% of the average four-week Treasury bill rate (calculated daily). For deposits denominated in other currencies, the Trust earns interest at a rate of the one-month LIBOR less 100 basis points. Additionally, effective October 6, 2010, the Managing Owner retained RJOIM, an affiliate of the Managing Owner, to serve as a cash manager to the Trust. The Trust’s assets which are managed by the cash manager are held by Wells Fargo Bank, N.A. as custodian. As of December 31, 2011, Wells Fargo Bank, N.A. held approximately $31.5 million of the Trust’s assets. To the extent excess cash is not invested in securities by the cash manager, such cash will be subject to the creditworthiness of the institution where such funds are deposited.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Manager Owner together with Liberty Funds Group monitors the Trust’s performance and the concentration of its open positions, and consults with the Advisors concerning the Trust’s overall risk profile. If the Managing Owner felt it necessary to do so, the Managing Owner could require the Advisors to close out individual positions as well as entire programs traded on behalf of the Trust. However, any such intervention would be a highly unusual event. The Managing Owner primarily relies on the Advisors’ own risk control policies while maintaining a general supervisory overview of the Trust’s market risk exposures.
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Risk Management
The information below outlines the general risk management practices of each Advisor. These descriptions are not intended to be exhaustive.
Abraham Trading: A vital part of ATC’s trading strategy is sound risk management. The good times, when the markets are in trending periods, will take care of themselves. ATC’s trading strategy is designed to endure the imminent non-trending periods in order to profit when trends in the markets do occur. Each commodity interest is tracked on its own merits, and a stop loss level is determined at the time a trade is entered. Stops are designed to weed out losing trades quickly and attempt to limit any loss to no more than a nominal percentage of the account’s net assets.
On average, ATC utilizes approximately 20% of the nominal account value of participating customers to meet initial margin requirements, although this percentage may vary widely.
Since all trading methods and strategies to be utilized by ATC are proprietary and confidential, the foregoing discussion is necessarily of a general nature.
Conquest Capital: CCG sets its trade size on a security inversely proportional to the level of recent volatility of the security. Each new position for a market is sized by calculating the number of contracts that would provide the desired dollar volatility for that market for that system. CCG uses price volatility instead of return volatility in its calculations and does not implement pyramiding, scaling out of positions, and other methods of trading the equity curve as part of its portfolio management rules.
CCG applies disciplined risk control methods to its Macro trading program, which are incorporated in the stop-loss and position size calculation for CCG systems. CCG selects the level of exposure for the Macro program so that the maximum hypothetical drawdown is below acceptable real-time drawdown levels. CCG selects from the following risk measures: price volatility of positions at the time of entry, maximum per trade risk from entry to stop, maximum per trade risk from closing price to stop, portfolio maximum daily loss, portfolio maximum consecutive daily drawdown, standard deviation of portfolio daily returns, slippage as percentage of return, and liquidity.
CCG’s trading programs have volatility-based stops for positions in the market. Position sizes are based on price volatility to equalize risk at the trade initiation time for all markets within each trading program.
Global Advisors (Jersey) Limited: GAJL and its principals believe that money management discipline is a vital element of any trading program. This discipline is comprised of the following major components which are utilized in the program:
| 1. | Diversification |
GAJL trades primarily U.S. exchange-traded commodity futures and options on futures contracts, and may trade on any United States and non-United States exchange that has been designated as a “contract market” by the CFTC and on certain other non-United States exchanges. “Commodity interests” include, but are not limited to, contracts on and for physical commodities, currencies, money market instruments and items which are now, or may hereafter be, the subject of trading futures contracts, swaps, and other commodity-related contracts. GAJL may also trade the cash and forward markets, including the interbank market and exchange of futures for physicals for its client accounts.
The trading strategy is designed to gain exposure to opportunities in the majority of actively traded market groups, while simultaneously limiting, to the extent possible, the exposure in any one particular group. The intent of this policy is to increase, on a discretionary basis, opportunities for gain, decrease risk and provide more consistent returns. Especially in view of the above, there may be times, due to market and other conditions, when trading is not well diversified; in fact, on occasion, there may be a heavy concentration of a given commodity (such as Brent crude) or a commodity complex (such as energies) which could result in a greater return or risk to the account.
| 2. | Risk Management |
GAJL estimates that for the program, which targets 10% annualized volatility, approximately 5%-10% of a client account’s net asset value on both an intraday and overnight basis will be committed to margin at any one time. However, margin usage may, from time to time, be greater or less than this range, depending on market conditions, current margin requirements and changes in account equity.
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| 3. | Client Rebalancing |
GAJL seeks to ensure that market risk and return are appropriately balanced across clients in proportion to each client’s account equity. GAJL regularly balances clients’ exposure to net position in each futures contract or option on futures contract, accordingly.
Trades are allocated during the month on a ticket-by-ticket basis according to volume and price sequence parameters, determined near the beginning of the month with client account equities. As the program’s net contract positions are added to or reduced, each client’s exposure to the program’s net position in a contract under this method may not exactly equal its proportionate level of risk as represented by its account equity. To correct these risk imbalances, at its discretion, GAJL makes trades on a regular basis which rebalance client account risks to what they should be, given each client’s account equity. GAJL may simultaneously reduce a position for one client while adding to a position for another client at prevailing market prices to adjust each client’s risk to its appropriate level, given their account size as a proportion of the program’s overall assets under management. Discretion includes employing knowledge of a contract’s volatility and the size of the necessary rebalancing trades, and balancing that need with the desire to minimize slippage and commissions for clients. Near the beginning of each month, GAJL rebalances each client account to reflect their proportion of the net equity in the program.
Haar Capital Management: HCM utilizes certain risk management tools, including stop-loss orders and portfolio diversification. HCM also manages risk by varying the size of positions based in part on an assessment of market volatility. To manage these risks, HCM evaluates the volatility and correlation across multiple markets, as well as projected price behavior in response to specific market-moving events, consistent with managing longer-term risks and evaluating longer-term trends. No assurances can be made, however, that the historical market correlations will occur or persist in all market conditions.
John W. Henry & Company: Stop-losses are used in some models and managed by JWH in a proprietary manner to balance the potential loss on any trade versus the opportunity for maximum profit. Stop losses may not necessarily limit losses, since they become market orders upon execution; as a result, a stop-loss order may not be executed at the stop-loss price. Other models do not have any stop-loss methodology but rely on market diversification and a change in directional signals to offset risk. Risk in some programs may also be managed by varying position size or risk levels for a market, based in part on assessment of market volatility, while other programs will maintain position sizes in markets regardless of changes in volatility. There are no systematic constraints on portfolio volatility or the maximum drawdown for any program. Volatility will not cause systematic adjustments to be made to existing positions. Some programs consider volatility in determining the size of positions initiated. Other programs do not consider volatility in determining the size of positions initiated.
Modern portfolio techniques are used in an effort to construct an overall diversified portfolio for each JWH trading program. However, some programs will have limited diversification because of their sector focus. These techniques will attempt to take into account the volatility and correlation of the markets that are included in the program. In an attempt to maintain diversification, portfolio adjustments will be made to account for systematic changes identified by JWH’s research in the relationships across markets. JWH at its sole discretion may override computer-generated signals and may at times use discretion in applying its quantitative models, which may affect performance positively or negatively. This could occur, for example, when JWH determines that markets are illiquid or erratic, such as may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events.
Risk management research and investment program analysis may suggest modifications regarding the relative weighting among various contracts, modifying the style and/or timing used by an investment program to trade a particular contract, the addition or deletion of a contract traded by an investment program, or a change in position size in relation to account equity. JWH’s research on these and other issues has resulted in investment program modifications from time to time in the past, and are expected to do so in the future.
Position size adjustments relative to account equity are an integral part of JWH’s investment strategy and historically have been made in a systematic manner as the equity in the account from trading profits increases. JWH may override indicated systematic position size adjustments when, in its discretion, it deems that is warranted by its assessment of market conditions. In the case of declines in equity, position sizes are generally maintained in spite of any trading losses. Systematic methods for maintaining or adjusting the trade size to equity in an account may affect performance and will alter the risk exposure of the account, with leverage increasing in down markets until losses are offset, and decreasing in profitable market conditions until systematic adjustments are made.
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Factors that may affect decisions to adjust the size of a position in relation to account equity include ongoing research, program volatility, current market volatility, risk exposure, subjective judgment, and evaluation of these and other general market conditions.
NuWave Investment Management: In addition to the subjective decision making authority reserved for its principals, NW also maintains certain risk management procedures for determining the appropriate quantity of contracts to be traded for an account of a given size and for all accounts. NW may adjust its trading portfolios and the position size of an order prior to placement, and/or after the initial position is established, based on such factors as past market volatility, prices of commodities, amount of risk, potential return and margin requirements. The decision not to trade a certain futures interest at certain times or to reduce the number of contracts traded in a particular futures interest may result in missing significant profit opportunities that otherwise might have been captured if NW depended solely on the computer-based aspects of its trading strategy or on different trading strategies altogether.
NW may, at its discretion, adjust leverage in certain markets or entire portfolios. Adjustments to certain positions or entire portfolios for leverage may positively or negatively affect performance. In addition, if an adjustment is made to one trading portfolio it is not necessarily made to all portfolios. Factors which may affect the decision to adjust leverage include research, portfolio diversification, current market volatility, risk exposure, subjective judgment, and evaluation of other general market conditions. No assurance is given that such leverage adjustments will be financially beneficial, and such leverage adjustments may actually result in lost opportunities or substantial losses.
New client accounts may encounter certain risks related to the initial investment of assets during account start-up periods. For example, during an account’s start-up period, the level of diversification may be lower than a previously existing account with a fully committed and diversified portfolio. Also, a new account may commence trading in markets which have experienced price movement in the account’s favor but then subsequently retrace.
Since NW considers preservation of initial assets paramount to producing trading results, NW employs risk management techniques in an effort to reduce risk. These techniques include attempts to trade multiple uncorrelated markets in an effort to diversify as well as to limit the equity committed to each market and market sector. In addition, NW prefers to initiate new client accounts following periods of negative performance in order to protect initial capital. No assurance can be given that such techniques will be financially beneficial, and such techniques may actually result in lost opportunities or substantial losses.
Dominion Capital Management Institutional Advisors, Inc.: The cornerstone to DCM’s approach to the markets is aggressive risk management. DCM’s traders monitor the markets 24 hours a day, implementing DCM’s disciplined, systematic trading and risk management strategies. DCM uses proprietary risk management software to monitor exposure and risk real-time (by position, sector, and portfolio). Money and risk management is dynamic and adjusts to different market conditions.
Trigon Investment Management, LLC: TIM’s Discretionary Macro Program implements a three-stage risk control framework. At the portfolio level, capital at risk is limited to 6% of the net asset value. Thus if all stops are elected and all premium goes to zero (the program is never net short premium), then the maximum 24-hour drawdown is designed to be limited to 6% of the net asset value. At the strategy level, the program’s risk is roughly evenly divided between the Global Short-Term Rate and Opportunistic Strategies programs. While some “borrowing” may occur (a strategy’s risk may edge above 3%), it would likely be modest. This enforces diversification. Finally, at the trade level, risk control is accomplished through trading of liquid markets with firm stops. Trades typically risk about 35 basis points of the net asset value to a maximum of 70 basis points.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and the notes thereto filed as Exhibit 13.01 to this report.
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The following summarized (unaudited) quarterly financial information presents the results of operations and other data for three-month periods ended March 31, June 30, September 30 and December 31, 2011 and 2010.
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2011 | 2011 | 2011 | 2011 | |||||||||||||
| Total Trading Revenues (Loss) | $ | (778,101 | ) | $ | (1,017,646 | ) | $ | 2,596,261 | $ | (1,057,488 | ) | |||||
| Total Trading Expenses | 1,118,167 | 1,046,523 | 925,805 | 840,265 | ||||||||||||
| Trading Income (Loss) | (1,896,268 | ) | (2,064,169 | ) | 1,670,456 | (1,897,753 | ) | |||||||||
| Non-Trading Income (Loss) | (115,844 | ) | 213,990 | 1,288,994 | (75,459 | ) | ||||||||||
| Net Income (Loss) | $ | (2,012,112 | ) | $ | (1,850,179 | ) | $ | 2,959,450 | $ | (1,973,212 | ) | |||||
| Net Income (Loss) per Trading Unit | ||||||||||||||||
| Class A | $ | (3.76 | ) | $ | (4.74 | ) | $ | 4.15 | $ | (4.97 | ) | |||||
| Class B | $ | (3.41 | ) | $ | (4.47 | ) | $ | 4.87 | $ | (4.76 | ) | |||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2010 | 2010 | 2010 | 2010 | |||||||||||||
| Total Trading Revenues (Loss) | $ | (13,618 | ) | $ | 617,657 | $ | 1,649,268 | $ | 1,279,235 | |||||||
| Total Trading Expenses | 1,133,490 | 1,083,762 | 1,042,319 | 1,373,892 | ||||||||||||
| Trading Income (Loss) | (1,147,108 | ) | (466,105 | ) | 606,949 | (94,657 | ) | |||||||||
| Non-Trading Income (Loss) | (1,043,154 | ) | 15,800,342 | 106,825 | 685,691 | |||||||||||
| Net Income (Loss) | $ | (2,190,262 | ) | $ | 15,334,237 | $ | 713,774 | $ | 591,034 | |||||||
| Net Income (Loss) per Trading Unit | ||||||||||||||||
| Class A | $ | (1.98 | ) | $ | (0.90 | ) | $ | 0.85 | $ | (0.17 | ) | |||||
| Class B | $ | (1.51 | ) | $ | (0.40 | ) | $ | 1.40 | $ | 0.35 | ||||||
The Trust has not disposed of any segments of its business.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Under the supervision and with the participation of the management of R.J. O’Brien Fund Management, LLC, the Managing Owner of the Trust at the time this annual report was filed, the Managing Owner’s Chief Executive Officer (the Trust’s principal executive officer) and Chief Financial Officer (the Trust’s principal financial officer), have evaluated the effectiveness of the design and operation of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011. The Trust’s disclosure controls and procedures are designed to provide reasonable assurance that information the Trust is required to disclose in the reports that the Trust files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Managing Owner have concluded that the disclosure controls and procedures of the Trust were effective at December 31, 2011.
Management’s Report on Internal Control Over Financial Reporting. The Managing Owner of the Trust is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Managing Owner has assessed the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Managing Owner used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control-Integrated Framework. The Managing Owner has concluded that, as of December 31, 2011, the Trust’s internal control over financial reporting is effective based on these criteria. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. This annual report does not include an attestation report of the Trust’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Trust’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Trust to provide only management’s report in this annual report.
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Changes in Internal Control Over Financial Reporting: There were no changes in the Trust’s internal control over financial reporting, during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
Limitations on the Effectiveness of Controls: Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
There are no directors or executive officers of the Trust. As of December 31, 2011, the Trust was managed by its Managing Owner, R.J. O’Brien Fund Management, LLC. The officers and directors of the Managing Owner as of December 31, 2011 were as follows:
R.J. O’Brien Fund Management, LLC
Gerald Corcoran is Chief Executive Officer and Director of RJOFM: Gerry Corcoran was appointed Chief Executive Officer of RJO in June 2000 and was appointed as Chief Executive Officer of RJOFM in November of 2006. He joined the RJO family in 1987 as Chief Financial Officer and served as Chief Operating Officer, a position he was promoted to in 1992. He is also a member of the Board of Directors. Prior to joining RJO, Mr. Corcoran served as controller for the Chicago Sun-Times, the nation’s seventh largest daily newspaper. He is a former member of the Chicago Mercantile Exchange where he served on the Clearing House Committee. Mr. Corcoran also serves on the Board of Governors of the Chicago Board of Trade Clearing Corporation, the only AAA rated clearing organization in the world. Mr. Corcoran has a Bachelor of Business Administration from Loyola University and is a Certified Public Accountant.
Jason T. Manumaleuna is Chief Financial Officer and Director of RJOFM: Mr. Manumaleuna became the Chief Financial Officer and a member of the Board of Directors of RJOFM on October 17, 2011 and has been a listed NFA principal of the Managing Owner since October 2011. Mr. Manumaleuna also serves as the Chief Financial Officer of R.J. O’Brien & Associates, LLC, a futures commission merchant and the Trust’s futures broker, and is a registered National Futures Association principal of RJO since October 2010. He joined R.J. O’Brien & Associates, LLC in May 2008. Prior to these positions, Mr. Manumaleuna worked in internal audit at MF Global Holdings from December 2007 to May 2008. Prior to working at MF Global Holdings, Mr. Manumaleuna served as the Controller for Calyon Financial LLC from March 2005 to December 2007. Prior to Calyon, Mr. Manumaleuna served as Controller of Refco LLC’s Chicago office from April 2000 to March 2005.
Annette A. Cazenave is Executive Vice President and Director of RJOFM: With RJOFM’s purchase of RCMI in December of 2006, Ms. Cazenave joined RJOFM with over 26 years of comprehensive experience in alternative asset management (futures, derivatives and hedge funds) marketing and business management. Ms. Cazenave joined Cargill in March of 2004. Previously, Ms. Cazenave was VP, Marketing and Product Development, for Horizon Cash Management, LLC (2002-2004). Prior to this, she was President and Principal of Skylark Partners, Inc., in New York, a financial services consulting firm. Additionally, Ms. Cazenave held senior level positions with ED&F Man Funds Division (now Man Investments) in New York (1986-1993). Ms. Cazenave began her career in 1979 as a Sugar trader and holds a B.A. from Drew University and an M.B.A. from Thunderbird, The American Graduate School of International Management.
Each officer and director holds such office until the election and qualification of his or her successor or until his or her earlier death, resignation or removal.
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Section 16(a) Beneficial Ownership Reporting Compliance
The Trust does not have any directors or officers of its own and no person is known to the Trust to beneficially own more than 10% of the outstanding units.
Audit Committee
The Managing Owner created an audit committee on August 27, 2008. The audit committee with respect to the Trust is comprised of Gerald Corcoran, Jason Manumaleuna and Jamal Oulhadj. None of the directors are considered to be independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Therefore, there is no Audit Committee Financial Expert.
Code of Ethics
The Trust does not have any officers; therefore, it has not adopted a code of ethics applicable to the Trust’s principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The Managing Owner operates the Trust and has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. This code of ethics is included by reference in Exhibit 14.01 of this annual report.
Item 11. Executive Compensation
The Trust has no officers or directors. The Managing Owner administers the business and affairs of the Trust (exclusive of Trust trading decisions which are made by the independent Advisors). The officers and directors of the Managing Owner receive no compensation from the Trust for acting in their respective capacities with the Managing Owner.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters
| (a) | As of December 31, 2011, no person was known to the Trust to own beneficially more than 5% of the outstanding units. |
| (b) | As of December 31, 2011, the Managing Owner beneficially held an ownership of $48,857 (which is the equivalent of 535 units) or approximately 0.14% of the ownership of the Trust as of that date. |
| (c) | As of December 31, 2011, no arrangements were known to the Trust, including any pledges by any person of units of the Trust or shares of its Managing Owner or the parent of the Managing Owner, such that a change in control of the Trust may occur at a subsequent date. |
Item 13. Certain Relationships and Related Transactions and Director Independence.
None. The Trust does not have any directors or officers of its own nor is any person known to have beneficial ownership of more than 5% of the outstanding units.
Item 14. Principal Accounting Fees and Services.
| (a) | Audit Fees |
The Trust paid CF & Co., L.L.P., the Trust’s independent registered public accounting firm, $121,064 and $134,732 respectively for the 2011 and 2010 audits and for professional services rendered in connection with the audit of the Trust’s annual financial statements included in the Trust’s Form 10-K filings, the review of financial statements included in the Trust’s Form 10-Q filings and review of other SEC filings.
| (b) | Audit-Related Fees |
The Trust did not pay CF & Co., L.L.P. any amount in 2011 or 2010 for assurance reviews and related professional services rendered in connection with the audit or review of the Trust’s financial statements that are not covered by Item 14(a) above.
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| (c) | Tax Fees |
The Trust did not pay CF & Co., L.L.P. any amount in 2011 or 2010 for professional services in connection with tax compliance, tax advice and tax planning. The Trust engaged Deloitte & Touche LLP, which does not provide audit services to the Trust, to provide professional services in connection with tax compliance, tax advice and tax planning and paid Deloitte & Touche LLP $90,000 for such services for 2011 and $125,000 for such services for 2010. These fees consisted primarily of services rendered in connection with the preparation of a Schedule K-1 to IRS Form 1065 for each unitholder.
| (d) | All Other Fees |
None.
| (e) | Audit Committee Pre-Approval Policies and Procedures |
| (i) | The audit committee with respect to the Trust has not developed pre-approval policies as of the date of this report. Consequently, all audit and non-audit services provided by CF & Co., L.L.P. must be approved by the directors of the Managing Owner. |
| (ii) | None of the services described in Item 9(e)(2) through 9(e)(4) of Schedule 14A of the Exchange Act were provided by CF & Co., L.L.P.; therefore, no services were required to be approved by the board of directors of the Managing Owner on behalf of the Trust. |
| (f) | Less than 50% of the hours expended on CF & Co., L.L.P.’s audit of the Trust’s financial statements were attributable to the work of persons who were not full-time, permanent employees of CF & Co., L.L.P. |
Part IV
Item 15. Exhibits, Financial Statements Schedules.
| (a) | The following documents are included herein: |
| (1) | Financial Statements: |
| a. | Report of Independent Registered Public Accounting Firm — CF & Co., L.L.P. |
| b. | Consolidated Statements of Financial Condition as of December 31, 2011 and 2010. |
| c. | Condensed Consolidated Schedules of Investments as of December 31, 2011 and 2010. |
| d. | Consolidated Statements of Operations, for the years ended December 31, 2011, 2010 and 2009. |
| e. | Consolidated Statements of Changes in Unitholders’ Capital for the years ended December 31, 2011, 2010 and 2009. |
| f. | Notes to Consolidated Financial Statements. |
| (2) | All financial statement schedules have been omitted either because the information required by the schedules is not applicable, or because the information required is contained in the financial statements herein or the notes hereto. |
| (3) | Exhibits: |
| 33 |
Index to Exhibits
| Exhibit | ||
| Number | Description of Document | |
| 1.01 |
Third Amended and Restated Selling Agreement, made as of July 1, 2011, among R.J. O’Brien Securities, LLC, RJO Global Trust (the “Registrant”), and R.J. O’Brien Fund Management, LLC. (1)
| |
| 3.01 | Ninth Amended and Restated Declaration and Agreement of Trust, dated as of September 1, 2010. (2) | |
| 3.02 | First Amendment to the Ninth Amended and Restated Declaration and Agreement of Trust, dated as of July 13, 2011. (3) | |
| 3.03 | Restated Certificate of Trust. (4) | |
| 10.01* | Amended and Restated Advisory Agreement, made as of September 16, 2008, among JWH Global Trust, R.J. O’Brien Fund Management, LLC, and John W. Henry & Company, Inc. (5) | |
| 10.02* | Advisory Agreement, made as of August 25, 2008, among JWH Global Trust, R.J. O’Brien Fund Management, LLC, and Abraham Trading, L.P. (5) | |
| 10.03* | Advisory Agreement, made as of January 28, 2009, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and NuWave Investment Management, LLC. (6) | |
| 10.04* | Advisory Agreement, made as of June 1, 2009, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and Global Advisors (Jersey) Limited. (7) | |
| 10.05* | Advisory Agreement, made as of July 1, 2009, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and Conquest Capital, LLC. (7) | |
| 10.06** |
Advisory Agreement, made as of July 1, 2009, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and Haar Capital Management, LLC. (7)
| |
| 10.07* | Advisory Agreement, made as of October 1, 2010, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and Dominion Capital Management Institutional Advisors, Inc. (8) | |
| 10.08* | Advisory Agreement, made as of October 1, 2010, among RJO Global Trust, R.J. O’Brien Fund Management, LLC, and Trigon Investment Advisors, LLC. (8) | |
| 10.09 | Customer Agreement between the Registrant and R.J. O’Brien & Associates, Inc., dated September 27, 2006. (9) | |
| 13.01 | Annual Report to Unitholders for Fiscal Year 2011. | |
| 14.01 | R.J. O’Brien Fund Management, LLC. Code of Ethics. | |
| 31.01 | Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer. | |
| 31.02 | Rule 13a-14(a)/15d-14(a) Certifications of Principal Financial Officer. | |
| 32.01 | Section 1350 Certification of Chief Executive Officer. | |
| 32.02 | Section 1350 Certification of Chief Financial Officer. | |
| 101.INS** | XBRL Instance Document | |
| 101.SCH** | XBRL Taxonomy Extension Schema | |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
| 34 |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
*Confidential Treatment was requested and granted with respect to the omitted portions of these exhibits.
(1) Incorporated by reference herein from the exhibit of the same description filed on August 15, 2011 with Registrant’s Quarterly Report on Form 10-Q.
(2) Incorporated by reference herein from the exhibit of the same description filed on December 2, 2010 with the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-170937) (included as Exhibit A to the prospectus therein).
(3) Incorporated by reference herein from the exhibit of the same description filed on July 15, 2011 on Form 8-K.
(4) Incorporated by reference herein from the exhibit of the same description filed on September 30, 2008 on Form 8-K
(5) Incorporated by reference herein from the exhibit of the same description filed on October 6, 2008 with Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-146177).
(6) Incorporated by reference herein from the exhibit of the same description filed on March 30, 2009 with the Registrant’s Annual Report on Form 10-K.
(7) Incorporated by reference herein from the exhibit of the same description filed on August 14, 2009 with the Registrant’s Quarterly Report on Form 10-Q.
(8) Incorporated by reference herein from the exhibit of the same description filed on November 12, 2010 with the Registrant’s Quarterly Report on Form 10-Q.
(9) Incorporated by reference herein from the exhibit of the same description filed on July 5, 2007 with the Registrant’s Annual Report on Form 10-K.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
| 35 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: March 27, 2012 | RJO GLOBAL TRUST | |
| By: R.J. O’Brien Fund Management, LLC. | ||
| (Managing Owner) | ||
| By: | /s/ Jason T. Manumaleuna | |
| Jason T. Manumaleuna | ||
| Vice President and | ||
| Chief Financial Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Form 10-K has been signed below by the following persons on behalf of the Registrant on March 27, 2012, and in the capacities indicated:
R.J. O’Brien Fund Management, LLC.
| Signatures | Title | |
| /s/ Gerald F. Corcoran | Chief Executive Officer and Director | |
| Gerald F. Corcoran | (principal executive officer) | |
| /s/ Jason T. Manumaleuna | Chief Financial Officer and Director | |
| Jason T. Manumaleuna | (principal financial and accounting officer) | |
| /s/ Annette A. Cazenave | Executive Vice President and Director | |
| Annette A. Cazenave |
| 36 |
Exhibit 13.01
Message from the Managing Owner
Dear Unitholder:
The RJO Global Trust Class A units posted a loss of (9.26%) for 2011, Class B units posted a loss of (7.42%). The NAV per unit for Class A at year-end was $91.32 and for Class B at year end was $96.98 (please see Note (1) and Note (9) in the notes to financial statements for more information with respect to the calculation of Net Asset Value) compared to $100.64 per Class A unit at the beginning of the year and $104.75 per unit for Class B. Beneficial Owners purchased $943,530 worth of Class A units and $219,959 worth of Class B units in the Trust during 2011.
The stock market started the year with a solid gain. U.S. treasuries and the U.S. dollar were slightly weaker. Precious metals were decidedly weaker during the month but other commodities, lead higher by grains, allowed the Dow Jones-UBS Commodity Index to post a gain of 1%. The stock market benefitted from low interest rates and strong corporate earnings. The U.S. bond market has not responded to signs of inflation that have begun to surface in the emerging economies of China, India, and Brazil. In particular the economies of several Northern African countries have shown stress over food prices. The political stress in Egypt and Tunisia added significant support to grain and energy prices. Near month end, market participants saw evidence of those governments beginning to hoard food to make sure supplies are adequate at any cost. Concern over access to the Suez Canal and the flow of oil exports from the region were reasons given for strength in oil prices. Stocks kept climbing higher quietly during the month of February. The rally was disrupted in the latter part of February as violence erupted in Libya. Stress in the Middle East sparked a renewed rally in the petroleum markets. In an odd turn of events, market participants identified climbing fuel prices, which on their own might be considered inflationary and negative for fixed income markets, as a reason that global economies might slow and therefore lessen inflationary pressures. With this as a backdrop, U.S. treasuries posted a modest gain. Commodity indices led higher by energy and metals markets posted all-time highs. Domestically, the House and Senate have undertaken a project to revise and pass a budget that will reign in the country’s ballooning budget deficit. Negotiations do not appear to be going well. This all adds up to a volatile market outlook. In March, an earthquake in Japan and the tsunami that followed unleashed a series of events that will change that country forever. Stocks and commodities plunged following the disaster but recovered during the latter part of the month to finish unchanged. A coalition of foreign forces decided to intervene in Libya to support the rebel groups battling against Gaddafi. Unemployment in the U.S. was reported to be improving with the best number since 2008. The USDA reports the lowest corn inventories in years.
In April stocks scored another gain in what has been a near perfect environment for the market over the last 12 months. The S&P 500 has doubled since March 2009 and remains just 13% below an all time high. Interest rates have remained at near historic lows and economic activity has been quietly improving. Still, there is a certain uneasiness surrounding the current situation, as many prudent market watchers are concerned that the Federal Reserve Bank’s accommodative monetary policy is the only support underlying the market. If the Fed were unable to maintain accommodative monetary policy, the market would have to deal quickly with inflationary evidence and questions of currency stability. Commodities remain in a steady uptrend and, although experiencing some brief pullbacks, have been led higher by food, metal, and energy markets. Stocks lost just over 1% during May while commodities lost just over 5%. The markets seemed concerned that domestic global economic growth was slowing. Concerns over the European Union’s situation with Greece and its debt situation have brought credit market tensions to the forefront. As a result, U.S. treasuries showed strength again this month with the benchmark 10-year note closing out the month with its yield hovering near 3%. Given the markets concern over budget deficits and commodity led inflation, it is remarkable that the yield on the 10-year note is trading so low. The markets appear to be very nervous about the potential of a U.S. budget impasse and a double dip recession. Stocks staged a strong rally during the last few days of June but still finished the month down almost 2%. Commodities lost 5% during the month as crude oil and grains sold off dramatically from recent highs. On the energy front, the International Energy Agency orchestrated the release of 60 million barrels of oil to help loosen the oil market and to keep prices below $100 per barrel. The USDA reported that farmers have planted a record amount of corn. In fact, planted acreage is 9% higher than ever before. Greece avoided a financial default by approving an austerity package despite a series of violent domestic protests. Allowing Greece to solve its debt problem by creating more debt from within the European Community in a global environment that includes the U.S. fighting its own rising debt problems, finally got the attention of treasury markets around the world. The unfolding events caused rates to creep up slightly during the month. July should be interesting as politicians position themselves in the effort to increase the U.S. debt ceiling or face our own credit default.
| 1 |
Stocks continued their losing streak in July finishing with a lackluster 2% loss. The market continues to struggle with anemic economic data and a stressful political climate related to debt management both here in the U.S. and in Europe. While the European community avoided an immediate crisis in Greece, problems remain critical in Italy and in Spain. For the first time our country’s history, our government flirted with default as our leaders could not agree on a plan to increase our debt limit or a long term plan to balance the U.S. budget. With this environment as a backdrop and investors looking for safe havens to protect value, gold and the Swiss franc each made new highs. Interest rates remain at or near record lows. Many commodities began climbing back to higher price levels seen earlier this spring. As a result, the Dow Jones UBS-Commodity Index returned to positive territory at month end for the year to date. At one point during August, stocks were down almost 12%. The S&P rallied five straight days to finish the month with a loss of 5.43%. The final monthly result masks the fear that was present in early August. As stocks were in free fall, gold rocketed to an all time high nominal price of over $1,900 per ounce. The Swiss franc rose to an all time high against the U.S. dollar and against the Euro as global investors worried over the viability of the European Union and the ability of the U.S. economy to avoid another recession. Ten-year note yields dipped below 2% for a few days for the first time since 1960 seeming to signal desperation on the part of investors seeking to avoid stock exposure and market risk. With no evidence of a solution to numerous global economic and political problems, it was somewhat surprising to see that stocks and commodities finished the month on a positive note. The market seems to have embraced the Federal Reserve Bank’s plan to leave interest rates at or near zero until 2013. It seems that something would have to give between weakening global economies and increasing global debt problems. Global stock markets continued their slide during September and posted their worst quarterly performance since the fall of 2008. Concerns over slumping global demand for commodities caused a 15% drop in the Dow Jones-UBS Commodity Index, its second worst month ever and the worst month since October 2008. After making new highs earlier this summer gold and corn are each almost 25% below their peaks. Crude oil, coffee, and copper have fallen between 15 and 20%. It would appear that the markets are pricing in a Greek default and the impact such a default might have on the European Union. While the direct economic impact of such a problem is uncertain, the thought of it has created a lack of confidence that has been pervasive across many markets and has been reflected in many recent consumer and business reports. Consumers appear reluctant to spend and businesses are hesitant to hire new employees and invest in new projects. Not a good combination for economic growth.
After posting the worst quarterly performance since the fall of 2008, the stock market responded in October with a gain of 13%, its best single month since 1987. It is interesting to note the market’s increased volatility. For a record 68 consecutive days the S&P had an intraday trading range of over 1%. The string was interrupted on Friday, October 28 as the market seemed to pause to consider the announced European debt restructuring plan. A new string began on October 31 with the market losing 2.5%. Commodities, which had been tracking stocks closely for the last two years, decoupled and continued their losing streak. The Dow Jones-UBS Commodity Index rebounded gaining over 6% during the month. The index has lost 7.9% for the year to date. Interest rates experienced a reversal with the 10 year note yield rising 50 basis points from its early October low. This reversal was attributed to problems in Europe, inflationary concerns, and poor demand for treasuries at recent U.S. government debt auctions. At the close on the day before Thanksgiving, the S&P 500 had lost 8.5% during November. The market staged an amazing turn around to finish slightly positive for the month. This helped crude oil and gold but other commodities slumped and caused the Dow Jones-UBS Commodity Index to post another negative month. Corn and natural gas for example both lost over 6% during the month. The market continues to be sensitive to and influenced by developments surrounding the European debt crisis. Every morning, it seems, the market reacts positively or negatively to overnight headlines coming out of Europe. United government central bank intervention to create additional liquidity for European financial institutions, in fact, caused the market to surge almost 4% on the last day of November. Market rallies based on government intervention do not usually signify a stable foundation for economic growth. In addition to the rally in stocks, the concerted central bank intervention caused foreign currencies to surge against the dollar and interest rates on longer duration treasuries to increase. There seems to be plenty of turmoil in the market to create trading opportunities. For a year that contained historically high periods of volatility, blistering sell offs, short covering rallies, and ranges from low to high of over 27%; it was interesting to see the stock market close the year with a very slight 2% gain. Commodities as an asset class lost over 13% and were lead lower by grains, softs, base metals, and some energy markets. Fixed income markets confounded experts, who expected a rising interest rate environment earlier in the year, by finishing with the best performance of the year. The U.S. Government’s 10 year note, for example, finished with a total return of more than 15%. As we begin 2012, the European debt situation remains unsolved, there is plenty of tension in the Middle East and on the Korean peninsula, China’s economic development continues to dominate global trade issues, and an already deadlocked partisan U.S. political system is entering a Presidential election year. Basically, it’s business as usual. The market turmoil can represent opportunities for our traders as we look forward to the year ahead.
| 2 |
We thank you for your continued support.
Past performance is not indicative of future results.
| /s/ Jason T. Manumaleuna | |
| Jason T. Manumaleuna | |
| Chief Financial Officer | |
| R.J. O’Brien Fund Management, LLC | |
| 3 |
RJO GLOBAL TRUST
Table of Contents
| Report of Independent Registered Public Accounting Firm – CF & Co., L.L.P. | 5 |
| Financial Statements: | |
| Consolidated Statements of Financial Condition as of December 31, 2011 and 2010 | 6 |
| Condensed Consolidated Schedules of Investments as of December 31, 2011 and 2010 | 7 |
| Consolidated Statements of Operations, for the years ended December 31, 2011, 2010, and 2009 | 8 |
| Consolidated Statements of Changes in Unitholders’ Capital, for the years ended December 31, 2011, 2010, and 2009 | 9 |
| Notes to Consolidated Financial Statements | 10 |
| 4 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Managing Owner and Beneficial Owners of RJO Global Trust and Subsidiary:
We have audited the accompanying consolidated statements of financial condition, including the condensed consolidated schedules of investments, of RJO Global Trust and Subsidiary (the “Trust”) as of December 31, 2011 and 2010 and the related consolidated statements of operations and changes in unitholders’ capital for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The Trust is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RJO Global Trust and Subsidiary as of December 31, 2011 and 2010 and the results of their operations and changes in unitholders’ capital, for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
| /S/ CF & Co., L.L.P. | |
| CF & Co., L.L.P. | |
| Dallas, Texas | |
| March 27, 2012 | |
| 5 |
RJO GLOBAL TRUST AND SUBSIDIARY
Consolidated Statements of Financial Condition
| December 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Assets | ||||||||
| Assets: | ||||||||
| Equity in commodity Trading accounts: | ||||||||
| Cash on deposit with broker | $ | 2,670,744 | $ | 22,388,362 | ||||
| Unrealized gain on open contracts | 363,947 | 1,357,343 | ||||||
| Purchased options on futures contracts (premiums paid - $33,376 and $245,722, respectively) | 22,525 | 120,263 | ||||||
| Total due from broker | 3,057,216 | 23,865,968 | ||||||
| Cash and cash equivalents on deposit with affiliate | 9,596,823 | 18,737,332 | ||||||
| Cash on deposit with bank | 648 | 16,248 | ||||||
| Fixed income securities (cost $21,993,704 and $11,544,636, respectively), held by affiliate | 21,870,890 | 11,540,784 | ||||||
| Interest receivable | 123,363 | 36,141 | ||||||
| Cash on deposit with bank - Non-Trading | 1,647,219 | 5,133,598 | ||||||
| Prepaid expenses - Non-Trading | 95,825 | 81,602 | ||||||
| Total Assets | $ | 36,391,984 | $ | 59,411,673 | ||||
| Liabilites and Unitholders' Capital | ||||||||
| Liabilities: | ||||||||
| Equity in commodity Trading accounts: | ||||||||
| Options written on futures contracts (premiums received - $14,375) | $ | 1,006 | $ | - | ||||
| Accrued commissions | 111,034 | 151,916 | ||||||
| Accrued management fees | 48,884 | 76,511 | ||||||
| Accrued incentive fees | - | 278,042 | ||||||
| Accrued offering expenses | - | 16,588 | ||||||
| Accrued operating expenses | 217,118 | 201,344 | ||||||
| Redemptions payable-Trading | 493,332 | 1,549,974 | ||||||
| Accrued legal fees- Non-Trading | 500 | - | ||||||
| Accrued management fees to U.S. Bank-Non-Trading | 31,715 | 17,492 | ||||||
| Distribution payable - Non-Trading | 536,188 | 1,083,908 | ||||||
| Total liabilities | 1,439,777 | 3,375,775 | ||||||
| Unitholders' capital: | ||||||||
| Unitholders' capital (Trading): | ||||||||
| Beneficial owners | ||||||||
| Class A (355,858 and 490,278 units outstanding at December 31, 2011 and December 31, 2010, respectively) | 32,497,392 | 49,340,822 | ||||||
| Class B (12,697 and 13,420 units outstanding at December 31, 2011 and December 31, 2010, respectively) | 1,231,294 | 1,405,692 | ||||||
| Managing owner (535 and 11,679 Class A units outstanding at December 31, 2011 and December 31, 2010, respectively) | 48,857 | 1,175,357 | ||||||
| Unitholders' capital (LLC equity/Non-Trading): | ||||||||
| Participating owners (306,807 and 407,463 units outstanding at December 31, 2011 and December 31, 2010, respectively) | 158,535 | 737,509 | ||||||
| Nonparticipating owners (1,966,481 and 1,865,825 units outstanding at December 31, 2011 and December 31, 2010, respectively) | 1,016,129 | 3,376,518 | ||||||
| Total unitholders' capital | 34,952,207 | 56,035,898 | ||||||
| Total Liabilities and Unitholders' Capital | $ | 36,391,984 | $ | 59,411,673 | ||||
| Net asset value per unit: | ||||||||
| Trading: | ||||||||
| Class A | $ | 91.32 | $ | 100.64 | ||||
| Class B | $ | 96.98 | $ | 104.75 | ||||
| LLC equity/Non-Trading | $ | 0.52 | $ | 1.81 | ||||
See accompanying notes to consolidated financial statements.
| 6 |
RJO GLOBAL TRUST AND SUBSIDIARY
Condensed Consolidated Schedule of Investments
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Percentage of | Percentage of | |||||||||||||||
| Net Assets | Fair value | Net Assets | Fair value | |||||||||||||
| Long Positions | ||||||||||||||||
| Fixed Income Securities | ||||||||||||||||
| Certificate of Deposit | ||||||||||||||||
| Chile | ||||||||||||||||
| Financials (cost $1,500,037) | - | $ | - | 2.68 | % | $ | 1,500,480 | |||||||||
| Commercial Paper | ||||||||||||||||
| South Korea | ||||||||||||||||
| Financials (cost $1,499,660) | - | - | 2.68 | % | 1,499,820 | |||||||||||
| United States | ||||||||||||||||
| Insurance (cost $1,499,561) | - | - | 2.68 | % | 1,499,580 | |||||||||||
| United States | ||||||||||||||||
| Energy (cost $1,242,569) | 3.56 | % | 1,242,938 | - | - | |||||||||||
| Financial (cost $1,896,629) | 5.44 | % | 1,899,873 | - | - | |||||||||||
| Total Commercial Paper | 9.00 | % | 3,142,811 | 5.35 | % | 2,999,400 | ||||||||||
| Corporate Bonds | ||||||||||||||||
| United States | ||||||||||||||||
| Financials (cost $6,682,059 and $1,345,903, respectively) | 19.22 | % | 6,717,547 | 2.40 | % | 1,344,503 | ||||||||||
| Great Britain | ||||||||||||||||
| Energy (cost $1,527,135) | 4.31 | % | 1,506,885 | - | - | |||||||||||
| Total Corporate Bonds | 23.53 | % | 8,224,432 | 2.40 | % | 1,344,503 | ||||||||||
| Government Agencies | ||||||||||||||||
| United States | ||||||||||||||||
| US Government Agency (cost $10,499,879 and $3,393,729, respectively) | 30.04 | % | 10,498,215 | 6.05 | % | 3,390,654 | ||||||||||
| Short-Term Investment Funds | ||||||||||||||||
| United States | ||||||||||||||||
| Short-Term Investment Funds (cost $5,432 and $2,305,746, respectively) | 0.02 | % | 5,432 | 4.11 | % | 2,305,747 | ||||||||||
| Total Fixed Income Securities (cost $21,993,704 and $11,544,636, respectively) | $ | 21,870,890 | $ | 11,540,784 | ||||||||||||
| Long Positions | ||||||||||||||||
| Futures Positions | ||||||||||||||||
| Agriculture | 0.01 | % | $ | 3,573 | 1.64 | % | $ | 920,055 | ||||||||
| Currency | 0.03 | % | 9,244 | 0.45 | % | 251,310 | ||||||||||
| Energy | -0.34 | % | (119,410 | ) | 0.12 | % | 65,691 | |||||||||
| Indices | 0.05 | % | 17,851 | 0.03 | % | 19,608 | ||||||||||
| Interest rates | 0.40 | % | 139,768 | 0.21 | % | 117,158 | ||||||||||
| Metals | -0.23 | % | (80,138 | ) | 1.41 | % | 789,173 | |||||||||
| Forward Positions | ||||||||||||||||
| Currency | -0.99 | % | (344,428 | ) | -0.86 | % | (483,988 | ) | ||||||||
| Total long positions on open contracts | $ | (373,540 | ) | $ | 1,679,007 | |||||||||||
| Short Positions | ||||||||||||||||
| Futures Positions | ||||||||||||||||
| Agriculture | 0.02 | % | $ | 6,835 | -0.58 | % | $ | (323,637 | ) | |||||||
| Currency | -0.02 | % | (5,365 | ) | -0.04 | % | (23,476 | ) | ||||||||
| Energy | 0.64 | % | 225,038 | -0.08 | % | (45,099 | ) | |||||||||
| Indices | -0.13 | % | (47,027 | ) | 0.10 | % | 57,841 | |||||||||
| Interest rates | -0.03 | % | (10,045 | ) | -0.02 | % | (13,742 | ) | ||||||||
| Metals | 0.21 | % | 72,320 | -1.16 | % | (651,198 | ) | |||||||||
| Forward Positions | ||||||||||||||||
| Currency | 1.42 | % | 495,731 | 1.21 | % | 677,647 | ||||||||||
| Total short positions on open contracts | $ | 737,487 | $ | (321,664 | ) | |||||||||||
| Total unrealized gain on open contracts | $ | 363,947 | $ | 1,357,343 | ||||||||||||
| Long put options on future contracts | ||||||||||||||||
| Indices (premiums paid - $245,722) | - | $ | - | 0.21 | % | $ | 120,263 | |||||||||
| Currency (premiums paid - $33,376) | 0.06 | % | 22,525 | - | - | |||||||||||
| Total long put options on futures contracts | $ | 22,525 | $ | 120,263 | ||||||||||||
| Short put options on future contracts | ||||||||||||||||
| Currency (premiums received - $14,375) | 0.00 | % | $ | (1,006 | ) | - | $ | - | ||||||||
See accompanying notes to consolidated financial statements.
| 7 |
RJO GLOBAL TRUST AND SUBSIDIARY
Consolidated Statements of Operations
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Trading gain (loss): | ||||||||||||
| Gain (loss) on trading of commodity contracts: | ||||||||||||
| Realized gain (loss) on closed positions | $ | 353,195 | $ | 3,040,780 | $ | (4,475,589 | ) | |||||
| Change in unrealized gain (loss) on open positions | (865,419 | ) | 464,878 | (340,613 | ) | |||||||
| Foreign currency transaction gain (loss) | 167,482 | (39,241 | ) | 46,164 | ||||||||
| Total Trading gain (loss) | (344,742 | ) | 3,466,417 | (4,770,038 | ) | |||||||
| Net investment income (loss): | ||||||||||||
| Interest income | 292,141 | 69,977 | 49,056 | |||||||||
| Realized gain (loss) on fixed income securities | (98,217 | ) | - | - | ||||||||
| Change in unrealized gain (loss) on fixed income securities | (106,156 | ) | (3,852 | ) | - | |||||||
| Total net investment gain (loss) | 87,768 | 66,125 | 49,056 | |||||||||
| Expenses: | ||||||||||||
| Commissions - Class A | 2,004,324 | 2,322,754 | 2,689,716 | |||||||||
| Commissions - Class B | 39,950 | 17,806 | 14,769 | |||||||||
| Advisory fees | 62,625 | 13,087 | - | |||||||||
| Management fees | 705,342 | 930,774 | 1,192,210 | |||||||||
| Incentive fees | 155,519 | 278,042 | 54,149 | |||||||||
| Ongoing offering expenses | 114,267 | 135,000 | 248,000 | |||||||||
| Operating expenses | 848,733 | 936,000 | 1,312,679 | |||||||||
| Total expenses | 3,930,760 | 4,633,463 | 5,511,523 | |||||||||
| Trading income (loss) | (4,187,734 | ) | (1,100,921 | ) | (10,232,505 | ) | ||||||
| Non-Trading income (loss): | ||||||||||||
| Interest on Non-Trading reserve | 2,927 | 8,774 | 6,830 | |||||||||
| Collections in excess of impaired value | 1,672,496 | 16,870,555 | 3,850,660 | |||||||||
| Legal and administrative fees | (130,495 | ) | (1,005,791 | ) | (2,188,384 | ) | ||||||
| Management fees paid to US Bank | (233,247 | ) | (323,834 | ) | (366,120 | ) | ||||||
| Non-Trading income (loss) | 1,311,681 | 15,549,704 | 1,302,986 | |||||||||
| Net income (loss) | $ | (2,876,053 | ) | $ | 14,448,783 | $ | (8,929,519 | ) | ||||
See accompanying notes to consolidated financial statements.
| 8 |
RJO GLOBAL TRUST AND SUBSIDIARY
Consolidated Statement of Changes in Unitholders’ Capital
For years ended December 31, 2011, 2010, and 2009
| Unitholders' Capital (Trading) | Beneficial Owners - Trading Class A | Beneficial Owners - Trading Class B | Managing Owners - Trading Class A | |||||||||||||||||||||
| Units | Dollars | Units | Dollars | Units | Dollars | |||||||||||||||||||
| Balances at December 31, 2008 | 658,747 | $ | 78,645,263 | - | $ | - | 11,679 | $ | 1,394,355 | |||||||||||||||
| Trading income (loss) | - | (9,914,709 | ) | - | (124,531 | ) | - | (193,265 | ) | |||||||||||||||
| Unitholders' contributions | 15,140 | 1,627,869 | 413 | 45,000 | - | - | ||||||||||||||||||
| Transfers from Class A to Class B | (9,952 | ) | (1,172,473 | ) | 9,935 | 1,172,473 | - | - | ||||||||||||||||
| Unitholders redemptions | (112,495 | ) | (12,474,861 | ) | (990 | ) | (111,177 | ) | - | - | ||||||||||||||
| Balances at December 31, 2009 | 551,440 | 56,711,089 | 9,358 | 981,765 | 11,679 | 1,201,090 | ||||||||||||||||||
| Trading income (loss) | - | (1,087,408 | ) | - | 12,220 | - | (25,733 | ) | ||||||||||||||||
| Unitholders’ contributions | 54,776 | 5,337,442 | 6,432 | 658,669 | - | - | ||||||||||||||||||
| Transfers from Class A to Class B | (649 | ) | (65,443 | ) | 633 | 65,443 | - | - | ||||||||||||||||
| Unitholders’ redemptions | (115,289 | ) | (11,554,858 | ) | (3,003 | ) | (312,405 | ) | - | - | ||||||||||||||
| Balances at December 31, 2010 | 490,278 | 49,340,822 | 13,420 | 1,405,692 | 11,679 | 1,175,357 | ||||||||||||||||||
| Trading income (loss) | - | (3,983,977 | ) | - | (104,084 | ) | - | (99,673 | ) | |||||||||||||||
| Unitholders’ contributions | 10,039 | 943,530 | 2,169 | 219,959 | - | - | ||||||||||||||||||
| Unitholders’ redemptions | (144,459 | ) | (13,802,983 | ) | (2,892 | ) | (290,273 | ) | (11,144 | ) | (1,026,827 | ) | ||||||||||||
| Balances at December 31, 2011 | 355,858 | $ | 32,497,392 | 12,697 | $ | 1,231,294 | 535 | $ | 48,857 | |||||||||||||||
| Unitholders' Capital (Trading) | Total Unitholders' Capital - Trading | |||||||
| Units | Dollars | |||||||
| Balances at December 31, 2008 | 670,426 | $ | 80,039,618 | |||||
| Trading income (loss) | - | (10,232,505 | ) | |||||
| Unitholders' contributions | 15,553 | 1,672,869 | ||||||
| Transfers from Class A to Class B | (17 | ) | - | |||||
| Unitholders' redemptions | (113,485 | ) | (12,586,038 | ) | ||||
| Balances at December 31, 2009 | 572,477 | 58,893,944 | ||||||
| Trading income (loss) | - | (1,100,921 | ) | |||||
| Unitholders' contributions | 61,208 | 5,996,111 | ||||||
| Transfers from Class A to Class B | (16 | ) | - | |||||
| Unitholders' redemptions | (118,292 | ) | (11,867,263 | ) | ||||
| Balances at December 31, 2010 | 515,377 | 51,921,871 | ||||||
| Trading income (loss) | - | (4,187,734 | ) | |||||
| Unitholders’ contributions | 12,208 | 1,163,489 | ||||||
| Unitholders’ redemptions | (158,495 | ) | (15,120,083 | ) | ||||
| Balances at December 31, 2011 | 369,090 | $ | 33,777,543 | |||||
| Unitholders' Capital (LLC Equity/Non-Trading) | Participating Owners- | Nonparticipating Owners- | Total Unitholders' Capital- | |||||||||||||||||||||
| LLC Equity/Non-Trading | LLC Equity/Non-Trading | LLC Equity/Non-Trading | ||||||||||||||||||||||
| Units | Dollars | Units | Dollars | Units | Dollars | |||||||||||||||||||
| Balances at December 31, 2008 | 611,108 | $ | 1,953,345 | 1,662,180 | $ | 5,312,910 | 2,273,288 | $ | 7,266,255 | |||||||||||||||
| Non-Trading income (loss) | - | 325,015 | - | 977,971 | - | 1,302,986 | ||||||||||||||||||
| Reallocation due to Redemptions | (98,144 | ) | (344,487 | ) | 98,144 | 344,487 | - | - | ||||||||||||||||
| Balances at December 31, 2009 | 512,964 | 1,933,873 | 1,760,324 | 6,635,368 | 2,273,288 | 8,569,241 | ||||||||||||||||||
| Non-Trading income (loss) | - | 3,236,859 | - | 12,312,845 | - | 15,549,704 | ||||||||||||||||||
| Reallocation due to Redemptions | (105,501 | ) | (504,417 | ) | 105,501 | 504,417 | - | - | ||||||||||||||||
| Unitholders' distribution | - | (3,928,806 | ) | - | (16,076,112 | ) | - | (20,004,918 | ) | |||||||||||||||
| Balances at December 31, 2010 | 407,463 | 737,509 | 1,865,825 | 3,376,518 | 2,273,288 | 4,114,027 | ||||||||||||||||||
| Non-Trading income (loss) | - | 148,123 | - | 1,163,558 | - | 1,311,681 | ||||||||||||||||||
| Reallocation due to Redemptions | (100,656 | ) | (165,608 | ) | 100,656 | 165,608 | - | - | ||||||||||||||||
| Unitholders' distribution | - | (561,489 | ) | - | (3,689,555 | ) | - | (4,251,044 | ) | |||||||||||||||
| Balances at December 31, 2011 | 306,807 | $ | 158,535 | 1,966,481 | $ | 1,016,129 | 2,273,288 | $ | 1,174,664 | |||||||||||||||
| Total Unitholders Capital at December 31, 2011 | $ | 34,952,207 | ||||||||||||||||||||||
| Unitholders' Capital | Unitholders' Capital | Unitholders' Capital | ||||||||||
| Trading Class A | Trading Class B | (LLC Equity/Non-Trading) | ||||||||||
| Net asset value per unit at December 31, 2010 | $ | 100.64 | $ | 104.75 | $ | 1.81 | ||||||
| Net change per unit | (9.32 | ) | (7.77 | ) | (1.29 | ) | ||||||
| Net asset value per unit at December 31, 2011 | $ | 91.32 | $ | 96.98 | $ | 0.52 | ||||||
See accompanying notes to consolidated financial statements.
| 9 |
Notes to Consolidated Financial Statements –
December 31, 2011, 2010, 2009
| (1) | General Information and Summary |
RJO Global Trust (the “Trust”), a Delaware statutory trust organized on November 12, 1996, was formed to engage in the speculative trading of futures contracts on currencies, interest rates, energy and agricultural products, metals, commodity indices and stock indices, spot and forward contracts on currencies and precious metals, and exchanges for physicals pursuant to the trading instructions of independent trading advisors. Since December 1, 2006, R.J. O’Brien Fund Management, LLC (“RJOFM” or the “Managing Owner”) has been the Managing Owner of the Trust. R.J. O’Brien & Associates, LLC (“RJO”), an affiliate of RJOFM, is the clearing broker and the broker for forward contracts for the Trust. R.J. O’Brien Securities, LLC (“Selling Agent”) is the lead selling agent of the units of beneficial interest of the Trust (the “units”).
The Trust is a multi-advisor commodity pool where trading decisions for the Trust are delegated to eight independent commodity trading advisors (each an “Advisor” and collectively the “Advisors”) as of December 31, 2011, pursuant to advisory agreements executed between the Trust and each Advisor (each an “Advisory Agreement” and collectively the “Advisory Agreements”).
Units of beneficial ownership of the Trust commenced selling on April 3, 1997. Effective July 1, 2011, the Managing Owner determined to discontinue the public offering of the units and begin offering the units on a private placement basis only. The Trust filed a Post-Effective Amendment to its Registration Statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) on July 5, 2011 to deregister the remaining units that were unsold under the public offering. The Post-Effective Amendment was declared effective by the SEC on July 8, 2011.
The Trust currently offers two classes of units on a private basis: Class A units and Class B units. Class A units are subject to a selling commission. Class B units are not charged a selling commission, and will only be offered to certain qualified investors participating in a program through certain financial advisors. Both Class A and Class B units are traded pursuant to identical trading programs and differ only in respect to selling commissions. See Note (8) for further detail regarding commissions.
The Trust will be terminated on December 31, 2026, unless terminated earlier upon the occurrence of one of the following: (1) beneficial owners holding more than 50% of the outstanding units notify the Managing Owner to dissolve the Trust as of a specific date; (2) 120 days after the filing of a bankruptcy petition by or against the Managing Owner, unless the bankruptcy court approves the sale and assignment of the interests of the Managing Owner to a purchaser/assignor that assumes the duties of the Managing Owner; (3) 120 days after the notice of the retirement, resignation, or withdrawal of the Managing Owner, unless beneficial owners holding more than 50% of the outstanding units appoint a successor; (4) 90 days after the insolvency of the Managing Owner or any other event that would cause the Managing Owner to cease being managing owner of the Trust, unless beneficial owners holding more than 50% of the outstanding units appoint a successor; (5) dissolution of the Managing Owner; (6) insolvency or bankruptcy of the Trust; (7) a decrease in the net asset value to less than $2,500,000; (8) a decline in the net asset value per unit to $50 or less; (9) dissolution of the Trust; or (10) any event that would make it unlawful for the existence of the Trust to be continued or require dissolution of the Trust.
Prior to December 1, 2006, the managing owner of the Trust was Refco Commodity Management, Inc. (“RCMI”). An affiliate of RCMI, Refco Capital Markets, Ltd. (“RCM”) had held certain assets of the Trust, acting as the Trust’s broker of forward contracts during 2005. During that year, RCM experienced financial difficulties resulting in RCM’s inability to liquidate the assets. RCM filed for bankruptcy protection in October, 2005. As a result, the Trust held a bankruptcy claim against RCM.
Effective January 1, 2007, JWH Special Circumstance LLC (the “LLC”), a Delaware limited liability company, was established to pursue the claims against RCM. Any assets or liabilities held by the LLC are designated as “Non-Trading.” Any revenue earned or expenses incurred by the LLC are also designated as “Non-Trading.” The Trust is the sole member of the LLC and holds that membership for the benefit of the unitholders who were investors in the Trust at the time of the bankruptcy of RCM. U.S. Bank National Association (“US Bank”) is the manager of the LLC. US Bank may make distributions to the unitholders, as defined above, upon collection, sale, settlement or other disposition of the bankruptcy claim and after payment of all fees and expenses pro rata to the unitholders, as follows:
| (a) | Any unitholder who had redeemed their entire interest in the Trust prior to distribution shall receive cash. |
| 10 |
| (b) | Any unitholder who had continued to own units in the Trust shall receive additional units in the Trust at the then net asset value of the Trust. |
The unitholders have no right to request redemptions from the LLC.
The LLC agreed to compensate US Bank, as manager, the following: (1) an initial acceptance fee of $120,000; (2) an annual fee of $25,000; (3) a distribution fee of $25,000 per distribution; (4) out-of-pocket expenses; and (5) an hourly fee for all personnel at the then expected hourly rate ($350 per hour at the time the agreement was executed).
See Note (6) for further detail regarding collection and distribution activity related to the assets held at RCM.
| (2) | Summary of Significant Accounting Policies |
The accounting and reporting policies of the Trust conform to accounting principles generally accepted in the United States of America and to practices in the commodities industry. The following is a description of the more significant of those policies that the Trust follows in preparing its consolidated financial statements.
| (a) | Basis of presentation |
The accompanying consolidated financial statements of the Trust have been prepared in accordance with accounting principles generally accepted in the United States of America.
Reclassifications have been made to the Trust’s December 31, 2009 information to conform to the current presentation.
| (b) | Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Trust and its wholly-owned subsidiary, JWH Special Circumstances, LLC. All material intercompany transactions have been eliminated upon consolidation.
| (c) | Revenue Recognition |
Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and measured at fair value daily. Unrealized gains on open contracts reflected in the consolidated statements of financial condition represent the difference between original contract amount and fair value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the consolidated financial statements. As the broker has the right of offset, the Trust presents unrealized gains and losses on open futures contracts (the difference between contract trade price and quoted market price) as a net amount in the consolidated statements of financial condition. Any change in net unrealized gain or loss on futures and forward contracts from the preceding period is reported in the consolidated statements of operations. Gains or losses are realized when contracts are liquidated.
The Trust may write (sell) and purchase exchange listed options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Trust writes an option, the premium received is recorded as a liability in the statement of financial condition and measured at fair value daily. When the Trust purchases an option, the premium paid is recorded as an asset in the consolidated statements of financial condition and measured at fair value daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the consolidated statements of operations. When a written option expires or the Trust enters into a closing purchase transaction, the difference between the net premium received and any amount paid at expiration or on executing a closing purchase transaction, including commission, is recognized as a component of realized gain (loss) on closed positions. When a purchased option is exercised, the proceeds on the sale of an underlying instrument (for a purchased put option), or the purchase cost of an underlying instrument (for a purchased call option) is adjusted by the amount of the premium paid.
| 11 |
At December 31, 2011, the Trust earns interest on 100% of the Trust’s average daily balances on deposit with RJO during each month at 100% of the average four-week Treasury bill rate for that month in respect of deposits denominated in dollars. For deposits denominated in other currencies, the Trust earns interest at a rate of one-month LIBOR less 100 basis points. To the extent excess cash is not invested in securities, such cash will be subject to the creditworthiness of the institution where such funds are deposited. The Trust also earns interest on cash and cash equivalents held at Wells Fargo Bank N.A. and managed by RJO Investment Management, LLC (“RJOIM”), an affiliate of the Managing Owner.
Fixed income securities are recorded at fair value, with changes in fair value recorded in the statement of operations as unrealized gain (loss) on fixed income securities. Realized gains (losses) from liquidation of fixed income securities are determined on the specific identification basis. Premiums and discounts on securities purchased are amortized over the lives of the respective instruments. Interest income is recognized on the accrual basis.
| (d) | Ongoing Offering Costs |
Ongoing offering costs, subject to a ceiling of 0.50% of the Trust’s average month-end net assets, are paid by the Trust and expensed as incurred.
| (e) | Foreign Currency Transactions |
Trading accounts in foreign currency denominations are susceptible to both movements in the underlying contract markets as well as fluctuation in currency rates. Foreign currencies are translated into U.S. dollars for closed positions at an average exchange rate for the year, while year-end balances are translated at the year-end currency rates. The impact of the translation is reflected in the consolidated statements of operations.
| (f) | Use of Estimates |
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| (g) | Valuation of Assets Held at Refco Capital Markets, Ltd. |
The Trust recorded an impairment charge against its assets held at RCM at December 31, 2005, based on management’s estimate of fair value at that time. Subsequent recoveries from RCM were credited against the then book value of the claim. On June 28, 2007, the Trust’s cumulative recoveries from RCM exceeded the book value of the impaired assets held at RCM, which resulted in no remaining book value for those assets. All recoveries in excess of the book value of the impaired assets have been recorded as “Collections in excess of impaired value” on the Trust’s consolidated statements of operations. Any future administrative and/or legal expenses associated with liquidation of the assets held at RCM have not been reflected as such future expenses are not capable of being estimated. See Note (6) for further details.
| (3) | Fees |
Management fees are accrued and paid monthly. Incentive fees are accrued monthly and paid quarterly. Trading decisions for the period of these financial statements were made by the Advisors.
Pursuant to the Trust’s agreements with the Advisors, each Advisor receives a monthly management fee at the rate of up to 0.167% (a 2% annual rate) of the Trust’s month-end net assets calculated after deduction of brokerage fees, but before reduction for any incentive fee or other costs and before inclusion of new unitholder subscriptions and redemptions for the month. These management fees are not paid on the LLC net assets.
The Trust also pays the Advisors a quarterly incentive fee of up to 20% of the “New Trading Profit,” if any, of the Trust. The incentive fee is based on the performance of each Advisor’s portion of the assets allocated to them. New Trading Profit in any quarter is equal to the “Trading Profit” for such quarter that is in excess of the highest level of such cumulative trading profit as of any previous calendar quarter-end. Trading Profit is calculated by including realized and unrealized profits and losses, excluding interest income, and deducting the management fee and brokerage fee.
| 12 |
| (4) | Income Taxes |
No provision for U.S. federal income taxes has been made in the accompanying consolidated financial statements as each beneficial owner is responsible for reporting income (loss) based on the pro rata share of the profits or losses of the Trust. The LLC is also treated as a partnership. Generally, for both U.S. federal and state tax purposes, trusts, such as the RJO Global Trust, are treated as partnerships. The only significant differences in financial and income tax reporting basis are ongoing offering costs.
The Trust files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. The Trust’s federal income tax returns for all tax years ended on or after December 31, 2007, remain subject to examination by the Internal Revenue Service. The Trust’s state and local income tax returns are subject to examination by the respective state and local authorities over various statutes of limitations, most ranging from three to five years from the date of filing.
| (5) | Trading Activities and Related Risks |
The Trust engages in the speculative trading of U.S. and foreign futures contracts, options, and forward contracts (collectively derivatives) through the Advisors. These derivatives include both financial and non-financial contracts held as part of a diversified trading strategy. The Trust is exposed to both market risk, the risk arising from changes in the market value of the contracts, and credit risk, the risk of failure by another party to perform according to the terms of a contract.
The purchase and sale of futures requires margin deposits with a futures commission merchant (“FCM”). Additional deposits may be necessary for any loss on contract value. The CE Act requires an FCM to segregate or secure all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other property, such as U.S. Treasury bills, deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’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 the total of cash and other property deposited.
The Trust has cash on deposit with an affiliate interbank market maker in connection with its trading of forward contracts. In the normal course of business, the Trust does not require collateral from such interbank market maker. Due to forward contracts being traded in unregulated markets between principals, the Trust also assumes a credit risk, the risk of loss from counterparty non-performance.
For derivatives, risks arise from changes in the market value of the contracts. Theoretically, the Trust is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
The Trust, as writer of an option, has no control over whether the underlying instrument may be sold (called) and as a result bears the risk of an unfavorable change in the market value of the instrument underlying the written option. There is also the risk the Trust may not be able to enter into a closing transaction because of an illiquid market.
The Trust is a buyer of exchange-traded options. As such, the Trust pays a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Purchased options expose the Trust to a risk of loss limited to the premiums paid.
Net trading results from derivatives for the years ended December 31, 2011, 2010, and 2009 are reflected in the consolidated statements of operations and equal gain or loss from trading less brokerage commissions. Such trading results reflect the net gain or loss arising from the Trust’s speculative trading of futures contracts, options and forward contracts.
The Trust’s primary exposure to fixed income securities are defined by the U.S. Commodity Futures Trading Commission (“CTFC”) guidelines of acceptable securities for investment of segregated assets. The scope of the acceptable securities by the CTFC are defined further by the RJOIM agreement with the Trust to include but not limited to, U.S. Treasury and government agencies’ securities, purchase agreements collateralized by U.S. Treasury and government agencies, corporate debt securities, and bank debt securities. The Trust’s total investment in corporate debt securities, bank deposit securities, and certificate of deposits combined cannot exceed 40% of the Trust’s total assets.
The beneficial owners bear the risk of loss only to the extent of the market value of their respective investments.
| 13 |
| (6) | Assets Held at Refco Capital Markets, Ltd. |
Effective October 31, 2005, $57,544,206 of equity and 2,273,288 in substitute units, which represented the assets held at RCM plus $1,000,000 in cash, were transferred to a Non-Trading account, as explained in Note 2(g). On December 31, 2005 the $56,544,206 of assets held at RCM were reduced by $39,580,944 for impairment to $16,963,262, or 30% of the original value of the assets. The table below summarizes all recoveries from RCM and distributions to redeemed and continuing unitholders.
| Recoveries from RCM, Distributions paid by US Bank from the LLC, and effect on impaired value of assets held at RCM | ||||||||||||||||||||||||
| Amounts Received from | Balance of | Collections in
Excess of | Cash Distributions to
Non-Participating | Additional Units in Trust for
Participating Owners | ||||||||||||||||||||
| Date | RCM | Impaired Value | Impaired Value | Owners | Units | Dollars | ||||||||||||||||||
| 12/29/06 | $ | 10,319,318 | $ | 6,643,944 | $ | - | $ | 4,180,958 | 54,914 | $ | 5,154,711 | |||||||||||||
| 04/20/07 | 2,787,629 | 3,856,315 | - | - | - | - | ||||||||||||||||||
| 06/07/07 | 265,758 | 3,590,557 | - | - | - | - | ||||||||||||||||||
| 06/28/07 | 4,783,640 | - | 1,193,083 | - | - | - | ||||||||||||||||||
| 07/03/07 | 5,654 | - | 5,654 | - | - | - | ||||||||||||||||||
| 08/29/07 | - | - | - | 2,787,947 | 23,183 | 1,758,626 | ||||||||||||||||||
| 09/19/07 | 2,584,070 | - | 2,584,070 | - | - | - | ||||||||||||||||||
| 12/31/07 | 2,708,467 | - | 2,708,467 | - | - | - | ||||||||||||||||||
| 03/28/08 | 1,046,068 | - | 1,046,068 | - | - | - | ||||||||||||||||||
| 04/29/08 | - | - | - | 2,241,680 | 10,736 | 1,053,815 | ||||||||||||||||||
| 06/26/08 | 701,148 | - | 701,148 | - | - | - | ||||||||||||||||||
| 12/31/08 | 769,001 | - | 769,001 | - | - | - | ||||||||||||||||||
| 06/29/09 | 2,748,048 | - | 2,748,048 | - | - | - | ||||||||||||||||||
| 12/30/09 | 1,102,612 | - | 1,102,612 | - | - | - | ||||||||||||||||||
| 05/19/10 | 1,695,150 | - | 1,695,150 | - | - | - | ||||||||||||||||||
| 06/04/10 | 14,329,450 | * | - | 14,329,450 | * | - | - | - | ||||||||||||||||
| 08/01/10 | - | - | - | 16,076,112 | 40,839 | 3,928,806 | ||||||||||||||||||
| 10/15/10 | 282,790 | * | - | 282,790 | * | - | - | - | ||||||||||||||||
| 12/30/10 | 563,163 | * | - | 563,163 | * | - | - | - | ||||||||||||||||
| 06/02/11 | 343,664 | * | - | 343,664 | * | - | - | - | ||||||||||||||||
| 08/30/11 | 1,328,832 | * | - | 1,328,832 | * | - | - | - | ||||||||||||||||
| 12/01/11 | - | - | - | 3,689,555 | 6,168 | 561,489 | ||||||||||||||||||
| Totals | $ | 48,364,462 | $ | - | $ | 31,401,200 | $ | 28,976,252 | 135,840 | $ | 12,457,447 | |||||||||||||
*The collections on June 4, 2010 were from a settlement agreement reached with Cargill, Inc. and Cargill Investors Services, Inc. (together, "Cargill"). The gross collections of $15,300,000 on June 4, 2010, were reduced by $970,550, which represented Cargill's percentage of distributions, as defined in the Settlement Agreement. All subsequent collections are shown net and were reduced by Cargill's percentage of distributions at 57.25% of the gross collections.
| (7) | Fair Value Measurements |
In accordance with the Fair Value Measurements Topic of the Financial Accounting Standards Board Accounting Standards Codification, the Trust established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Trust has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The value of the Trust’s exchange-traded futures contracts and options fall into this category.
| 14 |
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. This category includes forward currency contracts, options on forward currency contracts and fixed income securities that the Trust values using models or other valuation methodologies derived from observable market data.
Level 3 inputs are unobservable inputs for an asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. As of December 31, 2011 and December 31, 2010, the Trust did not have any Level 3 assets or liabilities.
An asset or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following table presents the Trust’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, respectively:
| December 31, 2011 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Unrealized gain on open contracts: | ||||||||||||||||
| Futures positions | $ | 212,644 | $ | - | $ | - | $ | 212,644 | ||||||||
| Forward currency positions | - | 151,303 | - | 151,303 | ||||||||||||
| Purchased options on futures contracts | 22,525 | - | - | 22,525 | ||||||||||||
| Fixed income securities | - | 21,870,890 | - | 21,870,890 | ||||||||||||
| Total assets | 235,169 | 22,022,193 | - | 22,257,362 | ||||||||||||
| Liabilities | ||||||||||||||||
| Options written on futures contracts | (1,006 | ) | - | - | (1,006 | ) | ||||||||||
| Total fair value | $ | 234,163 | $ | 22,022,193 | $ | - | $ | 22,256,356 | ||||||||
| December 31, 2010 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Unrealized gain on open contracts: | ||||||||||||||||
| Futures positions | $ | 1,163,684 | $ | - | $ | - | $ | 1,163,684 | ||||||||
| Forward currency positions | - | 193,659 | - | 193,659 | ||||||||||||
| Purchased options on futures contracts | 120,263 | - | - | 120,263 | ||||||||||||
| Fixed income securities | - | 11,540,784 | - | 11,540,784 | ||||||||||||
| Total fair value | $ | 1,283,947 | $ | 11,734,443 | $ | - | $ | 13,018,390 | ||||||||
There were no significant transfers in or out of Level 1 and Level 2 fair value measurements.
| (8) | Operations |
Redemptions
A beneficial owner may cause any or all of his or her units to be redeemed by the Trust effective as of the last business day of any month based on the Net Asset Value per unit on such date on five business days’ written notice to NAV Consulting, Inc., the Trust’s administrator, or the Managing Owner. Payment will generally be made within 10 business days of the effective date of the redemption. Any redemption made during the first 11 months of investment is subject to a 1.5% redemption penalty, payable to the Managing Owner. Any redemption made in the twelfth month of investment or later will not be subject to any redemption penalty. The Trust’s Ninth Amended and Restated Declaration and Agreement of Trust, as amended (the “Trust Agreement”) contains a full description of redemption and distribution policies.
| 15 |
Subscriptions
Investors that are eligible to participate in the private offering of the Units may purchase Units in the Trust pursuant to the terms of the Trust’s Confidential Private Placement Memorandum and disclosure document (the “Memorandum”) and a signed subscription form. The Trust Agreement and the Memorandum contain a full description of subscription policies. An investment in the Trust does not include a beneficial interest or investment in the LLC.
Commissions
The Managing Owner and/or affiliates act as commodity brokers for the Trust through RJO. Commodity brokerage commissions are typically paid upon the completion or liquidation of a trade and are referred to as “round-turn commissions,” which cover both the initial purchase (or sale) and the subsequent offsetting sale (or purchase) of a commodity futures contract.
The Trust’s brokerage fee constitutes a “wrap fee” of 5.0% of the Trust’s month-end assets on an annual basis (0.41675% monthly) with respect to Class A units and 3.0% of the Trust’s month-end assets on an annual basis (0.25% monthly) with respect to Class B units, which covers the fees described below. “Brokerage fee” includes the following across each class of units:
| Recipient | Nature of Payment | Class A Units | Class B Units | |||||||||
| Managing Owner | Managing Owner fee | 0.75 | % | 0.75 | % | |||||||
| Selling Agent | Selling commission | 2.00 | % | 0.00 | % | |||||||
| Managing Owner | Underwriting expenses | 0.35 | % | 0.35 | % | |||||||
| Managing Owner | Clearing, NFA, and | |||||||||||
| exchange fees (capped at) | 1.57 | % | 1.57 | % | ||||||||
| Liberty Funds Group | Consulting fees | 0.33 | % | 0.33 | % | |||||||
| Totals | 5.00 | % | 3.00 | % | ||||||||
Commissions were not paid with respect to the LLC net assets.
| (9) | Financial Highlights |
The following financial highlights show the Trust’s financial performance of the Trading units for the periods ended December 31, 2011, 2010 and 2009. Total return is calculated as the change in a theoretical beneficial owner’s investment over the entire period, and is not annualized. Total return is calculated based on the aggregate return of the Trust’s Trading units taken as a whole.
| 16 |
| Class A | Class B | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
| Per share operating performance: | ||||||||||||||||||||||||
| Net asset value of Trading units, beginning of period | $ | 100.64 | $ | 102.84 | $ | 119.39 | $ | 104.75 | $ | 104.91 | $ | 119.39 | ||||||||||||
| Total Trading income (loss): | ||||||||||||||||||||||||
| Trading gain (loss) | (0.27 | ) | 6.32 | (7.58 | ) | (0.28 | ) | 6.81 | (7.74 | ) | ||||||||||||||
| Investment income | 0.20 | 0.16 | 0.08 | 0.22 | 0.17 | 0.08 | ||||||||||||||||||
| Expenses | (9.25 | ) | (8.68 | ) | (9.05 | ) | (7.71 | ) | (7.14 | ) | (6.82 | ) | ||||||||||||
| Trading income (loss) | (9.32 | ) | (2.20 | ) | (16.55 | ) | (7.77 | ) | (0.16 | ) | (14.48 | ) | ||||||||||||
| Net asset value of Trading units, end of period | $ | 91.32 | $ | 100.64 | $ | 102.84 | $ | 96.98 | $ | 104.75 | $ | 104.91 | ||||||||||||
| Total return: | ||||||||||||||||||||||||
| Total return before incentive fees | (8.88 | )% | (1.63 | )% | (13.78 | )% | (7.08 | )% | 0.49 | % | (12.05 | )% | ||||||||||||
| Less incentive fee allocations | (0.38 | )% | (0.51 | )% | (0.08 | )% | (0.34 | )% | (0.64 | )% | (0.08 | )% | ||||||||||||
| Total return | (9.26 | )% | (2.14 | )% | (13.86 | )% | (7.42 | )% | (0.15 | )% | (12.13 | )% | ||||||||||||
| Ratios to average net assets: | ||||||||||||||||||||||||
| Trading income (loss) | (10.32 | )% | (2.10 | )% | (15.12 | )% | (7.94 | )% | 1.01 | % | (13.35 | )% | ||||||||||||
| Expenses: | ||||||||||||||||||||||||
| Expenses, less incentive fees | (9.30 | )% | (8.10 | )% | (8.08 | )% | (7.34 | )% | (6.19 | )% | (6.13 | )% | ||||||||||||
| Incentive fees | (0.38 | )% | (0.51 | )% | (0.08 | )% | (0.34 | )% | (0.64 | )% | (0.08 | )% | ||||||||||||
| Total expenses | (9.68 | )% | (8.61 | )% | (8.16 | )% | (7.68 | )% | (6.83 | )% | (6.21 | )% | ||||||||||||
The calculations above do not include activity within the Trust’s Non-Trading Accounts.
The net income and expense ratios are computed based upon the weighted average net assets for the Trust for the periods ended December 31, 2011, 2010, and 2009. The amounts are not annualized.
| (10) | Cash Management Agreement with Affiliate. |
On October 6, 2010, the Managing Owner retained RJOIM, an SEC registered investment advisor and an affiliate of the Managing Owner, as cash manager. The assets managed by RJOIM are held in segregated accounts in custody by Wells Fargo Bank, N.A. RJOIM is paid an annual fee, currently 0.20% calculated and accrued daily at a rate equal to 1/360 of the principal balance. As of December 31, 2011 the Trust’s deposits held by RJOIM consisted of cash of $9,596,823 and fixed income securities of $21,870,890. Advisory fees earned by RJOIM aggregated $62,625 and $13,087 for the years ended December 31, 2011 and 2010 respectively.
| (11) | Derivative Instruments and Hedging Activities. |
The Trust does not utilize hedge accounting and marks its derivatives to market through operations.
| 17 |
Derivatives not designated as hedging instruments:
As of December 31, 2011
| Asset | Liability | |||||||||||
| Type of | Derivatives | Derivatives | Net | |||||||||
| Futures Contracts | Fair Value | Fair Value | Fair Value | |||||||||
| Agriculture | $ | 10,408 | $ | - | $ | 10,408 | ||||||
| Currency | 527,500 | (350,799 | ) | 176,701 | ||||||||
| Energy | 225,038 | (119,410 | ) | 105,628 | ||||||||
| Indices | 17,851 | (47,027 | ) | (29,176 | ) | |||||||
| Interest Rates | 139,768 | (10,045 | ) | 129,723 | ||||||||
| Metals | 72,320 | (80,138 | ) | (7,818 | ) | |||||||
| $ | 992,885 | $ | (607,419 | ) | $ | 385,466 | ||||||
As of December 31, 2010
| Asset | Liability | |||||||||||
| Type of | Derivatives | Derivatives | Net | |||||||||
| Futures Contracts | Fair Value | Fair Value | Fair Value | |||||||||
| Agriculture | $ | 920,055 | $ | (323,637 | ) | $ | 596,418 | |||||
| Currency | 928,957 | (507,464 | ) | 421,493 | ||||||||
| Energy | 65,691 | (45,099 | ) | 20,592 | ||||||||
| Indices | 197,712 | - | 197,712 | |||||||||
| Interest Rates | 117,158 | (13,742 | ) | 103,416 | ||||||||
| Metals | 789,173 | (651,198 | ) | 137,975 | ||||||||
| $ | 3,018,746 | $ | (1,541,140 | ) | $ | 1,477,606 | ||||||
The above reported fair values are included in equity in commodity Trading accounts – unrealized gain on open contracts and in purchased options and written on futures contracts on the consolidated statements of financial condition as of December 31, 2011 and 2010, respectively.
Trading gain (loss) for the following periods:
| Years Ended December 31, | ||||||||||||
| Type of Futures Contracts | 2011 | 2010 | 2009 | |||||||||
| Agriculture | $ | (1,105,067 | ) | $ | 1,678,921 | $ | (1,399,288 | ) | ||||
| Currency | (1,380,681 | ) | 1,582,144 | (765,584 | ) | |||||||
| Energy | 63,841 | (1,308,951 | ) | (983,149 | ) | |||||||
| Indices | 865,269 | (773,614 | ) | (680,897 | ) | |||||||
| Interest Rates | 935,552 | 2,380,917 | (2,303,699 | ) | ||||||||
| Metals | 276,344 | (93,000 | ) | 1,362,579 | ||||||||
| $ | (344,742 | ) | $ | 3,466,417 | $ | (4,770,038 | ) | |||||
See Note (5) for additional information on the Trust’s purpose for entering into derivatives not designed as hedging instruments and its overall risk management strategies.
| 18 |
Acknowledgment
To the best of my knowledge and belief, the information contained herein is accurate and complete.
| /s/ Jason T. Manumaleuna | |
| Jason T. Manumaleuna | |
| Principal Financial Officer | |
| R.J. O’Brien Fund Management, LLC | |
| The Managing Owner and Commodity Pool Operator of | |
| RJO Global Trust | |
| March 27, 2012 | |
| 19 |
Exhibit 14.01
R.J. O’Brien Fund Management, LLC.
Code of Ethics
Introduction
R.J. O’Brien Fund Management, LLC (“RJOFM”) adopted ethical guidelines to provide RJOFM employees a framework in which to examine problems arising out of its business and to assist RJOFM employees to act in a fair, ethical and lawful manner. In addition, RJOFM has adopted this Code of Ethics to address certain specific issues relating to its business.
RJOFM (“the Company”) acts as the managing owner and/or general partner of a commodity pool (the “Pool”) that is a public reporting issuer under the Securities Exchange Act of 1934, as amended. As the managing owner and/or general partner, the Company is responsible for the management and administration of the Pool.
The Company expects its principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions (collectively, the “Covered Officers”) to know and follow the policies outlined in this RJOFM Code of Ethics. Any Covered Officer who violates the letter or spirit of these policies is subject to disciplinary action, up to and including termination.
Every Covered Officer has the responsibility to obey the law and act honestly and ethically. To that end, this Code of Ethics is a guide that is intended to make Covered Officers sensitive to some of the significant legal and ethical issues that may arise in connection with the operation of the Pool and to the mechanisms available to report illegal or unethical conduct. It is not, however, a comprehensive document that addresses every legal or ethical issue that you may confront, nor is it a summary of all laws and policies that apply to the business activities of the Company or the Pool. For additional information regarding the Company policies, you should refer to R.J. O’Brien & Associates, LLC.’s Chief Compliance Officer. Ultimately, no code of ethics can replace the thoughtful behavior of an ethical officer.
If you have any questions about this Code of Ethics or are concerned about conduct you believe violates this Code of Ethics, the Company’s policies or applicable laws, rules or regulations, you should consult with the R.J. O’Brien & Associates’ Chief Compliance Officer, Nancy Westwick at (312) 373-5000. No one at the Company has the authority to make exceptions to these policies, other than the Company’s Board of Directors (or a committee thereof).
Compliance with Laws, Rules and Regulations
The Covered Officers must comply fully with all applicable foreign, federal, state and local laws, rules and regulations that govern the Company’s or the Pool’s business conduct. Failure to comply with such laws, rules and regulations may result in disciplinary action (in addition to those imposed by any governmental, regulatory or self-regulatory body), up to and including termination.
Conflicts of Interest
Business decisions must be made in the best interest of the Company, not motivated by personal interest or gain. The same principle applies to business decisions made by the Company in respect of the investors in the Pool. Therefore, as a matter of Company policy, all Covered Officers must avoid any actual or perceived conflict of interest.
A “conflict of interest” occurs when a Covered Officer’s personal interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Company or, as applicable, those of the Pool. A conflict of interest situation can arise when a Covered Officer takes actions or has interests (financial or other) that may make it difficult to fulfill duties owed to the equity owners of the Pool. Conflicts of interest also may arise when a Covered Officer or a member of a Covered Officer’s family receives improper personal benefits as a result of the Covered Officer’s affiliation with the Company, regardless of whether such benefits are received from the Company or a third party. Loans by the Company or the Pool to, or guarantees by the Company or the Pool of obligations of, Covered Officers and their family members are of special concern and are prohibited.
It is difficult to identify exhaustively what constitutes a conflict of interest. For this reason, the Covered Officers must avoid any situation in which their independent business judgment might appear to be compromised. Questions about potential conflicts of interest situations, and disclosure of these situations as they arise, should be promptly addressed and reported to the Chief Compliance Officer at (312) 373-5000.
Corporate Opportunities
The Covered Officers are prohibited from: (a) taking for themselves personally opportunities that properly belong to the Company and/or Pool or are discovered through the use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the Company. The Covered Officers owe a duty to the Company and to the Pool to advance its legitimate interests when the opportunity to do so arises.
Public Company Reporting
As a result of the Pool’s status as “public reporting company,” the Company is required, on behalf of the Pool, to file periodic and other reports with the Securities and Exchange Commission. The Company takes its obligations with respect to the Pool’s public disclosure seriously. To that end:
A. each Covered Officer must take all reasonable steps to ensure that these reports and other public communications represent full, fair, accurate, timely and understandable disclosure regarding the financial and business condition of the Pool;
B. each Covered Officer must promptly bring to the attention of the Board of Directors any material information of which a Covered Officer may become aware that affects the disclosures made by the Company in the public filings made on behalf of the Pool or otherwise would assist the Board of Directors in fulfilling its responsibilities to the Pools; and
C. each Covered Officer must promptly bring to the attention of the Chief Compliance Officer and the Board of Directors any information he or she may have concerning (i) significant deficiencies in the design or operation of internal controls that could adversely affect the Company’s ability to record, process, summarize and report financial data, including on behalf of the Pool, or (ii) any fraud, whether or not material, involving management or other employees who have a significant role in the Company’s financial reporting, including on behalf of the Pool, disclosures or internal controls.
Reporting Illegal or Unethical Behavior
Each Covered Officer has a duty to adhere to this Code of Ethics. Each Covered Officer must also promptly bring to the attention of the Chief Compliance Officer or the CEO and to the Board of Directors any information the Covered Officer may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company or the Pool, and the operation of its or their businesses, by the Company or any agent thereof, or of a violation of this Code of Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company’s or the Pool’s financial reporting, disclosures or internal controls. Confidentiality will be maintained to the fullest extent possible.
A Covered Officer will not be penalized for making a good-faith report of violations of this Code of Ethics or other illegal or unethical conduct, nor will the Company tolerate retaliation of any kind against anyone who makes a good-faith report. A Covered Officer who knowingly submits a false report of a violation, however, will be subject to disciplinary action. If you report a violation and in some way also are involved in the violation, the fact that you stepped forward will be considered.
If the result of an investigation indicates that corrective action is required, the Board of Directors will decide, or designate appropriate persons to decide, what actions to take, including, when appropriate, legal proceedings and disciplinary action up to and including termination, to rectify the problem and avoid the likelihood of its recurrence. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code of Ethics, and shall include written notices to the individual indicating any action taken. In determining what action is appropriate in a particular case, the Board of Directors or its designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether the individual in question had committed other violations in the past.
Amendment, Modification and Waiver
This Code of Ethics may be amended, modified or waived by the Board of Directors of the Company. Any change to, or waiver (whether explicit or implicit) of, this Code of Ethics must be disclosed promptly to the Pool that is a public reporting company by filing a Form 8-K on behalf of each affected Pool or by another permitted means.
Acknowledgment
Each Covered Officer is accountable for knowing and abiding by the policies contained in this Code of Ethics. The Company may require that the Covered Officers sign an acknowledgment confirming that they have received, read and understand this Code of Ethics and are complying with them.
Exhibit 31.01
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Gerald Corcoran, do hereby certify that:
| 1. | I have reviewed this annual report on Form 10-K of RJO Global Trust; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and, |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 27, 2012 | ||
| By: | /s/ Gerald Corcoran | |
| Gerald Corcoran | ||
| Chief Executive Officer | ||
| R.J. O’Brien Fund Management, LLC | ||
Exhibit 31.02
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Jason T Manumaleuna, do hereby certify that:
| 1. | I have reviewed this annual report on Form 10-K of RJO Global Trust; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and, |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 27, 2012 | ||
| By: | /s/ Jason T. Manumaleuna | |
| Jason T. Manumaleuna | ||
| Chief Financial Officer | ||
| R.J. O’Brien Fund Management, LLC | ||
Exhibit 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTIONS 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald Corcoran, Chief Executive Officer of R.J. O’Brien Fund Management, LLC (“RJOFM”), Managing Owner of RJO Global Trust (the “Trust”), certify that (i) the attached annual report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the attached annual report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Trust.
| By: | /s/ Gerald Corcoran | |
| Gerald Corcoran | ||
| Chief Executive Officer | ||
| R.J. O’Brien Fund Management, LLC | ||
| March 27, 2012 | ||
Exhibit 32.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTIONS 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jason T. Manumaleuna, Chief Financial Officer of R.J. O’Brien Fund Management, LLC (“RJOFM”), Managing Owner of RJO Global Trust (the “Trust”), certify that (i) the attached annual report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the attached annual report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Trust.
| By: | /s/ Jason T. Manumaleuna | |
| Jason T. Manumaleuna | ||
| Chief Financial Officer | ||
| R.J. O’Brien Fund Management, LLC | ||
| March 27,2012 | ||
|
Fees
|
12 Months Ended | |||
|---|---|---|---|---|
|
Dec. 31, 2011
|
||||
| Fees |
Management fees are accrued and paid monthly. Incentive fees are accrued monthly and paid quarterly. Trading decisions for the period of these financial statements were made by the Advisors.
Pursuant to the Trust’s agreements with the Advisors, each Advisor receives a monthly management fee at the rate of up to 0.167% (a 2% annual rate) of the Trust’s month-end net assets calculated after deduction of brokerage fees, but before reduction for any incentive fee or other costs and before inclusion of new unitholder subscriptions and redemptions for the month. These management fees are not paid on the LLC net assets.
The Trust also pays the Advisors a quarterly incentive fee of up to 20% of the “New Trading Profit,” if any, of the Trust. The incentive fee is based on the performance of each Advisor’s portion of the assets allocated to them. New Trading Profit in any quarter is equal to the “Trading Profit” for such quarter that is in excess of the highest level of such cumulative trading profit as of any previous calendar quarter-end. Trading Profit is calculated by including realized and unrealized profits and losses, excluding interest income, and deducting the management fee and brokerage fee. |