UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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)
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Delaware
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36-4113382
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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222 S Riverside Plaza
Suite 900
Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
(888) 292 - 9399
(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 ☒ 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 ☒ 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. ☒ 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). ☒ Yes ☐ 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. ☒ 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 ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ 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: $6,215,180 as of June 30, 2016.
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Part I
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3
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Item 1.
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3
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Item 1A.
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8
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Item 2.
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16
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Item 3.
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16
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Item 4.
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16
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Part II
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17
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Item 5.
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17
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Item 6.
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17
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Item 7.
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17
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Item 7A.
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26
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29
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29
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Item 8.
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32
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Item 9.
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33
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Item 9A.
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33
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Item 9B.
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33
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Part III
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34
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Item 10.
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34
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Item 11.
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35
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Item 12.
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35
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Item 13.
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35
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Item 14.
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36
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Part IV
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37
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Item 15.
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37
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Part I
General Development of Business: Narrative Description of Business
The 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 U.S. and international futures, spot and forward contracts on currencies, interest rates, energy and agricultural products, metals and stock indices, hybrid instruments, swaps, any rights pertaining thereto and any options thereon or on physical commodities, as well as securities and any rights pertaining thereto and any options thereon, pursuant to the trading instructions of multiple independent commodity trading advisors (each a “Trading Advisor” and collectively, the “Trading Advisors”).
R.J. O’Brien Fund Management, LLC, the managing owner of the Trust (“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 has been registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator, and has been a member in good standing of the National Futures Association (“NFA”) in such capacity, since December 1, 2006. 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”) through its investment in RJ OASIS (as defined below).
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 began 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. Effective January 15, 2014, the Managing Owner began offering Class C and Class D units. The Class A and Class B units are no longer offered.
Pursuant to an Investment Management Agreement dated August 30, 2013 (the “Investment Management Agreement”), the Managing Owner appointed RPM Risk & Portfolio Management Aktiebolag, a limited liability company organized under the laws of Sweden, as investment manager to the Trust (“RPM” or the “Investment Manager”). RPM has been registered with the CFTC as a commodity trading advisor (CTA), and has been a member in good standing of the NFA in such capacity, since August 27, 2015. Prior to August 27, 2015, RPM was exempt from registration as a CTA pursuant CFTC Rule 4.14(a)(10) as (i) during the course of any 12-month periods, it had not furnished commodity trading advice to more than 15 persons; and (ii) it did not hold itself out generally to the public as a CTA. The Trust remains a multi-advisor commodity pool where trading decisions for the Trust are delegated to the Trading Advisors, representing the Investment Manager’s “Evolving Manager Program”. RPM is responsible for selecting, monitoring, and replacing each commodity trading advisor available for its Evolving Manager Program. RPM is also responsible for the Trust’s allocations to each Trading Advisor through the Trust’s investment in RJ OASIS (as defined below). RPM may also add, remove or replace any Trading 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.
The Evolving Manager Program seeks to identity and select commodity trading advisors with shorter track records and with smaller assets under management who, in the opinion of the Investment Manager, appear to have potential for long-term over-performance relative to their respective peer group. RPM may add, delete or modify such categories of investment strategies in line with its investment objective and policy. The strategies include three broad based categories that are described as follows (each, an “Eligible Strategy”):
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Trend Following. A strategy that is often classified as “long volatility” because it tries to take advantage of large movements or “trends” in prices. Trading programs are often fully systematic with limited application of discretion using a wide range of technical analysis methods to determine when trends occur.
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Short-Term Trading. A strategy that refers to all futures and currency investment strategies with a trading horizon ranging from intraday to less than a month, which seeks to exploit short-term price inefficiencies. This is typically done using technical analysis.
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Fundamental Trading. A strategy that attempts to predict the future direction of markets based on macroeconomic data with less focus on price data alone. A fundamental approach seeks to find opportunities where price does not properly reflect the fundamental valuation of the underlying asset, i.e. its intrinsic value. A fundamental valuation can be done using various approaches but the most common methodologies are macroeconomic analysis and relative valuation.
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The Investment Manager will, in its discretion, determine the minimum or maximum target allocation or allocation range, or the manner in which to rebalance the Trust or adjust relative weightings of the Trust. RPM has complete flexibility in allocation and reallocating the Trust’s capital in any manner that it may deem appropriate. There can be no assurance as to which factors the Investment Manager may consider in making capital allocations for the Trust, or as to which allocation the Investment Manager may make.
As of January 23, 2017, the Trust’s assets are currently allocated to O’Brien Alternative Strategic Investment Solutions, LLC (“RJ OASIS”), a Delaware series limited liability company operated by RJOFM. During the period of November 24, 2016 to January 23, 2017, the Trust had redeemed all interests in RJ OASIS due to the declaration of a Special Redemption Date (as defined below). Each “series” of RJ OASIS feeds into a separate trading company established to facilitate trading by a particular Trading Advisor (each, a “Trading Company” and collectively, the “Trading Companies”). The Trading Companies are operated by RJOFM. RJOFM is the Managing Member of each RJ OASIS series and each Trading Company. RJOFM has no equity interest in any RJ OASIS series or Trading Company. Following the Special Redemption Date (as defined below), the Trust’s assets were initially allocated to a single series (the “OASIS RPM Evolving CTA Series”), of which the Trust is the sole member, and the assets of the OASIS RPM Evolving CTA Series then feeds into separate Series, whose assets are allocated to separate Trading Companies established to facilitate trading by a particular Trading Advisor.
The Trust is governed by the Tenth Amended and Restated Declaration and Agreement of Trust dated January 31, 2015 (the “Trust Agreement”).
On November 21, 2016, the Net Asset Value per Unit (as defined in the Trust Agreement) of the Class A Units declined to less than $50, after adding back all distributions. Due to this decline in the Net Asset Value per Unit of the Class A Units, a legacy provision in the Trust Agreement from when the Trust was publicly offered was triggered, requiring RJOFM to liquidate all of the Trust’s open positions and suspend trading until after a Special Redemption Date (as defined in the Trust Agreement). RJOFM declared December 30, 2016 as the Special Redemption Date in a notice to unitholders dated November 30, 2016, a copy of which is filed as Exhibit 20.01 hereto. Pursuant to this notice, Class A unitholders had the opportunity to redeem their interest in the Trust by submitting a written redemption request to the Managing Owner by no later than December 28, 2016. Following such date, in accordance with the Trust Agreement, if the Net Assets of the Trust (as defined in the Trust Agreement) were at least $1,000,000 and the Net Asset Value per Unit of the Class A Units was in excess of $25, the Trust could, in the discretion of the Managing Owner, resume trading. After such date, the Net Assets of the Trust were $4,091,193 and the Net Asset Value per Unit of the Class A Units was $49.35 and the Managing Owner decided to resume the Trust’s trading through the Trust’s investment in the OASIS RPM Evolving CTA Series.
Prior to the Trust’s allocation to the OASIS RPM Evolving CTA Series on January 23, 2017, RPM delegated trading decisions for the Trust to six independent Trading Advisors: Revolution Capital Management, LLC (“RCM”), PGR Capital LLP (“PGR”), ROW Asset Management, LLC (“ROW”), Turning Wheel Capital, Inc. (“TWC”), Claughton Capital, LLC (“Claughton”) and Degraves Capital Management PTY (“DCM”), pursuant to advisory agreements executed between the Managing Member, and, as applicable, each Trading Company and each Trading Advisor (each an “Advisory Agreement” and collectively the “Advisory Agreements”).
The Advisory Agreements provide that each Trading Advisor has discretion in and responsibility for the selection of the Trading Company’s commodity transactions with respect to that portion of the Series’ assets allocated to it. As of December 31, 2016, no assets were allocated to trading.
As of November 21, 2016, on the date the Net Asset Value per Unit of the Class A units declined to less than $50 and prior to quarter-end reallocation, RCM was managing 14.29%, ROW 10.65%, TWC 5.03% and DCM 6.69% of the Trust’s assets, respectively. Following the Trust’s resuming trading through its investment in the OASIS RPM Evolving CTA Series and as of January 23, 2017, the date of the Trust’s initial allocation to the OASIS RPM Evolving CTA Series and prior to the quarter-end reallocation, RPM delegated trading decisions for the Trust to three independent Trading Advisors: RCM, Claughton and DCM, pursuant to separate Advisory Agreements. As of January 23, 2017, RCM was managing 38.56%, Claughton 7.72% and DCM 7.58%.
The Trust has no officers, directors or employees.
RJO is a “futures commission merchant,” the Managing Owner is a “commodity pool operator” and the Trading 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 CFTC and are each a member of NFA in such respective capacities. 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 SEC, and is a member of the Financial Industry Regulatory Authority (“FINRA”).
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 any 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 Investment Manager and (in its role as managing member of each RJ OASIS series and each Trading Company) directing payment of the management and incentive fees payable to the Trading Advisors under the Advisory Agreements, as applicable.
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, through its investment in RJ OASIS, 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”); and (iii) to pay delivery, insurance, storage, service and other fees and charges incidental to the Trust’s trading. For the year ended December 31, 2016, $30,392 of ongoing offering costs were paid or accrued in connection with the offering of the units.
The Advisory Agreements with RCM, and PGR were entered into on October 9, 2013, and amended on April 1, 2015. The Advisory Agreement with CIM was entered into on April 17, 2014, and separately amended on April 30, 2014, February 19, 2015, and April 1, 2015 and then was then terminated in February 2016. The Advisory Agreement with ROW was entered into on September 18, 2014, and separately amended on October 18, 2014, April 1, 2015, March1, 2016 and April 1, 2016. The Advisory Agreement with TWC was entered into on March 31, 2015, and separately amended on April 22, 2015 and June 1, 2015. The Advisory Agreement with Claughton was entered into on April 1, 2015, and separately amended on April 22, 2015 and June 1, 2015. The Advisory Agreement with DCM was entered into on December 31, 2015.
Certain of the Advisory Agreements terminate automatically in the event that the relevant Trading Company is dissolved. The Advisory Agreements generally allow the appropriate Trading Company or the Managing Owner to terminate, upon written notice, the Advisory Agreement upon specified notice periods or upon the occurrence of certain events, which may include where, (A) any person described as a “principal” of the Trading Advisor in the Trust’s offering document ceases for any reason to be an active “principal” of the Trading Advisor; (B) a Trading Advisor becomes bankrupt or insolvent; (C) a Trading 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 appropriate Trading Company; (D) the registration, as a commodity trading advisor (“CTA”), of a Trading 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, a Trading 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, a Trading Advisor violates any Trading Policy (as defined in its Advisory Agreements) or administrative policy, except with the prior express written consent of the Managing Owner; or (G) a Trading Advisor fails in a material manner to perform any of its obligations under its Advisory Agreement.
The Advisory Agreements generally allow the appropriate Trading Advisor to terminate upon written notice its Advisory Agreement upon specified notice periods or upon the occurrence of certain events, which may include where, (A) the Managing Owner imposes additional trading limitations in the form of one or more Trading Policies (as defined in its Advisory Agreement) or administrative policies that a Trading Advisor does not consent to, such consent not to be unreasonably withheld; (B) the Managing Owner objects to a Trading Advisor implementing a proposed material change to its respective trading program and the Trading Advisor certifies to the Managing Owner in writing that it believes such change is in the best interests of the appropriate Trading Company; (C) the Managing Owner or the appropriate Trading Company 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 Trading Advisor; (D) the total Trust funds allocated to the Trading Advisor’s management falls below a level at which the Trading Advisor can reasonably implement its Trading Program; (E) the appropriate Trading Company 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; or (G) the Managing Owner or appropriate Trading Company merges, consolidates or sells a substantial portion of its assets.
The Trading 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 Trading Advisor obtains, produces or utilizes in the performance of services for the Trust. To the extent that a Trading 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 NAV to less than $2,500,000; (8) dissolution of the Trust; or (9) 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, the Managing Owner appointed RJO Investment Management LLC (“RJOIM”), an affiliate of the Managing Owner, to manage the Trust’s cash deposited with Wells Fargo Bank, N.A. (“Wells”). As of December 31, 2016, Wells held approximately $4,850,000 of the Trust’s assets. 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, 2016, accounting and transfer agency services for the Trust are provided by NAV Consulting, Inc., the Trust’s administrator.
Refco-related Matter
In 2005, certain assets held by the Trust’s prior clearing broker, Refco Capital Markets, LTD (“REFCO, LTD”), 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 REFCO, LTD, and all Non-Trading Accounts were transferred to the LLC. Any new funds received from REFCO, LTD by the LLC will be distributed to unitholders who were investors in the Trust at the time of the bankruptcy of REFCO, LTD 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:
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(a) |
Any unitholder who had redeemed their entire interest in the Trust prior to distribution shall receive cash.
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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).
Effective as of June 15, 2015 (the “Termination Date”), the LLC was dissolved by US Bank. US Bank effected the dissolution based upon their belief that substantially all of the LLC’s claims had been liquidated and the related proceeds had been distributed to the unitholders, and that the LLC was not likely to receive further significant recoveries related to such claims. Accordingly, the LLC has ceased to carry on its business as of the Termination Date except insofar as may be necessary for the winding up of its business. As of the Termination Date, the LLC has taken full account of its assets and liabilities, and has made payment or has otherwise provided for all of its remaining debts and liabilities. US Bank has established a contingency reserve with all remaining funds from the LLC in its possession in the approximate amount of $475,000 to pay for any future wind up expenses of, or other claims made against, the LLC on or prior to June 15, 2017 (the “Reserve Termination Date”). To the extent no claims or obligations of the LLC remain outstanding as of the Reserve Termination Date (as determined in US Bank’s reasonable discretion), US Bank will distribute the then remaining funds to the unitholders, provided, however, if the amount of remaining funds available for distribution does not significantly exceed the cost of making such distribution, US Bank reserves the right to donate the remaining amounts to a nationally recognized charity.
Accordingly, the LLC/Non-trading unitholders capital accounts were distributed to US Bank on the Termination Date. Amounts estimated to be due to Participating Owners aggregating $17,890 are reflected as a distribution payable and a receivable from US Bank in the Consolidated Statements of Financial Condition.
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 U.S. and international futures, spot and forward contracts on currencies, interest rates, energy and agricultural products, metals and stock indices, hybrid instruments, swaps, any rights pertaining thereto and any options thereon or on physical commodities, as well as securities and any rights pertaining thereto and any options thereon, pursuant to the trading instructions of the Trading Advisors. 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, 2016, 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.
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 https://www.rjobrien.com/clients/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.
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 Trading 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 Trading 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 Trading Advisors makes trading decisions independent of the other Trading Advisors for the Trust. Thus, it is possible that the Trading Companies could hold opposite positions in the same or similar futures, forwards, and options, thereby offsetting any potential for profit from these positions. Each such position would cost the Trust transactional expenses (such as brokerage, commissions and NFA fees) but could not generate any recognized gain or loss.
Moreover, the Investment Manager is responsible for selecting, monitoring, and replacing each commodity trading advisor available for its Evolving Manager Program. The Investment Manager is also responsible for the Trust’s allocations to each Trading Advisor through the Trust’s investment in RJ OASIS. The Investment Manager may change the allocation to each Trading Advisor at any time without the consent of or advance notice to Unitholders.
The Investment Manager is responsible for selecting and replacing, if necessary, each commodity trading advisor that is available to the Trust through RPM’s Evolving Manager Program. The Investment Manager may, add, remove or replace any Trading Advisor without the consent of or advance notice to unitholders.
Any such replacement or reallocation could adversely affect the performance of the Trust or of any one Trading Company.
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 Trust, the Trading Companies or the Trading Advisors 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 Trading Companies and their respective Trading 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 Trading Advisors will trade the Trust’s assets in a profitable manner.
A principal risk in commodity interest trading is the traditional volatility (or rapid fluctuation) in the market prices of commodities. The volatility of commodity trading may cause the Trust or a Trading Company to lose all or a substantial amount of its assets in a short period of time. Prices of commodity interests are affected by a wide variety of complex and hard to predict factors, such as political and economic events, weather and climate conditions and the prevailing psychological characteristics of the marketplace.
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 11.44% (for Class B units) to 13.65% (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 payable to the Trading Advisors, and Class C and D units are subject to an additional 10% quarterly incentive fee payable to the Investment Manager. Because these incentive fees are calculated quarterly, they could represent a substantial expense to the Trust even in a breakeven or unprofitable year.
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 Trust’s Trading 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 Trading Advisors and the Investment Manager incentive fees based on the new trading profits they each generate for the Trust with respect to the assets traded by such Trading 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 Trading 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 a Trading Advisor during a year in which the assets allocated to the Trading Company to which it advises suffer a loss for the year. Because each Trading Advisor receives an incentive fee based on the new net trading profits earned by the Trading Company that it advises, the Trading Advisor 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 Trading 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 Trading 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 and none is expected to develop. 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.
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 Trading 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 a Trading 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, have 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. Specific market movements of the commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer, or seller, of a put option collects a premium and risks losing the difference between the strike price and the market price of the underlying commodity or futures contract (less the premium received) if the option buyer exercises its put option. The writer, or seller, of a call option has unlimited risk. A call option writer collects a premium and risks losing the difference between the price it would have to pay to obtain the underlying commodity or futures contract and the strike price (less the premium received) if the option buyer exercises its call option.
Options Are Volatile and Inherently Leveraged, and Sharp Movements in Prices Could Cause the Trust to Incur Large losses
Certain Trading 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.
Cash Flow Needs May Cause Positions to be Closed which May Cause Substantial Losses
Certain Trading 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
A Trading Company may take positions with a face value of 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 Trading 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 amount of margin required to be deposited with respect to an individual futures contract is determined by the exchange upon which the contract is traded and the commodity broker at which the position is held and may be changed at any time.
Notional Allocations
At any given time, the Managing Owner may authorize a Trading Company to allocate notional equity to a Trading Advisor for trading, which notional equity may exceed the net asset value of such Trading Company (which may cause the notional equity with respect to the Trust’s trading overall to exceed the Trust’s net asset value), depending on the amount of notional equity that is being utilized with respect to each Trading Company. RPM considers the volatility of the strategy, the margin usage and the historical profit and loss pattern with respect to a Trading Company and its Trading Advisor when determining specific allocations of notional equity to a Trading Advisor for trading. Generally, RPM will not allocate notional equity to a Trading Advisor in excess of three times available cash of its respective Trading Company. Similar to trading on leverage, notional equity allocations may increase the amount of losses with respect to a trade or trades that, but for such allocations, would not have been as large. None of the fees charged to the Trust are charged on notional equity. Fees charged to the Trading Company may be charged on notional equity; however, such fees will not exceed 2% of the portion of Net Assets allocated to such Trading Company.
The Trading Advisors’ Trading is Subject to Execution Risks
Market conditions may make it impossible for the Trading 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 will not 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 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.
Performance-Based Compensation to the Investment Manager and Trading Advisors
The Investment Manager and the Trading Advisors are entitled to compensation based upon net trading gain in the value of the assets they manage on behalf of the Trust. Performance-based arrangements may give the Investment Manager incentives to cause the Trading Advisors to engage in transactions that are more risky or speculative than they might otherwise make because speculative investments might result in higher incentive fees received by the Investment Manager. The Trading Advisors also receive performance-based compensation and may have similar incentives. This behavior may result in substantial losses to the Trust. The Trading 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 Trading 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 Trading Advisors during periods when the Trust is not profitable on an overall basis. Also, the fees payable to Trading Advisors in other investments utilizing RPM’s Evolving Manager Program may differ materially from the fees payable to the Trading Advisors by the Trading Companies of the Trust.
Disadvantages of Replacing or Switching Trading Advisors
A Trading Advisor generally is required to recoup previous trading losses before it can earn performance-based competition. However, the Investment Manager may elect to replace a Trading 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 Trading Advisor. In addition, the new or replacement Trading 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 a Trading Advisor, therefore, could be significant.
The Opportunity Costs of Rebalancing the Trading Programs
The monthly (or more frequent) rebalancing of the Trust’s assets among its Trading 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 Trust’s Trading 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, which may be employed by some of the Trust’s Trading Advisors. In 1980, the amount of assets in the managed futures industry was estimated at approximately $300 million; by 2016 this estimate was approximately $340 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
Some of the Trust’s Trading Advisors may 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.
The Trust is Subject to Speculative Position Limits
U.S. futures exchanges have established speculative position limits (referred to as “position limits”) on the maximum net long or net short position which any person or group of persons may hold or control in particular futures and options on futures. Most exchanges also limit the amount of fluctuation in commodity futures contract prices on a single trading day. Therefore, a Trading Advisor may have to modify its trading instructions, or reduce the size of its position in one or more futures or options contracts in order to avoid exceeding such position limits, which could adversely affect the profitability of the Trust. The futures exchanges may amend or adjust these position limits or the interpretation of how such limits are applied, which may adversely affect the profitability of the Trust.
In addition, in October 2011, the CFTC adopted rules governing position limits on futures (and options on futures) on a number of agricultural, energy and metals commodities, as well as on swaps that perform a significant price discovery function with respect to those futures and options. In September 2012, the CFTC’s rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC for further consideration. It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling. If so, these rules could have an adverse effect on the Trading Advisors’ trading for 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 Trading 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 Trust’s Trading 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 Trading 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 Trading 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 Trading 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, and other requirements and restrictions for the purpose of preventing price manipulation and other disruptions to market integrity, avoiding systemic risk, preventing fraud and promoting innovation, competition and financial integrity of transactions. 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. The CFTC has no power to compel the enforcement of the rules of a foreign exchange or applicable foreign laws. Therefore, the Trust will not receive a benefit of U.S. government regulation for these trading activities.
Unregulated Markets, Particularly the Trading of Spot and Forward Contracts in Currency, Lack Regulatory Protections of Exchanges
A portion of the Trust’s trading—primarily it’s trading of spot and forward contracts in currencies—may take 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 Trust’s Trading 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 Brokers or Others
The Trust is subject to the risk of insolvency of an exchange, clearinghouse, commodity broker, and counterparties with whom the Trading 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 marked-to-market 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 (“FCM”) 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. If no property is available for distribution, the Trust would not recover any of its assets.
On July 21, 2010, the President signed into law major financial services reform legislation in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). With respect to each Trading Advisor’s over-the-counter (“OTC”) foreign exchange contracts and uncleared swaps, prior to the implementation of the Dodd-Frank Act’s provisions, there was no requirement to segregate funds held with respect to such contracts. A party engaging in uncleared swaps with a swap dealer or major swap participant may now ask that the portion of collateral at risk upon the swap dealer or major swap participant’s insolvency be held with an independent third party custodian. It is likely the party requesting segregation will pay the costs of such custodial arrangement. There are no limitations on the amount of allocated assets a portfolio manager can trade on foreign exchanges or in forward contracts.
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 was to be 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 registration with the CFTC or membership in the NFA of the Managing Owner 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.
Off-Exchange Foreign Currency Futures and Options
The Trust’s Trading Advisors may trade forward contracts in foreign currencies and may engage in spot commodity transactions (transactions in physical commodities). These contracts, unlike futures contracts and options on futures, historically were not regulated by the CFTC when traded between certain “eligible contract participants,” as defined in the CE Act. The Dodd-Frank Act includes foreign currency forwards and foreign currency swaps (as such terms are defined in the Dodd-Frank Act) in the definition of “swap.” The CFTC has been granted authority to regulate all non-security based swaps, but grants the U.S. Treasury Department the discretion to exempt foreign currency forwards and foreign currency swaps from all aspects of the Dodd-Frank Act other than reporting, recordkeeping and business conduct rules for swap dealers and major swap participants. In November 2012, the U.S. Treasury determined that those transactions can be carved out of the swap category, and they are subject only to the noted categories of the Dodd-Frank Act requirements. Therefore, the Trust will not receive the full benefit of CFTC regulation for certain of its foreign currency trading activities.
The percentage of each Trading Advisor’s positions that are expected to constitute foreign currency forwards and foreign currency swaps can vary substantially from month to month.
Trading Swaps Creates Distinctive Risks
The Trading Advisors may trade in certain swaps. Unlike futures and options on futures contracts, most swap contracts currently are not traded on or cleared by an exchange or clearinghouse. The CFTC currently requires only a limited class of swap contracts (certain interest rate and credit default swaps) to be cleared and executed on an exchange or other organized trading platform. In accordance with the Dodd-Frank Act, the CFTC will in the future determine which other classes of swap contracts will be required to be cleared and executed on an exchange or other organized trading platform. Until such time as these transactions are cleared, the Trust will be subject to a greater risk of counterparty default on its swaps. Because swaps do not generally involve the delivery of underlying assets or principal, the amount payable upon default and early termination is usually calculated by reference to the current market value of the contract. Some swap counterparties may require the Trust to deposit collateral to support its obligation under the swap agreement but may not themselves provide collateral for the benefit of the Trust. If the counterparty to such a swap defaults, the Trust would be a general unsecured creditor for any termination amounts owed by the counterparty to the Trust as well as for any collateral deposits in excess of the amounts owed by the Trust to the counterparty, which would result in losses to the Trust.
There are no limitations on daily price movements in swaps. Speculative position limits are not currently applicable to swaps, but in the future may be applicable for swaps on certain commodities. In addition, participants in the swap markets are not required to make continuous markets in the swaps they trade, and determining a market value for calculation of termination amounts can lead to uncertain results.
Trading of swaps will be subject to substantial change under the Dodd-Frank Act and related regulatory action. Under the Dodd-Frank Act, many commodity swaps will be required to be cleared through central clearing parties and executed on exchanges or other organized trading platforms. Security-based swaps will be subject to similar requirements. Additional regulatory requirements will apply to all swaps, whether subject to mandatory clearing, or not. These include margin, collateral and capital requirements, reporting obligations, speculative position limits for certain swaps, and other regulatory requirements. Swaps which are not offered for clearing by a clearing house will continue to be traded bi-laterally. Such bi-lateral transactions will remain subject to many of the risks discussed in the preceding paragraph.
Central Clearing Parties Could Fail
Central clearing parties are highly capitalized. Cleared transactions are supported by initial and variation margin. As a result, failure of a central clearing party is highly unlikely. If a central clearing party were to fail, however, the impact on the financial system in general and on the Trust’s positions in particular is uncertain.
Stop-loss Orders May not Prevent Large Losses
Certain of the Trust’s Trading 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.
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 regulated futures and certain futures options traded on U.S. exchanges, certain foreign currency contracts, and certain broad based 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.
Tax Laws Are Subject To Change at Any Time
Tax laws and court and IRS interpretations thereof are subject to change at any time, possibly with retroactive effect. Prospective investors are urged to discuss scheduled and potential tax law changes with their tax advisors.
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.
Item 4. Mine Safety Disclosure
The Trust is not an operator, and does not have a subsidiary that is an operator, of a coal or other mine. Therefore, disclosure under Item 4 is not applicable.
Part II
Item 5. Market for the Registrant’s Units and Related Security Holder Matters and Issuer Purchases of Equity Securities
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(a) |
(i) There is no established public market for the units and none is expected to develop.
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(ii) As of December 31, 2016, there were 83,198 units held in the Trust by approximately 720 Beneficial Owners for an investment of $4,113,406 and there were 535 units held in the Trust by the Managing Owner for an investment of $26,403. A total of 28,569 units had been redeemed by Beneficial Owners and zero units were redeemed by the Managing Owner during the period from January 1, 2016 to December 31, 2016. The Trust’s Tenth Amended and Restated Declaration and Agreement of Trust of the Registrant 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 to determine 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).
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(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, 2016 through December 31, 2016.
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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 during fiscal year 2016 were $0.
Item 6. Selected Financial Data
The following Selected Financial Data is presented for the years ended December 31, 2012, 2013, 2014, 2015 and 2016 and is derived from the financial statements for such fiscal years.
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2012
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2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Revenues (000)
|
|
$
|
(2,267
|
)
|
|
$
|
247
|
|
|
$
|
525
|
|
|
$
|
(162
|
)
|
|
$
|
(23
|
)
|
|
Net Income (Loss) From Continuing Operations (000)
|
|
|
(4,738
|
)
|
|
|
(1,531
|
)
|
|
|
(1,001
|
)
|
|
|
(1,180
|
)
|
|
|
(830
|
)
|
|
Net Income (Loss) Non-Trading (000)
|
|
|
254
|
|
|
|
(237
|
)
|
|
|
26
|
|
|
|
(754
|
)
|
|
|
-
|
|
|
Net Income (Loss) Per Unit - Class A
|
|
|
(14
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
Net Income (Loss) Per Unit - Class B
|
|
|
(14
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
Net Income (Loss) Per Unit - Class C
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Assets (000)
|
|
|
25,015
|
|
|
|
16,132
|
|
|
|
11,929
|
|
|
|
6,890
|
|
|
|
4,937
|
|
|
Net Asset Value per Unit - Class A
|
|
|
77
|
|
|
|
71
|
|
|
|
67
|
|
|
|
58
|
|
|
|
49
|
|
|
Net Asset Value per Unit - Class B
|
|
|
83
|
|
|
|
79
|
|
|
|
76
|
|
|
|
67
|
|
|
|
58
|
|
*No Net Income (Loss) has been presented for Class C units since all Class C units were purchased and fully redeemed in January 2015. Class C Net Assets were zero at the beginning and the end of the year.
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 2016, no Class A units were converted to Class B units and, no Class C or Class D units were purchased by the Beneficial Owners. The Managing Owner did not purchase any units during this time. For the fiscal year ended December 31, 2016, the Beneficial Owners redeemed a total of 28,569 units for $1,561,883. For the fiscal year ended December 31, 2016, the Beneficial Owners redeemed a total of 28,453 Class A units for $1,533,5841 and 116 Class B units for $8,042. No Class C and no Class D units were redeemed. The Managing Owner did not redeem any units during the fiscal year ended December 31, 2016.
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 their respective Trading Company’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 Trading Company’s futures and forward contracts and re-allocating Trading Company’s assets to different market sectors. As of December 31, 2016, there were no market sectors where the Trust maintained an investment having an exposure. 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 Trading 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, 2016, 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 Trading 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, 2016, RJO had paid or accrued to pay interest of $7,422 to the Trust. For the calendar year ended December 31, 2015, the Clearing Broker paid or accrued to pay interest of $850 to the Trust.
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 as custodian. As of December 31, 2016, Wells held approximately $4,850,000 of the Trust’s assets. For the calendar year ended December 31, 2016 the assets held in this account earned $7,339 of interest income. For the calendar year ended December 31, 2015 the assets held in this account earned $1,682 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 Trading 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.
The summaries set forth below outline certain performance factors which may have affected the performance of the Trading Advisors during fiscal years 2016, 2015, and 2014. During this time, the Trust’s assets were allocated to different combinations of CTAs over time. As of December 31, 2016, no assets were allocated to Trading Advisors.
The performance summaries are an outline description of how the Trust performed in the past, and 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.
2016
The RJO Global Trust Class A units posted a loss of (15.04%) and Class B units posted a loss of (13.31%) for 2016. The NAV per unit for Class A at year-end was $49.35 and for Class B at year end was $57.94 (please see Note (1) and Note (8) in the notes to financial statements for more information with respect to the calculation of net asset value) compared to $58.09 per Class A unit at the beginning of the year and $66.84 per unit for Class B. During 2016, no Class A or Class B units were purchased and no Class A units were converted to Class B units.
In January, market action was almost solely driven by deteriorating investor sentiment fueled by the oil glut and concerns about China’s slowing economy. After the first historic U.S. Federal Reserve (“Fed”) rate hike in seven years, the U.S. dollar remained historically strong in anticipation of further rate increases. The U.S. dollar strength has put pressure on dollar-linked currencies such as the Chinese renminbi and the Hong Kong dollar. The dollar-pegged currencies of the Gulf States have also been under pressure as the oil glut has been eroding their petrodollar income. Free-floating currencies of other commodity producing emerging countries like Brazil, South Africa, and Russia have been in free fall. Equities and developed fixed income yields have fallen in tandem with crude oil. Bearish equity and commodity markets only found some solid ground at the end of the month. The reversal was induced by central banks’ comments starting with the speech of the European Central Bank’s (“ECB”) Mario Draghi expressing that ECB has further tools to push inflation up close to target. ECB’s effort to calm the markets was further supported by its U.S. counterpart’s comment indicating a rate hike at the March FOMC meeting as less likely. At the end of the month, oil bulls could take a breather as oil prices rebounded some 25% from a 14-year low on speculation that Russia may cooperate in production cuts with Organization of Petroleum Exporting Countries (“OPEC”). However, this speculation was later downplayed by comments from the Saudis. In February, equities continued to trade in concert with oil prices. During the first half of the month, market sentiment turned bearish once again amid lingering concerns about global growth, corporate earnings, and stubbornly low inflation. Equities retreated across the board in tandem with sliding oil prices; the U.S. dollar dropped against all of its major counterparts; gold jumped; the VIX spiked and bonds rallied. In the second half of the month, stock markets rebounded forcefully as oil prices rallied on news that Saudi Arabia, Russia, and two other producers would agree to a production “freeze”. Elsewhere in commodities, the rally in gold was halted; in currencies, the U.S. dollar trimmed its losses as Sterling attracted much of the attention with the Brexit exit worries keeping the pound under pressure; in fixed income, however, yields continued lower, especially in Europe and Japan, as inflation figures failed to lift off, fueling expectations for more quantitative easing (“QE”) in the near future. In March, overall bullishness gained additional strength helped by a combination of much-stronger-than-expected U.S. data, in particular a sturdy U.S. Jobs Report, paired with surprisingly dovish comments by the Fed, further monetary stimuli by other central banks, namely the ECB, and ongoing talks between Saudi Arabia and Russia about limiting oil production. Equities and commodities rallied throughout the month. For example, commodities, in mid-March, crude oil breached U.S. $40 per barrel as hopes for an output freeze by major producers drove prices higher. In currencies, the U.S. dollar depreciated against most other currencies, major and emerging, after particularly cautious comments made by Fed officials. In fixed income, initially, yields jumped as optimism about the global economy returned before dropping back again mid-month after the ECB had unleashed a bigger-than-expected stimulus package expanding its QE and cutting interest rates further.
In April 2016, market sentiment got caught up between recovering oil prices, on one hand, and disappointing earnings and central banks’ inertia on the other. The main theme was the resilient rally in energies. Throughout the month, oil prices continued to rise, although with significant day-to-day volatility; Brent crude breaching U.S. $45 per barrel. Elsewhere, market direction was less clear. In equities, at the beginning of the month, stocks remained under pressure amid concerns about global growth and dovish minutes for the Fed. Then, equity markets rebounded forcefully boosted by the jump in oil prices, subsequently climbing to fresh 2016 highs. Towards month end, however, stocks slipped again as a lackluster earnings season and disappointing economic growth dampened investor sentiment. In fixed income, government bond yields pretty much followed equity markets and the overall changes in risk appetite. In currencies, the U.S. dollar remained under pressure and the Japanese yen surged as the Fed expectedly left rates unchanged, while the Bank of Japan unexpectedly made no change to its monetary policy, dashing traders’ hopes of further stimulus measures. In May 2016, major financial markets, such as equities and bonds, were struggling to find direction. The month started off with a risk-off move. Equity indices retreated and bonds moved higher as weak economic data, such as disappointing earnings from European banks, soft Chinese data, Brexit talks, a resurgence of Greek woes, and lower-than-expected U.S. non-farm payrolls, reinforced risk aversion. In the second half of the month, the Fed’s interest rate policy once again took center stage. Markets had all but dismissed the prospect of a rate hike in June or July, but the hawkish tone in the FOMC minutes have now significantly increased the chances of a summer rate rise. Accordingly, U.S. Treasury yields jumped and the U.S. dollar rallied while stocks turned volatile. Towards month-end, stronger-than-expected data like the upward revision to the 2016 first quarter U.S. GDP amplified these moves. In commodities, gold and other precious metals sold off. Otherwise, oil closed in on the $50 per barrel level for the first time this year as bulls took encouragement from recent unexpected supply disruptions such as production outages in Nigeria and political tensions in Venezuela. The strength recently seen in soybean prices continued amid worries over the rain-ravaged crop in Argentina, the third biggest exporter of the oilseed, and the top shipper of the processing products soymeal and soy oil. Elsewhere, cocoa rebounded after the International Cocoa Organization cut its forecast for world output. In June 2016, the Brexit vote sent shockwaves through the financial system and the month was quite volatile. Initially an abysmal U.S. jobs report followed by dovish comments from the Fed, which left interest rates unchanged, set the tone for an overall bearish market environment. That is, the U.S. dollar and the British pound dropped, especially against the Japanese yen, and global equity and commodity prices came under pressure. Gold prices jumped and a wave of risk aversion drove core government bond yields in Europe and Japan to fresh record lows, with the 10-year Bund yield entering negative territory for the first time. Then, for a short while, risk appetite returned with a vengeance as opinion polls in the UK showed that momentum for the Brexit “Leave Campaign” had stalled. Nearly all of the abovementioned trends reversed, in whole or in part. On June 24th 2016, the UK voted by a small 4% majority to leave the European Union. The result sent shockwaves through the financial system. Equities and sterling plunged, bonds and precious metals rallied, and the VIX spiked. Towards month-end, markets had stabilized somewhat with equity markets recouping some of the previous losses.
After June’s Brexit-shock, July 2016 was a lot quieter with the VIX reaching new lows for the year. During the first half of the month, Brexit worries continued to put pressure on the British pound and UK stocks. In fixed income, government bond yields in several countries touched new record lows. In equities, however, global stocks rebounded forcefully, eventually reaching new record high levels, bolstered by expectations of continued central bank accommodation, strong U.S. jobs data, and a more confident view of the global economy in general. By mid-month, the risk-on mood had spread to basically all financial markets pushing government bond yields up from record lows. In currencies, the U.S. dollar appreciated significantly in expectation of another rate hike by the Fed later this year; especially against the Japanese yen due to prospects of further policy easing in Japan. Towards month-end, however, risk appetite was undermined again by sliding oil prices due to bearish U.S. inventory data and disappointing second quarter U.S. GDP growth. Bond yields and the U.S. dollar fell back again, whereas equities remained largely unaffected. In August 2016, markets had to deal with confusing and partly conflicting signals. In the beginning of the month, the rally in equity markets continued as the Bank of England substantially beat expectations regarding further monetary stimulus whereas the Bank of Japan disappointed. In the second half of the month, equities struggled to keep their upward momentum. U.S. statistics came in mixed, with stagnating retail sales and tame inflation on the one hand and a continued strong labor market on the other. Additionally, there were confusing signals from the Fed where the minutes revealed that the Federal Open Market Committee (“FOMC”) is split over the timing of the next rate hike. Apparently, market participants perceived the Fed’s tone as more hawkish as bonds sold off and the U.S. dollar strengthened noticeably towards month-end. In commodity markets the situation was more straightforward. In energies, prices reversed forcefully and oil rallied throughout the month on hopes that major producers would somehow agree on an output freeze. In soft commodities, prices in soybeans, corn, and other grains rallied as adverse weather in Argentina and Brazil continues to affect the countries’ harvests. In September 2016, central bank (non-)activity continued to unnerve markets. First, bonds retreated and stocks softened as the ECB once again disappointed market participants by making no change to its monetary policy, i.e. not expanding its QE efforts. Disappointing U.S. data added to uncertainty. However, in commodities, crude soared on news that U.S. oil inventories had fallen more than expected. In the second week, the VIX jumped to 19% and equity markets sold off as optimism about the Fed policy outlook evaporated and energy stocks were hit by steep falls for oil prices. Crude was down sharply after warnings from the International Energy Agency that the global oil glut would last well into 2017. Then, both the Bank of Japan and the Fed delivered their respective policy announcements with the Fed leaving its policy unchanged while the Bank of Japan made some unexpected changes to its quantitative and qualitative easing (QQE) programs. Equities and bonds rallied as the U.S. dollar tumbled against most of its major counterparts. Finally, in the last week of September, events happened in quick succession. First, crude oil made strong gains after OPEC surprisingly unveiled a tentative agreement to cut production for first time in eight years. However, the general OPEC-driven jump in risk appetite faded quickly as concerns over the health of Deutsche Bank drove equities lower again triggering rallies for bonds, the Japanese yen, and gold.
In October, “core” government bond yields on both sides of the Atlantic rebounded forcefully on the back of fears over a possible early reduction of the ECB’s QE program. The bond sell-off gathered momentum throughout the month, with yields reaching multi-month highs, as robust economic data, such as a much better-than-expected U.S. 3rd quarter GDP, was seen as significantly increasing the chances of a Fed rate hike before year-end. The improved economic picture failed to impress equity markets where disappointing corporate earnings, volatile sessions for oil prices, fears that central bank policy could indeed be at an inflection point, and political uncertainty surrounding Brexit and the upcoming U.S. election created a choppy trading environment. In FX, however, the perceived change in central banks’ attitudes created a profitable market milieu as the U.S. dollar rallied against most of its counterparts. Furthermore, fears of a “hard” Brexit weighed on the pound as European policy makers exchanged rhetorical blows across the English Channel. In commodities, oil prices could not sustain their upward momentum as doubts mounted that OPEC could successfully implement any output cuts. In the beginning of November, markets were gripped by the upcoming presidential U.S. elections and fear of a possible Donald Trump victory. Ignoring better-than-expected statistics such as a strong first estimate of third quarter U.S. GDP growth and solid U.S. non-farm payrolls, the VIX spiked, stocks sold off, the U.S. dollar weakened, and the sell-off in bonds took a breather. However, when that fear became a reality, during an extraordinary trading day, the early “flight to safety” vanished into thin air as market participants digested the implications of Donald Trump’s stunning victory. Since then, the VIX has dropped back to ultra-low levels, U.S. stocks have rallied to new all-time highs, and the U.S. dollar has strengthened significantly, in particular against the Japanese yen, the euro, and the Mexican peso. The sell-off in bonds has gathered momentum again amid better-than-expected data and higher inflation expectations. In commodities, after choppy trading throughout the month, crude surged back to over $50 per barrel on the last trading day as OPEC finally agreed to cut production. Elsewhere, precious metals sold off after the election whereas industrial metals surged amid the promise of a U.S. infrastructure boom under President Trump. Finally, the price of cocoa butter continued to rise amid concerns that the El Niño weather phenomenon will hit cocoa production in West Africa. In December, the so-called “Trump rally” continued. Equities, especially in the U.S., rallied on fiscal stimulus hopes and expectations that U.S. president-elect Trump’s mooted policies would speed up the U.S. economy amid a lighter regulatory touch. Furthermore, relief that the Italian constitutional referendum had passed without any major market drama and the bounce in oil prices in the wake of OPEC’s recent output cut agreement as well as the traditional seasonal tailwinds lifted U.S. stock markets to new record highs. Regarding central bank policies, the ECB’s latest policy surprise (extending but not expanding QE) and the Bank of Japan’s decision to leave its policy stance unchanged stood in stark contrast to a much more hawkish Fed who hiked U.S. borrowing costs by another 25bps (expected) but also raised its interest rate projections for first time in two years (unexpected) from two to three rate rises in 2017. Accordingly, the U.S. dollar climbed to multi-year highs against its major counterparts whereas treasury prices and precious metals came under pressure.
2015
The RJO Global Trust Class A units posted a loss of (13.93%) and Class B units posted a loss of (12.18%) for 2015. The NAV per unit for Class A at year-end was $58.09 and for Class B at year end was $66.84 (please see Note (1) and Note (8) in the notes to financial statements for more information with respect to the calculation of net asset value) compared to $67.49 per Class A unit at the beginning of the year and $76.11 per unit for Class B. During 2015 no Class A or Class B units were purchased and no Class A units were converted to Class B units. Beneficial owners purchased $500,000 of Class C units during 2015 and realized a gain of $20,020 before redeeming.
Market action in January 2015 was dominated by central bank activity. On January 15th, the Swiss National Bank’s surprising decision to remove its currency peg against the Euro sent shock waves through global markets, with at least two big retail foreign exchange brokerages going bust overnight. A week later, in a dramatic change of policy, the ECB finally announced its own long-awaited quantitative easing program, which turned out to be much bigger-than-expected, further hurting the Euro but providing support for equity markets. Yet another week later, this was followed by rather dovish FOMC statements indicating patience on raising rates amid weaker economic conditions in the U.S., which partly reversed the previous moves in stocks and foreign exchange. The Greek leftist party, Syriza, winning the election in Greece further added to overall uncertainty towards month-end. Thus, whereas the currency and, in particular, equity markets provided managers with choppy trading conditions, global bond markets continued to rally amid the gloomy mood providing managers with profitable trading conditions. In commodity markets, with no production cuts insight and weaker global demand in general, oil continued on its downward path dropping below U.S. $50 per barrel. February started out with large market sell-offs and longer term trends reversing forcefully across many different markets. In commodities, oil prices soared on producers’ spending cuts announcements reversing the bearish trend which had been running since July 2014. Easing tensions over Greece and Ukraine, as well as further central bank policy accommodation, boosted stocks but lead to sharp falls in government bonds prices. In currencies, the bullish trend in the U.S. dollar reversed as well, but, given the relative hawkishness of the Fed, the single currency soon stabilized trading in a tight range against other majors for the rest of the month. Whereas the sell-offs in energy and fixed income markets weighed on performance, the rebound in equities provided well-needed balancing profits. Throughout the month, equity markets rose notably on the back of easing geopolitical tensions and because overall economic momentum remained largely intact. While energy markets stayed choppy, European bond yields hit record lows towards month-end ahead of the imminent start of the ECB’s QE program, thus partially reducing losses seen in the first half of the month. In March, hawkish expectations of the FOMC meeting were in the spotlight in the first half of the month. Eventually, the Fed dropped the word ‘patience’ from the FOMC statement but indicated that they would not be impatient raising interest rates.
As the projected fund rate for the year-end, and for the next year, came in much lower than what had been projected by the Fed previously, it sent the dollar lower after reaching 12-year high against its major pairs. In commodities, oil prices had first plunged to multi-year low then reversed back sharply on U.S. dollar weakness and tensions in Yemen. At month-end when the U.S. dollar was on the rise again, energy commodities were sliding towards previous lows. Equities were mixed in March, in the U.S., macro data trailed expectations pushing stocks lower, whereas ECB’s bond purchases along with improving economic environment boosted equities in Europe to new all-time highs. Dovish stance from all major central banks around the world has kept long-term interest rates low and driven yields to new all-time lows in major euro economies.
In April, the rally in the U.S. dollar, which had started in 2nd half of 2015, halted and reversed course as expectations of tighter policy by the Fed had faded amid a series of weaker-than-expected statistics casting doubt over the apparent strength of the U.S. economy. Even though, the Fed said current U.S. economic weakness reflected only “transitory factors” the first rate hike now seems to be postponed until after the summer. The reversal in the dollar was mirrored by the action in fixed income markets, where bond yields jumped towards month-end on signs of progress in Greek debt negotiations and as German consumer prices held above zero for a second successive month igniting premature talk of tapering the ECB’s monthly bond purchases. Most equity markets were up on the month but provided a volatile trading environment as market participants digested increasing and fading Greek debt default worries, new stock market regulations in China, recent U.S. activity data weakness and the Fed’s changing attitude coupled with anxiety about upcoming earnings reports. In commodity markets, crude oil prices posted the strongest monthly gain since 2009 as U.S. production showed signs of slowing and as traders worried over potential supply disruptions in the Middle East. May was characterized by choppy market conditions as trendiness grinded to a halt. The sell-off, which had started in April, continued well into the first half of May before partially reversing course during the second half. In currencies, the U.S. dollar strengthened again – especially against the Euro – as the ECB signaled a higher pace of its upcoming bond-purchasing program and despite the last FOMC minutes making a June rate hike rather unlikely. The apparent postponement of the Fed’s first rate hike until after the summer provided a stimulus for global equities although the Fed’s announced “data dependency” of its monetary policy going forward, mixed messages on the state of the ongoing Greek debt negotiations, and Chinese “bubble” fears significantly added to uncertainty. In fixed income, after last month’s major sell-off, bond prices remained unsteady and did not return to their long-term bullish trend as forecast-beating inflation figures were balanced by weaker-than-expected economic data. In commodities, the resurgent dollar helped drive prices down, especially in precious metals, whereas crude remained unchanged on a month-to-month basis despite a volatile trading session. In June, market volatility stayed elevated. In early June, the sell-off in bonds continued as a robust U.S. jobs report reassured market participants that the Fed would start raising rates later this year. In currencies, however, renewed U.S. dollar strength was short-lived. The U.S. dollar retreated against most of its major counterparts following a more dovish FOMC statement at mid-month. In equities, the Fed and Greece vied for investors’ attention, which created a see-saw market environment. However, at the end of June, Athens’ call for a public referendum on the terms of its creditors’ final bailout offer surprised global stock markets as the country is now edging ever closer to exiting the Eurozone in an unorderly fashion. In commodities, corn and soybean markets surged towards month-end after a pair of government reports suggested a tighter supply situation going forward.
In July 2015, directionless volatility remained high in global equity and fixed income markets where indices and yields fluctuated in response to developments in China and Greece. In the first half of the month, indices dropped and yields jumped in response to tumbling Chinese equity markets and another acceleration in the Greek bailout drama as voters there favored not to accept creditors’ bailout terms. By mid-month, however, these trends reversed due to a rebound in Chinese equities and the Greek parliament agreeing to its creditors’ bailout plan after all. Elsewhere, moves were more sustainable. In currencies, the U.S. dollar renewed its rally seen in the first quarter of the year following upbeat comments by the Fed as economic data reinforced expectations of at least one rate hike later this year. In commodities, market direction was also quite clear, i.e. the stronger dollar, higher U.S. interest rate expectations, concerns over weaker Chinese growth, and rising supply sent prices in oil, grains, copper, and especially gold downward. In August, the People’s Bank of China (“PBoC”) devaluating its currency, which sent shockwaves through the financial system. The devaluation was the renminbi’s biggest drop in decades raising fears about the condition of the world’s second largest economy and, thus, about global growth itself. The move dominated market action as the VIX (markets’ “fear gauge”) reached levels not seen since the European debt crisis in 2011. Equities tumbled, along with emerging market currencies and commodities, as nervous market participants moved into government bonds and gold. However, in the last few days of the month, markets rebounded forcefully creating the second coordinated market sell-off (rather “buy-in”) for the year on August 27. Equities bounced back, bond yields jumped, and the VIX dropped to long-term average levels as expectations for the Fed’s first rate hike were pushed back by officials’ dovish comments. Global growth fears also seemed exaggerated after a hefty upward revision of U.S. 2015 Q2 GDP growth to an annual rate of 3.7% (from 2.3%). The reversal in crude oil was particularly brutal with oil prices rocketing more than 25% in three successive trading sessions amid vague hints of a change in OPEC supply policy. In September, market sentiment stayed largely gloomy amid global growth concerns. Although volatility indices retreated a bit towards more long-term average levels, the market environment remained volatile and difficult to trade. For example, in the beginning of the month, following weak manufacturing figures out of China and the U.S., the strong rally in oil prices seen at the end of the previous month reversed sharply. Following the reversal of the reversal, oil prices then continued lower throughout the month. Equities started the month on a positive note, with bond yields rising as well, following strong U.S. employment figures. However, by mid-month, stock markets and bond yields sounded the retreat as the cautious tone of the FOMC latest policy statement seriously undermined confidence among market participants.
Towards month-end, the fallout from the Volkswagen emission scandal provided another knock to sentiment, as car making stocks on both sides of the Atlantic suffered further steep falls. In currencies, the U.S. dollar appreciated towards month-end, reversing its previous course once again, following an upward revision to U.S. 2015 Q2 gross domestic product growth and Fed boss Janet Yellen indicating that an interest rate rise later this year was still in the cards.
During the first half of October, market sentiment remained bearish as participants continued to worry about global growth pushing back expectations for when the Fed might start raising rates. In the second half, bullishness returned to most financial markets and the VIX volatility index dropped significantly amid relative strong earnings reports, not-as-bad-as-expected data releases, and supportive central bank action around the globe. For example, the ECB hinted that more QE was coming later this year while the PBoC cut interest rates for a sixth time in 12 months to support the Chinese economy. At month-end, although leaving rates unchanged, the Fed dropped any reference to risks to the U.S. economy from global developments and explicitly mentioned the possibility of rates being raised before the year was over. Markets reacted accordingly. In fixed income, bond yields had been moving sideways throughout the month before increasing notably on the Fed’s more hawkish tone at month-end. In currencies, the U.S. dollar slipped against other major currencies during the first half of the month before regaining all lost ground during the second, reflecting the divergence in attitudes between the Fed and other central banks. In commodities, after an initial jump, oil prices dropped due to increasing inventories before reversing again towards month-end. In equities, global stock markets put in their best monthly performance in years and, during the second half of the month, showed remarkable resilience in the face of the increased possibility of the Fed moving before year-end. In November, in foreign exchange, the U.S. dollar continued to appreciate propelled by solid U.S. data, in particular much stronger-than-expected non-farm payrolls, rising inflation, and the Fed’s more hawkish tone, sealing up a rate hike at the next FOMC meeting on December 15th. In contrast, the ECB is expected to ease further which generated directional as well as relative trading opportunities in fixed income markets. However, at first, bonds sold off in response to strong U.S. payrolls. During the second half of the month, European bonds rebounded forcefully in expectation of more QE coming from the ECB whereas treasuries did not. In commodities, disappointing Chinese data, adding to fears that global demand for basic resources was slowing, and the firm U.S. dollar weighed on industrial commodities and gold. In equities, it all came together creating a difficult trading environment. In the first half of the month, stock markets suffered as renewed weakness for commodity prices heightened concerns that the Fed could raise rates despite slowing global growth. In the second half, stocks rallied sharply, especially in Europe, as participants shrugged off geopolitical tensions in Syria and steep falls in the Chinese equity market. In December, market action was almost solely driven by central bank announcements. On December 3rd, the ECB shocked markets with a significantly less dovish stance than expected (QE extended but not expanded) evoking the third coordinated market sell-off this year as equities, bonds, and the U.S. dollar dropped sharply. On December 16th, in a historical move the Fed raised rates for the first time in exactly seven years abandoning its zero interest rate policy, thus reassuring market participants of the relative strength of the U.S. economy. As a result, equity markets reversed course once again whereas fixed income and currency markets remained in a tight range for the rest of the month. In commodities, at the beginning of the month, the sell-off in oil gathered further momentum as OPEC failed to agree to any production quotas. However, towards month-end, oil prices bounced back significantly after U.S. inventory data had fallen much more than expected.
2014
The RJO Global Trust Class A units posted a loss of (5.27%) and Class B units posted a loss of (3.35%) for 2014. The NAV per unit for Class A at year-end was $67.49 and for Class B at year end was $76.11 (please see Note (1) and Note (8) in the notes to financial statements for more information with respect to the calculation of net asset value) compared to $71.25 per Class A unit at the beginning of the year and $78.74 per unit for Class B. During 2014 no Class A or Class B units were purchased and no Class A units were converted to Class B units.
A sudden pick-up in risk aversion brought about by speculation about a Chinese credit crisis and escalating political tensions in Ukraine, Thailand and Turkey was the major theme in January. As a result, equity markets sold off broadly, particularly in emerging markets, thereby reversing the rally experienced in late December. Investors instead bought into the safe haven appeal of bonds and gold sending prices higher in related securities. In the currency sector, the U.S. dollar reversed its long term bullish trend against the Japanese yen while the Canadian dollar hit a four-year low amid speculation that slowing economic growth will push the Bank of Canada closer to considering lowering interest rates. In energy markets, natural gas surged to a four-year high as forecasts for tumbling stockpiles during a frigid winter prompted the strongest rally in 19 months. The month of February started off with yet another market sell off as a disappointing ISM Manufacturing Report pushed stocks down sharply. However, equity markets recovered strongly with global indices ending the month shy of historical record high levels amid confidence about the economy being strong enough to withstand future cuts to monetary stimulus. Weather-related soft data coming out of the U.S. and escalating political tensions in Ukraine were not enough to dampen the optimism in the equity sector. Most of the price action was otherwise seen in soft commodities where the price of soybeans reacted positively to the hot and dry weather in the world’s top exporting countries Argentina and Brazil. The equity rally seen in late February was – once again – reversed during the first half of the March, this time around, on escalating tensions in Ukraine where Russia reclaimed Crimea despite threats of international sanctions. Equity indices were also weighed down by the fact that China experienced its first domestic corporate bond default in recent history while at the same time presenting data that pointed to a continued decline in manufacturing growth.
Furthermore, the accompanying statements from Janet Yellen’s first meeting as new FOMC chairman, where she said that the Fed’s stimulus program would most likely be finished by the fall and that a rate hike could come as soon as early 2015, added to investor anxiety. As a result, equity markets remained weak throughout the first half of March while bond yields and the U.S. dollar edged higher following FOMC. However, in the latter part of the month, risky assets were again on the rise on easing concerns for Russia and supported by strong economic data. Elsewhere, soft commodities such as meat and soybeans rallied throughout the month as supplies remain tight due to droughts, higher feed costs, and lower profitability for farmers and high demand especially from emerging markets.
The month of April was characterized by continued investor anxiety over the escalating tensions in Ukraine which translated into highly choppy market action. Despite strong warnings from the European leaders and U.S. president Barack Obama hinting of further significant sanctions against the country, the violence reportedly continued adding pressure to financial markets early in the month. Standard & Poor’s also cut Russia’s credit rating to one notch above junk, citing large capital outflows in the first quarter. Having experienced selling pressure in the first half of the month, equities recovered towards month end with the S&P 500 ending just shy of record levels. In the energy sector, the geopolitical tensions pushed prices higher early in the month but turned lower as the month progressed. Fixed income markets experienced falling yields and higher prices, especially in Europe where the central bank hinted of potential large scale asset purchases in order to battle low inflation. In commodity markets, the crop sector experienced higher prices fueled by reports showing increased international demand for U.S. crops. In May, despite the ongoing conflict in Ukraine, financial markets took little notice with U.S. equity markets, as measured by the S&P 500 ending at all-time-high levels. Stocks were primarily supported by dovish language in the latest FOMC meeting minutes. Fixed income markets experienced higher prices and falling yields on expectations for a continued low rate environment, especially in Europe where the ECB is now expected to reduce its target rate further next month. Thus, in currencies, the euro reversed its long-term bullish trend against the greenback with weak inflation numbers coming out of the Eurozone supporting the view of a quantitative easing approach from the ECB. In commodity markets, supported by the Ukraine conflict, the price of oil continued to march higher. Towards the end of the month, gold drifted down to a 3-month low amid the broadly positive mood in equity markets and little inflation fears. Central bank action and language was in the spotlight in June. In the U.S., Federal Reserve chairman Janet Yellen stated that the Fed is now expecting the U.S. economy to expand at a slower-than-previously-expected rate. At the same time, the ECB took measures to come to terms with a potentially deflationary environment by lowering key interest rates. In the UK, the Bank of England surprised the market by hinting that interest rates might rise sooner than anticipated. The continued dovish Fed language sent U.S. equity markets to record highs, while fixed income markets were on the rise in Europe. In response to the Bank of England announcement, the British pound surged to a 5-year high against the U.S. dollar. In commodity markets, recent bearish trends in precious metals reversed sharply on geopolitical tensions, this time in Iraq. For the same reason, the price of crude oil continued higher on the back of fears for supply disruptions, thereby supporting the existing bullish trend.
Underlying bullish trends in risky assets as well as in fixed income markets continued during the first part of July. However, as the month progressed markets turned more nervous; heightened concerns about the situation in Ukraine following the shooting down of a Malaysian Airlines passenger jet, jitters about potential interest rate hikes following a rise in the U.S. Employers Cost Index and the Standard & Poor’s default downgrade on Argentina after the government missed a deadline for paying interest on $13 billion of restructured bonds all added to anxiety. Equity markets sold off sharply towards month end as volatility came back into the picture with the VIX surging 27% on the very last trading day of the month. In energies, crude oil snapped a three month winning streak slipping below the $100 per barrel mark on bearish U.S. inventory data. In fixed income, the German 10-year bond yield fell to a record low by mid-month; however, yields inched higher towards month end leading U.S. treasury prices to their third monthly loss of the year. In agricultural commodities, corn continued to slide as the U.S. Department of Agriculture in a report predicted that U.S. farmers may harvest the second biggest corn crop ever this year. The bullish trends in fixed income and equity markets seen during the first half of July resurfaced in August. In fixed income, yields turned lower as soft unemployment data coming out of the U.S. pushed investors’ expectations on coming interest rate hikes forward. Continued tensions between Russia and Ukraine coupled with concerns for European growth prospects also added to upward pressure in bonds. However, equity markets managed to shrug off geopolitical tensions and marched higher, building on what has been a long-lasting bullish trend. In currencies, the U.S. dollar recorded gains against major currencies while in agricultural commodities, Vladimir Putin’s decision to ban imports of agricultural products from countries that have imposed sanctions on Russia had a negative impact on certain contracts, most notably within meats. Most of last month’s market action was seen in currency and fixed income. The prospect of higher U.S. interest rates, fueled by indications from the Fed that rate hikes are likely to come sooner than the market had anticipated, supported the U.S. dollar which continued to strengthen significantly against other major currencies. The Japanese yen sold off sharply plummeting to a 6-year low against the greenback. In fixed income markets, yields on shorter-dated U.S. government bonds climbed mid-month to the highest levels in more than three years as worries over higher interest rates drove investors to cut holdings. In the commodity sector, U.S. corn prices fell to a 5-year low on higher-than-expected supplies. Wheat futures also fell after the USDA's stockpile estimates topped analysts’ expectations. In metals, gold and silver prices dropped 6% and 12% respectively during the month as a consequence of the rise in the U.S. currency.
October presented some wild market action as the VIX spiked and risky assets plunged, in the beginning of the month, following disappointing U.S. economic data, concerns of a German economic slowdown, and magnified fears about the Ebola spread. However, risk appetite returned towards month end underpinned by news that the Bank of Japan would expand its already aggressive monetary policy. In addition, Japan’s traditionally largest buyer of government bonds, i.e. the Government Pension and Investment Fund, was reported to more than double its allocation to domestic stocks, which sent Japanese equities significantly higher and made the yen plunge to a near 7-year low. Elsewhere in currencies, the U.S. dollar continued to strengthen against the euro, supported by the Fed’s announcement that its program of Quantitative Easing was to end in October. At the same time, the Fed stated that interest rates would remain on hold at their current lows for a considerable time. Fixed income markets experienced muted reactions to this statement but saw wild swings during the month with bond yields plunging mid-month, only to recover as the month progressed. In commodity markets, the price of oil fell hard on concerns about abundant supply and sluggish demand, at the same time, trend reversals were seen in soybeans and wheat leading to losses for momentum based strategies. In metals, gold prices declined to 4-year low levels amid continued low inflation figures. November continued where October left off; some trends even accelerated towards month end. Equity markets continued to post moderate gains throughout the month, with some indices reaching new record highs, as economic news in the U.S. such as third quarter GDP, consumer confidence, and initial jobless claims came in better-than-expected. In currencies, the U.S. dollar strengthened further against the euro and the Japanese yen as the U.S. economy is looking increasingly good compared to the rest of the world with Japan slipping back into recession while the ECB continues to fight deflation. In fixed income, government bond yields moved lower amid the generally lackluster growth picture painted outside the U.S. In particular, towards month end, yields in the Eurozone hit their lowest on record as German CPI fell to a 5-year low sparking speculation that the ECB could soon embark on “full-blown” QE. That being said, commodities were last month’s hotspot with crude oil tumbling to a 4-year low below U.S. $70 per barrel as OPEC failed to agree on any production cuts in order to support prices. In December, the rally in equity markets took a breather. Stock markets dropped sharply mid-month as the relentless decline in oil prices and Russia’s ongoing ruble crisis had unsettled market participants. Increasing growth concerns outside of the U.S. and disappointment after the ECB’s decision to table any more stimuli until next year added to risk aversion. However, equities rebounded substantially towards year-end, some indices reaching record highs, following the impressive upward revision to U.S. GDP in the third quarter and reassurance from the Fed. This improvement in economic conditions in the U.S. also helped the dollar to its highest level against other major currencies in more than eight years. In commodity markets, oil continued on its downward path albeit at a milder pace due to OPEC’s inaction after the International Energy Agency cut its global demand forecast for 2015. In fixed income, yields were generally lower amid the weaker global growth outlook.
(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.
(f) Tabular Disclosure of Contractual Obligations
The business of the Trust is the speculative trading of commodity interests, including U.S. and international futures, spot and forward contracts on currencies, interest rates, energy and agricultural products, metals and stock indices, hybrid instruments, swaps, any rights pertaining thereto and any options thereon or on physical commodities, as well as securities and any rights pertaining thereto and any options thereon, pursuant to the trading instructions of the Trading Advisors. 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 Trading 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).
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 2016 and 2015. All open position trading risk exposures of the Trust have been included in calculating the figures set forth below. During fiscal year 2016, the Trust’s average total capitalization was approximately $5.9 million, and during fiscal year 2015, the Trust’s average total capitalization was approximately $7.6 million.
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FISCAL YEAR 2016
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|
| |
|
|
|
|
|
|
|
|
|
|
|
|
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Market Sector
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Highest Value at Risk*
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|
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Lowest Value at Risk*
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|
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Average Value at Risk
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% of Average Capitalization**
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Agriculture
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$
|
0.2
|
|
|
$
|
0.0
|
|
|
$
|
0.1
|
|
|
|
1.8
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%
|
|
Currencies
|
|
|
0.4
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
2.3
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%
|
|
Energies
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
1.5
|
%
|
|
Indices
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
3.1
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%
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|
Interest Rates
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
1.5
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%
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|
Metals
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
1.1
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%
|
|
Total
|
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$
|
1.3
|
|
|
$
|
0.0
|
|
|
$
|
0.7
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|
|
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11.3
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%
|
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FISCAL YEAR 2015
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|
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|
|
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|
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|
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Market Sector
|
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Highest Value at Risk*
|
|
|
Lowest Value at Risk*
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|
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Average Value at Risk
|
|
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% of Average Capitalization**
|
|
|
Agriculture
|
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$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
1.9
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%
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|
Currencies
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
3.8
|
%
|
|
Energies
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
2.2
|
%
|
|
Indices
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
2.9
|
%
|
|
Interest Rates
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
2.0
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%
|
|
Metals
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
1.3
|
%
|
|
Total
|
|
$
|
1.8
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
|
14.1
|
%
|
* 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.
** 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, 2016 and December 31, 2015, the Trust had approximately $0 and $5.3 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 as custodian. As of December 31, 2016 and 2015, Wells held approximately $4,850,000 and $1,450,000, respectively, 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 Trading 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 Trading 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 Trust had no primary trading risk exposure as of December 31, 2016.
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/British pound, dollar/Canadian dollar positions, and dollar/Australian dollar, dollar/Mexican peso, dollar/Czech Koruna and exposure to cross-rates positions such as Australian dollar/Canadian dollar, euro/Australian dollar and euro/British pound positions. As of December 31, 2016, the Trust had no currency exposure.
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. As of December 31, 2016, the Trust had no interest rate exposure.
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, 2016, the Trust had no equity exposure.
Metals. The programs currently used for the Trust may trade precious and base metals. The Trust’s primary metals market exposure is to price fluctuations. At December 31, 2016, the Trust had no exposure to precious and base metals.
Agricultural. The Trust’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions, such as the drought that occurred during the summer of 2015. As of December 31, 2016, the Trust had no agricultural exposure.
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. As of December 31, 2016, the Trust had no energy market exposure.
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 CFTC 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, 2016 and December 31, 2015.
Foreign Currency Balances. The Trust’s primary foreign currency balances are in Australian dollar, British pounds, Canadian dollar, Hong Kong dollar, Japanese yen, and eurodollar. As of December 31, 2016 the Trust had no foreign currency exposure.
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 as custodian. As of December 31, 2016 and 2015,Wells held approximately $4,850,000 and $1,450,000, respectively, 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 the Investment Manager monitors the Trust’s performance and the concentration of its open positions, and consults with the Trading Advisors concerning the Trust’s overall risk profile. If the Managing Owner or the Investment Manager felt it necessary to do so, the Managing Owner could require the Trading 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 and Investment Manager primarily rely on the Trading Advisors’ own risk control policies while maintaining a general supervisory overview of the Trust’s market risk exposures.
The information below outlines the general risk management practices of each Trading Advisor to the Trust. These descriptions are not intended to be exhaustive.
Revolution Capital Management LLC: RCM utilizes rigorous statistical methods to uncover and exploit numerous inefficiencies in futures markets. RCM utilizes multiple different model architectures encompassing several hundred independent signal generators for each market traded and combines these signals in a proprietary manner to maximize risk-adjusted performance. All trading signals are generated and followed in a systematic manner, although RCM reserves the right to override the system in a discretionary manner in certain specified circumstances in accordance with its risk management policies.
RCM’s overall model ensemble exploits inefficiencies over short- to long-term time scales, which they define as a 1 to 200 day range. The models attempt to profit from price trends, but not all of the models used are “trend-following” in nature. RCM is involved in ongoing research and development and will continue to add models to the trading ensemble as they are developed and validated. The offered trading programs use various combinations of models from the ensemble. Thus, the overall strategy for an offered program may change over time, and clients will not necessarily be informed of these changes as they occur.
RCM employs sophisticated risk-management techniques that account for long-term volatility, short-term volatility, the number and liquidity of the markets traded, and the dependencies/inter- relationships between markets and market sectors. The account positions are automatically balanced on an ongoing basis to maximize the expected risk-adjusted return of the account. The execution of the trading system is fully automated: data acquisition, data processing, and order requests are all automated. Nonetheless, in order to minimize the probability of mistakes, all potential orders are validated by RCM’s principals before actual execution occurs.
“Alpha Program”
RCM’s Alpha Program incorporates long-term, medium-term, and short-term models into one ensemble system. Because of the long-term component, the performance may have a nonzero correlation to trend following systems employed by others. The model suite has been chosen to provide maximal diversification across time scales and strategies. The program targets an annualized volatility in the range of 12% to 15%.
The Alpha Program will trade on both U.S. and foreign exchanges, and may trade in the following markets:
| · |
Metals: gold, copper, silver
|
| · |
Meats: live cattle, lean hogs
|
| · |
Currencies: Swiss franc, Mexican peso, Australian dollar, Canadian dollar, British pound, Japanese yen, Euro currency
|
| · |
Grains: wheat, soybeans, soybean oil, corn
|
| · |
Stock Indices: S&P 500, FTSE 100 (UK), CAC40 (France), DAX (Germany), Hang Seng (Hong Kong), Share Price Index (Australia), Nikkei 225 (Japan), Nasdaq, Euro Stoxx (Euro zone)
|
| · |
Interest Rates: 30-year U.S. bond, 10-year U.S. note, 5-year U.S. note, 2-year U.S. note, Long Gilt (UK), Euro Schatz, Euro Bobl, Euro Bund, 3-year Australian Bonds
|
| · |
Energies: crude oil, heating oil, natural gas, RBOB gas
|
| · |
Softs: coffee, cotton, sugar #11
|
PGR Capital LLC: PGR’s investment strategies have a strong mathematical and statistical basis and exploit established signal processing and econometric techniques. Underlying PGR’s strategies are models of how markets move; it is an important principle that focuses on real markets rather than data mining. Strategies are primarily directional in nature; they identify and take advantage of both upward and downward price momentum. The source of these trends may be sound economic considerations, asymmetric information or behavioral patterns of market participants. Whatever the cause, persistent trends can be shown to occur in all markets across all sectors with varying strengths and durations. PGR’s strategies have been designed to identify the direction and strength of any trend over multiple timeframes and have the ability to adapt to the prevailing market conditions. Another key feature of PGR’s strategies is that they are continuous and update on every tick in the market. This approach allows PGR to be fully systematic, enhances their ability to adapt to changes in conditions and avoids the dangers of optimization around discrete events.
Broad diversification is a key feature of the program and is achieved through trading a wide range of global futures and forwards markets. These encompass liquid markets in the equity index, bond, currency, short-term interest rate and commodity sectors. Over time, markets may be added to add diversification and capacity; equally, markets may be removed should opportunities disappear.
Rigorous risk management is central to all PGR’s systems and operations. Risk control is integral to the trading strategies themselves; the strategies scale positions according to individual market risk and react dynamically to changing market conditions to control the risk of the portfolio as a whole. The automation of trade execution and reconciliation avoids the possibility of human errors while further processes continuously monitor and assess risk throughout all stages of the investment process. Financial markets are always subject to unexpected events which by their nature cannot be predicted. These include the effects of wars, terrorist attacks, natural disasters, fraud etc. Any investment program is vulnerable to these events which cannot be avoided. However, when they do occur it is important to be able to rapidly assess the situation and react accordingly. By PGR adjusting its positions and gearing according to the prevailing levels of market and portfolio risk PGR can rapidly control the risk of its portfolio as a whole. PGR has developed novel processes to monitor and assess market risk using a number of standard and non-standard measures including correlations, value at risk, sector exposure, entropy, stress tests etc. These measures enable PGR to better understand and react to market risks.
Technology is the backbone of PGR’s business. PGR’s sophisticated, robust and already-proven computerized systems enable the entire trading process to be automated, from real-time signal generation, through electronic trade execution to STP trade reconciliation. This results in reliable and efficient execution and operations twenty-four hours a day, five days a week without the need for a dedicated trading team. The system monitors live market data from real-time feeds and continuously updates the desired position for each market. Orders are generated and sent electronically when there is sufficient liquidity and the spread is narrow.
ROW Asset Management, LLC: The ROW Diversified Program seeks to generate consistent long-term appreciation through active leveraged investing in global futures, forwards, and options markets. ROW utilizes a quantitative approach to forecasting, portfolio construction, and risk management. The Program invests in metals, currency, interest rate, energy, agriculture, and equity index instruments. ROW achieves style diversification by using a combination of Carry, Trend, Fair Value, Pattern Recognition, Volatility, Sentiment, and Mean Reversion models.
Turning Wheel Capital, Inc.: TWC’s Base Alpha strategy uses proprietary statistical modeling and pattern search to trade the most liquid CFTC-approved equity futures contracts, with a maximum hold time of 24 hours. The program is neither trend-following nor counter-trend in orientation. Instead, the Base Alpha strategy pursues specific market inefficiencies opportunistically, seeking short-term profitability without bias. The strategy is 100% systematic and highly alpha-source diversified (a wide range of uncorrelated systems comprise the overall strategy). The program has strict loss limits for each trade as well as per day, per week, and per month, and reduces overall leverage overnight and during high volatility market environments.
Claughton Capital, LLC: Claughton uses what it regards as an innovative systematic approach to trade various markets called the Auto-Reactive Positioning (ARP) strategy. The ARP strategy is designed to dynamically allocate capital between a predominantly employed probability based pattern recognition sub-strategy and an occasionally employed sub-strategy of following the trend. The trading approach utilizes market behavior to determine what sub-strategy is most appropriate to trade at any given time with market conditions dictating when a transition occurs on an intraday basis.
Claughton’s trading is conducted on a variety of market sectors. Individual markets, within each sector, are selected based upon liquidity considerations through which less liquid markets are “filtered out”. Claughton will generally apply its trading approach to both U.S. and non-U.S. futures markets. These markets will include (but are not limited to) capital-oriented markets such as long term interest rate futures (e.g., U.S. Treasury Bond futures, German Bund futures), precious metals, foreign exchange and stock index futures, such as the Standard and Poor’s 500 stock index futures, certain industrial commodities (e.g., crude oil), and agricultural markets (e.g. soybeans). In addition, Claughton may trade in foreign futures contracts. In the event that the futures markets become illiquid, Claughton may trade cash commodities including precious metals to protect investor positions.
Degraves Capital Management, PTY: The trading methodologies utilized by DCM were developed after extensive statistical and mathematical analyses of historical market data. DCM’s quantitative strategies are proprietary and confidential in nature. DCM’s trading systems are entirely systematic and based on empirical research into robust statistical patterns in market data. The key observation from this research, is that across a range of time-horizons, the distribution of returns in financial markets has heavy tails – meaning that moves which are large for the time-horizon under consideration occur with a sufficiently high frequency. The time series models aim to capture these large moves.
DCM has built a trading system that is profitable on an intraday time scale by successfully combining the following principles:
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.
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, 2016 and 2015.
| |
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
| |
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
Total Trading Revenues (Loss)
|
|
$
|
642,100
|
|
|
$
|
60,051
|
|
|
$
|
(123,451
|
)
|
|
$
|
(601,854
|
)
|
|
Total Trading Expenses
|
|
|
250,817
|
|
|
|
236,296
|
|
|
|
202,512
|
|
|
|
123,581
|
|
|
Less: Operations attributed to non-controlling interests
|
|
|
6,049
|
|
|
|
461
|
|
|
|
(1,331
|
)
|
|
|
(11,187
|
)
|
|
Trading Income (Loss) net of non-controlling interests
|
|
|
385,234
|
|
|
|
(176,706
|
)
|
|
|
(324,632
|
)
|
|
|
(714,248
|
)
|
|
Non-Trading Income (Loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net Income (Loss)
|
|
$
|
385,234
|
|
|
$
|
(176,706
|
)
|
|
$
|
(324,632
|
)
|
|
$
|
(714,248
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Trading Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
3.43
|
|
|
$
|
1.84
|
|
|
$
|
(1.41
|
)
|
|
$
|
(12.60
|
)
|
|
Class B
|
|
$
|
4.30
|
|
|
$
|
2.81
|
|
|
$
|
(0.64
|
)
|
|
$
|
(15.37
|
)
|
| |
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
| |
|
2015 |
|
|
2015 |
|
|
2015 |
|
|
2015 |
|
|
Total Trading Revenues (Loss)
|
|
$
|
466,776
|
|
|
$
|
(904,512
|
)
|
|
$
|
(37,863
|
)
|
|
$
|
313,249
|
|
|
Total Trading Expenses
|
|
|
328,213
|
|
|
|
255,923
|
|
|
|
227,960
|
|
|
|
216,415
|
|
|
Less: Operations attributed to non-controlling interests
|
|
|
-
|
|
|
|
(14,555
|
)
|
|
|
74
|
|
|
|
3,237
|
|
|
Trading Income (Loss) net of non-controlling interests
|
|
|
138,563
|
|
|
|
(1,145,880
|
)
|
|
|
(265,897
|
)
|
|
|
93,597
|
|
|
Non-Trading Income (Loss)
|
|
|
(126,757
|
)
|
|
|
(626,923
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net Income (Loss)
|
|
$
|
11,806
|
|
|
$
|
(1,772,803
|
)
|
|
$
|
(265,897
|
)
|
|
$
|
93,597
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Trading Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
0.84
|
|
|
$
|
(8.85
|
)
|
|
$
|
(2.18
|
)
|
|
$
|
0.79
|
|
|
Class B
|
|
$
|
1.34
|
|
|
$
|
(9.70
|
)
|
|
$
|
(2.15
|
)
|
|
$
|
1.24
|
|
The Trust has not disposed of any segments of its business.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The independent registered public accounting firm of the Trust, CF & Co., LLP (“CF”), announced that, effective June 30, 2016, all of its partners and staff had joined Moss Adams LLP. As a result, effective August 1, 2016, CF resigned as the Trust’s independent registered public accounting firm. The Trust engaged Moss Adams LLP to serve as the Trust’s independent registered public accounting firm effective August 1, 2016.
None of the reports of CF on the financial statements of the Trust for the past two years contain an adverse opinion or a disclaimer of opinion, or was qualified or modified as to the uncertainty, audit scope, or accounting principles.
During the Trust’s fiscal year ended December 31, 2015 and 2014 and the subsequent interim periods through August 1, 2016, there were (i) no disagreements (as such term is used in Item 304(a) (1)(iv) of Regulation S-K) between the Trust and CF on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of CF, would have caused CF to make reference to the subject matter of the disagreement(s) in connection with its report on the Trust’s financial statements and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
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, 2016. 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, 2016.
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, 2016. 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, 2016, 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.
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, 2016, 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 only provide reasonable (but 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, 2016, 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, 2016 were as follows:
R.J. O’Brien Fund Management, LLC
Julie M. DeMatteo - Manager and Director: Ms. DeMatteo joined the Managing Owner in June of 2013 and became registered as a Principal in October 2013. Ms. DeMatteo is the principal executive officer of the Managing Owner. Ms. DeMatteo is also Chief Executive Officer of RJO Investment Management LLC, an SEC-registered investment adviser and affiliate of the Managing Owner. As Chief Executive Officer, Ms. DeMatteo is primarily responsible for the supervision of RJOIM and its investment advisor representatives. Ms. DeMatteo was transitioning employment from March 2013 to May 2013. From April 2010 to February 2013, Ms. DeMatteo was a Director in the Prime Services Division of Barclays Capital Inc., a futures commission merchant. She was responsible for working with the capital introduction and structured product groups to expand the firm’s footprint in the managed futures market segment. From July 2008 to March 2010, Ms. DeMatteo was Executive Director of Business Development for AlphaMetrix LLC, a CPO and CTA. In this role, she was responsible for asset raising, product development and establishing wholesale distribution relationships for the firm. From July 2008 to December 2008, she was an Associated Person with Dekla Financial Inc., an introducing broker. In this capacity, she was responsible for business development for the firm. She was transitioning between employers during June 2008. From August 2005 to May 2008, Ms. DeMatteo was Director, President and Chief Executive Officer of UBS Managed Fund Services Inc. (“UBSMF”). UBSMF created custom investment solutions for UBS clients and affiliated companies. In this capacity, she was responsible for business development and oversaw all logistical aspects of the firm’s business. From July 2000 to August 2005, she was Executive Director and Senior Counsel for the exchange traded derivatives business at UBS Securities. In this capacity, she was responsible for all legal and compliance initiatives for the business. She holds a Bachelor of Science in Accounting and Finance from Eastern Illinois University and a Juris Doctorate from Loyola University College of Law.
James Gabriele - Manager and Director: Mr. Gabriele joined RJO Holdings Corp. in September 2012 as CFO of RJO Holdings Corp., a Principal of the Managing Owner. He joined the Managing Owner in August 2013, and became registered as a Principal in December 2013. Mr. Gabriele became listed as a Principal for R.J. O’Brien Associates, LLC, a futures commission merchant in December 2013, where he supervises finance department staff. At RJO, he oversees all aspects of finance for the Managing Owner’s operating entities, including futures brokerage and asset management. From March 1993 to December 2001, he served as Managing Director and Chief Financial Officer of ING Barings Futures and Options Clearing Services, part of ING Group. At ING, Jim served as Global Head of Finance and member of the Executive Committee. After that, Mr. Gabriele spent eight years in hedge fund administration where he started his own company providing clients with full service back office outsourcing across numerous structures and asset classes. In January 2002, Mr. Gabriele co-founded The Gabriele Group, which provided outsourced accounting and back office services to hedge funds, trading companies, and real estate limited partnerships. In March of 2006, The Gabriele Group combined its hedge fund administration business with Caledonian Group, a fund administration provider. From March 2006 to March 2009, he was Managing Director at Caledonian Global Fund Services. As a shareholder and member of the senior management team, his responsibilities included operations and client management. From April 2009 to January 2011, Mr. Gabriele was at Butterfield Fulcrum, a top tier global hedge fund administrator, as Managing Director and member of the Business Development and the Client Management Teams. In February 2011, Mr. Gabriel returned to The Gabriele Group as Managing Member providing management consulting services to a variety of financial sector firms. Mr. Gabriele has a BBS in accounting from Loyola University of Chicago, and is a Certified Public Accountant.
Augustine Perrotta – Chief Compliance Officer: Mr. Perrotta joined the Managing Owner in October 2015, has been NFA Associate Member approved and Principal approved for the Managing Owner since September 2015, and Associated Person registered for the Managing Owner since October 2015. Mr. Perrotta joined R.J. O’Brien & Associates, LLC, a futures commission merchant, in October 2012, where he serves as Associate General Counsel and Regulatory Attorney. Prior to joining R.J. O’Brien & Associates, LLC, from March 2012 to September 2012, Mr. Perrotta was self-employed as a consultant to nascent entities planning private placement offerings. Previously, from June 2004 through February 2012, Mr. Perrotta was employed by various members of the Superfund Group of Investment Companies, an international asset management organization, specializing in quantitative alternate investment strategies, where he served initially as Associate General Counsel before being promoted to General Counsel. In these capacities, he was responsible for a wide-range of legal, regulatory, and compliance matters impacting the Superfund Group of Investment Companies’ activities, including its commodity pool operator, introducing broker, investment advisor, and broker-dealer businesses. Mr. Perrotta has a Law Degree (Juris Doctorate) and a Master of Business Administration in Finance (MBA) from DePaul University.
Colleen M. Roberts – Chief Operating Officer: Ms. Roberts joined the Managing Owner in November 2013 as Head of Operations and was appointed as Chief Operating Officer in October 2015. Ms. Roberts has been Principal approved for the Managing Owner since November 11, 2015. As Chief Operating Officer, Ms. Roberts is primarily responsible for the daily/monthly operations of the various commodity pools for which the Managing Owner operates, including the Trust. From January 2013 through March 2014, Ms. Roberts was a Senior Analyst in the Financial Information Systems department of R.J. O’Brien & Associates, LLC, a futures commission merchant, where she was primarily responsible for providing support to the Accounting and Commission teams along with supporting the company’s executive and division heads with the annual corporate budgeting process. From January 1995 through December 2012, Ms. Roberts was the Director of Special Projects for R.J. O’Brien & Associates, LLC, where her primary responsibility was Y2K disaster recovery and the automation of the monthly commission payout process for over 300 introducing brokers and producers, in addition to backing up regulatory accountants and working on other finance department projects. Ms. Roberts has a Bachelor of Science in Finance from Marquette University.
Each officer holds such office until the election and qualification of his or her successor or until his or her earlier death, resignation or removal.
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 Julie M. DeMatteo and James Gabriele. 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 Trading 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
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As of December 31, 2016, no person was known to the Trust to own beneficially more than 5% of the outstanding units.
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As of December 31, 2016, the Managing Owner beneficially held an ownership of $26,403 (which is the equivalent of 535 units) or approximately 0.64% of the ownership of the Trust as of that date.
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| (c) |
As of December 31, 2016, no arrangements were known to the Trust, including any pledges by any person of units of the Trust or units 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.
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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. The Trust is not the subsidiary of any business entity.
Item 14. Principal Accounting Fees and Services.
(a) Audit Fees
The Trust paid CF, the Trust’s independent registered public accounting firm through July 31, 2016, $12,000 and $90,057 respectively for the 2016 and 2015 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 the review of other SEC filings.
The Trust paid Moss Adams, LLP, the Trust’s independent registered public accounting firm from August 1, 2016 forward $79,213 for the 2016 audit 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 the review of other SEC filings.
(b) Audit-Related Fees
The Trust did not pay CF or Moss Adams, LLP any amount in 2016 or 2015 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.
(c) Tax Fees
Beginning in 2016, the Trust engaged CF to provide professional services in connection with tax compliance, tax advice and tax planning and paid CF $40,000 for such services for 2016. The Trust did not pay CF any amount in 2015 for professional services in connection with tax compliance, tax advice and tax planning. For 2015, the Trust engaged Deloitte Tax 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 Tax LLP $80,000 for such services for 2015. 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
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(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 or Moss Adams, LLP must be approved by the directors of the Managing Owner.
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(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 or Moss Adams, LLP.; therefore, no services were required to be approved by the board of directors of the Managing Owner on behalf of the Trust.
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(f) Less than 50% of the hours expended on CF’s or Moss Adams, LLP’s, audit of the Trust’s financial statements were attributable to the work of persons who were not full-time, permanent employees of either CF or Moss Adams, LLP.
Part IV
Item 15. Exhibits, Financial Statements Schedules.
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The following documents are included herein:
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(1) |
Financial Statements:
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a. |
Report of Independent Registered Public Accounting Firm — Moss Adams, LLP
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b. |
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015
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c. |
Condensed Consolidated Schedules of Investments as of December 31, 2016 and 2015
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d. |
Consolidated Statements of Operations, for the years ended December 31, 2016, 2015 and 2014
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e. |
Consolidated Statements of Changes in Unitholders’ Capital for the years ended December 31, 2016, 2015, and 2014
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f. |
Notes to Consolidated Financial Statements
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(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.
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Index to Exhibits
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Exhibit
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Number
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Description of Document
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3.01
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Tenth Amended and Restated Declaration and Agreement of Trust of the Registrant, dated as of January 31, 2015. (1)
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3.02
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Restated Certificate of Trust of the Registrant. (2)
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10.01
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Third Amended and Restated Limited Liability Company Agreement of O’Brien Alternative Strategic Investment Solutions, LLC, dated April 1, 2015. (3)
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10.02
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Third Amendment to Advisory Agreement, made as of March 1, 2016 by and among OASIS ROW, LLC and R.J. O’Brien Fund Management, LLC and ROW Asset Management, LLC. (4)
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10.03
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Fourth Amendment to Advisory Agreement, made as of April 1, 2016 by and among OASIS ROW, LLC and R.J. O’Brien Fund Management, LLC and ROW Asset Management, LLC. (4)
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13.01
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14.01
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20.01
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Special Redemption Notice to Unitholders, dated November 30, 2016.
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31.01
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31.02
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32.01
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32.02
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101.INS
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XBRL Instance Document *
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101.SCH
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XBRL Taxonomy Extension Schema *
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase *
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase *
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101.LAB
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XBRL Taxonomy Extension Label Linkbase *
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase *
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* Filed herewith.
(1) Incorporated by reference herein from the exhibit of the same description filed on March 27, 2015 on Form 10-K.
(2) Incorporated by reference herein from the exhibit of the same description filed on September 30, 2008 on Form 8-K.
(3) Incorporated by reference herein from the exhibit of the same description filed on May 15, 2015 on Form 10-Q.
(4) Incorporated by reference herein from the exhibit of the same description filed on May 13, 2016 on Form 10-Q.
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.
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Date: March 30, 2017
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RJO GLOBAL TRUST
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By: R.J. O’Brien Fund Management, LLC.
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(Managing Owner)
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By:
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/s/ James Gabriele
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James Gabriele
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Chief Financial Officer
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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 30, 2017, and in the capacities indicated:
R.J. O’Brien Fund Management, LLC.
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Signatures
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Title
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/s/ Julie M. DeMatteo
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Chief Executive Officer and Director
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Julie M. DeMatteo
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(principal executive officer)
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/s/ James Gabriele
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Chief Financial Officer and Director
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James Gabriele
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(principal financial and accounting officer)
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