MAN AHL DIVERSIFIED I LP - 10-K - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Reference is made to "Item 8. Financial Statements and Supplementary Data." The information contained therein is essential to, and should be read in conjunction with, the following analysis.
Capital Resources and Liquidity
Units may be offered for sale as of the first business day, and may be redeemed as of the last business day, of each month.
The Partnership raises additional capital only through the sale of Units and capital is increased through trading profits (if any) and interest income. The Partnership does not engage in borrowing. The Partnership, not being an operating company, does not incur capital expenditures. It functions solely as a passive trading vehicle, investing the substantial majority of its assets in the Trading Company. Its remaining capital resources are used only as assets available to make further investments in the Trading Company and to pay Partnership expenses. Accordingly, the amount of capital raised for the Partnership should not have a significant impact on its operations.
Partnership assets not invested in the Trading Company are maintained in cash and cash equivalents in bank accounts or accounts with Citibank N.A. and The Bank of New York Mellon and are readily available to the Partnership. The Partnership may redeem any part or all of its limited partnership interest in the Trading Company at any month-end at the net asset value per unit of the Trading Company. The Trading Company's assets are generally held as cash or cash equivalents which are used to margin futures and provide collateral for forward contracts and other OTC contract positions and are withdrawn, as necessary, to pay redemptions (to the Partnership and other investors in the Trading Company). Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Trading Company's futures trading, the Trading Company's assets are highly liquid and are expected to remain so.
During its operations through December 31, 2015, the Partnership experienced no meaningful periods of illiquidity in any of the numerous markets in which it trades.
Critical Accounting Policies
The Partnership records its transactions in futures contracts, forward contracts and other derivatives, including related income and expenses, on a trade-date basis. Open futures contracts traded on an exchange are valued at fair value, which is based on the closing settlement price on the exchange where the futures contract is traded by the Partnership on the day with respect to which the Partnership's Net Asset Value is being determined. Open forward contracts and other derivatives traded on the interbank market are valued at fair value at their settlement price on the day with respect to which the Partnership's Net Asset Value is being determined. If the General Partner determines the fair value of an investment cannot be accurately determined pursuant to the foregoing methods, such investment shall be assigned such fair value as the General Partner may determine in its sole discretion.
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America
requires management to make estimates and assumptions, such as accrual of expenses, that affect the amounts and disclosures reported in the financial statements. Based on the nature of the business and operations engaged in by the Partnership, the General Partner believes that the estimates utilized in preparing the Partnership's financial statements are appropriate and reasonable; however, actual results could differ from the estimates. The estimates do not provide a range of possible results that would require the exercise of subjective judgment. The General Partner further believes that, based on the nature of the business and operations of the Partnership, no other reasonable assumptions relating to the application of the Partnership's critical accounting estimates other than those to be used would likely result in materially different amounts from those reported. The Partnership's significant accounting policies are described in detail in Note 2 to the Financial Statements.
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Off-Balance Sheet Arrangements
Neither the Partnership nor the Trading Company engages in off-balance sheet arrangements with other entities.
Contractual Obligations
The Partnership does not enter into contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company or that would affect its liquidity or capital resources. The Partnership's sole business is trading futures contracts, forward currency and other OTC contracts, both long (contracts to buy) and short (contracts to sell), and investing in cash and cash equivalents. All of the Partnership's futures, forward and OTC contracts, other than certain currency forward contracts, are settled by offset, not delivery. The substantial majority of such contracts are for settlement within four to six months of the trade date and the substantial majority of such contracts are held by the Partnership for less than four to six months before being offset or rolled over into new contracts with similar maturities. The Partnership's annual audited financial statements with the attached Trading Company's annual audited financial statements, included as Exhibit 13.1 of this report, present a Condensed Schedule of Investments setting forth net unrealized appreciation (depreciation) of the Partnership's open positions, both long and short, at December 31, 2015 fiscal year-end.
Allocations by Market Sector
The following table indicates the percentage of the Partnership's assets allocated to initial margin for the Partnership's open trading positions by market sector as of December 31, 2015. The Partnership's capitalization was $173,101,434 as of December 31, 2015. Also see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," below.
Fiscal Year 2015
Margin Allocation % of Capitalization
Market Sector as of December 31st as of December 31st
Agriculturals $ 3,269,274 1.89 %
Bonds $ 3,487,583 2.01 %
Credit $ 385,675 0.22 %
Currencies $ 6,589,364 3.81 %
Energy $ 3,259,755 1.88 %
Interest rates $ 4,286,774 2.48 %
Metals $ 1,655,725 0.96 %
Stock indices $ 3,654,535 2.11 %
Total $ 26,588,685 15.36 %
Results of Operations
Due to the nature of the Partnership's trading, the Partnership's income or loss from operations may vary widely from period to period. Management cannot predict whether the Partnership's future Net Asset Value per Unit will increase or experience a decline. The Partnership was organized in September 1997 under the Delaware Revised Uniform Limited Partnership Act and commenced operations on April 3, 1998.
Performance Summary
The Partnership is a speculative managed futures fund which trades pursuant to the AHL Diversified Program, indirectly through its investment in the Trading Company. The AHL Diversified Program is a futures and forward OTC price trend-following, trading system. The AHL Diversified Program is entirely quantitative in nature and implements trading positions on the basis of statistical analyses of past price histories. The AHL
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Diversified Program, like most trend-following systems, is designed in the anticipation that most of its trades will be unprofitable; the objective of overall profitability depends on the system identifying certain major trends which occur and recognizing significant profits from participating in such trends.
The past performance of the AHL Diversified Program is not necessarily indicative of its future results. This is the case with all speculative trading strategies. Moreover, the markets in which the AHL Diversified Program is active have seen major changes in recent years, including the influx of entirely different classes of market participants. These changed circumstances may mean that the markets in which the Trading Advisor has previously traded on behalf of the Trading Company are not necessarily representative of those in which it trades on behalf of the Trading Company currently.
As a speculative futures fund, the Partnership (through the Trading Company) effectively maintains all of its capital in reserve. The Trading Company does not "buy" or "sell" futures or forward contracts in the traditional sense; rather, through taking positions in these markets, the Trading Company, and thus the Partnership indirectly, acquires loss/profit exposure and uses its capital to cover losses and provide margin (which constitutes a good faith deposit towards the Trading Company's (but not the Partnership's) obligation to pay such losses) to support its open positions. Each of the Partnership and the Trading Company maintains most of its capital in cash and cash equivalents.
Futures trading programs are proprietary and confidential. As is the case with any speculative futures fund, it is impossible to predict how the Partnership will perform. It is not possible, as it is in the case of an operating business, to predict performance trends, analyze future market conditions or evaluate the likely success or failure of the Partnership.
There are certain general market conditions in which the Partnership is more likely to be profitable than in others. For example, in trendless or stagnant markets, the AHL Diversified Program is unlikely to be profitable. On the other hand, trending markets with substantial price change momentum can be favorable to the AHL Diversified Trading Program. However, because of the continually changing population of market participants as well as supply and demand characteristics, it cannot be predicted how the AHL Diversified Program, and thus the Partnership, will perform in any given market conditions.
2015 2014
31-Dec -15 31-Dec -14
Ending Equity $ 173,101,434 $ 202,024,664
Net assets decreased $28,923,230 for the year ended December 31, 2015. This decrease was attributable to subscriptions in the amount of $16,867,462, redemptions in the amount of $43,053,561 and net loss from operations of $2,737,131.
For the year ended December 31, 2015, the Partnership accrued or paid total expenses of $9,810,584, including $2,000,360 in servicing fees, $5,952,076 in General Partner administrative fees and Trading Advisor management fees, and $1,858,148 in other expenses. Interest income of $149,041 was earned or accrued on the Partnership's cash and cash equivalent investments.
The Net Asset Value of a Class A Unit decreased by $61.42 to $3,444.80. The Net Asset Value of a Class B Unit decreased by $61.41 to $3,444.82. The Net Asset Value of a Class A-2 Unit decreased by $19.30 to $3,749.11. The Net Asset Value of a Class B-2 Unit decreased by $19.31 to $3,749.17.
Partnership trading yielded mixed results in 2015 and ended the year overall in negative performance territory. In the equities sector, reversals in market sentiment predominated the first quarter. The Partnership started off the year sustaining losses from its stock indices shorts in January, subsequently achieved gains in February on account of long equity positioning and ended the quarter with additional losses driven by long
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exposure to the S&P 500. Second quarter equity trading entailed similar volatility. Although the Partnership's long exposure to Heng Seng and H-share futures in April capitalized on buoyant equity markets in
Hong Kong
and
China
, the Partnership's long exposure to the
Eurozone suffered as uncertainty surrounding the Greek debt crises negotiations produced spikes in volatility. A shrinking global risk appetite as well as weakened business activity in
China
subsequently prompted selloffs in the Asian and
U.S.
markets which battered the Partnership's long equity positions in both markets in the third quarter. Fourth quarter trading of equities also brought negative results as the news of a large and significant fall in the growth of the
U.S.
workforce accompanied by the
European Central Bank's ("ECB") failure to expand its asset purchases ran counter to the Partnership's long equity positions.
With respect to fixed-income trading, the Partnership started off the year with strong first quarter returns. In January,
Canada's
surprise cut to its benchmark interest rate and collapsing
U.S.
bond yields contributed to making the Partnership's bond and rate positions among the Partnership's strongest profit drivers for the year. Despite moderate February losses on account of investor demand shifting from bonds to equities, March bond trading proved profitable as the
ECB's massive asset purchase program and accommodative remarks from
U.S.
Federal Reserve Chair,
Janet Yellen, favored the Partnership's long exposure to the
U.S.
and European bond markets. The second quarter, however, brought a reversal of fortunes as the Partnership suffered losses from strong swings in the German bond market, unprofitable short positions in Australian bonds and continuing investor uncertainty regarding the Greek debt crisis. The Partnership thereafter experienced a return to profitability in the fixed-income sector as the Partnership's positions in Italian bonds and Eurodollars produced substantial positive returns and overshadowed July losses sustained from short
U.S.
Treasury positions. Although the Partnership's European bond positions achieved gains in October, notable volatility in December resulted in losses for the Partnership's German, Italian and French bond positions at the end of the year.
Relative to the Partnership's experience in the equities and fixed-income sectors, commodity trading produced more favorable returns in 2015, but was similarly hampered by sharp price reversals throughout the year. In January, returns from the Partnership's commodity positions were neutral as losses sustained in the agricultural sector offset gains achieved in the energy markets. This offsetting relationship subsequently reversed in February as short oil exposure suffered from substantial and swift price increases while the Partnership's agricultural positions produced gains. The prices of oil and oil-related products reversed course again in March, falling significantly from a strong February rally and buoying the Partnership's March results. Following a neutral month of commodity trading in April, quick reversals in the agricultural markets in May and June resulted in substantial losses for the Partnership. Long exposure to base metals and short agricultural positions produced particularly large losses during this period as zinc prices dropped around 10% following a 20% rally in March and mid-month heavy rains and flooding across growing regions damaged crops and generally reversed a steady price decline which had taken place during the first part of the year. In July, a subsequent long
U.S.
dollar trend and heightened prospects of Iranian oil entering the global markets supported the Partnership's gold, energies, crude oil, gasoline and diesel shorts. The Partnership's short exposure to coal and electricity generated gains in August as each maintained their downward trend despite short-term reversals in oil prices. September trading additionally produced profits as continued reports of weakened Chinese business activity and growing expectations of shrinking Chinese demand for commodities benefitted the Partnership's short positions in oil and industrial metals. The theme of falling oil prices and overall depressed commodity demand continued to drive the Partnership's trading successes during the fourth quarter as the Partnership realized gains from its shorts in natural gas, oil and metals. These profits were partially reduced by losses sustained from short positions in live cattle and December short-term trend reversals.
Although starting off the first quarter with positive momentum, currency trading produced net losses over the course of 2015 as heightened volatility and swift market corrections during the second and fourth quarters proved challenging for the Partnership's trend-following approach. In January, long
U.S.
dollar positions against the Euro and
UK
pound each returned gains, which were augmented by positive returns from February trading in the foreign currency markets. This profitable run continued in March due to the Partnership's short exposure to the Brazilian real which was negatively affected by the country's continuing political scandals and economic
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troubles. The second quarter, however, produced a sharp reversal in trading returns. In April, the Partnership's long
U.S.
dollar positions against several G10 markets suffered as the value of the Euro jumped approximately 6% from prior lows. Although gains realized from short exposure to the Japanese yen helped to offset these May losses, June trading experienced a continuing run of negative results on account of the Partnership's
U.S.
dollar positioning. In July, the Partnership subsequently returned to profitability in the currencies sector as a long
U.S.
dollar trend arising from reports of favorable
U.S.
economic data and the prospect of higher
U.S.
interest rates benefitted the Partnership's short positions in gold and foreign currencies relative to the
U.S.
dollar. With the
U.S.
dollar continuing to strengthen on account of investor flight from emerging market currencies to the comparative safety of the
U.S.
, the Partnership's continuing short exposure to foreign currencies, such as the Brazilian real, South Korean won and the Australian dollar, produced substantial returns in August. These gains were partially offset by losses sustained during September currency trading. The Partnership thereafter ended the year with moderately negative results from fourth-quarter currency trading as the Partnership experienced offsetting returns in October and November while December trading produced losses from a swift rallying of the Euro.
Trading in the credit sector, although having a neutral impact during most of the year, served as a slight drag on the Partnership's overall performance during 2015. Protective positioning in investment and higher yield credit index swaps provided positive returns in February, but these gains were subsequently outweighed by moderate losses sustained during the remaining quarters of the year.
2014
Net assets decreased $856,954 for the year ended December 31, 2014. This decrease was attributable to subscriptions in the amount of $3,190,548, redemptions in the amount of $51,478,138 and net income from operations of $47,430,636.
For the year ended December 31, 2014, the Partnership accrued or paid total expenses of $8,169,377, including $1,918,407 in servicing fees, $5,883,411 in General Partner administrative fees and Trading Advisor management fees, and $367,559 in other expenses. Interest of $212,816 was earned or accrued on the Partnership's cash and cash equivalent investments.
The Net Asset Value of a Class A Unit increased by $798.40 to $3,506.22. The Net Asset Value of a Class B Unit increased by $798.40 to $3,506.23. The Net Asset Value of a Class A-2 Unit increased by $894.35 to $3,768.41. The Net Asset Value of a Class B-2 Unit increased by $894.39 to $3,768.48.
The Partnership's investments produced overall noteworthy results in 2014, with particularly strong performance achieved in the fixed-income sector. The key themes that influenced the Partnership's bond trading were the increasingly accommodative monetary policy of the ECB as well as the continued interventionist strategies employed by
the United States
and
Japan
. In January, existing long positions in French and Italian bond futures, as well as Euro-bund and Canadian contracts, provided the most significant returns. Long Italian and French positions thereafter buoyed the Partnership's fixed-income results for March in the face of sharp reversals in both the Eurodollar and
U.S.
Treasury bond markets. Trading profits in the second quarter were similarly driven by the
ECB's accommodative stance relative to the continued stimulus tapering by
the United States
. As desire for higher yields increased investor demand back to the
U.S.
and other bond markets in May, the Partnership realized profits from its long
U.S.
and Australian bond positions. Although a long stake in
U.S.
Treasuries subsequently produced losses in June, corresponding long positions in European bonds offset these losses with the rallying of European markets. In July and August, the Partnership's long positions in
Europe
and
the United States
generated positive returns as investors sought security in safe-haven assets and Federal Reserve Chair,
Janet Yellen, and
ECB President, Mario Draghi, respectively noted the commitment of the
U.S.
to low short-term interest rates and the
ECB's intention to pursue a more active interventionist stance to boost growth and prevent deflation. September and the first part of October subsequently brought notable volatility and losses,
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but bond trading ultimately ended the year on a strong note. The Partnership generated positive returns in each month of the fourth quarter from its long positions in the rallying Japanese and Canadian bond markets and as its investments proved well-timed to take advantage of the ECB's first-ever purchases of asset-backed debt, continued deflationary risks, and increased stresses to oil producing countries from falling energy prices.
In contrast to the bond sector, the Partnership's equity positions generated mixed results in 2014. Investor concern over the withdrawal of
U.S.
stimulus, the varied strategies of central banks, geopolitical developments and the arrival of lower input prices for energy and raw materials were the major performance drivers during this period. The Partnership started off the year with losses from its long positions as both the European and
U.S.
equity markets experienced declines and
Germany's
DAX Index in particular was subject to sharp reversals due to the uncertainty borne out of the Russian-Ukrainian political conflict. After continuing to create losses in April following the bursting of a mini-stock bubble, equity trading provided substantial gains in the second quarter as the Partnership's long positions in
U.S.
and European equities rose in conjunction with the S&P 500's and the DAX index's respective climbs to all-time highs. These long positions created losses in the third quarter, however, following the Argentine debt default that prompted a selloff in global equities and comments from
Janet Yellen concerning stretched valuations in certain markets. The mixed-results pattern continued in the fourth quarter with its whipsaw market conditions. In October, investor anxiety over the end of the
Federal Reserve's asset purchasing program and the arrival of the first case of Ebola ever recorded in
the United States
brought a sharp fall in equity prices, which subsequently rebounded in November with the arrival of lower input prices for energy and raw materials. Conversely, lower energy prices and the resulting stresses they engendered for countries dependent on oil revenue prompted a global sell off in equities in December. By mid-month, equities once more rallied, this time on
Janet Yellen's remarks that there would be no upcoming surprises with respect to interest rates. The Partnership sustained losses during this volatile fourth quarter.
Commodity trading produced similarly mixed results. With respect to agriculturals, the Partnership realized modest gains overall with trading in specific months comprising a significant portion of the Partnership's performance attribution from this sector. In June and July, long cattle and short corn and wheat positions were well-timed to take advantage of record-high futures prices for cattle and the downward trend of grain values which had spiked on earlier concerns over the harsh winter. Reversals in the grain markets, however, as well as in the longer trends seen in cocoa trading produced losses for the Partnership in October. With respect to energies, trading initially contributed modestly to the Partnership's performance, but by the end of the third quarter, became increasingly profitable as fundamental demand and supply principles, in contrast to global risk appetite, appeared to drive the energy sector more than any other time since the financial crisis. The Partnership's short positions in oil were particularly profitable during this period as energy prices, already suppressed in October on account of the strengthening
U.S.
dollar and weaker global growth, plummeted in November with
OPEC's decision to maintain levels of oil production despite the rapid decline in oil prices. The theme of falling energy prices persisted in December and the Partnership's continued short positions remained favorable. In contrast to the Partnership's favorable fourth-quarter run in the energy sector, metals trading accounted for a much smaller portion of the Partnership's 2014 performance attribution and shorts in gold and silver produced losses due to fears of weakening growth and geopolitical instability in the
Middle East
.
Trading in currencies resulted in positive returns for the Partnership in 2014 with some of the key themes including the continuing growth of the
U.S.
economy,
Europe's
and
Japan's
stimulus initiatives and falling oil prices. Although currency trading started off to a slow start, the second half of the year yielded notable gains as short positions taken on the Japanese yen, Euro, and the currencies of other struggling economies added sizable returns in light of the currencies' notable depreciation relative to the
U.S.
dollar.
The interest rates and credit sectors had a minor influence on performance in 2014 and, aside from metals, comprised the sectors with the smallest Partnership allocations.
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2013
Net assets decreased $176,469,369 for the year ended December 31, 2013. This decrease was attributable to subscriptions in the amount of $13,658,527, redemptions in the amount of $172,227,858 and net loss from operations of $17,900,038.
For the year ended December 31, 2013, the Partnership accrued or paid total expenses of $14,202,849, including $4,507,344 in servicing fees, $9,312,545 in General Partner administrative fees and Trading Advisor management fees, and $382,960 in other expenses. Interest of $302,588 was earned or accrued on the Partnership's cash and cash equivalent investments.
The Net Asset Value of a Class A Unit decreased by $176.65 to $2,707.82. The Net Asset Value of a Class B Unit decreased by $176.65 to $2,707.83. The Net Asset Value of a Class A-2 Unit decreased by $149.34 to $2,874.06. The Net Asset Value of a Class B-2 Unit increased by $149.33 to $2,874.09.
Trading in bonds and short term interest rates started off with losses in January 2013, the main detractors being long positions in US Treasuries, French bonds, Short Sterling and Eurodollar. However, bond trading returned to profitability in February as markets returned to a more cautious state following January's bullish nature. Safe haven bonds, such as US Treasuries, returned some of the larger gains with returns also coming from emerging market bonds. Long interest rate positions, such as in Eurodollar, Euribor and Short Sterling, further provided positive results because of the relaxed monetary policies of major central banks. In March, bond trading largely continued this positive run due to the portfolio's long bond holdings. A small portion of the gain, however, was lost via Italian long dated bonds and positions in US Treasuries. In April, a long exposure to fixed income assets including European bonds, US Treasuries and Eurodollar contracts again delivered profits despite a loss on long exposures to Japanese bonds. The Partnership subsequently sustained a loss in May primarily because of its long exposure to US Treasuries,
UK
gilts and bonds from commodity focused economies. Long exposure to interest rate holdings also incurred a loss following a cut in
Eurozone rates. Indeed, Eurodollar, Euribor and
Short Sterling contracts all ended May in negative territory. The Partnership continued to post a loss in June on account of its long holdings of US Treasuries, European bonds, and contracts involving Eurodollar, Euribor and
Short Sterling. In August, rising yields hurt long exposure to
U.S.
treasuries which was one of the largest negatives over the month. Similarly, bond holdings hurt performance in September as short exposure to debt from commodity-focused economies suffered. Long holdings of Italian bonds further delivered a loss with destabilization of the Italian coalition government resulting in heavy selling of the country's debt. Some performance was recovered via long German and French bonds as higher grade fixed income attracted safe haven inflows from investors. Nevertheless, bond trading ultimately ended the year in December on a sour note as bond prices dropped following the
Federal Reserve's reduction in bond purchasing integral in its quantitative easing policy.
In contrast to bond and interest rate trading, equity positions largely generated positive results for the Partnership in 2013. Equity trading provided noteworthy results in January because of long equity exposure across all regions, including the US and European indices. Such long exposure continued to generate solid performance throughout the year although losses were sustained in
U.S.
and European stock indices when equities fell out of favor.
With respect to currency trading, short exposure to Japanese yen provided positive returns in January as the Japanese yen fell 6% on a trade-weighted basis following the announcement of stimulus and deflation control. Currency trading in February, however, provided mixed results as positive returns from shorting the British pound was offset by losses from short exposure to the US dollar. Continued trading strategies with respect to both the British pound and
U.S.
dollar produced the opposite effects in the months of March and April. In March, the short exposure to the US dollar largely resulted in positive returns while, in April, short positions in the British pound produced negative returns when the
United Kingdom
avoided a triple-dip recession. Currency trading became a notable performance detractor in the months following. In July, long exposure to the
U.S.
dollar suffered due to the
U.S.'s
continuing accommodative monetary policy. In August, losses were concentrated in
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long Eurodollar positions as better-than-expected data raised Eurozone interest rate expectations. The losses sustained in September were attributable to long exposure to the
U.S.
dollar, dollar pairs against emerging-market currencies, and both long and short Euro exposures. Short exposure to Eurodollar and
Short Sterling particularly suffered as accommodative monetary policy in the
U.S.
lowered expectations for interest rates globally.
Commodity trading started off the year generating a gain, largely due to short electricity contracts as milder, wetter weather drove prices down. Long exposure to oil and oil derivatives and short gold exposure also returned positive numbers. Energy trading took a hit in February though, with all positions contributing to the loss. Long positions in crude oil, crude oil by-products, and base metals followed the same theme. In March, the commodity allocations also delivered negative performance on the whole, driven predominantly by a long exposure to energy markets. Exposure to crude oil and its derivatives caused the greatest losses as the portfolio was long at the start of the period and suffered as oil prices fell. The portfolio's exposure was subsequently reduced, and thus, did not participate in some of the upward movement towards the end of the period. Although some profits were obtained through a short allocation to both precious and base metals in April, exposure to wheat and corn detracted from these gains. Conversely, agricultural trading in May posted a gain primarily through long soybeans and short sugar positions. Energies produced slightly negative returns in May with long natural gas adding a loss that short electricity and coat contacts partially offset. In June, short metals added a notable gain as prices of both base and precious metals fell sharply. The reverse was true in July when Chinese growth figures pushed up the price of base metals and precious metals also rose. Short positions in agriculturals similarly generated a loss from increased prices in cocoa, coffee and soya. Commodity trading in August produced mixed results as early gains from long exposures were lost after increased industrial production in
China
hurt short positions in base metals. September provided similarly mixed results. While short exposure to precious metals suffered losses, agricultural holdings produced positive results overall. High Midwest temperatures threatened to damage soyabean crops and resulted in strong returns from long exposures to soyabeans. Short corn positions further turned out to be profitable from larger-than-expected stockpiles of corn. Returns on energy trades were mixed as
Middle East
tensions created profit on long holdings of crude oil and oil prices subsequently dropped. Commodity trading in October also produced a loss as volatility in energy markets caused difficulties for directional trading. In contrast, short metal holdings generated positive gains in November after the price of gold and aluminum dropped throughout the month. Long soyabean holdings additionally helped performance as US export demand increase. In the month of December, long crude oil holdings weighed the most on commodity trading profitability after Western countries and
Iran
reached an agreement over
Iran's
nuclear program. The Partnership, however, still benefited from short positions on canola and wheat which sold off strongly through the month. Trading on metals produced mixed results in December.
The credit sector provided mixed performance results in 2013. Short exposure to European and US credit default protection initially captured gains in January as the cost of default insurance fell, but subsequently, created losses after the cost of European default protection rose. The Partnership did achieve positive gains in the credit sector during the fourth quarter, however, after credit markets continued to tighten to post-crisis lows.
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