FUTURES PORTFOLIO FUND L.P. filed on May 13, 2019 10-Q

FUTURES PORTFOLIO FUND L.P. files 10-Q in a filing on Mon, May 13 accessible here.

The six classes of Units in the Fund differ only in the fees applicable to each class. Class A Units are subject to a 2% per annum selling agent fee. Class A2 Units may pay an up-front sales commission of up to 3% of the offering price and a 0.6% per annum selling agent fee. Class A3 Units may pay an up-front sales commission of up to 2% of the offering price and a 0.75% per annum selling agent fee. Class B Units are subject to a 0.2% per annum broker dealer servicing fee. Class I Units are subject to higher minimum investments requirements and lower General Partner management fees (0.75% per annum instead of 1.50% per annum) as well as a General Partner performance fee (7.5% of new profits, described more fully in Footnote 4). Class R Units do not pay selling compensation or servicing fees to selling agents, and are generally intended for clients of registered investment advisors. There were no Class A3 Units outstanding on March 31, 2019.

At March 31, 2019, the Fund owned approximately $25 million of Class I shares of the Steben Managed Futures Strategy Fund (‘SMFSF’), which represents approximately 36% of that fund. SMFSF is a non-diversified series of shares of beneficial interest of Steben Alternative Investment Funds (the ‘Trust’), a statutory trust organized under the laws of the State of Delaware, and is registered under the Investment Company Act of 1940, as amended (the ‘1940 Act’), as an open-end investment company. SMFSF issues four classes of shares: Class A, C, I and N. The General Partner serves as the investment manager of SMFSF. SMFSF has a similar investment strategy to the Fund, using commodity trading advisors to engage in the speculative trading of futures contracts, forward currency contracts and other financial instruments.

The General Partner does not maintain a capital balance in the Fund. Pursuant to the terms of the Partnership Agreement, each year the General Partner receives from the Fund 1% of any net income earned by the Fund. Conversely, the General Partner pays to the Fund 1% of any net loss incurred by the Fund. Such amounts are reflected as General Partner 1% allocation receivable or payable in the statements of financial condition and as General Partner 1% allocation in the statements of operations.

■General Partner Management Fee – the Fund incurs a monthly fee on Class A, A2, A3, B and R Units equal to 1/12th of 1.5% of the month-end net asset value of the Class A, A2, A3, B and R Units, payable in arrears. The Fund incurs a monthly fee on Class I Units equal to 1/12th of 0.75% of the month-end net asset value of the Class I Units, payable in arrears.

■General Partner Performance Fee – the Fund incurs a monthly fee on Class I Units equal to 7.5% of any Net New Trading Profits of the Class I Units calculated monthly. In determining Net New Trading Profits, any trading losses incurred by the Class I Units in prior periods is carried forward, so that the incentive fee is assessed only if and to the extent the profits generated by the Class I units exceed any losses from prior periods. The general partner performance fee is payable quarterly in arrears.

■Selling Agent Fees – the Class A Units incur a monthly fee equal to 1/12th of 2% of the month-end net asset value of the Class A Units. Class A2 Units may pay an up-front sales commission of up to 3% of the offering price and a 0.6% per annum selling agent fee. Class A3 Units may pay an up-front sales commission of up to 2% of the offering price and a 0.75% per annum selling agent fee. The General Partner, in turn, pays the selling agent fees to the respective selling agents. If there is no designated selling agent or the General Partner was the selling agent, such portions of the selling agent fees are retained by the General Partner.

■Broker Dealer Servicing Fees – the Class B Units incur a monthly fee equal to 1/12th of 0.2% of the month-end net asset value of the Class B Units. The General Partner, in turn, pays the fees to the respective selling agents. If there is no designated selling agent or the General Partner was the selling agent, such portions of the broker dealer servicing fees are retained by the General Partner.

■Administrative Expenses – the Fund incurs a monthly fee equal to 1/12th of 0.45% of the month-end net asset value of the Fund, payable in arrears to the General Partner. In return, the General Partner provides operating and administrative services, including accounting, audit, legal, marketing, and administration (exclusive of extraordinary costs and administrative expenses charged by other funds in which the Fund may have investments).

The Fund has advisory agreements with various commodity trading advisors, pursuant to which the Fund incurs a monthly advisor management fee that ranges from 0% to 3% per annum of allocated net assets (as defined in each respective advisory agreement), paid monthly or quarterly in arrears. Additionally, the Fund incurs advisor incentive fees, payable quarterly in arrears, ranging from 0% to 30% of net new trading profits (as defined in each respective advisory agreement).

Principal Global Investors, LLC serves as the cash manager for the Fund. The Fund incurs monthly fees, payable in arrears to the Cash Manager, equal to approximately 1/12th of 0.11% and 0.10% of the investments in securities and certificates of deposit as of the period ended March 31, 2019 and 2018, respectively.

The month’s trend reversal in risk assets such as equities and oil proved challenging for the Fund’s trend-following programs, which began the year with defensive net short positioning. U.S. Dollar weakness, especially against commodity exporter currencies as the Canadian Dollar, also detracted from performance. The Fund did make gains in fixed income trading with long positions in European bonds, which rallied during the month. The Fund finished with a net loss of 3.31%, 3.20%, 3.16%, 3.08, and 3.15% for Class A, A2, B, I, and R Units, respectively.

The Fund made gains with short positions in agricultural markets, particularly wheat and coffee, which saw large price declines. In currencies, long U.S. Dollar positions against the Euro were profitable. However, long U.S. and European bond positions detracted from performance. There were also modest losses in stock indices, as trend-following systems gradually transitioned out of short positions. The Fund finished with a net loss of 0.16%, 0.04%, 0.01% for Class A, A2, and B Units, respectively, and a net gain of 0.07% and 0.01% for Class I and R Units, respectively.

The Fund had a strong month, profiting from long positions in bonds, particularly in Europe, which rallied as a result of economic growth concerns. Long positions in stocks also added to performance, as equity markets were lifted by supportive central bank statements. In currencies, long U.S. Dollar positions against the Euro made a positive contribution. Performance in commodities was relatively flat with modest losses in energy markets. The Fund finished with a net gain of 4.82%, 4.94%, 4.98%, 5.07%, and 5.00% for Class A, A2, B, I, and R Units, respectively.

Global equity markets rallied sharply in January, driven higher by investor euphoria over economic growth data and US tax cuts. This pushed already rich valuations further towards historic extremes. By the end of the month, the S&P 500’s Shiller P/E ratio exceeded its high during the 1929 stock market bubble. Meanwhile, anticipation of sustained monetary tightening by the Federal Reserve pushed the US 10-year bond yield up to 2.7%, its highest level since 2014. In foreign exchange markets, the U.S. Dollar weakened against a broad set of developed and emerging market currencies.

The Fund enjoyed a strong start to 2018, following a solid fourth quarter finish last year. Profits were made in long equity positions, particularly in Asia and the U.S. Gains were also made in currencies through short positions in the U.S. dollar against long positions in the Euro, British pound, and Australian dollar. In commodities, energy was a positive contributor as long oil positions benefited from a rise in the price of crude from $60 to $65 per barrel. Detractors for the month included long bond positions in the U.S. and Europe, as well as short positions in grains. The Fund finished with a net gain of 5.65%, 5.81%, 5.90%, and 5.83% for Class A, B, I, and R Units, respectively.

Following a period of historic calm in markets, volatility jumped higher in February as equities sold off and bond yields increased. The S&P 500 Total Return Index had closed higher for 15 consecutive months prior to February’s decline. Market participants attributed the February spike in volatility to several factors including high equity valuations, the potential for faster than expected interest rate hikes and fears that inflation was rising too quickly. The decline in stocks spilled over into other sectors as well. Oil prices ended January at nearly $65 per barrel, fell as low as $59 by mid-February, before recovering to $61 at month-end. Bond markets did not provide safety for investors either. The Bloomberg Barclays US Aggregate Bond Index was down more than 2% this year through February, after posting its first back-to-back monthly losses since 2016.

After strong performance in the fourth quarter of 2017 and into January, the Fund experienced a reversal of those gains in February. Positions that led to the Fund’s previous performance gains contributed to losses for the month. In particular, the Fund had losses from long exposure in equity and oil contracts. The currency sector was also challenging due to the Fund’s short bias positioning in the U.S. dollar, which strengthened against most major currencies. Interest rate markets were a positive contributor as the Fund recently shifted towards a short bias in those markets and bond prices declined. The Fund finished with a net loss of 9.12%, 8.99%, 8.91%, and 8.97% for Class A, B, I, and R Units, respectively.

Global equities declined again in March, with the MSCI World Index falling 2.4%, as President Trump announced a range of import tariffs, which investors feared could spark a trade war with China and Europe. Technology stocks were also hit over privacy concerns, as it was reported that large datasets of Facebook user activity had been used in political advertising. Meanwhile, the Federal Reserve raised U.S. interest rates by 25 basis points, the first of several expected hikes this year. Long-term bond yields dipped in Europe on disappointment in economic growth indicators.

The Fund finished the month with a positive return. Gains came primarily from long positions in the energy sector as crude oil prices rose to $65 per barrel on rising Mideast tensions and continued tight supply. In currencies, the Fund also benefited from short U.S. dollar positions, particularly against the British pound. Modestly-sized long equity positions detracted from performance, as did long positions in base metals. Fixed income sector returns were relatively flat as declines in short U.S. bond positions were offset by gains in long European bond positions. The Fund finished with a net gain of 0.55%, 0.70%, 0.79%, and 0.72% for Class A, B, I, and R Units, respectively.

The term ‘off-balance sheet risk’ refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in future obligation or loss. The Fund trades in futures and forward currency contracts, and is therefore a party to financial instruments with elements of off-balance sheet market and credit risk. In entering into these contracts there exists a risk to the Fund that such contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. If the markets should move against all of the futures interests positions of the Fund at the same time, and if the trading advisors were unable to offset futures interest positions of the Fund, the Fund could lose all of its assets and the limited partners would realize a 100% loss. The General Partner minimizes market risk through diversification of the portfolio allocations to multiple trading advisors, and maintenance of a margin-to-equity ratio that rarely exceeds 35%.

Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund’s speculative trading and the recurrence in the markets traded by the Fund to market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund’s experience to date (i.e., ‘risk of ruin’). Risk of ruin is defined to be no more than a 5% chance of losing 20% or more on a monthly basis. 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 Fund’s losses in any market sector will be limited to Value at Risk or by the Fund’s attempts to manage its market risk.

Exchange margin requirements have been used by the Fund as the measure of its Value at Risk. 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 interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

In quantifying the Fund’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 Fund’s positions are rarely, if ever, 100% positively correlated, have not been reflected.

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