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| CMD > SEC Filings for CMD > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
This information should be read in conjunction with the financial statements and notes to the financial statements included with this Annual Report on Form 10-K. The discussion and analysis that follows may contain statements that relate to future events or future performance. In some cases, such forward-looking statements can be identified by terminology such as "may," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or the negative of these terms or other comparable terminology. None of the Trust, the Sponsor nor the Trustee assumes responsibility for the accuracy or completeness of forward-looking statements. Except as expressly required by federal securities laws, none of the Trust, the Sponsor or the Trustee is under a duty to update any of the forward-looking statements to conform such statements to actual results or to a change in expectations or predictions.
Introduction
As further described in Part 1 above, each "Ultra" Fund seeks daily investment results (before fees and expenses) that correspond to twice (200%) the daily performance of its corresponding benchmark. Each "UltraShort" Fund seeks daily investment results (before fees and expenses) that correspond to twice (200%) the inverse (opposite) of the daily performance of its corresponding benchmark. Each Fund generally invests in Financial Instruments (i.e., commodity-based or currency-based instruments whose value is derived from the value of an underlying asset, rate or index) as a substitute for investing directly in a commodity or currency in order to gain exposure to the commodity index, commodity or currency. Financial Instruments also are used to produce economically "leveraged" or "inverse" investment results and may include futures contracts and options on futures contracts, swap agreements, forward contracts and other commodity-based or currency-based options contracts.
The Funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the Funds from achieving such results. Accordingly, results over periods of time greater than one day should not be expected to be a simple multiple (+200 or -200%) of the period return of the corresponding benchmark and will likely differ significantly.
Liquidity and Capital Resources
A significant portion of the NAV of each Fund is held in cash and/or U.S. Treasury Securities, agency securities, or other high credit quality short-term fixed-income or similar securities as described above. A portion of these investments may be posted as collateral in connection with swap agreements and/or used as margin for each Fund's trading in futures and forward contracts. The percentage that U.S. Treasury bills and other short-term fixed-income securities bear to the total net assets of each Fund varies from period to period as the market values of the underlying swaps, futures contracts and forward contracts change. None of the Funds earned interest income from high credit quality short-term fixed income securities during the period from commencement of trading through December 31, 2008.
Each Fund's underlying swaps, futures and forward contracts, as the case may be, are subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, swaps and forward contracts are not traded on an exchange, do not have uniform terms and conditions, and in general are not transferable without the consent of the counterparty. In the case of futures contracts, commodity exchanges may limit fluctuations in certain futures contract prices during a single day by regulations referred to as "daily limits." During a single day, no futures trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, such positions can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Futures contract prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent a Fund from promptly liquidating its futures positions.
Entry into swap agreements or forward contracts further impacts liquidity because these contractual agreements are executed "off-exchange" between private parties and, therefore, the time required to offset or "unwind" these positions may be greater than that for regulated instruments. This potential delay could be exacerbated to the extent a counterparty is not a United States person.
The Trust is unaware of any other trends, demands, conditions or events that are reasonably likely to result in material changes to the Trust's liquidity needs.
Because each Fund enters into swaps and may trade futures and forward contracts, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk).
Results of Operations for the period from Commencement of Trading to December 31, 2008
NAV of ProShares Ultra DJ-AIG Commodity
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $3,325,011 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 150,014 Shares at December 31, 2008 due to 150,000 Shares (3 Creation Units) being created and no Shares being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of the Dow Jones-AIG Commodity Index. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV decreased by -11.34%. During the period ended December 31, 2008, the benchmark fell by a cumulative -5.17% and had an annualized volatility of 33%.
NAV of ProShares UltraShort DG-AIG Commodity
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $2,679,883 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 100,014 Shares at December 31, 2008 due to 100,000 Shares (2 Creation Units) being created and no Shares being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of the Dow Jones-AIG Commodity Index. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV increased by 7.18%. During the period ended December 31, 2008, the benchmark index fell by a cumulative -5.17% and had an annualized volatility of 33%.
NAV of ProShares Ultra DJ-AIG Crude Oil
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $99,772,943 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 6,750,014 Shares at December 31, 2008 due to 7,250,000 Shares (145 Creation Units) being created and 500,000 Shares (10 Creation Units) being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of the Dow-Jones-AIG Crude Oil Sub-Index. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV decreased by -40.88%. During the period ended December 31, 2008, the benchmark index fell by a cumulative -19.4% and had an annualized volatility of 98%.
NAV of ProShares UltraShort DJ-AIG Crude Oil
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $14,502,399 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 500,014 Shares at December 31, 2008 due to 600,000 Shares (12 Creation Units) being created and 100,000 Shares (2 Creation Units) being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of the Dow Jones-AIG Crude Oil Sub-Index. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV increased by 16.02%. During the period ended December 31, 2008, the benchmark index fell by a cumulative -19.40% and had an annualized volatility of 98%.
NAV of ProShares Ultra Gold
The Fund commenced trading on December 1, 2008. The Fund's NAV increased from $350 at December 1, 2008 to $27,736,722 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at December 1, 2008 to 900,014 Shares at December 31, 2008 due to 900,000 Shares (18 Creation Units) being created and no Shares being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV increased by 23.27%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 11.79% and had an annualized volatility of 37%.
NAV of ProShares UltraShort Gold
The Fund commenced trading on December 1, 2008. The Fund's NAV increased from $350 at December 1, 2008 to $3,875,093 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at December 1, 2008 to 200,014 Shares at December 31, 2008 due to 200,000 Shares (4 Creation Units) being created and no Shares being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of gold bullion as measured by the U.S. Dollar P.M. fixing price for delivery in London. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV decreased by -22.50%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 11.79% and had an annualized volatility of 37%.
NAV of ProShares Ultra Silver
The Fund commenced trading on December 1, 2008. The Fund's NAV increased from $350 at December 1, 2008 to $10,011,149 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at December 1, 2008 to 350,014 Shares at December 31, 2008 due to 350,000 Shares (7 Creation Units) being created and no Shares being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of silver bullion as measured by the U.S. Dollar P.M. fixing price for delivery in London. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV increased by 14.41%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 8.88% and had an annualized volatility of 53%.
NAV of ProShares UltraShort Silver
The Fund commenced trading on December 1, 2008. The Fund's NAV increased from $350 at December 1, 2008 to $1,960,071 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at December 1, 2008 to 100,014 Shares at December 31, 2008 due to 100,000 Shares (2 Creation Units) being created and no Shares being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV decreased by -21.61%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 8.88% and had an annualized volatility of 53%.
NAV of ProShares Ultra Euro
The Fund commenced trading on November, 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $4,386,411 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 150,014 Shares at December 31, 2008 due to 150,000 Shares (3 Creation Units) being created and no Shares being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of the spot price of the Euro versus the U.S. Dollar. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV increased by 16.96%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 8.25% and had an annualized volatility of 21%.
NAV of ProShares UltraShort Euro
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $7,331,163 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 350,014 Shares at December 31, 2008 due to 350,000 Shares (7 Creation Units) being created and no Shares being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of the spot price of the Euro versus the U.S. Dollar. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV decreased by -16.22%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 8.25% and had an annualized volatility of 21%.
NAV of ProShares Ultra Yen
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $2,845,053 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 100,014 Shares at December 31, 2008 due to 100,000 Shares (2 Creation Units) being created and no Shares being redeemed during the period. Further adding to the NAV increase was the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the daily performance of the spot price of the Japanese yen versus the U.S. Dollar. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the daily performance of its benchmark, the Fund's per share NAV increased by 13.79%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 6.86% and had an annualized volatility of 17%.
NAV of ProShares UltraShort Yen
The Fund commenced trading on November 24, 2008. The Fund's NAV increased from $350 at November 24, 2008 to $2,166,617 at December 31, 2008. The increase in the Fund's NAV resulted primarily from an increase in outstanding Shares, which increased from 14 Shares at November 24, 2008 to 100,014 Shares at December 31, 2008 due to 100,000 Shares (2 Creation Units) being created and no Shares being redeemed during the period. This increase in NAV was offset by the cumulative effect of the Fund seeking daily investment results (before fees and expenses) that correspond to 200% of the inverse of the daily performance of the spot price of the Japanese yen versus the U.S. Dollar. For the period ended December 31, 2008, over which the Fund's daily performance had a statistical correlation over 0.99 to 200% of the inverse of the daily performance of its benchmark, the Fund's per share NAV decreased by -13.35%. During the period ended December 31, 2008, the benchmark index rose by a cumulative 6.86% and had an annualized volatility of 17%.
Off-Balance Sheet Arrangements and Contractual Obligations
As of March 30, 2009, the Funds have not utilized, nor do they expect to utilize in the future, special purpose entities to facilitate off balance sheet financing arrangements and have no loan guarantee arrangements or off balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Funds. While each Fund's exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on a Fund's financial position.
Each Fund's contractual obligations are with the Sponsor, certain service providers and with any counterparty to a Financial Instrument. Management fee payments made to the Sponsor are calculated as a fixed percentage of each Fund's NAV. As such, the Sponsor cannot anticipate the amount of payments that will be required under these arrangements for future periods as NAVs are not known until a future date. The agreement with the Sponsor may be terminated by either party upon 30 days written notice to the other party.
Market Risk
Trading in futures contracts involves each Fund entering into contractual commitments to purchase or sell a commodity underlying a Fund's benchmark at a specified date and price, should it hold such futures contract into the deliverable period. Should a Fund enter into a contractual commitment to sell a physical commodity, it would be required to make delivery of that commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which the value of a commodity can rise is unlimited, entering into commitments to sell commodities would expose a Fund to theoretically unlimited risk.
Each Fund's exposure to market risk is influenced by a number of factors including the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of each Fund's trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of investors' capital.
Credit Risk
When a Fund enters into swap agreements, futures or forward contracts, the Fund is exposed to credit risk that the counterparty to the contract will not meet its obligations.
The counterparty for futures contracts traded on United States and on most foreign futures exchanges is the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges, which may become applicable in the future), it may be backed by a consortium of banks or other financial institutions.
Swap and forward agreements are contracted for directly with counterparties. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to a Fund.
Swap agreements do not generally involve the delivery of securities or other underlying assets either at the outset of a transaction or upon settlement. Accordingly, if the counterparty to a swap agreement defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any.
Forward agreements do not involve the delivery of securities at the onset of a transaction, but may be settled physically in the underlying asset if such contracts are held to expiration, particularly in the case of currency forwards. Thus prior to settlement, if the counterparty to a forward contract defaults, a Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. However if physically settled forwards are held until expiration (presently, there is no plan to do this), at the time of settlement a Fund may be at risk for the full notional value of the forward contracts depending on the type of settlement procedures used.
The Sponsor attempts to minimize certain of these market and credit risks by normally:
• executing and clearing trades with creditworthy counterparties, as determined by the Sponsor;
• limiting the outstanding amounts due from counterparties to the Funds;
• not posting margin directly with a counterparty;
• limiting the amount of margin or premium posted at an FCM; and
• ensuring that deliverable contracts are not held to such a date when delivery of the underlying asset could be called for.
The FCM for each Fund, in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Fund, all assets of the Fund relating to domestic futures trading, and the FCM is not allowed to commingle such assets with other assets of the FCM. In addition, CFTC regulations also require the FCM to hold in a secure account assets of each Fund related to foreign futures trading.
Critical Accounting Policies
The Funds' critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Sponsor's application of these policies involves judgments and actual results may differ from the estimates used.
Each Fund has significant exposure to Financial Instruments. The Funds hold a significant portion of their assets in swaps, futures or forward contracts, all of which are recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported in the Statement of Operations.
The use of fair value to measure financial instruments, with related unrealized gains or losses recognized in earnings in each period is fundamental to the Funds' financial statements. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).
Derivatives (e.g., futures, swaps and forward agreements) are generally valued using third party pricing services or other procedures as determined by the Sponsor. Futures contracts, except for the Gold and Silver
Funds, are generally valued at the last settled price on the applicable exchange on which that future trades. Futures in the Gold and Silver Funds are valued at the last sales price prior to the time at which the net asset value per share of a Fund is determined. If there was no sale on that day, and for non-exchange traded derivatives, the Sponsor may in its sole discretion choose to determine a fair value price as the basis for determining the market value of such position for such day. Such fair value prices would be generally determined based on available inputs about the current value of the underlying financial instrument or commodity and would be based on principles that the Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.
FASB Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 2 within the financial statements in Item 15 for further information regarding FASB Statement No. 157.
When market closing prices are not available, the Sponsor may value an asset of the Fund pursuant to policies the Sponsor has adopted, which are consistent with normal industry standards.
Realized gains (losses) and changes in unrealized gain (loss) on open positions are determined on a specific identification basis and recognized in the Statement of Operations in the period in which the contract is closed or the changes occur, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosure
Commodity Price Sensitivity
Each of the Commodity Funds and the Commodity Index Funds is exposed to commodity price risk through its holdings of Financial Instruments. The following tables provide information about each of the Commodity Funds' and the Commodity Index Funds' Financial Instruments, which are sensitive to commodity price risk. As of December 31, 2008, each of the Commodity Funds and the Commodity Index Funds' positions were as follows:
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