Organization
PowerShares DB US Dollar Index Bullish Fund (the “Fund”; “Fund” may also refer
to the Fund and the Master Fund, collectively, as the context requires), a separate series of PowerShares DB US Dollar Index Trust (the “Trust”), a Delaware statutory trust organized in two separate series and formed on August 3,
2006, and its subsidiary, DB US Dollar Index Bullish Master Fund (the “Master Fund”), a separate series of DB US Dollar Index Bullish Master Trust (the “Master Trust”), a Delaware statutory trust organized in two separate series
and formed on August 3, 2006. DB Commodity Services LLC, a Delaware limited liability company (“DBCS” or the “Managing Owner”), funded both the Fund and the Master Fund with a capital contribution of $1,000 in exchange for
40 General Shares of each of the Fund and Master Fund. The fiscal year end of the Fund is December 31
st
. The term of the Fund is perpetual
(unless terminated earlier in certain circumstances) as provided for in the Amended and Restated Declaration of Trust and Trust Agreement of each of the Trust and the Master Trust (the “Trust Agreements”).
The Fund offers common units of beneficial interest (the “Limited Shares”) only to certain eligible financial institutions (“Authorized
Participants”) in one or more blocks of 200,000 Limited Shares, called a Basket. The proceeds from the offering of Limited Shares are invested in the Master Fund. The Fund and the Master Fund commenced investment operations on February 15,
2007 with the initial offering of 1,000,000 Limited Shares to Deutsche Bank Securities Inc. as initial purchaser of the Fund in exchange for $25,000,000. The Fund commenced trading on the American Stock Exchange (the “Amex”) on
February 20, 2007. After the initial offering of the Limited Shares, an additional 3,800,000 Limited Shares were issued to certain Authorized Participants for $90,525,280 and 600,000 Limited Shares were redeemed for $14,907,566 during the
period from February 15, 2007 (commencement of investment operations) to December 31, 2007. Limited Shares may be purchased from the Fund only by Authorized Participants.
This report covers the three months ended December 31, 2007 and the period from February 15, 2007 (commencement of investment operations) to
December 31, 2007 (herein referred to as “Period Ended December 31, 2007”). No investment operations occurred prior to February 15, 2007, therefore, the 2007 and 2006 operating results are not comparable.
Fund Investment Overview
The Master Fund invests in
futures contracts, or DX Contracts, with a view to tracking the changes, whether positive or negative, in the level of the Deutsche Bank US Dollar Index (USDX®) Futures Index – Excess Return (Long Index), the Long Index or the Index, over
time. The Fund earns interest income from United States Treasury Obligations and other high credit quality short-term fixed income securities. The Index is calculated to reflect the changes in market value over time, whether positive or negative, of
long positions on DX Contracts. DX Contracts are traded through the currency markets of ICE Futures U.S. (formerly known as the New York Board of Trade®), under the symbol “DX.” The changes in market value over time, whether positive
or negative, of the DX Contracts are related to the changes, whether positive or negative, in the level of the U.S. Dollar Index®, or the USDX®. The Index provides a general indication of the international value of the U.S. dollar
relative to the six major world currencies, or Index Currencies, which comprise the USDX® — Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
The Fund, through its Master Fund, establishes long positions in DX Contracts with a view to tracking the changes, whether positive or negative, in the
level of the Index. The performance of the Fund also is intended to reflect the excess, if any, of its Master Fund’s interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income
securities over the expenses of the Fund and the Master Fund.
A patent application directed to the creation and operation of the Trust is
pending at the United States Patent and Trademark Office.
The Trustee
Under the Trust Agreements of each of the Fund and the Master Fund, Wilmington Trust Company, the Trustee of the Fund and the Master Fund has delegated
to the Managing Owner the exclusive management and control of all aspects of the business of the Fund and the Master Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee
have any liability for the acts or omissions of the Managing
1
Owner. Pursuant to the Trust Agreements, the Trustee is compensated by the Fund or Master Fund, as appropriate. Under the Trust Agreements, the Managing
Owner, from the assets of the Fund or the Master Fund, will indemnify the Trustee for any liability or expense relating to the formation, operations and termination of the Funds incurred without gross negligence or willful misconduct of the Trustee.
The Managing Owner
The Managing
Owner was formed on May 23, 2005. The Managing Owner is an indirect wholly owned subsidiary of Deutsche Bank AG. The Managing Owner serves as the commodity pool operator and commodity trading advisor of the Fund and the Master Fund. The
Managing Owner and its trading principals have limited experience in operating commodity pools and managing futures trading accounts. The Managing Owner is registered as a commodity pool operator and commodity trading advisor with the Commodity
Futures Trading Commission (the “CFTC”) and is a member of the National Futures Association (the “NFA”). As a registered commodity pool operator and commodity trading advisor, with respect to both the Fund and the Master Fund,
the Managing Owner must comply with various regulatory requirements under the Commodity Exchange Act and the rules and regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements,
and reporting and recordkeeping requirements. The Managing Owner is also subject to periodic inspections and audits by the CFTC and NFA.
The Managing Owner’s main business offices are located at 60 Wall Street, New York, New York 10005, telephone (212) 250-5122.
The Master Fund pays the Managing Owner a management fee (the “Management Fee”) monthly in arrears, in an amount equal to 0.50% per annum of the daily net asset value of the Master Fund. No separate Management Fee is paid by
the Fund. The Management Fee is paid in consideration of the Managing Owner’s commodity futures trading advisory services.
Pursuant
to the Trust Agreements, the Fund and the Master Fund will indemnify the Managing Owner against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with its activities on behalf of
the Master Fund and the Fund incurred without negligence or misconduct.
The Commodity Broker
Deutsche Bank Securities Inc., a Delaware corporation, serves as the Master Fund’s clearing broker (the “Commodity Broker”). The Commodity
Broker is also an indirect wholly-owned subsidiary of Deutsche Bank AG and an affiliate of the Managing Owner. In its capacity as clearing broker, the Commodity Broker executes and clears each of the Master Fund’s futures transactions and
performs certain administrative services for the Master Fund.
A variety of executing brokers execute futures transactions on behalf of the
Master Fund. Such executing brokers “give-up”, or transfer for clearing, all such transactions to the Commodity Broker. The Commodity Broker is registered with the CFTC as a futures commission merchant and is a member of the NFA in such
capacity.
The Master Fund pays to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees, give-up
fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities. The Commodity Broker’s brokerage commissions and trading fees are determined on a contract-by-contract basis. Brokerage
commissions and fees in any future fiscal year or any part of any future fiscal year may be greater. On average, total charges paid to the Commodity Broker were approximately $7.00 per round-turn trade for the period from February 15, 2007
(commencement of investment operations) to December 31, 2007.
A round-turn trade is a completed transaction involving both a purchase
and a liquidating sale, or a sale followed by a covering purchase.
The Administrator
The Managing Owner, on behalf of the Fund and the Master Fund, has appointed The Bank of New York as the administrator (the “Administrator”) of
the Fund and the Master Fund and has entered into an Administration Agreement in connection therewith. The Bank of New York serves as custodian, or Custodian, of the Fund and has entered into a Global Custody Agreement, or Custody Agreement, in
connection therewith. The Bank of New York serves as the transfer agent, or Transfer Agent, of the Fund and has entered into a Transfer Agency and Service Agreement in connection therewith.
2
The Bank of New York, a banking corporation
organized under the laws of the State of New York with trust powers, has an office at 2 Hanson Place, 12
th
Floor, Brooklyn, New York 11217. The Bank
of New York is subject to supervision by the New York State Banking Department and the Board of Governors of the Federal Reserve System.
Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the operation and administration of the Fund and the Master Fund (other than making investment decisions),
including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund administrative services. The Administrator retains certain financial books and records,
including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details and trading and related documents
received from futures commission merchants.
The Administration Agreement will continue in effect from the commencement of trading
operations unless terminated on at least 90 days’ prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator may terminate the Administration Agreement upon 30 days’ prior written notice if
the Fund and/or Master Fund has materially failed to perform its obligations under the Administration Agreement.
The Administration
Agreement provides for the exculpation and indemnification of the Administrator from and against any costs, expenses, damages, liabilities or claims (other than those resulting from the Administrator’s own bad faith, negligence or willful
misconduct) which may be imposed on, incurred by or asserted against the Administrator in performing its obligations or duties under the Administration Agreement.
The Administrator’s monthly fees are paid on behalf of the Fund and the Master Fund by the Managing Owner out of the Management Fee.
The Administrator and any of its affiliates may from time-to-time purchase or sell Limited Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Administrator receives a transaction processing fee in connection with orders from Authorized Participants to create or redeem Baskets
in the amount of $500 per order. These transaction processing fees are paid indirectly by the Authorized Participants and not by the Fund or the Master Fund.
The Distributor
ALPS Distributors (the “Distributor”) provides certain distribution services to the Fund.
Pursuant to the Distribution Services Agreement between the Managing Owner, in its capacity as managing owner of the Fund, the Fund and the Distributor, the Distributor assists the Managing Owner and the Administrator with certain functions and
duties relating to the creation and redemption of Baskets.
The date of the Distribution Services Agreement is the effective date and such
Agreement will continue until two years from such date and thereafter will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by the Fund’s Managing Owner or otherwise
as provided under the Distribution Services Agreement. The Distribution Services Agreement is terminable without penalty on sixty days’ written notice by the Managing Owner or by the Distributor. The Distribution Services Agreement will
automatically terminate in the event of its assignment.
Pursuant to the Distribution Services Agreement, the Fund will indemnify and hold
harmless the Distributor and each of its directors and officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act, against any loss, liability, claim, damages or expenses (including the
reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Limited Shares, based upon the ground
that the registration statement, prospectus, statement of additional information, shareholder reports or other information filed or made public by the Fund (as from time-to-time amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the statements not misleading under the 1933 Act or any other statute or the common law.
3
A I M Distributors, Inc. and PowerShares Capital Management, LLC
Certain marketing services are provided for the Fund by A I M Distributors, Inc. or PowerShares Capital Management, LLC. This assistance includes the
licensing of the PowerShares® registered service mark to the Managing Owner for use with the Fund. PowerShares® is a registered service mark of PowerShares Capital Management LLC. PowerShares Capital Management LLC is not a sponsor or
promoter of the Fund and has no responsibility for the performance of the Fund or the decisions made or actions taken by the Managing Owner.
Through a marketing agreement between the Managing Owner and A I M Distributors, Inc. (“AIM Distributors”) an affiliate of PowerShares Capital Management LLC, or PowerShares, the Managing Owner, on behalf of the Fund and the
Master Fund, has appointed AIM Distributors as a marketing agent. AIM Distributors assists the Managing Owner and the Administrator with certain functions and duties such as providing various educational and marketing activities regarding the Fund,
primarily in the secondary trading market, which activities include, but are not limited to, communicating the Fund’s name, characteristics, uses, benefits, and risks, consistent with the prospectus. AIM Distributors will not open or maintain
customer accounts or handle orders for the Fund. AIM Distributors engages in public seminars, road shows, conferences, media interviews, field incoming telephone “800” number calls and distribute sales literature and other communications
(including electronic media) regarding the Fund.
AIM Distributors is a subsidiary of Invesco, Ltd. Invesco, Ltd. is a leading independent
global investment manager operating under the AIM, INVESCO, AIM Trimark, Invesco Perpetual and Atlantic Trust brands.
Tax Reporting
The Fund has retained the services of PricewaterhouseCoopers LLP to assist with certain tax reporting requirements of the Fund and its Shareholders.
Regulation
Futures exchanges in the
United States are subject to regulation under the Commodity Exchange Act, or CEAct, by the CFTC, the governmental agency having responsibility for regulation of futures exchanges and trading on those exchanges. No governmental U.S. agency regulates
the over-the-counter, or OTC, foreign exchange markets.
The CEAct and the CFTC also regulate the activities of “commodity trading
advisors” and “commodity pool operators” and the CFTC has adopted regulations with respect to certain of such persons’ activities. Pursuant to its authority, the CFTC requires a commodity pool operator (such as the Managing
Owner) to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend the registration of a commodity pool operator if the CFTC finds that the operator has violated the CEAct or regulations thereunder and
in certain other circumstances. Suspension, restriction or termination of the Managing Owner’s registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and
might result in the termination of, the Fund and the Master Fund. The CEAct gives the CFTC similar authority with respect to the activities of commodity trading advisors, such as the Managing Owner. If the registration of a Managing Owner as a
commodity trading advisor were to be terminated, restricted or suspended, the Managing Owner would be unable, until such time (if any) as such registration were to be reinstated, to render trading advice to the Fund and the Master Fund. The Fund and
the Master Fund themselves are not registered with the CFTC in any capacity.
The CEAct requires all “futures commission
merchants,” such as the Commodity Broker, to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers’ funds and positions, and to maintain
specified book and records open to inspection by the staff of the CFTC.
The CEAct also gives the states certain powers to enforce its
provisions and the regulations of the CFTC.
Shareholders are afforded certain rights for reparations under the CEAct. Shareholders may
also be able to maintain a private right of action for certain violations of the CEAct. The CFTC has adopted rules implementing the reparation provisions of the CEAct which provide that any person may file a complaint for a reparations award with
the CFTC for violation of the CEAct against a floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, and their respective associated persons.
Pursuant to authority in the CEAct, the NFA has been formed and registered with the CFTC as a “registered futures association.” At the present
time, the NFA is the only non-exchange self-regulatory organization for commodities
4
professionals. NFA members are subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. As the
self-regulatory body of the commodities industry, the NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals who do not comply with such standards. The CFTC has delegated to the NFA responsibility
for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers and their respective associated persons and floor brokers. The Commodity Broker and the Managing Owner are members of the
NFA (the Fund and the Master Fund themselves are not required to become members of the NFA).
The CFTC has no authority to regulate trading
on foreign commodity exchanges and markets.
Employees
The Fund and the Master Fund have no employees.
Available Information
The Fund files with or submits to the SEC annual, quarterly and current reports and other information meeting the informational requirements of the
Exchange Act. These reports are available on the Managing Owner’s website at
http://dbfunds.db.com
. Investors may also inspect and copy these reports, proxy statements and other information, and related exhibits and schedules, at the
Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s Internet site at
http://www.sec.gov
.
The Fund also posts monthly performance reports and its annual report, as required by the Commodity Futures Trading Commission, on the Managing
Owner’s website at the address listed above.
An investment in the securities
of the Fund involves a high degree of risk. Investors should consider carefully all of the risks described below, together with the other information contained in this report and the Prospectus, before making a decision to invest in the securities
of the Fund. If any of the following risks occur, the business, financial condition and results of operations of the Fund may be adversely affected.
Investment and Trading Related Risks
The Value of the Limited Shares Relates Directly to the Value of the Futures Contracts
and Other Assets Held by the Master Fund and Fluctuations in the Price of These Assets Could Materially Adversely Affect an Investment in the Fund’s Limited Shares.
The Limited Shares are designed to reflect as closely as possible the changes, whether positive or negative, in the level of the Index, over time,
through the Master Fund’s investment in the DX Contracts. The value of the Limited Shares relates directly to the changes in market value over time, whether positive or negative, of the DX Contracts, less the liabilities (including estimated
accrued but unpaid expenses) of the Fund and the Master Fund. The price of the DX Contracts may fluctuate widely. Several factors may affect the price of the Index Currencies, and in turn, the DX Contracts owned by the Master Fund, including, but
not limited to:
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National debt levels and trade deficits, including changes in balances of payments and trade;
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•
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Domestic and foreign inflation rates and investors’ expectations concerning inflation rates;
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•
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Domestic and foreign interest rates and investors’ expectations concerning interest rates;
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•
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Currency exchange rates;
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•
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Investment and trading activities of mutual funds, hedge funds and currency funds;
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•
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Global or regional political, economic or financial events and situations;
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5
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•
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Supply and demand changes which influence the foreign exchange rates of various currencies;
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•
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Monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country
or on investment by residents of a country in other countries), trade restrictions, currency devaluations and revaluations;
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•
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Governmental intervention in the currency market, directly and by regulation, in order to influence currency prices; and
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•
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Expectations among market participants that a currency’s value soon will change.
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Net Asset Value May Not Always Correspond to Market Price and, as a Result, Baskets may be Created or Redeemed at a Value that Differs from the Market Price of the
Limited Shares.
Net asset value may not always correspond to market price and, as a result, baskets may be created or redeemed at
a value that differs from the market price of the Limited Shares.
The net asset value per share of the Limited Shares will change as
fluctuations occur in the market value of the Master Fund’s portfolio. Investors should be aware that the public trading price of a Basket of Limited Shares may be different from the net asset value of a Basket of Limited Shares (i.e., 200,000
Limited Shares may trade at a premium over, or a discount to, net asset value of a Basket of Limited Shares) and similarly the public trading price per Limited Share may be different from its net asset value per Limited Share. Consequently, an
Authorized Participant may be able to create or redeem a Basket of Limited Shares at a discount or a premium to the public trading price per Limited Share. This price difference may be due, in large part, to the fact that supply and demand forces at
work in the secondary trading market for Limited Shares are closely related, but not identical, to the same forces influencing the prices of the Index Currencies trading individually or in the aggregate at any point in time. Investors also should
note that the size of the Fund in terms of total assets held may change substantially over time and from time-to-time as Baskets are created and redeemed.
Authorized Participants or their clients or customers may have an opportunity to realize a riskless profit if they can purchase a Basket at a discount to the public trading price of the Limited Shares or can redeem a
Basket at a premium over the public trading price of the Limited Shares. The Managing Owner expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public
trading price to track net asset value per Limited Share closely over time.
The value of a Limited Share may be influenced by
non-concurrent trading hours between the Amex and ICE Futures U.S., which is the futures exchange on which DX Contracts are traded. While the Limited Shares trade on the Amex from 9:30 a.m. to 4:15 p.m. Eastern Standard Time, DX Contracts are traded
for 22 consecutive hours on ICE Futures U.S. from 8:00 p.m. Eastern Standard Time to 6:00 p.m. Eastern Standard Time on the next business day. Consequently, liquidity in DX Contracts will be reduced after the close of the Amex’s trading at 4:15
p.m. Eastern Standard Time. As a result, during the time when the ICE Futures U.S. is open and the Amex is closed, trading spreads and the resulting premium or discount on the Limited Shares may widen, and, therefore, increase the difference between
the price of the Limited Shares and the net asset value of the Limited Shares.
The Fund’s Performance May Not Always Replicate Exactly the
Changes in the Levels of the Index.
It is possible that the Fund’s performance may not fully replicate the changes in the
levels of the Index due to disruptions in the markets for the Index Currencies or DX Contracts, or due to other extraordinary circumstances. In addition, the Fund is not able to replicate exactly the changes in the levels of the Index because the
total return generated by the Master Fund is reduced by expenses and transaction costs, including those incurred in connection with the Master Fund’s trading activities, and increased by interest income from the Master Fund’s holdings of
short-term high quality fixed income securities. Tracking the Index requires trading of the Master Fund’s portfolio with a view to tracking the Index over time and is dependent upon the skills of the Managing Owner and its trading principals,
among other factors.
The Master Fund is Not Actively Managed and Tracks the Index During Periods in which the Index Is Flat or Declining as well as
when the Index Is Rising.
The Master Fund is not actively managed by traditional methods. For example, if the DX Contracts owned
by the Master Fund are declining in value, the Master Fund will not close out such positions, except in connection with a change in
6
the composition or weighting of the Index. The Managing Owner seeks to cause the net asset value to track the Index during periods in which the Index is flat
or declining as well as when the Index is rising.
Investors who Invest Only in the Fund May Not be Able to Profit if the Market Value of the DX
Contracts Moves Against Such Investment.
The Fund is expected to rise as a result of any upward price movement in DX Contracts.
If the price of the DX Contracts decreases, the PowerShares DB US Dollar Bearish Fund (the “Bearish Fund”) will profit and the
Fund will suffer a loss. If the price of the DX Contracts increases, the Fund will profit and the Bearish Fund will suffer a loss. Therefore, the investment experience of investors who plan to invest in either the Fund or the Bearish Fund will
depend upon selection of the appropriate Fund in light of the price movements of the DX Contracts. Such selection may become unprofitable in the future if the price of the DX Contracts changes direction.
Certain investors who decide to invest in both the Fund Shares and the Bearish Fund Shares may, nevertheless, suffer losses if the investor’s
investment mix between the Fund Shares and the Bearish Fund Shares is biased in one direction and the market price of the DX Contracts moves in the opposite direction. Additionally, investors should not invest in equal amounts in both the Fund and
the Bearish Fund simultaneously. The net effect of such an investment will be the income from the underlying 3-month U.S. Treasury bills, less fees and expenses.
Amex May Halt Trading in the Limited Shares Which Would Adversely Impact Your Ability to Sell Limited Shares.
The
Limited Shares are listed for trading on the Amex under the market symbol “UUP.” Trading in Limited Shares may be halted due to market conditions or, in light of Amex rules and procedures, for reasons that, in the view of the Amex, make
trading in Limited Shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a
specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the Limited Shares will continue to be met or will remain unchanged. The Fund and the Master Fund will be terminated if the Limited Shares
are delisted.
The Lack of an Active Trading Market for the Limited Shares May Result in Losses on Your Investment in the Fund at the Time of
Disposition of Your Limited Shares.
Although the Limited Shares are listed and traded on the Amex, there can be no guarantee that
an active trading market for the Limited Shares will be maintained. If you need to sell your Limited Shares at a time when no active market for them exists, the price you receive for your Limited Shares, assuming that you are able to sell them,
likely will be lower than the price you would receive if an active market did exist.
The Limited Shares Are a New Securities Product and Their Value
Could Decrease if Unanticipated Operational or Trading Problems Arise.
The mechanisms and procedures governing the creation,
redemption and offering of the Limited Shares have been developed specifically for this securities product. Consequently, there may be unanticipated problems or issues with respect to the mechanics of the operations of the Fund and the Master Fund
and the trading of the Limited Shares that could have a material adverse effect on an investment in the Limited Shares. In addition, although the Master Fund is not actively “managed” by traditional methods, to the extent that
unanticipated operational or trading problems or issues arise, the Managing Owner’s past experience and qualifications may not be suitable for solving these problems or issues.
As the Managing Owner and its Principals have Only a Limited History of Operating Investment Vehicles like the Fund or the Master Fund, their Experience may be Inadequate or Unsuitable to Manage the Fund or the
Master Fund.
The Managing Owner was formed to be the managing owner of investment vehicles such as the Fund and the Master Fund
and has only a limited history of past performance. The past performances of the Managing Owner’s management of other commodity pools are no indication of its ability to manage an investment vehicle such as the Fund or the Master Fund. If the
experience of the Managing Owner and its principals is not adequate or suitable to manage an investment vehicle such as the Fund and the Master Fund, the operations of the Fund and the Master Fund may be adversely affected.
7
You May Not Rely on Past Performance or Index Results in Deciding Whether to Buy Limited Shares.
The Fund and the Master Fund have a limited performance history upon which to evaluate your investment in the Fund and the Master
Fund. Although past performance is not necessarily indicative of future results, if the Fund and the Master Fund had a longer performance history, such performance history might (or might not) provide you with more information on which to evaluate
an investment in the Fund and the Master Fund. Likewise, the Index has a limited history which may not be indicative of future Index results, or of the future performance of the Fund or the Master Fund. Therefore, you will have to make your decision
to invest in the Fund on the basis of limited information.
Fewer Representative Index Currencies May Result In Greater Index Volatility.
The Index is concentrated in terms of the number of currencies represented. You should be aware that other currency indexes are more
diversified in terms of the number of currencies included. Concentration in fewer currencies may result in a greater degree of volatility in the Index and the net asset value of the Fund and the Master Fund which tracks the Index under specific
market conditions and over time.
Unusually Long Peak-to-Valley Drawdown Periods With Respect To Both the Long Index and the Short Index May Be
Reflected in Equally Long Peak-to-Valley Drawdown Periods with Respect to the Performance of the Limited Shares.
Although past
Index levels are not necessarily indicative of future Index levels, the Long Index and the Deutsche Bank US Dollar Index (USDX®) Futures Index – Excess Return (Short Index), or Short Index, which is tracked by the Bearish Fund, have
experienced unusually long peak-to-valley drawdown periods. As of December 31, 2007, the closing level of the Index decreased (40.29)% from the period December 1986 – December 2004. As of December 31, 2007, the closing level of the
Short Index decreased (36.79)% from the period June 1995 – January 2002. During the period from June 1995 – January 2002, the Index and Short Index experienced drawdown periods simultaneously.
Because it is expected that the Fund’s performance will track the changes in the closing levels of the underlying Index, the Fund would suffer a
continuous drawdown during the period that the Index suffers such a drawdown period, and in turn, the value of your Limited Shares will also suffer.
Price Volatility May Possibly Cause the Total Loss of Your Investment.
Futures contracts have a high degree of
price variability and are subject to occasional rapid and substantial changes. Consequently, you could lose all or substantially all of your investment in the Fund.
The following table* reflects various measures of volatility** of the history of the Index, as calculated on an excess return basis:
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Volatility
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Volatility Type
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Long Index
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Short Index
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Daily volatility over full history
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8.70%
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8.68%
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Average rolling 3 month daily volatility
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8.44%
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8.41%
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Monthly return volatility
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8.52%
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8.44%
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Average annual volatility
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8.57%
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8.54%
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The following table reflects the daily
volatility on an annual basis of the Long Index and the Short Index:
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Year
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Daily Volatility
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Long Index
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Short Index
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1986***
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0.00%
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0.00%
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1987
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9.44%
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9.07%
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1988
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9.64%
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9.70%
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1989
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10.25%
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10.23%
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1990
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8.77%
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8.35%
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1991
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11.53%
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11.89%
|
8
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|
|
|
|
|
|
Year
|
|
Daily Volatility
|
|
|
Long Index
|
|
Short Index
|
|
1992
|
|
11.70%
|
|
12.06%
|
|
1993
|
|
9.43%
|
|
9.54%
|
|
1994
|
|
7.83%
|
|
7.52%
|
|
1995
|
|
9.78%
|
|
9.55%
|
|
1996
|
|
4.99%
|
|
5.01%
|
|
1997
|
|
7.59%
|
|
7.91%
|
|
1998
|
|
8.06%
|
|
7.94%
|
|
1999
|
|
7.59%
|
|
7.71%
|
|
2000
|
|
8.77%
|
|
9.17%
|
|
2001
|
|
8.79%
|
|
8.65%
|
|
2002
|
|
7.49%
|
|
7.19%
|
|
2003
|
|
8.44%
|
|
8.25%
|
|
2004
|
|
9.52%
|
|
9.23%
|
|
2005
|
|
8.11%
|
|
8.48%
|
|
2006
|
|
6.96%
|
|
6.76%
|
|
2007*
|
|
5.21%
|
|
5.08%
|
Past Index results are not necessarily indicative of future changes, positive or negative, in the Index levels.
|
*
|
As of December 31, 2007.
|
|
**
|
Volatility, for these purposes means the following:
|
Daily Volatility
: The relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in price.
Monthly Return Volatility
: The relative rate at which the price of the Index moves up and down, found by calculating the annualized standard
deviation of the monthly change in price.
Average Annual Volatility
: The average of yearly volatilities for a given sample period.
The yearly volatility is the relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in price for each business day in the given year.
|
***
|
As of December 31, 1986.
|
Fees and Commissions are Charged
Regardless of Profitability and May Result in Depletion of Assets.
The Fund is indirectly subject to the fees and expenses
described herein which are payable irrespective of profitability. Such fees and expenses include asset-based fees of 0.50% per annum. Additional charges include brokerage fees of not greater than 0.05% per annum in the aggregate in selling
commissions. As of December 31, 2007, the Fund has earned interest income at an annual rate of approximately 4.20% per annum. Consequently, it is expected that interest income will exceed fees (other than selling commissions), however, if
interest rates fall below approximately 0.55%, the Fund will need to have positive performance in order to break even net of fees and expenses. Consequently, depending upon the performance of the Fund and the interest rate environment, the expenses
of the Master Fund could, over time, result in losses to your investment therein. You may never achieve profits, significant or otherwise.
You
Cannot Be Assured of the Managing Owner’s Continued Services, Which Discontinuance May Be Detrimental to the Fund.
You cannot
be assured that the Managing Owner will be willing or able to continue to service the Fund and the Master Fund for any length of time. If the Managing Owner discontinues its activities on behalf of the Fund and the Master Fund, the Fund and the
Master Fund may be adversely affected.
Possible Illiquid Markets May Exacerbate Losses.
Futures positions cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively
small volume of buy and sell orders in a market. A market disruption, such as when foreign
9
governments may take or be subject to political actions which disrupt the markets in their currency or major exports, can also make it difficult to liquidate
a position.
There can be no assurance that market illiquidity will not cause losses for the Fund. The large size of the positions which
the Master Fund may acquire on behalf of the Fund increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will be
exacerbated due to the fact that the Master Fund only invests in the DX Contract.
You May Be Adversely Affected by Redemption Orders that Are
Subject To Postponement, Suspension or Rejection Under Certain Circumstances.
The Fund may, in its discretion, suspend the right
of redemption or postpone the redemption settlement date, (1) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable, or (2) for such other period as the Managing
Owner determines to be necessary for the protection of the Shareholders of the Fund. In addition, the Fund will reject a redemption order if the order is not in proper form as described in the participant agreement among the Authorized Participant,
the Managing Owner and the Managing Owner in its capacity as managing owner of the Fund or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. Any such postponement, suspension or rejection could adversely affect a
redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of the Authorized Participant’s redemption proceeds if the net asset value of the Fund declines during the period of delay. The Fund disclaims any
liability for any loss or damage that may result from any such suspension or postponement.
Because the Futures Contracts Have No Intrinsic Value,
the Positive Performance of Your Investment Is Wholly Dependent Upon an Equal and Offsetting Loss.
Futures trading is a risk
transfer economic activity. For every gain there is an equal and offsetting loss rather than an opportunity to participate over time in general economic growth. Unlike most alternative investments, an investment in Limited Shares does not involve
acquiring any asset with intrinsic value. Overall stock and bond prices could rise significantly and the economy as a whole prosper while Limited Shares trade unprofitably.
Failure of Currency Futures Trading to Exhibit Low to Negative Correlation to General Financial Markets Will Reduce Benefits of Diversification and May Exacerbate Losses to Your Portfolio.
Historically, currency futures’ returns have tended to exhibit low to negative correlation with the returns of other assets such as stocks and
bonds. Although currency futures trading can provide a diversification benefit to investor portfolios because of its low to negative correlation with other financial assets, the fact that the Index is not 100% negatively correlated with financial
assets such as stocks and bonds means that the Fund cannot be expected to be automatically profitable during unfavorable periods for the stock or bond market, or vice-versa. If the Limited Shares perform in a manner that correlates with the general
financial markets or do not perform successfully, you will obtain no diversification benefits by investing in the Limited Shares and the Limited Shares may produce no gains to offset your losses from other investments.
Shareholders Do Not Have the Protections Associated With Ownership of Limited Shares in an Investment Company Registered Under the Investment Company Act of 1940.
Neither the Fund nor the Master Fund is registered as an investment company under the Investment Company Act of 1940 and is not
required to register under such Act. Consequently, Shareholders do not have the regulatory protections provided to the investors in registered and regulated investment companies.
Various Actual and Potential Conflicts of Interest May Be Detrimental to Shareholders.
The
Fund and the Master Fund are subject to actual and potential conflicts of interest involving the Managing Owner, various commodity futures brokers and Authorized Participants. The Managing Owner and its principals, all of whom are engaged in other
investment activities, are not required to devote substantially all of their time to the business of the Fund and the Master Fund, which also presents the potential for numerous conflicts of interest with the Fund and the Master Fund. As a result of
these and other relationships, parties involved with the Fund and the Master Fund have a financial incentive to act in a manner other than in the best interests of the Fund, the Master Fund and the Shareholders. The Managing Owner has not
established any formal procedure to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. Although the
10
Managing Owner attempts to monitor these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts do
not, in fact, result in adverse consequences to the Shareholders.
The Fund and the Master Fund may be subject to certain conflicts with
respect to the Commodity Broker, including, but not limited to, conflicts that result from receiving greater amounts of compensation from other clients, or purchasing opposite or competing positions on behalf of third party accounts traded through
the Commodity Broker.
Tax Related Risks
Shareholders of the Fund Will Be Subject to Taxation on Their Share of the Fund’s Taxable Income (Including the Fund’s Share of the Master Fund’s Taxable Income), Whether or Not They Receive Cash Distributions.
Shareholders of the Fund will be subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on
their share of the Fund’s taxable income (including the Master Fund’s taxable income allocable to the Fund), whether or not they receive cash distributions from the Fund. Shareholders of the Fund may not receive cash distributions equal to
their share of the Fund’s taxable income (including the Master Fund’s taxable income) or even the tax liability that results from such income.
Items of Income, Gain, Loss, Deduction, and Credit with respect to Limited Shares could be Reallocated if the IRS does not Accept the Assumptions or Conventions Used by the Fund or the Master Fund in Allocating Such Tax Items.
U.S. federal income tax rules applicable to partnerships are complex and often difficult to apply to publicly traded partnerships.
The Fund and the Master Fund will apply certain assumptions and conventions in an attempt to comply with the applicable rules and to report income, gain, deduction, loss and credit to Shareholders of the Fund in a manner that reflects the
Shareholders’ beneficial shares of partnership items, but these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will successfully assert that the conventions and
assumptions used by the Fund or the Master Fund do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deduction, loss or credit be adjusted or reallocated in a manner that
adversely affects you.
The Current Treatment of Long Term Capital Gains Under Current U.S. Federal Income Tax Law May Be Adversely Affected, Changed
or Repealed in the Future.
Under current law, long term capital gains are taxed to noncorporate investors at a maximum U.S.
federal income tax rate of 15%. This tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time and is currently scheduled to expire for tax years beginning after December 31, 2010.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE LIMITED SHARES; SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
Other Risks
Failure of Futures Commission Merchants or Commodity Brokers to Segregate Assets May Increase Losses; Despite Segregation of Assets, the Master Fund Remains at
Risk of Significant Losses Because the Master Fund May Only Receive a Pro-Rata Share of the Assets, or No Assets at All.
The CEAct
requires a clearing broker to segregate all funds received from customers from such broker’s proprietary assets. If the Commodity Broker fails to do so, the assets of the Master Fund might not be fully protected in the event of the Commodity
Broker’s bankruptcy. Furthermore, in the event of the Commodity Broker’s bankruptcy, the Master Fund Units could be limited to recovering either a pro rata share of all available funds segregated on behalf of the Commodity Broker’s
combined customer accounts or the Master Fund Units may not recover any assets at all, even though certain property specifically traceable to the Master Fund was held by the Commodity Broker. The Commodity Broker may, from time-to-time, have been
the subject of certain regulatory and private causes of action.
In the event of a bankruptcy or insolvency of any exchange or a clearing
house, the Master Fund could experience a loss of the funds deposited through its Commodity Broker as margin with the exchange or clearing house, a loss of any profits on its open positions on the exchange, and the loss of unrealized profits on its
closed positions on the exchange.
11
Regulatory Changes or Actions May Alter the Nature of an Investment in the Fund.
Considerable regulatory attention has been focused on non-traditional investment pools which are publicly distributed in the United States. There is a
possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the Fund or the ability of the Fund to continue to implement its investment strategy.
The futures markets are subject to comprehensive statutes, regulations, and margin requirements. In addition, the CFTC and the exchanges are authorized
to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of
trading. The regulation of futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. The effect of any future regulatory change on the Fund is impossible to predict,
but could be substantial and adverse.
Lack of Independent Advisers Representing Investors.
The Managing Owner has consulted with counsel, accountants and other advisers regarding the formation and operation of the Fund and the Master Fund. No
counsel has been appointed to represent you in connection with the offering of the Limited Shares. Accordingly, you should consult your own legal, tax and financial advisers regarding the desirability of an investment in the Limited Shares.
Possibility of Termination of the Fund or Master Fund May Adversely Affect Your Portfolio.
The Managing Owner may withdraw from the Fund upon 120 days’ notice, which would cause the Fund and the Master Fund to terminate unless a substitute
managing owner were obtained. Owners of 50% of the Limited Shares have the power to terminate the Fund. If it is so exercised, investors who may wish to continue to invest in the Fund’s Index through a fund vehicle will have to find another
vehicle, and may not be able to find another vehicle that offers the same features as the Fund. Such detrimental developments could cause you to liquidate your investments and upset the overall maturity and timing of your investment portfolio. If
the registrations with the CFTC or memberships in the NFA of the Managing Owner or the Commodity Broker were revoked or suspended, such entity would no longer be able to provide services to the Fund and the Master Fund.
Shareholders Do Not Have the Rights Enjoyed by Investors in Certain Other Vehicles.
As interests in separate series of a Delaware statutory trust, the Limited Shares have none of the statutory rights normally associated with the
ownership of shares of a corporation (including, for example, the right to bring “oppression” or “derivative” actions). In addition, the Limited Shares have limited voting and distribution rights (for example, Shareholders do not
have the right to elect directors and the Fund is not required to pay regular distributions, although the Fund may pay distributions in the discretion of the Managing Owner).
An Investment in the Limited Shares May Be Adversely Affected by Competition From Other Methods of Investing in Currencies.
The Fund and the Master Fund constitute a new, and thus untested, type of investment vehicle. They compete with other financial vehicles, including other commodity pools, hedge funds, traditional debt and equity
securities issued by companies and foreign governments, other securities backed by or linked to currencies, and direct investments in the underlying currencies or currencies futures contracts. Market and financial conditions, and other conditions
beyond the Managing Owner’s control, may make it more attractive to invest in other financial vehicles or to invest in such currencies directly, which could limit the market for the Limited Shares and reduce the liquidity of the Limited Shares.
Competing Claims Over Ownership of Intellectual Property Rights Related to the Fund Could Adversely Affect the Fund and an Investment in the Limited
Shares.
While the Managing Owner believes that all intellectual property rights needed to operate the Fund and the Master Fund are
either owned by or licensed to the Managing Owner or have been obtained, third parties may allege or assert ownership of intellectual property rights which may be related to the design, structure and operations of the Fund and the Master Fund. To
the extent any claims of such ownership are brought or any proceedings are instituted to assert such claims, the negotiation, litigation or settlement of such claims, or the ultimate disposition of such claims in a court of law if a suit is brought,
may adversely affect the Fund and the Master Fund and an investment in the Limited Shares, for example, resulting in expenses or damages or the termination of the Fund and the Master Fund.
12
Because the Price of DX Contracts Is Primarily Influenced by Short-Term Interest Rate Differentials, You May Sell
Your Limited Shares at a Time When the DX Contracts Are Being Traded at a Discount, and therefore Receive an Amount that Would be Lower than if the DX Contracts Were Trading at a Premium.
The price of DX Contracts responds directly to short-term interest rate differentials. For example, if interest rates in the U.S. are broadly higher than
international interest rates, then DX Contracts will trade at a discount to the spot index. If U.S. rates are lower, DX Contracts will trade at a premium to the spot index. This relationship also holds for long-dated futures versus nearby futures.
Because interest rates move up and down, DX Contracts may trade at a premium some of the time and at a discount at other times. In turn, if you sell your Limited Shares during a period when the DX Contracts are trading at a discount, you may receive
less than you may have received if you sold your Limited Shares during a period when the DX Contracts are trading at a premium.
The Value of the
Limited Shares Will be Adversely Affected if the Fund or the Master Fund is Required to Indemnify the Trustee or the Managing Owner.
Under the Trust Agreement, the Trustee and the Managing Owner have the right to be indemnified for any liability or expense either incurs without negligence or misconduct. That means the Managing Owner may require the assets of the Master
Fund to be sold in order to cover losses or liability suffered by it or by the Trustee. Any sale of that kind would reduce the net asset value of the Master Fund and the value of the Limited Shares.
The Net Asset Value Calculation of the Master Fund May Be Overstated or Understated Due to the Valuation Method Employed When a Settlement Price is not Available
on the Date of Net Asset Value Calculation.
Calculating the net asset value of the Master Fund (and, in turn, the Fund) includes,
in part, any unrealized profits or losses on open currency futures contracts. Under normal circumstances, the net asset value of the Master Fund reflects the settlement price of open currency futures contracts on the date when the net asset value is
being calculated. However, if a currency futures contract traded on an exchange (both U.S. and, to the extent it becomes applicable, non-U.S. exchanges) could not be liquidated on such day (due to the operation of daily limits or other rules of the
exchange or otherwise), the settlement price on the most recent day on which the position could have been liquidated will be the basis for determining the market value of such position for such day. In such a situation, there is a risk that the
calculation of the net asset value of the Master Fund on such day will not accurately reflect the realizable market value of such currency futures contract. For example, daily limits are generally triggered in the event of a significant change in
market price of a currency futures contract. Therefore, as a result of the daily limit, the current settlement price is unavailable. Because the settlement price on the most recent day on which the position could have been liquidated would be used
in lieu of the actual settlement price on the date of determination, there is a risk that the resulting calculation of the net asset value of the Master Fund (and, in turn, the Fund) could be under or overstated, perhaps to a significant degree.
Although the DX Contracts that the Master Fund will invest in are not currently subject to “daily limits,” the terms and conditions of these contracts may change in the future, and thus, may subject the Fund to the above-described risks.
Exchange Rates on the Index Currencies Could be Volatile and Could Materially and Adversely Affect the Performance of the Limited Shares.
Foreign exchange rates are influenced by national debt levels and trade deficits, domestic and foreign inflation rates and investors’
expectations concerning inflation rates, domestic and foreign interest rates and investors’ expectations concerning interest rates, currency exchange rates, investment and trading activities of mutual funds, hedge funds and currency funds; and
global or regional political, economic or financial events and situations. Additionally, foreign exchange rates on the Index Currencies may also be influenced by changing supply and demand for a particular Index Currency, monetary policies of
governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other countries), changes in balances of payments and
trade, trade restrictions, currency devaluations and revaluations. Also, governments from time-to-time intervene in the currency markets, directly and by regulation, in order to influence prices directly. Additionally, expectations among market
participants that a currency’s value soon will change may also affect exchange rates on the Index Currencies, and in turn, both the Index and the DX Contracts. These events and actions are unpredictable. The resulting volatility in the exchange
rates on the underlying Index Currencies may materially and adversely affect the market value of the DX Contracts, which would then negatively impact the value of your Limited Shares.
13
Substantial Sales of Index Currencies by the Official Sector Could Adversely Affect an Investment in the Limited
Shares.
The official sector consists of central banks, other governmental agencies and multi-lateral institutions that buy, sell
and hold certain Index Currencies as part of their reserve assets. The official sector holds a significant amount of Index Currencies that can be mobilized in the open market. In the event that future economic, political or social conditions or
pressures require members of the official sector to sell their Index Currencies simultaneously or in an uncoordinated manner, the demand for Index Currencies might not be sufficient to accommodate the sudden increase in the supply of certain Index
Currencies to the market. Consequently, the price of an Index Currency may decline, which may materially and adversely affect the market value of the DX Contract, which would then negatively impact the Limited Shares.
Although the Limited Shares are Limited Liability Investments, Certain Circumstances such as Bankruptcy of the Fund or Indemnification of the Fund by the
Shareholders will Increase the Shareholder’s Liability.
The Limited Shares are limited liability investments; investors may
not lose more than the amount that they invest plus any profits recognized on their investment. However, Shareholders could be required, as a matter of bankruptcy law, to return to the estate of the Fund any distribution they received at a time when
the Fund was in fact insolvent or in violation of its Trust Agreement. In addition, although the Managing Owner is not aware of this provision ever having been invoked in the case of any public futures fund, Shareholders agree in the Trust Agreement
that they will indemnify the Fund for any harm suffered by it as a result of
|
|
•
|
|
Shareholders’ actions unrelated to the business of the Fund, or
|
|
|
•
|
|
Taxes imposed on the Limited Shares by the states or municipalities in which such investors reside.
|