ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
This information should be read in conjunction with the consolidated financial statements and notes included in Item 1 of Part I of this Quarterly
Report, or Report. The discussion and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect
to future events and financial results. Words such as anticipate, expect, intend, plan, believe, seek, outlook and estimate as well as similar words and
phrases signify forward-looking statements. PowerShares DB Silver Funds forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ
materially from those expressed in our forward-looking statements.
You should not place undue reliance on any forward-looking statements.
Except as expressly required by the Federal securities laws, DB Commodity Services LLC, or the Managing Owner, undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors
described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Overview/Introduction
The Fund and the Master Fund seek to track changes, whether positive or negative, in the level of the
Deutsche Bank Liquid Commodity IndexOptimum Yield Silver Excess Return (DBLCI-OY SI ER), or the Index, over time, plus the excess, if any, of the Master Funds 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. The Limited Shares are designed for investors who want a cost-effective and convenient way to invest in a group of
commodity futures on U.S. and non-U.S. markets.
The Fund pursues its investment objective by investing substantially all of its assets in
the Master Fund. The Master Fund pursues its investment objective by investing in a portfolio of exchange-traded futures on the single commodity comprising the Index, or the Index Commodity. The single Index Commodity is silver. The Master
Funds portfolio also includes United States Treasury obligations and other high credit quality short-term fixed income securities for deposit with the Master Funds Commodity Broker as margin. The sponsor of the Index, or the Index
Sponsor, is Deutsche Bank AG London. DBLCI and Deutsche Bank Liquid Commodity Index are trademarks of Deutsche Bank. Trademark applications in the United States are pending with respect to both the Fund and the Index. Deutsche Bank AG
London is an affiliate of the Fund, the Master Fund and the Managing Owner.
Under the Trust Agreements of the Trust and the Master Trust,
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 Trust, the Fund and the Master Trust and 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 Owner.
The Index Sponsor obtains information for inclusion in, or for use in the calculation of, the Index from sources the Index Sponsor considers reliable.
None of the Index Sponsor, the Managing Owner, the Trust, the Fund, the Master Trust, the Master Fund or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any data included
in the Index.
The Limited Shares are intended to provide investment results that generally correspond to the changes, positive or
negative, in the levels of the Index over time. The value of the Limited Shares is expected to fluctuate in relation to changes in the value of the Master Funds portfolio. The market price of the Limited Shares may not be identical to the net
asset value per Limited Share, but these two valuations are expected to be very close.
Performance Summary
This report covers the three months ended September 30, 2007 and the period from January 3, 2007 (commencement of investment operations) to
September 30, 2007 (herein referred to as Period Ended September 30, 2007). The Fund commenced trading on the American Stock Exchange (the Amex) on January 5, 2007.
Performance of the Fund and the exchange traded Limited Shares are detailed below in Results of Operations. Past performance of the Fund is
not necessarily indicative of future performance.
12
The Index is intended to reflect the change in market value of the Index Commodity. In turn, the Index is
intended to reflect the silver sector. The Deutsche Bank Liquid Commodity Index-Optimum Yield Silver Total Return, or DBLCI-OY SI TR, consists of the Index plus 3 month United States Treasury obligations returns. Past Index results are
not necessarily indicative of future changes, positive or negative, in the Index closing levels.
The section Summary of DBLCI-OY SI
TR and Underlying Index Commodity Returns for the Three Months Ended September 30, 2007 and the Period Ended September 30, 2007 below provides an overview of the changes in the closing levels of DBLCI-OY SI TR by
disclosing the change in market value of each underlying component Index Commodity through a surrogate (and analogous) index plus 3 month United States Treasury obligations returns. Please note also that the Funds objective is to
track the Index (not DBLCI-OY SI TR) and the Fund does not attempt to outperform or underperform the Index. The Index employs the optimum yield rolls method with the objective of mitigating the negative effects of contango, the condition in
which distant delivery prices for futures exceed spot prices, and maximizing the positive effects of backwardation, a condition opposite of contango.
Summary of DBLCI-OY SI TR and Underlying Index Commodity Returns for the Three Months Ended September 30, 2007 and the Period ended September 30, 2007
|
|
|
|
|
|
|
|
|
Total returns for index in the
DBLCI-OY SI TR
|
|
Index
|
|
Three Months Ended
September 30, 2007
|
|
|
Period Ended
September 30, 2007
|
|
DB Silver Indices
|
|
11.26
|
%
|
|
9.54
|
%
|
|
|
|
|
|
|
|
TOTAL RETURN
|
|
11.26
|
%
|
|
9.54
|
%
|
|
|
|
|
|
|
|
In the current interest rate environment, the total return on an investment in the Fund is
expected to outperform the Index and underperform the DBLCI-OY SI TR. The only difference between the Index and the DBLCI-OY SI TR is that the Index does not include interest income from a hypothetical basket of fixed income securities
while the DBLCI-OY SI TR does include such a component. The difference between the Index and the DBLCI-OY SI TR is attributable entirely to the hypothetical interest income from this hypothetical basket of fixed income securities. The
Funds interest income from its holdings of fixed-income securities is expected to exceed the Funds fees and expenses, and the amount of such excess is expected to be distributed periodically. The market price of the Shares is expected
closely to track the Index. The total return on an investment in the Fund over any period is the sum of the capital appreciation or depreciation of the Shares over the period, plus the amount of any distributions during the period. Consequently, in
the current interest rate environment, the Funds total return is expected to outperform the Index by the amount of the excess of its interest income over its fees and expenses but, as a result of the Funds fees and expenses, the total
return on the Fund is expected to underperform the DBLCI-OY SI TR. If the Funds fees and expenses were to exceed the Funds interest income from its holdings of fixed income securities, the Fund would underperform the Index.
Net Asset Value
Net asset
value means the total assets of the Master Fund, including, but not limited to, all futures, cash and investments less total liabilities of the Master Fund, each determined on the basis of U.S. generally accepted accounting principles, consistently
applied under the accrual method of accounting. In particular, net asset value includes any unrealized appreciation or depreciation on open commodity futures contracts, and any other credit or debit accruing to the Master Fund but unpaid or not
received by the Master Fund. All open commodity futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular commodity futures contract traded on the applicable exchange
on the date with respect to which net asset value is being determined; provided, that if a commodity futures contract could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position
is traded 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. The Managing Owner may in its discretion (and only
under extraordinary circumstances, including, but not limited to, periods during which a settlement price of a futures contract is not available due to exchange limit orders or force majeure type events such as systems failure, natural or man-made
disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance) value any asset of the Master Fund pursuant to such other principles as the Managing Owner deems
13
fair and equitable so long as such principles are consistent with normal industry standards. Interest earned on the Master Funds brokerage account is
accrued monthly. The amount of any distribution is a liability of the Master Fund from the day when the distribution is declared until it is paid.
The Fund invests substantially all of its assets in the Master Fund in a master-feeder structure. The Fund holds no investment assets other than Master Fund Limited Units. The Fund is the majority Master Fund Limited Unit owner and the
Managing Owner holds a minority interest in the Master Fund. Each Limited Share issued by the Fund correlates with the Master Fund Limited Unit issued by the Master Fund and held by the Fund.
Net asset value per Master Fund Limited Unit and Master Fund General Unit (collectively, Master Fund Units) is the net asset value of the
Master Fund divided by the number of outstanding Master Fund Units. Because there is a one-to-one correlation between Limited Shares of the Fund and the Master Fund Limited Units, the net asset value per Limited Share and the net asset value per
Master Fund Unit are substantially equal.
Critical Accounting Policies
The Funds and Master Funds critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the application
of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense and related disclosure of
contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. Both the Funds and the Master Funds application of these policies involve judgments and actual results may
differ from the estimates used.
The Master Fund expects to hold a significant portion of its assets in futures contracts and United States
Treasury Obligations, both of which will be recorded on trade date and at fair value in the consolidated financial statements, with changes in fair value reported in the consolidated statement of income and expenses. Generally, fair values are based
on quoted market closing prices. However, when market closing prices are not available, the Managing Owner may value an asset of the Master Fund pursuant to policies the Managing Owner has adopted, which are consistent with normal industry
standards.
Realized gains (losses) and changes in unrealized appreciation (depreciation) on open positions are determined on a specific
identification basis and recognized in the consolidated statement of income and expenses in the period in which the contract is closed or the changes occur, respectively.
Interest income on United States Treasury obligations is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury obligations.
Market Risk
Trading in futures
contracts involves the Master Fund entering into contractual commitments to purchase a particular commodity at a specified date and price. The market risk associated with the Master Funds commitments to purchase commodities is limited to the
gross or face amount of the contracts held.
The Master Funds exposure to market risk is also influenced by a number of factors
including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Master Funds trading
as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of the investors capital.
Credit Risk
When the Master Fund enters into futures contracts, the Master 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 of 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), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its
obligations to the Master Fund.
14
Liquidity
All of the Master Funds source of capital is derived from the Fund through the Funds offering of Limited Shares to Authorized Participants. Authorized Participants may then subsequently redeem such Limited
Shares. The Master Fund in turn allocates its net assets to commodities trading. A significant portion of the net asset value is held in United States Treasury obligations and cash, which is used as margin for the Master Funds trading in
commodities. The percentage that United States Treasury obligations bear to the total net assets will vary from period to period as the market values of the Master Funds commodity interests change. The balance of the net assets are held in the
Master Funds commodity trading account. Interest earned on the Master Funds interest-bearing funds is paid to the Master Fund.
The Master Funds commodity contracts will be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges may limit fluctuations in certain commodity
futures contract prices during a single day by regulations referred to as daily limits. During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has
increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the
daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Master Fund from promptly liquidating its commodity futures positions.
Because the Master Fund trades futures contracts, its capital is at risk due to changes in the value of future contracts (market risk) or the inability
of counterparties to perform under the terms of the contracts (credit risk).
The Commodity Broker, when acting as the Master Funds
futures commission merchant 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 Master Fund all assets of the Master Fund relating to
domestic futures trading and the Commodity Broker is not allowed to commingle such assets with other assets of the Commodity Broker. In addition, CFTC regulations also require the Commodity Broker to hold in a secure account assets of the Master
Fund related to foreign futures trading.
On any business day, an Authorized Participant may place an order with the Managing Owner to
redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption
procedures allow Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly from the Fund. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTCs
book-entry system to the Fund not later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants
DTC account is charged the non-refundable transaction fee due for the redemption order.
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND THE PERIOD JANUARY 3, 2007
(COMMENCEMENT OF INVESTMENT OPERATIONS) TO SEPTEMBER 30, 2007 (REFERRED TO HEREIN
AS PERIOD ENDED SEPTEMBER 30, 2007)
The Fund was launched on January 3, 2007 at $25.00 per share and
listed for trading on the Amex on January 5, 2007.
The Fund and the Master Fund seek to track changes in the closing levels of the
Deutsche Bank Liquid Commodity IndexOptimum Yield Silver Excess Return (DBLCI-OY SI ER), or the Index, over time, plus the excess, if any, of the Master Funds 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. The following graphs illustrate changes in (i) the price of the Limited Shares (as reflected by the graph
DBS), (ii) the Funds NAV (as reflected by the graph DBSNAV), and (iii) the closing levels of the Index (as reflected by the graph DBSLIX). The price of the Limited Shares generally has exceeded the
levels of the Index primarily because the Limited Share price reflects interest income from the Master Funds collateral holdings whereas the Index does not consider such interest income. There can be no assurances that the price of the Limited
Shares will continue to exceed the Index levels.
15
COMPARISON OF DBS, DBSNAV AND DBSLIX FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2007 AND THE PERIOD ENDED SEPTEMBER 30, 2007
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE,
SHOULD BE TAKEN AS AN INDICATION OF THE FUNDS FUTURE PERFORMANCE.
Deutsche Bank Liquid Commodity IndexOptimum Yield Silver Excess
Return is an index and does not reflect (i) actual trading and (ii) any fees or expenses.
16
WHILE THE FUNDS OBJECTIVE IS NOT TO GENERATE PROFIT THROUGH ACTIVE PORTFOLIO MANAGEMENT, BUT IS TO TRACK THE INDEX,
BECAUSE THE INDEX WAS ESTABLISHED IN JUNE 2006, CERTAIN INFORMATION RELATING TO INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE HYPOTHETICAL. HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.
WITH RESPECT TO INDEX DATA, NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS CONSISTENT
WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUNDS PAST PERFORMANCE OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN THE INDEX CLOSING
LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE.
WITH RESPECT TO INDEX DATA, ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD
DECEMBER 1988 THROUGH MAY 2006, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEXS METHODOLOGY, AND SELECTION OF INDEX COMMODITIES, IN HINDSIGHT.
NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUNDS EFFORTS TO
TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH ON THE FOLLOWING PAGES, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND. FURTHERMORE, THE
INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK OR ACCOUNT FOR THE IMPACT OF FEES AND COSTS ASSOCIATED WITH THE FUND.
THE MANAGING OWNER HAS HAD LIMITED
EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CLIENTS. BECAUSE THERE ARE LIMITED ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON
THE ANNUAL OR CUMULATIVE INDEX RESULTS.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
Fund Limited Share Price Performance
For the
three months ended September 30, 2007, Limited Shares increased 10.74% from $24.39 per share to $27.01 per share. The Limited Share price low and high for the three months ended September 30, 2007 and related change from the Limited Share
price on June 30, 2007 was as follows: Limited Shares traded from a low of $22.73 per share (-6.81%) on August 21, 2007 to a high of $27.01 per share (+10.74%) on September 30, 2007. Total return for the Fund, on a market value
basis was 10.74% for the three months ended September 30, 2007.
Fund Limited Share Net Asset Performance
For the three months ended September 30, 2007, the net asset value of each Limited Share increased 11.00% from $24.36 per share to $27.04 per share.
Total return on a net asset value basis, for the Fund, was 11.00% for the three months ended September 30, 2007.
Net income for the
three months ended September 30, 2007 was $2.14 million, resulting from $0.24 million of interest income and realized and unrealized gains of $1.93 million and operating expenses of $0.03 million.
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
Fund Limited
Share Price Performance
For the Period ended September 30, 2007, Limited Shares increased 8.04% from $25.00 per share to
$27.01 per share. The Limited Share price low and high for the Period ended September 30, 2007 and related change from the Limited Share price on January 3, 2007 (commencement of operations) was as follows: Limited Shares traded from a
high of $28.96 per share (+15.84%) on February 26, 2007 to a low of $22.73 per share (-9.08%) on August 21, 2007. Total return for the Fund, on a market value basis was 8.04% for the period ended September 30, 2007.
17
Fund Limited Share Net Asset Performance
For the Period ended September 30, 2007, the net asset value of each Limited Share increased 8.16% from $25.00 per share to $27.04 per share. Total
return on a net asset value basis, for the Fund, was 8.16% for the period ended September 30, 2007.
Net income for the Period ended
September 30, 2007 was $2.26 million, resulting from $0.79 million of interest income and realized and unrealized gains of $1.55 million and operating expenses of $0.08 million.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of its business, the
Master Fund is party to financial instruments with off-balance sheet risk. 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 a future
obligation or loss. The financial instruments used by the Master Fund are commodity futures, whose values are based upon an underlying asset and generally represent future commitments which have a reasonable possibility to be settled in cash or
through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.
The Fund and the Master
Fund 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 noted above, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund and the Master
Fund. While the Funds and the Master Funds exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on either the Funds or the Master
Funds financial position.
The Fund and Master Funds contractual obligations are with the Managing Owner and the Commodity
Broker. Management Fee payments made to the Managing Owner are calculated as a fixed percentage of the Master Funds net asset value. Commission payments to the Commodity Broker are on a contract-by-contract, or round-turn, basis. As such, the
Managing Owner cannot anticipate the amount of payments that will be required under these arrangements for future periods as net asset values are not known until a future date. These agreements are effective for one year terms, renewable
automatically for additional one year terms unless terminated. Additionally, these agreements may be terminated by either party for various reasons.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
INTRODUCTION
The Fund is designed to replicate positions in a commodity index. The market sensitive instruments held by it are
subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Funds main line of business.
Market movements can produce frequent changes in the fair market value of the Funds open positions and, consequently, in its earnings and cash
flow. The Funds market risk is primarily influenced by changes in the price of commodities.
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 in the markets in which the Fund trades and the recurrence in the markets traded by the Fund of market movements far
exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Funds experience to date (i.e., risk of ruin). In light of this, 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 Funds losses in any market sector will be limited to Value at
Risk or by the Funds attempts to manage its market risk.
18
Standard of Materiality
Materiality as used in this section, Quantitative and Qualitative Disclosures About Market Risk, is based on an assessment of reasonably possible market movements and the potential losses caused by such
movements, taking into account the leverage, and multiplier features of the Funds market sensitive instruments.
QUANTITATIVE
DISCLOSURES REGARDING MARKET RISK
Information regarding quantitative information about market risk (e.g., Value at Risk) is not required
pursuant to Item 305(a)(1)(iii)(B)(2) of Regulation S-K.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Funds market risk exposures except for those disclosures that are statements of
historical fact constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Funds primary market risk exposures are subject to numerous
uncertainties, contingencies and risks. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market
participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures of the Fund. There can be no assurance that the Funds current market exposure will not change
materially. Investors may lose all or substantially all of their investment in the Fund.
The following was the primary trading risk
exposure of the Fund as of September 30, 2007 by Index Commodity:
Silver
The price of silver is volatile and is affected by numerous factors. The largest industrial users of silver (e.g., photographic, jewelry, and electronic
industries) may influence its price. A change in economic conditions, such as a recession, can adversely affect industries which are dependent upon the use of silver. In turn, such a negative economic impact may decrease demand for silver, and,
consequently, its price. Worldwide speculation and hedging activity by silver producers may also impact its price.
QUALITATIVE DISCLOSURES
REGARDING NON-TRADING RISK EXPOSURE
General
The Fund is unaware of any (i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a
material effect on operations.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
Under ordinary circumstances, the Managing Owners discretionary power is limited to determining whether the Fund will make a distribution. Under
emergency or extraordinary circumstances, the Managing Owners discretionary powers increase, but remain circumscribed. These special circumstances, for example, include the unavailability of the Index or certain natural or man-made disasters.
The Managing Owner does not apply risk management techniques. The Fund initiates positions only on the long side of the market and does not employ stop-loss techniques.