(6) Risk

(a) Investment Related Risk

The NAV of each Fund’s shares relates directly to the value of the respective freight futures portfolio, cash and cash equivalents held by each Fund. Fluctuations in the prices of these assets could materially adversely affect the values and performance of an investment in BDRY and BWET shares. Past performance is not necessarily indicative of future results; all or substantially all of an investment in BDRY or BWET could be lost.

The NAV of BDRY and BWET shares relates directly to the value of the futures investments held by each Fund which are materially impacted by fluctuations in changes in spot charter rates. Charter rates for dry bulk vessels and crude oil tankers are highly volatile, may rapidly decrease and may remain at low levels in the future.

Futures and options contracts have expiration dates. Before or upon the expiration of a contract, BDRY and/or BWET may be required to enter into replacement contracts that are priced higher or that have less favorable terms than the contracts being replaced (see “Negative Roll Risk,” below). The Freight Futures market settles in cash against published indices, so there is no physical delivery against the futures contracts.

Similar to other futures contracts, the Freight Futures curve shape could be either in “contango” (where the futures curve is upward sloping with next futures price higher than the current one) or “backwardation” (where each of the next futures price is lower than the current one). Contango curves are generally characterized by negative roll cost, as the expiring contract value is lower than the next prompt contract value, assuming the same lot size. That means there could be losses incurred when the contracts are rolled each period (“Negative Roll Risk”) and such losses are independent of the Freight Futures price level.

The ongoing US-Iran conflict has led to major disruptions in oil flows out of the Middle East. The Strait of Hormuz, one of the most important waterways in the world, has seen a major disruption when it comes to vessel transits. As a result, freight rates for tankers have seen significant increases not only for vessels originating in the Middle East but around the globe due to heightened risk but also due to price dislocation in crude oil and related energy products. The disruption in oil flows has so far led to rapid increases in freight rates, but as long as the disruption persists, the risk of much lower rates is increasing as there is declining amount of oil shipped given the disruption. Spot freight rates might remain extremely volatile leading to significant volatility in freight futures. In addition, any resolution to the conflict and normalization of trade could lead to major and sharp declines in tanker freight rates and as a result in tanker freight futures. Although dry bulk rates remain relatively immune to the regional conflict as the amount of dry bulk cargo moving through the Straits of Hormuz is not significant versus other regions, the economic impact might affect global demand for commodities and thus lead to a decline in dry bulk freight rates.

Overall, the ongoing US-Iran conflict and the uncertainty relating to the timing and the matter of resolution remains a substantial risk to shipping and to freight rates and should continue to lead to extremely high volatility in tanker freight rates as well as tanker freight futures. The resulting volatility could greatly affect the value of BWET and could lead to significant and rapid decline in the value of the Fund and, to a smaller extent, also affect the value of BDRY.

The Russia Ukraine war continues to pose an increasing risk for global economic growth. Major economic sanctions against Russia are having a considerable impact on oil and gas prices, given the dependence of the EU on oil and gas exports out of Russia combined with limited spare capacity of such commodities globally. Energy price volatility has increased significantly, leading to inflationary pressures in the major developed countries that rely heavily on oil and gas exports out of Russia. In addition, disruptions in oil supply could lead to a drop in oil volumes been shipped and as a result a decline in demand for oil transportation. Such a decline could negatively affect tanker freight rates and as a result could negatively affect the price of BWET.

The announcements of tariffs on import goods by the US as well as corresponding increase in tariffs by other countries can have a meaningful negative impact on trade volumes, which could have a material adverse impact on shipping rates. As tariffs lead to less imports and exports, demand for transportation could potentially decrease leading to lower shipping rates. Such negative impact could affect both dry bulk and tanker rates alike. The impact of the implementation of higher tariffs around the globe on dry bulk shipping and tanker shipping will be negative, all else equal, leading to lower spot rates and as a result lower freight futures prices and a decline in the value of BDRY as well as BWET.

In addition, The People’s Republic of China (“China”) accounts for a sizable part of oil demand, and changes in the economic and political environment in China and policies adopted by the government to regulate its economy may have a material adverse effect on tanker charter rates and as a result, Freight Futures.

(b) Liquidity Risk

In certain circumstances, such as the disruption of the orderly markets for the futures contracts or Financial Instruments in which the Fund invest, the Funds might not be able to dispose of certain holdings quickly or at prices that represent what the market value may have been in an orderly market. Futures and option 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 can also make it difficult to liquidate a position. The large size of the positions that the Funds may acquire increases the risk of illiquidity both by making its positions more difficult to liquidate and by potentially increasing losses while trying to do so. Such a situation may prevent the Funds from limiting losses, realizing gains or achieving a high correlation with the applicable Benchmark Portfolio.

(c) Natural Disaster/Epidemic Risk 

Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including pandemics and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive to economies and markets and have recently led, and may continue to lead, to increased market volatility and significant market losses. Such natural disaster and health crises could exacerbate political, social, and economic risks previously mentioned, and result in significant breakdowns, delays, shutdowns, social isolation, and other disruptions to important global, local and regional supply chains affected, with potential corresponding results on the operating performance of the Funds and their investments. A climate of uncertainty and panic, including the contagion of infectious viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability of potential investment opportunities, and increases the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy of financial projections. Under these circumstances, the Funds may have difficulty achieving their investment objectives which may adversely impact performance. Further, such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual companies (including, but not limited to, the Funds’ Sponsor and third party service providers), sectors, industries, markets, securities and commodity exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Funds’ investments. These factors can cause substantial market volatility. Exchange trading suspensions and closures can impact on the ability of the Funds to complete redemptions and otherwise affect each Fund’s performance and the Funds’ trading in the secondary market. A widespread crisis may also affect the global economy in ways that cannot necessarily be foreseen at the current time. How long such events will last and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact on the Funds’ performance, resulting in losses to the Funds.