UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2010
or
¨ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER 0-49767
MLM INDEX™ FUND |
(Exact name of registrant as specified in its charter) |
DELAWARE | Unleveraged Series: 22-2897229 | |
Leveraged Series: 22-3722683 | ||
Commodity L/S Unleveraged Series 20-8806944 | ||
Commodity L/N Unleveraged Series 27-1198002 | ||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
405 South State Street, Newtown, PA |
(Address of principal executive offices) |
18940 |
(Zip Code) |
(267) 759-3500 |
(Registrant's telephone number including area code) |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” “ in Rule 12-b-2 of the Exchange Act. (Check One):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).
Yes o No x
MLM Index™ Fund
Index to FORM 10-Q
March 31, 2010
PART I – FINANCIAL INFORMATION | |||
Item 1 | Page Number | ||
4 | |||
5 | |||
6 | |||
7-10 | |||
11 | |||
12-22 | |||
Item 2 | 23-26 | ||
Item 3 | 26-27 | ||
Item 4 | 28-29 | ||
PART II – OTHER INFORMATION | |||
Item 1 | 28 | ||
Item 1A | 28 | ||
Item 2 | 28 | ||
Item 3 | 29 | ||
Item 5 | 29 | ||
Item 6 | 30 |
Item 1. | Financial Statements. |
MLM Index™ Fund
Condensed Statements of Financial Condition
As of March 31, 2010 (Unaudited) and December 31, 2009
March 31, 2010 | December 31, 2009 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 71,562,224 | $ | 91,417,211 | ||||
Due from broker | 35,101,038 | 38,376,426 | ||||||
Net unrealized gain on open futures contracts, at fair value | 3,824,219 | - | ||||||
Interest receivable | - | 5,414 | ||||||
Other assets | 5,000 | - | ||||||
Total assets | $ | 110,492,481 | $ | 129,799,051 | ||||
Liabilities and investors’ interest | ||||||||
Net unrealized loss on open futures contracts, at fair value | $ | - | $ | 1,134,488 | ||||
Redemptions payable | 7,353,258 | 23,834,370 | ||||||
Brokerage commissions payable | 61,631 | 65,124 | ||||||
Management fee payable | 75,048 | 95,998 | ||||||
Accrued expenses | 32,893 | 90,117 | ||||||
Total liabilities | 7,522,830 | 25,220,097 | ||||||
Investors’ interest | 102,969,651 | 104,578,954 | ||||||
Total liabilities and investors’ interest | $ | 110,492,481 | $ | 129,799,051 |
See Notes to Unaudited Condensed Financial Statements.
MLM Index™ Fund
Condensed Schedules of Investments
As of March 31, 2010 (Unaudited) and December 31, 2009
March 31, 2010 (Unaudited) Security Description | Number of contracts | Unrealized appreciation/ (depreciation) | Percentage of investors' Interest | |||||||||
Futures | ||||||||||||
Long futures contracts | ||||||||||||
Financial | 713 | $ | 351,895 | 0.34 | % | |||||||
Commodity | 191 | 1,050,229 | 1.02 | |||||||||
904 | 1,402,124 | 1.36 | ||||||||||
Short futures contracts | ||||||||||||
Financial | 141 | 291,481 | 0.28 | |||||||||
Commodity | 342 | 2,130,614 | 2.07 | |||||||||
483 | 2,422,095 | 2.35 | ||||||||||
Net unrealized gain on open futures contracts, at fair value | $ | 3,824,219 | 3.71 | % |
December, 31, 2009 Security Description | Number of contracts | Unrealized Appreciation (depreciation) | Percentage of investors' Interest | |||||||||
Futures | ||||||||||||
Long futures contracts | ||||||||||||
Financial | 900 | $ | (2,233,254 | ) | (2.14 | )% | ||||||
Commodity | 379 | 1,081,653 | 1.03 | |||||||||
1,279 | (1,151,601 | ) | (1.11 | )% | ||||||||
Short futures contracts | ||||||||||||
Financial | 84 | 120,124 | 0.11 | |||||||||
Commodity | 81 | (103,011 | ) | (0.10 | ) | |||||||
165 | 17,113 | 0.01 | ||||||||||
Net unrealized loss on open futures contracts, at fair value | $ | (1,134,488 | ) | (1.10 | )% |
See Notes to Unaudited Condensed Financial Statements.
MLM Index™ Fund
Unaudited Condensed Statements of Operations
For the three months ended March 31, 2010 and 2009
For the three months ended March 31, 2010 | For the three months ended March 31, 2009 | |||||||
Investment income | ||||||||
Interest | $ | 11,737 | $ | 60,187 | ||||
Expenses | ||||||||
Brokerage commissions | 200,984 | 267,780 | ||||||
Management fee | 236,610 | 316,072 | ||||||
Operating expenses | 129,613 | 176,021 | ||||||
Total expenses | 567,207 | 759,873 | ||||||
Net investment loss | (555,470 | ) | (699,686 | ) | ||||
Realized and unrealized gain (loss) on investments | ||||||||
Net realized (loss) gain on investments | (3,672,048 | ) | 13,586,042 | |||||
Net change in unrealized appreciation (depreciation) on investments | 4,949,230 | (12,935,304 | ) | |||||
Net realized and unrealized gain (loss) on investments | 1,277,182 | 650,738 | ||||||
Net income (loss) | $ | 721,712 | $ | (48,948 | ) |
See Notes to Unaudited Condensed Financial Statements.
MLM Index™ Fund
Unaudited Condensed Statement of Changes in Investors’ Interest
For the three months ended March 31, 2010
Leveraged Series | ||||||||||||||||||||
Class A Shares | Class B Shares | Class C Shares | Class D Shares | Total Leveraged Series | ||||||||||||||||
Investors’ interest at December 31, 2009 | $ | 4,638,578 | $ | 11,469,894 | $ | 1,164 | $ | 30,186,250 | $ | 46,295,886 | ||||||||||
Subscriptions | - | 205,806 | - | 50,000 | 255,806 | |||||||||||||||
Redemptions | (1,031,978 | ) | (239,373 | ) | - | (6,068,300 | ) | (7,339,651 | ) | |||||||||||
Transfers | (5,000 | ) | (4,650 | ) | - | (157,943 | ) | (167,593 | ) | |||||||||||
Net income | 28,443 | 203,177 | 21 | 388,115 | 619,756 | |||||||||||||||
Investors’ interest at March 31, 2010 | $ | 3,630,043 | $ | 11,634,854 | $ | 1,185 | $ | 24,398,122 | $ | 39,664,204 | ||||||||||
�� | ||||||||||||||||||||
Shares at December 31, 2009 | 51,127 | 108,685 | 14 | 281,580 | ||||||||||||||||
Subscriptions | - | 1,960 | - | 474 | ||||||||||||||||
Redemptions | (54 | ) | (45 | ) | - | (1,496 | ) | |||||||||||||
Transfers | (11,618 | ) | (2,289 | ) | - | (57,441 | ) | |||||||||||||
Shares at March 31, 2010 | 39,454 | 108,311 | 14 | 223,117 | ||||||||||||||||
Net asset value per share: | ||||||||||||||||||||
March 31, 2010 | $ | 92.01 | $ | 107.42 | $ | 87.80 | $ | 109.35 |
See Notes to Unaudited Condensed Financial Statements.
MLM Index™ Fund
Unaudited Condensed Statement of Changes in Investors’ Interest
For the three months ended March 31, 2010
Unleveraged Series | ||||||||||||||||||||
Class A Shares | Class B Shares | Class C Shares | Class D Shares | Total Unleveraged Series | ||||||||||||||||
Investors’ interest at December 31, 2009 | $ | 4,636,414 | $ | 9,124,592 | $ | 1,262 | $ | 32,673,423 | $ | 46,435,691 | ||||||||||
Subscriptions | - | 198,493 | - | 1,000,000 | 1,198,493 | |||||||||||||||
Redemptions | (111,862 | ) | (223,158 | ) | - | (6,110,643 | ) | (6,445,663 | ) | |||||||||||
Transfers | 5,000 | 4,650 | - | 157,943 | 167,593 | |||||||||||||||
Net income | 9,029 | 40,853 | 6 | 184,349 | 234,237 | |||||||||||||||
Investors’ interest at March 31, 2010 | $ | 4,538,581 | $ | 9,145,430 | $ | 1,268 | $ | 27,905,072 | $ | 41,590,351 | ||||||||||
Shares at December 31, 2009 | 40,930 | 72,234 | 11 | 288,259 | ||||||||||||||||
Subscriptions | - | 1,573 | - | 8,773 | ||||||||||||||||
Redemptions | (44 | ) | (37 | ) | - | (1,401 | ) | |||||||||||||
Transfers | (989 | ) | (1,772 | ) | - | (53,629 | ) | |||||||||||||
Shares at March 31, 2010 | 39,985 | 72,073 | 11 | 244,805 | ||||||||||||||||
Net asset value per share: | ||||||||||||||||||||
March 31, 2010 | $ | 113.51 | $ | 126.89 | $ | 111.47 | $ | 113.99 |
MLM Index™ Fund
Unaudited Condensed Statement of Changes in Investors’ Interest
For the three months ended March 31, 2010
Commodity L/S Unleveraged | Commodity L/N Unleveraged | |||||||||||
Class D Shares | Class D Shares | Total Investors’ Interest | ||||||||||
Investors’ interest at December 31, 2009 | $ | 3,246,160 | $ | 8,601,217 | $ | 104,578,954 | ||||||
Subscriptions | 10,000,000 | - | 11,454,299 | |||||||||
Redemptions | - | - | (13,785,314 | ) | ||||||||
Transfers | - | - | - | |||||||||
Net income (loss) | 119,093 | (251,374 | ) | 721,712 | ||||||||
Investors’ interest at March 31, 2010 | $ | 13,365,253 | $ | 8,349,843 | $ | 102,969,651 | ||||||
Shares at December 31, 2009 | 30,009 | 84,322 | ||||||||||
Subscriptions | 89,174 | - | ||||||||||
Redemptions | - | - | ||||||||||
Transfers | - | - | ||||||||||
Shares at March 31, 2010 | 119,183 | 84,322 | ||||||||||
Net asset value per share: | ||||||||||||
March 31, 2010 | $ | 112.14 | $ | 99.02 |
MLM Index™ Fund
Unaudited Condensed Statement of Changes in Investors’ Interest
For the three months ended March 31, 2009
Leveraged Series | Unleveraged Series | |||||||||||||||||||||||||||||||||||||||||||
Class A Shares | Class B Shares | Class C Shares | Class D Shares | Total Leveraged Series | Class A Shares | Class B Shares | Class C Shares | Class D Shares | Total Unleveraged Series | Total Investors’ Interest | ||||||||||||||||||||||||||||||||||
Investors’ interest at December 31, 2008 | $ | 6,903,329 | $ | 13,796,085 | $ | 1,327 | $ | 31,281,480 | $ | 51,982,221 | $ | 4,293,290 | $ | 12,404,908 | $ | 1,320 | $ | 67,514,995 | $ | 84,214,513 | $ | 136,196,734 | ||||||||||||||||||||||
Subscriptions | − | 153,171 | − | 3,585,000 | 3,738,171 | − | 153,171 | − | 575,000 | 728,171 | 4,466,342 | |||||||||||||||||||||||||||||||||
Redemptions | (439,778 | ) | (411,122 | ) | − | (1,012,867 | ) | (1,863,767 | ) | − | (1,532,163 | ) | − | (174,103 | ) | (1,706,265 | ) | (3,570,032 | ) | |||||||||||||||||||||||||
Transfers | − | (3,930 | ) | − | − | (3,930 | ) | − | 3,930 | − | − | 3,930 | − | |||||||||||||||||||||||||||||||
Other (selling commissions) | ||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (27,035 | ) | (25,422 | ) | (3 | ) | (32,950 | ) | (85,410 | ) | (12,669 | ) | 9,237 | (1 | ) | 39,896 | 36,462 | (48,948 | ) | |||||||||||||||||||||||||
Investors’ interest at March 31, 2009 | $ | 6,436,516 | $ | 13,508,782 | $ | 1,324 | $ | 33,820,663 | $ | 53,767,285 | $ | 4,280,621 | $ | 11,039,083 | $ | 1,319 | $ | 67,955,788 | $ | 83,276,811 | $ | 137,044,096 | ||||||||||||||||||||||
Shares at December 31, 2008 | 65,670 | 114,555 | 14 | 257,908 | 35,898 | 93,951 | 11 | 572,449 | ||||||||||||||||||||||||||||||||||||
Subscriptions | − | 1,245 | − | 29,073 | − | 1,148 | − | 4,821 | ||||||||||||||||||||||||||||||||||||
Redemptions | (4,058 | ) | (3,322 | ) | − | (8,044 | ) | − | (11,484 | ) | − | (1,470 | ) | |||||||||||||||||||||||||||||||
Transfers | − | (32 | ) | − | − | − | 29 | − | − | |||||||||||||||||||||||||||||||||||
Shares at March 31, 2009 | 61,612 | 112,446 | 14 | 278,937 | 35,898 | 83,644 | 11 | 575,800 | ||||||||||||||||||||||||||||||||||||
Net asset value per share: | ||||||||||||||||||||||||||||||||||||||||||||
March 31, 2009 | $ | 104.47 | $ | 120.14 | $ | 98.09 | $ | 121.25 | $ | 119.24 | $ | 131.98 | $ | 116.00 | $ | 118.02 |
See Notes to Unaudited Condensed Financial Statements.
MLM Index™ Fund
Unaudited Condensed Statements of Cash Flows
For the three months ended March 31, 2010 and 2009
For the three months ended | For the three months ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
Cash flows from operating and investing activities | ||||||||
Net income (loss) | $ | 721,712 | $ | (48,948 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating and investing activities: | ||||||||
Net change in operating assets and liabilities: | ||||||||
Due from broker | 3,275,388 | (13,320,858 | ) | |||||
Net unrealized gain on open futures contracts | (4,958,707 | ) | 12,664,656 | |||||
Interest receivable | 5,414 | 31,900 | ||||||
Other assets | (5,000 | ) | 28 | |||||
Brokerage commissions payable | (3,493 | ) | (2,197 | ) | ||||
Management fee payable | (20,950 | ) | 2,964 | |||||
Accrued expenses | (57,224 | ) | (183,367 | ) | ||||
Net cash used in operating and investing activities | (1,042,860 | ) | (855,822 | ) | ||||
Cash flows from financing activities | ||||||||
Subscriptions received, net of selling commissions | 11,454,299 | 4,466,342 | ||||||
Net redemptions, including payments of redemptions payable | (30,266,426 | ) | (5,703,443 | ) | ||||
Net cash used in financing activities | (18,812,127 | ) | (1,237,101 | ) | ||||
Net decrease in cash and cash equivalents | (19,854,987 | ) | (2,092,923 | ) | ||||
Cash and cash equivalents at beginning of period | 91,471,211 | 98,799,819 | ||||||
Cash and cash equivalents at end of period | $ | 71,562,224 | $ | 96,706,896 | ||||
Supplemental disclosures of non-cash financing activities: | ||||||||
Redemptions payable | $ | 7,353,258 | $ | 747,685 |
See Notes to Unaudited Condensed Financial Statements.
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements
March 31, 2010
1. Organization
MLM Index™ Fund (the “Trust”) was formed under the Business Trust Statute of the State of Delaware as a business trust in December 1997 and commenced operations on January 4, 1999. The Trust was organized for the primary purpose of seeking capital appreciation through the speculative trading of a diversified portfolio of futures contracts using the MLM Index™ Trading Program, which is based upon the MLM Index™ (the “Index”). The Index is a benchmark of the hypothetical returns available to a futures investor. The Index is comprised of a diverse portfolio of futures markets, including both financial and tangible markets.
Mount Lucas Management Corporation (the “Manager”) is the investment manager of the Trust and is responsible for the allocation of the Trust’s interest among a mix of trading strategies. The Manager is a registered investment advisor under the Investment Advisers Act of 1940, is registered as a commodity pool operator and a commodity-trading advisor with the Commodity Futures Trading Commission and is a member of the National Futures Association.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The following is a summary of the significant accounting and reporting policies used in preparing the financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been omitted. In the opinion of the Manager, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial positions of the Trust as of March 31, 2010 and the results of its operations for the three months ended March 31, 2010 and 2009. The operating results for these interim periods many not be indicative of the results expected for a full year. These financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2009.
Use of Estimates
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid financial instruments with maturities of three months or less, when purchased.
Certain of the Trust's cash at the broker is restricted to meet margin requirements (See Note 5).
Due from Brokers
The Trust’s trading activities utilize one broker located in the United States. Due from broker represents cash balances held, unrealized profit or loss on futures contracts, and amounts receivable or payable for transactions not settled at March 31, 2010 and December 31, 2009.
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
2. Summary of Significant Accounting Policies (continued)
Fair Value Measurements
The Trust has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the statement of assets and liabilities are categorized based on the inputs to the valuation techniques as follows:
Level 1:
Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. government and agency securities, and certain other sovereign government obligations).
Level 2:
Financial assets and liabilities whose values are based on the following:
a) | Quoted prices for similar assets or liabilities in active markets (for example, restricted stock); |
b) | Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently); |
c) | Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and |
d) | Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans). |
Level 3:
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
2. Summary of Significant Accounting Policies (continued)
Fair Value Measurements (continued)
The Trust’s trading positions are valued at market value and cash equivalents are carried at their net asset value per share including accrued interest, as applicable. All positions including the net unrealized appreciation or depreciation are included under the caption “net unrealized gain (loss) on open futures contracts” on the statements of financial condition. Market value is principally based on listed market prices or broker or dealer price quotations. The resulting change in unrealized profit or loss is reflected in net gain (loss) on change in unrealized appreciation (depreciation) on investments on the statements of operations.
The market price for futures (exchange-traded) contracts is based upon the settlement price posted by the various futures exchanges on which the contract is traded. The Trust considers prices for exchange- traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1).
Investment Transactions and Investment Income
All securities transactions are recorded on a trade-date basis. Realized gain and loss are recorded using specific identification method. Interest income is recorded using the accrual basis of accounting.
Income Taxes
All of the Series of the Trust are classified for Federal income tax purposes as separate partnerships. Investors in each Series will reflect their proportionate share of realized profit or loss on their separate tax returns. Accordingly, no provisions for income taxes are required for the Trust.
The Trust has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense.
Redemptions Payable
For purposes of both financial reporting and calculation of redemption value, Net Asset Value per unit is calculated by dividing Net Asset Value by the number of outstanding investors’ interests.
3. Cash and Cash Equivalents
The Trust’s cash and cash equivalents consisted of:
March 31, 2010 | December 31, 2009 | |||||||
Overnight money markets | $ | 27,006,000 | $ | 10,001,000 | ||||
U.S. Government Agency Securities | 44,152,210 | 81,011,771 | ||||||
Cash in checking account | 404,014 | 404,440 | ||||||
Total | $ | 71,562,224 | $ | 91,417,211 |
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
4. Investors’ Interest
The Trust is comprised of six series: the Unleveraged Series, which attempts to replicate the Index without leverage, the Leveraged Series, which attempts to replicate the Index at three times leverage, the MLM Commodity L/S Unleveraged Series which attempts to replicate the MLM Commodity Long/Short Index without leverage, the MLM Commodity L/S Leveraged Series which attempts to replicate the MLM Commodity Long/Short Index with three times leverage, the MLM Commodity L/N Unleveraged Series which attempts to replicate the MLM Commodity Long/Neutral Index without leverage and the MLM Commodity L/N Leveraged Series which attempts to replicate the MLM Commodity Long/Neutral Index with three times leverage (collectively, the “Series”). The MLM Commodity L/S Index is a subset of the MLM Index and contains only the commodity futures contracts of the entire MLM Index. The MLM Commodity L/N Index contains the same commodity futures contracts, but does not have short positions when the MLM Index algorithm indicates a short position in a particular contract. Prior to December 2004, each Series had five classes of shares: Class A, Class A-1, Class B, Class B-1 and Class C. On December 1, 2004, Class D shares were offered in each Series. On December 31, 2004, the Manager elected to close Class A-1 and Class B-1. Class A, Class B, Class C and Class D shares are sold by authorized selling agents appointed by the Manager to accredited investors at a price equal to each Class’s net asset value. Shares may be redeemed at net asset value as of the last day of any month upon at least ten business days’ written notice to the Manager. As of March 31, 2010 the MLM Commodity L/S Leveraged Series and the MLM Commodity L/N Leveraged Series have not commenced trading and have no assets. In addition, as of March 31, 2010, the MLM Commodity L/S Unleveraged Series and the MLM Commodity L/N Unleveraged Series have never had any investors in classes A, B or C.
The Manager allocates profits and losses among the investors of a Series based on the balance in each investor’s capital account.
The Class A and Class C shares of the Unleveraged and Leveraged Series are subject to a sales commission of 0% to 4% of the subscription amount, payable to the selling agent from the investor’s investment for each series. The amount of the sales commission will be determined by the selling agent.
5. Margin Requirements
The Trust had margin requirements of $5,218,998 and $5,914,588 at March 31, 2010 and December 31, 2009, respectively, which were satisfied by cash held at the broker.
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
6. Management Fee and Other Fees and Expenses
The Trust pays the Manager a management fee and the introducing broker a brokerage fee as a percentage of net assets, as of the first day of each month at the annualized rates as follows:
Leveraged Series | ||||||||||||||||||||||||
Brokerage Fee | Management Fee | Organizational Fee | Operating Expense | Selling Expense | Total Fees and Commissions | |||||||||||||||||||
Class A | 1.75 | % | 2.80 | % | N/A | * | 0.35 | % | 4.00 | % | 8.90 | % | ||||||||||||
Class B | 1.75 | % | 1.30 | % | N/A | * | 0.35 | % | N/A | 3.40 | % | |||||||||||||
Class C | 0.90 | % | 2.05 | % | N/A | 0.35 | % | 4.00 | % | 7.30 | % | |||||||||||||
Class D | 0.90 | % | 1.30 | % | N/A | 0.35 | % | N/A | 2.55 | % |
*effective January 1, 2010
Unleveraged Series, Unleveraged Commodity L/S Series and Unleveraged Commodity L/N Series | ||||||||||||||||||||||||
Brokerage Fee | Management Fee | Organizational Fee | Operating Expense | Selling Expense | Total Fees and Commissions | |||||||||||||||||||
Class A | 0.85 | % | 1.50 | % | N/A | * | 0.35 | % | 4.00 | % | 6.70 | % | ||||||||||||
Class B | 0.85 | % | 0.50 | % | N/A | * | 0.35 | % | N/A | 1.70 | % | |||||||||||||
Class C | 0.40 | % | 1.00 | % | N/A | 0.35 | % | 4.00 | % | 5.75 | % | |||||||||||||
Class D | 0.40 | % | 0.50 | % | N/A | 0.35 | % | N/A | 1.25 | % |
*effective January 1, 2010
The Trust pays 0.35% of average net assets for the Trust’s legal, accounting, auditing and other operating expenses and fees. The Trust also pays the cash manager and banking fees directly.
7. Derivative Financial Instruments
Derivatives are subject to various risks similar to non-derivative financial instruments including market, credit, liquidity and operational risk. The risks of derivatives should not be viewed in isolation but rather should be considered on an aggregate basis along with the Trust’s other trading-related activities.
The Trust purchases and sells futures in financial instruments and commodities. The Trust records its derivative activities on a fair value basis with realized and unrealized gains (losses) recognized currently in the statements of operations and in due from brokers on the statements of financial condition.
The following table reflects the fair value of the Trust’s derivative financial instruments.
Fair Value at | ||||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Financial futures | $ | 1,034,434 | $ | (391,058 | ) | $ | 187,104 | $ | (2,300,234 | ) | ||||||
Commodity futures | 3,291,989 | (111,146 | ) | 1,626,318 | (647,676 | ) | ||||||||||
Total | $ | 4,326,423 | $ | (502,204 | ) | $ | 1,813,422 | $ | (2,947,910 | ) |
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
7. Derivative Financial Instruments (continued)
March 31, 2010 | ||||||||||||
Change in | ||||||||||||
Realized P&L | Unrealized | Total | ||||||||||
Financial futures | $ | (2,820,569 | ) | $ | 2,756,506 | $ | (64,063 | ) | ||||
Commodity futures | (844,057 | ) | 2,202,201 | 1,358,144 | ||||||||
Total | $ | (3,664,626 | ) | $ | 4,958,707 | $ | 1,294,081 |
March 31, 2009 | ||||||||||||
Change in | ||||||||||||
Realized P&L | Unrealized | Total | ||||||||||
Financial futures | $ | 5,543,120 | $ | (4,672,695 | ) | $ | 870,425 | |||||
Commodity futures | 7,695,916 | (7,991,961 | ) | (296,045 | ) | |||||||
Total | $ | 13,239,036 | $ | (12,664,656 | ) | $ | 574,380 |
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
8. Financial Highlights
The following represents the per share operating performance and ratios to the average investors’ interest and other supplemental information for the three months ended March 31, 2010:
Leveraged Series | Unleveraged Series | Commodity L/S Unleveraged Series | Commodity L/N Unleveraged Series | |||||||||||||||||||||||||||||||||||||
Class A Shares | Class B Shares | Class C Shares | Class D Shares | Class A Shares | Class B Shares | Class C Shares | Class D Shares | Class D Shares | Class D Shares | |||||||||||||||||||||||||||||||
Per share operating performance: | ||||||||||||||||||||||||||||||||||||||||
Net asset value per share at December 31, 2009 | $ | 90.73 | $ | 105.53 | $ | 86.24 | $ | 107.20 | $ | 113.28 | $ | 126.32 | $ | 110.99 | $ | 113.35 | $ | 108.17 | $ | 102.00 | ||||||||||||||||||||
Income from investment operations: | ||||||||||||||||||||||||||||||||||||||||
Net investment expense | (0.72 | ) | (0.46 | ) | (0.53 | ) | (0.47 | ) | (0.58 | ) | (0.33 | ) | (0.41 | ) | (0.29 | ) | (0.24 | ) | (0.21 | ) | ||||||||||||||||||||
Net realized and unrealized gain on investment transactions | 2.00 | 2.35 | 2.09 | 2.62 | 0.81 | 0.90 | 0.89 | 0.93 | 4.21 | (2.77 | ) | |||||||||||||||||||||||||||||
Total from investment operations | 1.28 | 1.89 | 1.56 | 2.15 | 0.23 | 0.57 | 0.48 | 0.64 | 3.97 | (2.98 | ) | |||||||||||||||||||||||||||||
Net asset value per share at March 31, 2010 | $ | 92.01 | $ | 107.42 | $ | 87.80 | $ | 109.35 | $ | 113.51 | $ | 126.89 | $ | 111.47 | $ | 113.99 | $ | 112.14 | $ | 99.02 | ||||||||||||||||||||
Total Return: | 1.41 | % | 1.79 | % | 1.82 | % | 2.00 | % | 0.20 | % | 0.45 | % | 0.44 | % | 0.57 | % | 3.67 | % | (2.92 | )% | ||||||||||||||||||||
Ratio to Average Investors’ Interest: | ||||||||||||||||||||||||||||||||||||||||
Net investment expense | (0.90 | )% | (0.43 | )% | (0.61 | )% | (0.47 | )% | (0.51 | )% | (0.25 | )% | (0.38 | )% | (0.28 | )% | (0.07 | )% | (0.22 | )% | ||||||||||||||||||||
Expenses | (0.91 | )% | (0.44 | )% | (0.62 | )% | (0.48 | )% | (0.52 | )% | (0.27 | )% | (0.39 | )% | (0.30 | )% | (0.07 | )% | (0.22 | )% |
Total return is calculated as the change in the net asset value per share for the three months ended March 31, 2010. The per share operating performance and ratios are computed based upon the weighted average shares outstanding and the weighted average of investors’ interest, respectively for each class, for the three months ended March 31, 2010.
MLM Index ™ Fund
Notes to Unaudited Condensed Financial Statements (continued)
March 31, 2010
8. Financial Highlights (continued)
The following represents the per share operating performance and ratios to the average investors’ interest and other supplemental information for the three months ended March 31, 2009:
Leveraged Series | Unleveraged Series | |||||||||||||||||||||||||||||||
Class A | Class B | Class C | Class D | Class A | Class B | Class C | Class D | |||||||||||||||||||||||||
Shares | Shares | Shares | Shares | Shares | Shares | Shares | Shares | |||||||||||||||||||||||||
Per share operating performance: | ||||||||||||||||||||||||||||||||
Net asset value per share at December 31, 2008 | $ | 105.12 | $ | 120.43 | $ | 98.31 | $ | 121.29 | $ | 119.60 | $ | 132.04 | $ | 116.06 | $ | 117.94 | ||||||||||||||||
Income from investment operations: | ||||||||||||||||||||||||||||||||
Net investment income expense | (0.85 | ) | (0.50 | ) | (0.60 | ) | (0.51 | ) | (0.56 | ) | (0.28 | ) | (0.38 | ) | (0.25 | ) | ||||||||||||||||
Net realized and unrealized gain on investment transactions | 0.20 | 0.21 | 0.38 | 0.47 | 0.20 | 0.22 | 0.32 | 0.33 | ||||||||||||||||||||||||
Total from investment operations | (0.65 | ) | (0.29 | ) | (0.22 | ) | (0.04 | ) | (0.36 | ) | (0.06 | ) | (0.06 | ) | 0.08 | |||||||||||||||||
Net asset value per share at, March 31, 2009 | $ | 104.47 | $ | 120.14 | $ | 98.09 | $ | 121.25 | $ | 119.24 | $ | 131.98 | $ | 116.00 | $ | 118.02 | ||||||||||||||||
Total Return: | (0.62 | )% | (0.24 | )% | (0.22 | )% | (0.03 | )% | (0.30 | )% | (0.05 | )% | (0.05 | )% | 0.07 | % | ||||||||||||||||
Ratio to Average Investors’ Interest: | ||||||||||||||||||||||||||||||||
Net investment income expense | (0.82 | )% | (0.42 | )% | (0.61 | )% | (0.40 | )% | (0.46 | )% | (0.46 | )% | (0.33 | )% | (0.21 | )% | ||||||||||||||||
Expenses | (0.86 | )% | (0.46 | )% | (0.65 | )% | (0.44 | )% | (0.51 | )% | (0.27 | )% | (0.38 | )% | (0.26 | )% |
Total return is calculated as the change in the net asset value per share for the three months ended March 31, 2009. The per share operating performance and ratios are computed based upon the weighted average shares outstanding and the weighted average of investors’ interest, respectively for each class, for the three months ended March 31, 2009.
MLM Index ™ Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 2010
9. Statements of Financial Condition and Operations by Series
March 31, 2010 | Commodity | Commodity | ||||||||||||||||||
Assets | L/N Unleveraged Series | L/S Unleveraged Series | Leveraged Series | Unleveraged Series | Trust Total | |||||||||||||||
Cash and cash equivalents | $ | 7,626,487 | $ | 10,177,428 | $ | 20,076,301 | $ | 33,682,008 | $ | 71,562,224 | ||||||||||
Due from broker | 561,938 | 2,962,134 | 18,459,687 | 13,117,279 | 35,101,038 | |||||||||||||||
Net unrealized gain on open futures contracts, at fair value | 167,689 | 228,200 | 2,526,294 | 902,036 | 3,824,219 | |||||||||||||||
Other assets | - | - | - | 5,000 | 5,000 | |||||||||||||||
Total assets | $ | 8,356,114 | $ | 13,367,762 | $ | 41,062,282 | $ | 47,706,323 | $ | 110,492,481 | ||||||||||
Liabilities and investors’ interest | ||||||||||||||||||||
Redemptions payable | - | - | $ | 1,301,087 | $ | 6,052,171 | $ | 7,353,258 | ||||||||||||
Brokerage commissions payable | 2,586 | 987 | 38,504 | 19,554 | 61,631 | |||||||||||||||
Management fee payable | 3,460 | 1,322 | 47,272 | 22,994 | 75,048 | |||||||||||||||
Accrued expenses | 225 | 200 | 11,215 | 21,253 | 32,893 | |||||||||||||||
Total liabilities | 6,271 | 2,509 | 1,398,078 | 6,115,972 | 7,522,830 | |||||||||||||||
Investors’ interest | 8,349,843 | 13,365,253 | 39,664,204 | 41,590,351 | 102,969,651 | |||||||||||||||
Total liabilities and investors’ interest | $ | 8,356,114 | $ | 13,367,762 | $ | 41,062,282 | $ | 47,706,323 | $ | 110,492,481 |
December 31, 2009 | Commodity | Commodity | ||||||||||||||||||
Assets | L/N Unleveraged Series | Unleveraged Series | Leveraged Series | Unleveraged Series | Trust Total | |||||||||||||||
Cash and cash equivalents | $ | 7,999,557 | $ | 186,896 | $ | 27,107,971 | $ | 56,122,787 | $ | 91,417,211 | ||||||||||
Due from broker | 504,578 | 3,004,023 | 20,992,597 | 13,875,228 | 38,376,426 | |||||||||||||||
Net unrealized gain on open futures contracts, at fair value | 100,833 | 57,043 | - | - | 157,876 | |||||||||||||||
Interest receivable | - | - | 1,773 | 3,641 | 5,414 | |||||||||||||||
Total assets | 8,604,968 | 3,247,962 | 48,102,341 | 70,001,656 | 129,956,927 | |||||||||||||||
Liabilities and investors’ interest | ||||||||||||||||||||
Redemptions payable | - | - | 684,794 | 23,149,576 | 23,834,370 | |||||||||||||||
Net unrealized loss on open futures contracts, at fair value | - | - | 976,564 | 315,800 | 1,292,364 | |||||||||||||||
Brokerage commissions payable | 1,667 | - | 39,138 | 24,319 | 65,124 | |||||||||||||||
Management fee payable | 2,084 | 1,334 | 59,315 | 33,265 | 95,998 | |||||||||||||||
Accrued expenses | - | 468 | 46,644 | 43,005 | 90,117 | |||||||||||||||
Total liabilities | 3,751 | 1,802 | 1,806,455 | 23,565,965 | 25,377,973 | |||||||||||||||
Investors’ interest | 8,601,217 | 3,246,160 | 46,295,886 | 46,435,691 | 104,578,954 | |||||||||||||||
Total liabilities and investors’ interest | $ | 8,604,968 | $ | 3,247,962 | $ | 48,102,341 | $ | 70,001,656 | $ | 129,956,927 |
MLM Index ™ Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 2010
9. Statements of Financial Condition and Operations by Series (continued)
Period ended March 31, 2010 | Commodity L/N Unleveraged Series | Commodity L/S Unleveraged Series | Leveraged Series | Unleveraged Series | Trust Total | |||||||||||||||
Investment income | ||||||||||||||||||||
Interest | $ | - | $ | 1 | $ | 4,128 | $ | 7,608 | $ | 11,737 | ||||||||||
Expenses | ||||||||||||||||||||
Brokerage commissions | 3,197 | 8,371 | 127,897 | 61,519 | 200,984 | |||||||||||||||
Management fee | 3,996 | 10,463 | 152,962 | 69,189 | 236,610 | |||||||||||||||
Operating expenses | 3,115 | 7,656 | 52,197 | 66,645 | 129,613 | |||||||||||||||
Total expenses | 10,308 | 26,490 | 333,056 | 197,353 | 567,207 | |||||||||||||||
Net investment loss | (10,308 | ) | (26,489 | ) | (328,928 | ) | (189,745 | ) | (555,470 | ) | ||||||||||
Realized and unrealized gain (loss) on investments | ||||||||||||||||||||
Net realized loss | (40,982 | ) | (291,515 | ) | (2,549,063 | ) | (790,488 | ) | (3,672,048 | ) | ||||||||||
Net gain on change in unrealized appreciation on investments and foreign currency | 170,383 | 66,630 | 3,497,747 | 1,214,470 | 4,949,230 | |||||||||||||||
Net realized and unrealized gain (loss) on investments | 129,401 | (224,885 | ) | 948,684 | 423,982 | 1,277,182 | ||||||||||||||
Net income (loss) | $ | 119,093 | $ | (251,374 | ) | $ | 619,756 | $ | 243,237 | $ | 721,712 |
MLM Index ™ Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 2010
9. Statements of Financial Condition and Operations by Series (continued)
Period ended March 31, 2009 | Leveraged Series | Unleveraged Series | Trust Total | |||||||||
Investment income | ||||||||||||
Interest | $ | 19,628 | $ | 40,559 | $ | 60,187 | ||||||
Expenses | ||||||||||||
Brokerage commissions | 164,438 | 103,342 | 267,780 | |||||||||
Management fee | 199,236 | 116,836 | 316,072 | |||||||||
Operating expenses | 65,982 | 110,039 | 176,021 | |||||||||
Total expenses | 429,656 | 330,217 | 759,873 | |||||||||
Net investment loss | (410,028 | ) | (289,658 | ) | (699,686 | ) | ||||||
Realized and unrealized gain (loss) on investments | ||||||||||||
Net realized gain | 8,658,713 | 4,927,329 | 13,586,042 | |||||||||
Net loss on change in unrealized appreciation on investments and foreign currency | (8,334,095 | ) | (4,601,209 | ) | (12,935,304 | ) | ||||||
Net realized and unrealized gain (loss) on investments | 324,618 | 326,120 | (650,738 | ) | ||||||||
Net income (loss) | $ | (85,410 | ) | $ | 36,462 | $ | (48,948 | ) |
10. Subsequent Events
From April 1, 2010 through May 12, 2010, the Trust had subscriptions received or pending of $76,865, $73,715, $500,000 and $10,000,000 for the Leveraged Series, Unleveraged Series, Commodity L/S Unleveraged Series and Commodity L/N Unleveraged Series, respectively. In addition, the Trust had redemptions pending or received of $562,390 and $822,869 for the Leveraged and Unleveraged Series, respectively.
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
General
The purpose of the Trust is to replicate the results of the MLM Index™, an index designed to measure the risk premium available to futures traders. Designed as such, the results of the Trust depend on two factors, the results of the MLM Index™ itself, and the Manager's ability to replicate that Index. It is important to note that the Manager also calculates the results of the MLM Index™. Thus, their role is twofold - to calculate the results of the MLM Index™, and to replicate the results of the MLM Index™ for the Trust. Any changes made to the composition of the MLM Index™ by the MLM Index™ Committee of the Manager will affect the trading of the Trust, since the object of the Trust is to replicate the MLM Index™ as published.
Results of the MLM Index™
The MLM Index™ is calculated from the prices of 22 liquid futures markets. These markets are traded on domestic and foreign exchanges. For each market, the MLM Index™ generally uses the price of 4 different delivery months each year. For example, in the Japanese Yen futures market, the MLM Index™ uses the March, June, September and December delivery months. On the day before trading day, the MLM Index™ determines whether to hold a long or short position in each constituent contract based on the calculation methodology of the MLM Index™. Once established, that position is held for the subsequent period, at which time it is re-evaluated. The monthly results of each constituent market are then used to calculate the MLM Index™ return. The objective of the Trust is to replicate this monthly return. The MLM Commodity L/S Index is a subset of the MLM Index and contains only the commodity futures markets of the entire MLM Index. The MLM Commodity L/N Index contains the same commodity futures contracts, but does not have short positions when the MLM Index algorithm indicates a short position in a particular contract.
Clearly, the volatility of the constituent markets in the MLM Index™ can affect the results of the Trust. The influences on this volatility are varied and unpredictable. However, since the object of the Trust is to replicate the MLM Index™, the Manager takes no unusual action to mitigate this volatility. The role of the Manager is to buy or sell the appropriate number of futures contracts in each constituent market such that the aggregate return of those positions replicates as closely as possible the results of the MLM Index™ and its subsets.
In order to accomplish this objective, the Manager must calculate the number of contracts based on both the assets in the Trust and the distribution of the assets between the Series of the Trust. Since the MLM Index™ rebalances positions each month, at that time the Manager must ascertain the asset level and execute orders to achieve the desired allocations. This is achieved by adding the performance results of the Trust for the month to the assets at the beginning of the month, and adding additions of capital from new subscriptions and subtracting redemptions in order to determine the asset level at the end of the period.
Summary of Critical Accounting Policies
The financial statements have been prepared in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Other than accruals maintained in the normal course of business, neither management or the Trust prepares, maintains or updates any estimates. Management believes that the estimates utilized in preparing the financial statements are reasonable and prudent; however, actual results could differ from those estimates. The Trust's significant accounting policies are described in detail in Note 2 of the Notes to Financial Statements.
The Trust records all investments at fair value in its financial statements, with changes in fair value reported as a component of realized and unrealized gain (loss) on investments in the Statements of Operations. Generally, fair values are based on market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price.
Financial Condition
To replicate the results of the MLM Index™, the Trust must effect trades on domestic or foreign futures exchanges. Since inception of operations the Trust had used Refco, LLC as its futures commission merchant. In October of 2005, the Trust moved its clearing accounts to Citigroup Global Markets. The Manager deposits a percentage of the assets of the Trust in separate accounts at Citigroup Global Markets, one for each series. The amount deposited is determined by the margin requirement established by the exchanges to hold the positions in the Trust. The margin requirement varies, but is generally about 2.4% of assets for each unleveraged series and 7.1% of assets for each leveraged series.
The Trust’s assets are held in separate custodial accounts at State Street Bank and Trust (the “Bank”), one for each Series. The Trust has contracted with Credit Suisse Asset Management (CSAM) to manage the money in these accounts so as to maximize the interest income which accrues to the Trust, while maintaining strict credit controls as determined by the CE Act. When Citigroup Global Markets requires additional assets to maintain the positions for the Trust, the Bank makes a wire transfer to Citigroup Global Markets. If Citigroup Global Markets has surplus assets in the accounts, Citigroup Global Markets makes a wire transfer to the accounts at the Bank.
The Trust owns no capital assets and does not borrow money. Since the objective of the Trust is to replicate the results of the MLM Index™, its entire asset base participates in the speculative trading of futures contracts. As such, all the assets of the Trust are at risk. The level of assets will be determined by the results of the Trust, and the effect of addition of capital and the redemption of Trust interests. These variables are impossible to predict with any certainty.
Liquidity
The majority of the Trust's assets are held in liquid short-term interest rate instruments. The Trust takes substantial exposure in futures markets, which require relatively small deposits, called margin, to hold the positions. As at March 31, 2010, decreases in cash and cash equivalents and increases in due from broker amounted to approximately $19.9 and $3.3 million and net cash used in operations amounted to approximately $1.0 million, of which $0.7 million represents net gain from operations in the current period. In general, the Trust will have about 5% of its assets on deposit with brokers as margin, with the balance held in accounts with a major financial institution.
A holder of interests in the Trust may liquidate that holding at the end of any month at the net asset value of the interests, upon 10 days written notice to the Manager. While the Manager generally must honor all requests for redemption if presented in proper form, the Manager may suspend temporarily any redemption if the effect of such redemption, either alone or in conjunction with other redemptions, would impair the relevant Series' ability to operate if the impairment would be caused by a third party other than the Manager. Further, the right to obtain redemption is contingent upon the relevant Series having property sufficient to discharge its liabilities on the date of redemption. Under certain circumstances, the Manager may find it advisable to establish a reserve for contingent liabilities. In such event, the amount receivable by a redeeming holder of interests will be reduced by his proportionate share of the reserve. There is no secondary market for interests in the Trust, and none is anticipated. There are restrictions for transfer of interests.
Although the Trust trades in futures contracts which are in general liquid, the exchanges impose daily trading limits, which act to suspend trading when a particular market or contract trades up or down to a pre-determined price level. Should this happen, and the Trust was attempting to execute trades in that situation, the Trust may not be able to accurately replicate the results of the MLM Index™. These rules have not had a material impact on the operation of the Trust to date. The Trust generally trades only in the largest and most liquid futures contracts, and generally has available approximately 95% of its assets in the form of highly liquid money market securities. The Trust believes that, except in extreme market conditions, all open positions can be liquidated in an efficient, orderly fashion.
Off-Balance Sheet Arrangements
The Trust has no off-balance sheet arrangements that it believes does or will be reasonably likely to have a material current or future effect on the Trust’s results of operations, financial condition, liquidity, capital expenditures or capital resources.
Market and Credit Risks
The nature of the Trust is such that it undertakes substantial market risk in following its mandate to replicate the MLM Index™ and its subsets. Although the Manager monitors the intraday and daily valuation of the portfolio, no extraordinary measures are taken to reduce market risk. Specifically, the Manager maintains positions required to match, as closely as possible, the return of the MLM Index™ and its subsets. One could imagine certain circumstances where the Manager might be called upon to make a change to this policy, such as the closing of an exchange or some other emergency situation. In such case, management would use its best efforts to respond to such circumstances with the interests of the investors in mind.
The MLM Index™ and its subsets are not designed to predict which market will exhibit positive performance in any given year. The Manager does not select the constituent markets based on expectations of future performance. The MLM Index™ and its subsets are designed to represent participation in a diverse basket of future contracts using a trend-following algorithm. The MLM Index™ and its subsets are a diversified Index producing different levels of return in the various sectors from year to year.
The Trust incurs various kinds of credit risk in its operations. In order to facilitate the trading of the Trust, assets must be placed with both Futures Commission Merchants and Broker/Dealers. Management of the Trust deals only with established registered firms in both capacities, and monitors their financial condition on an ongoing basis. In addition, if the Trust were to enter into over the counter transactions, additional counterparty risk would be incurred. There were no OTC transactions for the three months ending March 31, 2010.
Results of Operations
At March 31, 2010, the Trust had assets of $110,492,481 and liabilities of $7,522,830 compared with assets of $129,799,051 and liabilities of $25,220,097 at December 31, 2009. Changes in the net assets of the Trust are the result of subscriptions and redemptions to the Trust, and the net gain from operations; including the results from futures trading, interest income, and fees and expenses. For the three-month period ended March 31, 2010, subscriptions to the Trust totaled $11,454,299 and redemptions totaled $13,785,314. During the three-month period ended March 31, 2010, the Trust had a net gain of $721,712 compared with a net loss of $48,948 for the same period in 2009. Some expenses of the Trust are based on a percentage of net assets, and therefore increase or decrease as the net assets of the Trust increase or decrease.
The Trust’s net income (loss) is directly related to the performance of the MLM Index™, which the Trust is designed to replicate. For the three months ended March 31, 2010, MLM Index™ performance was +0.97%. Performance was +0.43% for the same period ended March 31, 2009. The following table represents the performance by class for the MLM Index™ Fund for the three months ended March 31, 2010 and March 31, 2009.
March 31, 2010:
Leveraged Series | Unleveraged Series | Unleveraged Commodity L/S Series | Unleveraged Commodity L/N Series | |||||||||||||||||||||||||||||||||||||
Class A | Class B | Class C | Class D | Class A | Class B | Class C | Class D | Class D | Class D | |||||||||||||||||||||||||||||||
Shares | Shares | Shares | Shares | Shares | Shares | Shares | Shares | Shares | Shares | |||||||||||||||||||||||||||||||
Total Return: | 1.41 | % | 1.79 | % | 1.82 | % | 2.00 | % | 0.20 | % | 0.45 | % | 0.44 | % | 0.57 | % | 3.67 | % | (2.92 | )% |
March 31, 2009:
Leveraged Series | Unleveraged Series | |||||||||||||||||||||||||||||||
Class A | Class B | Class C | Class D | Class A | Class B | Class C | Class D | |||||||||||||||||||||||||
Shares | Shares | Shares | Shares | Shares | Shares | Shares | Shares | |||||||||||||||||||||||||
Total Return: | (0.62 | )% | (0.24 | )% | (0.22 | )% | (0.03 | )% | (0.30 | )% | (0.05 | )% | (0.05 | )% | 0.07 | % |
The Trust’s performance may be negative in years when the MLM Index™ is positive due to the timing of subscriptions and redemptions, the fees charged and/or the allocation of assets between the unleveraged and leveraged series of the Trust. Since inception of the Trust, the correlation of monthly results between the unleveraged series of the Trust and the MLM Index™ adjusted for fees is 0.99. The correlation between the leveraged series of the Trust and the MLM Index™ adjusted for leverage and fees is 0.99.
The components of the return of the MLM Index™ are the capital gains earned from the changes in futures market prices, and the interest income earned on cash balances. The mechanics and rules of futures markets allow the Trust to earn interest on approximately 100% of the assets in the Trust. The interest income takes two forms, directly from the Trust's futures broker paid on the margin deposits held by them, and excess cash.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The following is a discussion of the quantification of market risk for the Trust. Such calculations are often referred to as Value-at-Risk (“VAR”). The method used here may or may not differ from other methods used for VAR calculations by other firms. There is no one generally accepted method of VAR calculation and this method may not be comparable to methods used by others.
The market risk, or VAR of the Trust is directly related to the composition of the MLM Index™ and its subsets, and the ratio of each. Each month, the position of the MLM Index™ can be either long or short based on a 252 business day moving average rule. Since positions can be offset inside of sectors (one contract long in a particular commodity and one contract short in a related commodity), specific sector risk is less relevant than the historical risk of the MLM Index™ as a whole. Since the object of the Trust is to replicate the MLM Index™, it is reasonable to use the historic values of that Index to estimate market risk.
The VAR of the Trust is calculated as follows:
The Manager calculates the weighted average of the standard deviation of the historical returns of the MLM Index™ and its subsets over two time periods, using daily returns over the preceding 1 year ending at the date of this report, and using monthly returns over the preceding 10 years. Those results for the period ended March 31, 2010 are 0.51% and 2.27% respectively. It is important to note that this calculation is made on the historical data of the MLM Index™. The standard deviation is used to measure the dispersion of the returns of the MLM Index™ over time.
For the purposes of VAR, an attempt is made to estimate the size of a loss that may occur with some small probability. VAR does not estimate the possibility of a total loss, only the probability of a loss of some magnitude. The calculation is complicated by the fact that the standard deviation of the distribution assumes a normal distribution, which may or may not be a good estimate of the actual distribution. For the purposes of this estimate, the Manager has chosen to calculate the size of a daily and monthly loss that might occur with a probability of 1% (1 chance in 100). To do this, the standard deviation is multiplied by 2.35 to the standard 99% confidence interval, and by 1.5 to adjust for the possibility of a non-normal distribution. Using this methodology, for daily returns, this estimate is a loss of 1.73 %. For monthly returns, the estimate is a loss of 7.78%.
To ascertain a dollar loss amount for the Trust, the assets of the Trust as of March 31, 2010 are multiplied by the estimate of the risk calculated in step 2 above. The risk estimate is based on the Unleveraged MLM Index™, so Trust assets must be adjusted for the distribution of assets among the unleveraged and leveraged series of the Trust, with the leveraged assets having three times the risk of the unleveraged assets. Based on the asset levels as of March 31, 2010, the Manager estimates that the Trust could expect to lose approximately $3 million in any given day and $14 million in any given month.
The estimate above, though reasonable, should not be taken as an assurance that losses in the Trust could not be greater than these amounts. This is simply a quantitative estimate based on the historical performance of the MLM Index™ and its subsets.
The loss that occurs with small probability may be substantially greater than the loss indicted above. Also, market conditions could change dramatically from the conditions that prevailed over the period used to calculate the estimate, affecting the realized volatility of the market. Furthermore, other factors could affect trading, such as the inability to execute orders in a particular market, due to operational or regulatory restrictions that may alter the pattern of the Trust’s returns. Specifically, the Manager advises other funds in addition to the Trust. In certain markets there is a limit to the size a position that one entity can control (speculative limits). Since positions cannot exceed speculative limits, the Manager may have to allocate positions across accounts and funds, resulting in a less than complete replication of the MLM Index™ and its subsets. It is best to remember the fact that, as outlined in the offering for the Trust, that all the assets invested are at risk of loss.
Since the calculation of the VAR does not look at the specific instrument risks, but rather the results of the MLM Index™ and its subsets as a whole, risks related to actual execution are not included in the calculation. For example, counter-party risks from OTC transactions are not factored into the calculation.
Additional market risk may be attributed to the actual execution of the orders for the Trust. The Trust executes the majority of its orders on the last day of each month. As assets of the Trust grow, large orders may be placed in periods of reduced liquidity. Such orders may move the markets in which they are executed, adversely affecting the performance of the Trust. The Manager makes every effort to execute all orders efficiently, but general levels of liquidity are beyond the control of management. In certain circumstances, markets may move to the daily trading limits imposed by the exchanges, and the Trust may be unable to execute the necessary orders to replicate the MLM Index™ and its subsets, causing extensive slippage.
Item 4. | Controls and Procedures. |
The President and the Chief Operating Officer of the Manager (collectively the “Certifying Officers”) maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. The Certifying Officers have concluded that the disclosure controls and procedures are effective at the “reasonable assurance” level. As of March 31, 2010, the Certifying Officers evaluated the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rule [13a-15(e)/15d-15(e)] under the Exchange Act). Furthermore, the Certifying Officers concluded that disclosure controls and procedures in place were designed to ensure that information required to be disclosed in reports that are filed or submitted under the Exchange Act are (i) recorded, processed, summarized and reported on a timely basis in accordance with Commission rules and regulations; and (ii) accumulated and communicated to the Certifying Officers and other persons that perform similar functions, if any, to allow them to make timely decisions regarding required disclosure in periodic filings. There have been no significant changes in the Trust’s internal control over financial reporting in the quarter ended March 31, 2010 that has materially affected or is reasonably likely to materially affect the Trust’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
The Manager is not aware of any proceedings threatened or pending against the Trust and its affiliates which, if determined adversely, would have a material adverse effect on the financial condition or results of operations of the Trust.
Item 1a. | Risk Factors. |
None.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Leveraged Series | Unleveraged Series | Unleveraged Commodity L/S Series | Unleveraged Commodity L/N Series | |||||||||||||||||||||||||||||||||||||
Class A | Class B | Class C | Class D | Class A | Class B | Class C | Class D | Class D | Class D | |||||||||||||||||||||||||||||||
Jan-10 Subscriptions | $ | - | $ | 58,625 | $ | - | $ | - | $ | - | $ | 71,109 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Subscriptions Units | - | 567 | - | - | - | 565 | - | - | - | - | ||||||||||||||||||||||||||||||
# of Purchasers | - | 1 | - | - | - | 2 | - | - | - | - | ||||||||||||||||||||||||||||||
Unit Price | $ | - | $ | 102.80 | $ | - | $ | - | $ | - | $ | 125.18 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Feb-10 Subscriptions | $ | - | $ | 69,219 | $ | - | $ | 50,000 | $ | - | $ | 49,885 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Subscriptions Units | - | 667 | - | 474 | - | 397 | - | - | - | - | ||||||||||||||||||||||||||||||
# of Purchasers | - | 6 | - | 1 | - | 7 | - | - | - | - | ||||||||||||||||||||||||||||||
Unit Price | $ | - | $ | 103.79 | $ | - | $ | 105.58 | $ | - | $ | 125.51 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Mar-10 Subscriptions | $ | - | $ | 77,962 | $ | - | $ | - | $ | - | $ | 77,499 | $ | - | $ | 1,000,000 | $ | 10,000,000 | $ | - | ||||||||||||||||||||
Subscriptions Units | - | 726 | - | - | - | 611 | - | 8,773 | 89,174 | - | ||||||||||||||||||||||||||||||
# of Purchasers | - | 3 | - | - | - | 3 | - | 2 | 1 | - | ||||||||||||||||||||||||||||||
Unit Price | $ | - | $ | 107.42 | $ | - | $ | - | $ | - | $ | 126.89 | $ | - | $ | 113.99 | $ | 112.14 | $ | - |
Item 3. | Defaults Upon Senior Securities. |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits and Reports of Form 8-K. |
(a) Reports on Form 8-K
(b) Exhibits
Certification of President of the Manager Pursuant to Rule 13A-14(a) and Rule 15D-14(a), of the Securities Exchange Act, as amended. |
Certification of Chief Operating Officer of the Manager Pursuant to Rule 13A-14(a) and Rule 15D-14(a), of the Securities Exchange Act, as amended. |
Certification of President of the Manager Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Certification of Chief Operating Officer of the Manager Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MLM INDEX™ FUND | |
By: Mount Lucas Management Corporation | |
Its: Manager | |
By: /s/ Timothy J. Rudderow, Sr | |
Timothy J. Rudderow, Sr | |
President |
Date: May 12, 2010
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