ML ASPECT FUTURESACCESS LLC
(a Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of ML Aspect FuturesAccess LLC (the “Fund”) as of June 30, 2007, and the results of its operations for the three and six months ended June 30, 2007 and 2006. However, the operating results for the interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2006. Class D-SM commenced trading on April 1, 2007. Class D-TF commenced trading on June 1, 2007. Class D-SM Units pay Aspect annual management fees of 2.00 % of the Class’ average month-end net assets. The Class pays performance fees at 20% of any New Trading Profit, as defined. Class D-TF Units pay Aspect annual management fees of 1.50 % of the Class’ average month-end net assets. The Class pays performance fees at 15% of any New Trading Profit, as defined. Class D-SM and Class D-TF Units do not pay sponsor fees.
The preparation of financial statements in conformity with US GAAP 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.
2. NET ASSET VALUE PER UNIT
For financial reporting purposes, in conformity with US GAAP, the Fund deducted the total initial offering costs at inception from Members’ Capital for purposes of determining Net Asset Value. For all other purposes, including computing Net Asset Value for purposes of member subscription and redemption activity, such costs are amortized over 60 months. Consequently, the Net Asset Value and Net Asset Value per Unit of the different Classes for financial reporting purposes and for all other purposes are as follows:
At June 30, 2007 the Net Asset Values of the different Classes of Units are as follows:
| | Net Asset Value | | | | Net Asset Value per Unit | |
| | All Other
Purposes | | Financial
Reporting | | Number of
Units | | All Other
Purposes | | Financial
Reporting | |
Class A | | $ | 23,075,323 | | $ | 23,074,401 | | 18,307,714 | | $ | 1.2604 | | $ | 1.2604 | |
Class C | | 97,778,402 | | 97,767,375 | | 79,103,174 | | 1.2361 | | 1.2359 | |
Class D | | 24,108,577 | | 24,103,415 | | 18,241,191 | | 1.3217 | | 1.3214 | |
Class I | | 18,211,035 | | 18,202,949 | | 14,340,916 | | 1.2699 | | 1.2693 | |
Class D-SM | | 13,352,420 | | 13,352,420 | | 10,102,715 | | 1.3217 | | 1.3217 | |
Class D-TF | | 116,633,275 | | 116,633,276 | | 88,059,891 | | 1.3245 | | 1.3245 | |
| | $ | 293,159,032 | | $ | 293,133,836 | | 228,155,601 | | | | | |
| | | | | | | | | | | | | | | |
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At December 31, 2006 the Net Asset Values of the different Classes of Units are as follows:
| | Net Asset Value | | | | Net Asset Value per Unit | |
| | All Other
Purposes | | Financial
Reporting | | Number of
Units | | All Other
Purposes | | Financial
Reporting | |
Class A | | $ | 16,103,372 | | $ | 16,101,669 | | 13,808,907 | | $ | 1.1662 | | $ | 1.1660 | |
Class C | | 72,777,781 | | 72,762,861 | | 63,324,074 | | 1.1493 | | 1.1491 | |
Class D | | 16,419,981 | | 16,414,107 | | 13,531,909 | | 1.2134 | | 1.2130 | |
Class I | | 14,206,983 | | 14,198,283 | | 12,118,637 | | 1.1723 | | 1.1716 | |
| | $ | 119,508,117 | | $ | 119,476,920 | | 102,783,527 | | | | | |
| | | | | | | | | | | | | | | |
3. MARKET AND CREDIT RISK
The nature of this Fund has certain risks, which cannot be presented on the financial statements. The following summarizes some of those risks.
Market Risk
Derivative instruments involve varying degrees of market risk. Changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Fund’s Net unrealized profit (loss) on such derivative instruments as reflected in the Statements of Financial Condition. The Fund’s exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Fund as well as the volatility and liquidity of the markets in which the derivative instruments are traded. Investment in foreign markets may also entail legal and political risks.
The Sponsor of the Fund, Merrill Lynch Alternative Investments LLC (“MLAI”), has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of Aspect Capital Management Limited (“Aspect”), calculating the Net Asset Value of the Fund as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLAI does not intervene in the markets to hedge or diversify the Fund’s market exposure, MLAI may urge Aspect to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are expected to be unusual. It is expected that MLAI’s basic risk control procedures will consist simply of the ongoing process of advisor monitoring, with the market risk controls being applied by Aspect.
Credit Risk
The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may also require margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty nonperformance is the Net unrealized profit (loss), if any, included in the Statements of Financial Condition. The Fund attempts
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to mitigate this risk by dealing exclusively with Merrill Lynch & Co., Inc. (“Merrill Lynch”) entities as clearing brokers.
The Fund, in its normal course of business, enters into various contracts, with Merrill Lynch Pierce Fenner & Smith Inc. (“MLPF&S”) acting as its commodity broker. Pursuant to the brokerage arrangement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, these receivables and payables are offset and reported as a net receivable or payable and included in Equity in commodity futures trading accounts in the Statements of Financial Condition.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.109. In May 2007, FASB amended this guidance by issuing FASB Staff Position No. FIN 48-1, Definition of settlement in FASB Interpretation No. 48. FIN 48, as amended, prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity before being measured and recognized in the financial statements. Adoption of FIN 48, as amended, is required for fiscal years beginning after December 15, 2006. The Fund has evaluated its tax positions and has determined that the implementation of this pronouncement does not have a material impact to the financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a common definition for fair value under accounting principles generally accepted in the United States of America, establishes a framework for measuring fair value and expands disclosure requirements about such fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Fund is currently evaluating the impact of adopting FAS 157 on its financial statements.
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
MONTH-END NET ASSET VALUE PER UNIT
(NON US GAAP)
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and to report performance to investors throughout the year is the most valuable to the Members of the Fund. Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for all other purposes, as discussed in Note 2 to the financial statements.
Class A
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | $ | 1.0832 | | $ | 1.0733 | | $ | 1.1176 | | $ | 1.1701 | | $ | 1.1235 | | $ | 1.1246 | |
2007 | | $ | 1.1952 | | $ | 1.1332 | | $ | 1.1134 | | $ | 1.1604 | | $ | 1.2217 | | $ | 1.2604 | |
Class C
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | $ | 1.0768 | | $ | 1.0662 | | $ | 1.1093 | | $ | 1.1595 | | $ | 1.1115 | | $ | 1.1131 | |
2007 | | $ | 1.1769 | | $ | 1.1150 | | $ | 1.0946 | | $ | 1.1399 | | $ | 1.1991 | | $ | 1.2361 | |
Class D
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | $ | 1.1148 | | $ | 1.1086 | | $ | 1.1563 | | $ | 1.2076 | | $ | 1.1546 | | $ | 1.1599 | |
2007 | | $ | 1.2452 | | $ | 1.1823 | | $ | 1.1631 | | $ | 1.2137 | | $ | 1.2795 | | $ | 1.3217 | |
Class I
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | $ | 1.0786 | | $ | 1.0690 | | $ | 1.1139 | | $ | 1.1664 | | $ | 1.1231 | | $ | 1.1270 | |
2007 | | $ | 1.2019 | | $ | 1.1402 | | $ | 1.1206 | | $ | 1.1683 | | $ | 1.2304 | | $ | 1.2699 | |
Class D-SM
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | |
2007 | | N/A | | N/A | | 1.1631 | | $ | 1.2137 | | $ | 1.2795 | | $ | 1.3217 | |
| | | | | | | | | | | | | | | | |
Class D-TF
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2006 | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | |
2007 | | N/A | | N/A | | N/A | | N/A | | $ | 1.2795 | | $ | 1.3245 | |
| | | | | | | | | | | | | | | |
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Performance Summary
January 1, 2007 to June 30, 2007
January 1, 2007 to March 31, 2007
The Fund posted an overall loss for the quarter with the agriculture sector posting gains and currencies, metals, stock indices, interest rate and the energy sectors posted losses.
The agricultural sector was the only profitable sector for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting with gains in the mid-quarter only. Losses were posted at the beginning of the quarter and at the end as the price reversal in corn was a key element of the losses in the sector.
The currency sector was not profitable for the Fund. At the beginning of the quarter began with gains due to the short positions which captured the sell off in the U.K. gilts and the British pound following the Bank of England’s surprise decision to raise core interest rates. The U.S. dollar/Japanese yen cross-rate drove returns as the long positions in the U.S. dollar strengthened following the U.S. economic data releases and the lack of rate hikes by the Bank of Japan. In the wake of increased market volatility mid-quarter, the Japanese yen strengthened against the major currencies as investors liquidated their Japanese yen carry trade positions. This caused losses due to the short positions in the Japanese yen. However, the quarter is ended with currencies posting gains as the short positions in Euribor and the British pound were profitable as prices fell, helped by stronger than expected economic data releases in the United Kingdom and Eurozone. Also finishing profitably was the U.S. dollar which depreciated against the other major currencies coupled with weaker than expected data releases and rising concerns about the U.S. sub-prime mortgage market aided gains being posted.
The metals sector posted losses for the Fund. The beginning of the quarter began with losses which carried through mid-quarter due to a sell off of the long positions in copper and zinc. The quarter ended with gains being posted to the Fund.
The stock indices sector posted losses for the Fund. Long Japanese positions posted the best gains as markets rallied on the exporter friendly depreciation of the Japanese yen and a revival in oil prices. Losses posted mid-quarter were due to the reduced long positions in stock indices hurt by the continued fallout from the equity market sell-off at the end of February which continued through to the end of the quarter.
The interest rate sector posted losses for the Fund. The quarter began and ended with gains being posted to the Fund in a volatile market environment. However, these gains could not offset losses posted mid-quarter.
The energy sector was the least profitable for the Fund. Short positions in energies posted gains at the beginning of the quarter for the Fund as oil prices continued to fall, before a mid-month reversal driven by bad weather conditions pared back some of these gains. However, losses were incurred mid-quarter through to the end of quarter as oil prices rallied against the Fund’s short positions driven by mounting geopolitical pressures.
April 1, 2007 to June 30, 2007
The Fund posted profits for the quarter with interest rates, currencies, stock indices, and the energy sectors posting gains while metals and the agriculture sectors posting losses.
The interest rate sector posted the highest gains for the Fund. The beginning of the quarter through the mid- quarter gains were posted to the Fund. In the United Kingdom, the Bank of England signaled its intention to combat the current elevated levels of inflation after raising core interest rates by 25 basis points and stating in the subsequent Monetary Policy Committee (MPC) minutes that a larger hike had
9
also been considered. European debt prices also finished down following the release of above expectations regional Gross Domestic Product (GDP) data and strong indications from the European Central Bank (ECB) that rates would rise again in June. The short positions in bonds and interest rates were the most profitable positions at the quarter’s end. Bond prices fell following strong U.S. retail sales figures and above expectation Producer Price Index data (PPI). The biggest move in the sector was seen in the United Kingdom contracts after a surprisingly hawkish set of MPC minutes helped to suppress prices.
The currency sector posted profits for the Fund. The sector’s key holdings benefited from the weakening of both the Japanese yen and the U.S. dollar. In Japan, the lack of a core rate hike by the Bank of Japan and reports of a negative Consumer Price Index (CPI) figure for the year to March helped to send the Japanese yen lower against the U.S. dollar and euro. Elsewhere, the U.S. dollar depreciated on weak data releases including a low GDP forecast figure that hinted at slowing growth in the U.S. The currency sector finished flat mid quarter as losses in the British pound versus the U.S. dollar and the euro versus the U.S. dollar cross rates largely offset gains in the U.S. dollar versus the Japanese yen holdings as the U.S. dollar strengthened on the back of revised rate expectations in the U.S. The quarter ended with profits being posted to the Fund as gains in the New Zealand dollar, Japanese yen and Australian dollar cross-rates against the U.S. dollar offset losses in the U.S. dollar and Confoederatio Helvetica franc (CHF) positions.
Stock indices posted profits for the Fund. Long positions held across the sector were profitable at the beginning of the quarter as global equity markets continued to recover from their lows in March. Long positions continued to post profits to the Fund due to the strong M&A activity in the U.S. and Europe and an improving outlook for economic growth in Japan. The quarter ended in negative territory, as conditions remained volatile and largely trend-less amid investor concerns over inflation and high yields.
The energy sector also posted profits for the Fund. Profits were posted at the beginning of the quarter and at the end of the quarter, trading was difficult due to weather conditions and geopolitical pressure.
The metals sector posted losses for the Fund. Profits were posted at the beginning of the quarter as metals benefited from the re-emergence of stable trends as prices driven by tightening fundamentals and demand growth rallied. Metals finished on a loss at mid-quarter as prices were driven down on profit-taking and concerns over the strength of future Chinese demand. The quarter ended with losses being posted to the Fund due to supply tightness and bouts of increased risk aversion.
The agricultural sector was the least profitable sector for the Fund. The agricultural market was soft which attributed to the difficult trading environment. Losses were posted at the beginning of the quarter as cocoa prices reversed sharply against the Fund’s long positions along with corn and soybean as prices continued to slide on the release of the United States Department of Agriculture crop estimates for the 2007 planting season. Performance in agriculture was boosted towards the end of the quarter by the long positions in soybeans after prices rocketed in the wake of a U.S. Department of Agriculture report that showed planted soybean acreage had fallen below earlier forecasts.
January 1, 2006 to June 30, 2006
January 1, 2006 to March 31, 2006
The Fund posted an overall gain for the quarter with stock indices, metals and interest rate sectors posted gains while agricultural, currencies, and energy sectors posted losses.
Stock indices were the most profitable for the Fund. Stock indices continued their recent rally to the benefit of the Fund, despite a sharp correction the beginning of the first quarter following the Japanese Livedoor scandal. U.S. and global indices reacted to strong mid-and small-cap U.S. corporate results, and sentiment regarding the rate cycle, while Europe was lifted by large cap merger activity and high commodity prices. The quarter ended with most major stock markets still experiencing an uptrend, driven by continued optimistic sentiment around the markets.
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The metals sector was also profitable for this Fund. Strong profits came from metals as bullish trends continued through the beginning of the first quarter. Prices were driven higher by global industrial growth set against producers’ capacity problems. Aluminum had large gains as smelters closed in China and Switzerland, while zinc was helped on its way by decreasing inventories and South American labor disputes. Metal prices continued to rise through the end of the quarter driven by increasingly strong demand which benefited the Fund’s long positions.
The interest rate sector posted gains for the Fund. The beginning of the quarter found the best single market was in the interest rates sector, where the short in the Eurodollar profited from market expectations of further U.S. rate hikes.
The currency sector posted a loss for this Fund. Bonds contributed a loss to the Fund, with their recent meager rally extinguished by a sharp correction in the beginning of the quarter sparked by a strong German business confidence survey, a closing of European/U.S. interest rate differentials and a second month of Japanese price increases. However, the Fund profited mid-quarter from the weakening Swedish krona after bearish Swedish inflation figures, and from the strengthening U.S. dollar. The Japanese yen presented problems, however, as it strengthened amid speculation that Japanese rates might be raised sooner than expected. The quarter ended with bonds posting profits for the Fund, due to profits from the short position in Japanese ten year bonds. The Bank of Japan’s decision on March 9, 2006 to drop its policy of “quantitative easing” caused yields to rise sharply. Profits were also posted from the program’s short position in the Euribor. The fall in price was triggered by various data releases fuelling expectations of further rate hikes from the European Central Bank.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the sector posting losses for the Fund.
The energy sector was the least profitable for the Fund. Long positions in crude oil suffered heavily early in mid-quarter wherein the price dropped by nearly U.S. $10/bbl amid bountiful inventory figures, before recovering somewhat following violence in Nigeria and an attempted refinery bombing in Saudi Arabia. However, the short positions in natural gas produced good returns as the price continued it’s strong downwards trend, despite the short cold snap in North America. The quarter ended with a disappointment to the Fund, wherein short positions in unleaded gasoline and crude oil were affected by geopolitical concerns driving prices higher.
April 1, 2006 to June 30, 2006
The Fund posted an overall loss for the quarter with interest rates and metal sectors posting gains while energy, currencies, agriculture and stock indices sectors posted losses.
The interest rate sector was the most profitable for the Fund. Bonds continued to profit from its short positions as the global economy remained in an environment of rising short-term interest rates. Short positions in the U.K. ten year gilt were the best single market performers for the Fund. There were losses from short positions in bonds mid-quarter, however, interest rates proved profitable as the Federal Reserve’s focus on inflation became important. The quarter ended with the best single market in the interest rates sector, where the short in the Eurodollar profited from market participants’ focusing their attention on the central banks announcements and commentaries on inflation.
The metals sector was also profitable for this Fund. Strong profits came from metals as bullish trends continued through the middle of the second quarter. Several metals hit record highs at the beginning of the quarter as robust Chinese economic growth further increased global demand. Profits were also
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generated for the Fund mid-quarter contrary to the highly volatile price action. Prices started to fall again at the end of the quarter due to the Fund’s reduced, but remaining long positions.
The energy sector posted losses for the Fund. Modest gains were posted to the Fund beginning of the quarter only to fall mid quarter. Equity markets corrected sharply amid concerns over rising inflation and speculation that the long bull market might be coming to an end. The Fund’s long positions suffered as a result, especially in the highly commodity-influenced FTSE 100 as energies and metals markets also fell sharply. Energy markets proved difficult for the Fund, with the worst loss in crude oil. However, the quarter ended posting gains for the Fund from long positions in crude oil and short positions in natural gas.
The currency sector posted losses for the Fund. Long positions in the U.S. dollar contributed a loss to the Fund at the beginning of the quarter due to the weakening of the U.S. dollar to other currencies. A turbulent period in the markets mid-quarter resulted in most sectors witnessing sharp reversals, which hurt established positions. Short position in the Eurodollar did post a slight gain for the Fund at quarter’s end however, it was not enough to offset the losses.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the sector posting losses for the Fund. The worst single performance at quarter’s end came from cocoa futures which was a sharp reversal in June after two bearish months, affecting the Fund’s short positions.
Stock indices were the least profitable for the Fund. Modest gains were posted at the beginning of the quarter only to have sharp reversals mid quarter which hurt established positions. The Fund’s losses in stock indices were limited at quarter’s end as long positions were largely reduced, quickly adapting to the current market environment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Fund is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes and all or substantially all of the Fund’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund’s main line of business.
Market movements result in frequent changes in the fair market value of the Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Fund’s open positions and the liquidity of the markets in which it trades.
The Fund, under the direction of Aspect, rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Fund’s past performance is not necessarily indicative of its future results.
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 of the Fund’s speculative trading 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 Fund’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be
12
considered to constitute any assurance or representation that the Fund’s losses in any market sector will be limited to Value at Risk or by the Fund’s attempts to manage its market risk.
Quantifying The Fund’s Trading Value At Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s market risk exposures contain “forward-looking statement” within the meaning of the safe harbor form civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Fund’s risk exposure in the various market sectors traded by Aspect is quantified below in terms of Value at Risk. Due to the Fund’s mark-to-market accounting, any loss in the fair value of the Fund’s open positions is directly reflected in the Fund’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by the Fund as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95%-99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Fund), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Fund’s positions are rarely, if ever, 100% positively correlated have not been reflected.
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The Fund’s Trading Value at Risk in Different Market Sectors
The following table indicates the average, highest and lowest trading Value at Risk associated with the Fund’s open positions by market category for the fiscal period. For the three months ended June 30, 2007 and June 30, 2006, the Fund’s average Month-end Net Asset Value for all other purposes was approximately $157,346,822 and $46,162,294 respectively.
| | June 30, 2007 | |
Market Sector | | Average
Value at Risk | | % of Average
Capitalization | | Highest Value
At Risk | | Lowest Value
At Risk | |
| | | | | | | | | |
Agricultural Commodities | | $ | 154,893 | | 0.10 | % | $ | 257,333 | | $ | 43,237 | |
Currencies | | 453,645 | | 0.29 | % | 859,545 | | 73,826 | |
Energy | | 168,933 | | 0.11 | % | 322,537 | | 19,677 | |
Interest Rates | | 17,370,374 | | 11.04 | % | 34,849,043 | | 11,027,335 | |
Metals | | 230,790 | | 0.15 | % | 402,404 | | 54,595 | |
Stock Indices | | 901,170 | | 0.57 | % | 1,372,828 | | 434,645 | |
| | | | | | | | | |
TOTAL | | $ | 19,279,805 | | 12.26 | % | $ | 38,063,690 | | $ | 11,653,315 | |
| | June 30, 2006 | |
Market Sector | | Average
Value at Risk | | % of Average
Capitalization | | Highest Value
At Risk | | Lowest Value
At Risk | |
| | | | | | | | | |
Agricultural Commodities | | $ | 74,266 | | 0.16 | % | $ | 168,050 | | $ | 39,343 | |
Currencies | | 273,980 | | 0.59 | % | 881,168 | | 72,304 | |
Energy | | 154,427 | | 0.33 | % | 405,978 | | 10,048 | |
Interest Rates | | 5,762,221 | | 12.48 | % | 9,075,935 | | 1,094,608 | |
Metals | | 158,327 | | 0.34 | % | 495,831 | | 25,273 | |
Stock Indices | | 461,910 | | 1.00 | % | 1,586,854 | | 30,090 | |
| | | | | | | | | |
TOTAL | | $ | 6,885,131 | | 14.90 | % | $ | 12,613,816 | | $ | 1,271,666 | |
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Fund is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Fund. The magnitude of the Fund’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Fund to incur severe losses over a short period of time. The foregoing Value at Risk table — as well as the past performance of the Fund — gives no indication of this “risk of ruin.”
Non-Trading Risk
Foreign Currency Balances; Cash on Deposit with MLPF&S
The Fund has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial.
The Fund also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLPF&S. The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies. This cash flow risk is immaterial.
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Item 4. Controls and Procedures
Merrill Lynch Alternative Investments LLC, the Sponsor of ML Aspect FuturesAccess LLC (the “Fund”), with the participation of the Sponsor’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Fund as of the end of the period of this quarterly report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Fund’s internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 2007, the CFTC issued an order against MLAI and an advisory affiliate, to which MLAI and the affiliate consented, containing findings, which MLAI and the affiliate neither admitted nor denied, that MLAI and the affiliate filed with the NFA a number of annual reports for commodity pools for which they acted as commodity pool operators after the deadline established by the CFTC’s regulations, in violation of CFTC Regulation 4.22(c). MLAI and the affiliate were ordered to cease and desist from violating Regulation 4.22(c) and to pay a civil penalty in the amount of $500,000.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Issuance to accredited investors pursuant to Regulation D and Section 4(6) under the Securities Act. The selling agent of the following Class of Units was MLPF&S.
CLASS A
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | 2,011,848 | | 1,725,131 | | $ | 1.1662 | |
Feb-07 | | | 773,165 | | 646,892 | | 1.1952 | |
Mar-07 | | | 645,431 | | 569,565 | | 1.1332 | |
Apr-07 | | | 866,760 | | 778,480 | | 1.1134 | |
May-07 | | | 897,005 | | 773,080 | | 1.1603 | |
Jun-07 | | | 391,946 | | 320,820 | | 1.2217 | |
Jul-07 | | | 246,820 | | 195,827 | | 1.2604 | |
| | | | | | | | | | |
CLASS C
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | 2,881,057 | | 2,506,793 | | $ | 1.1493 | |
Feb-07 | | | 2,109,219 | | 1,792,182 | | 1.1769 | |
Mar-07 | | | 4,306,212 | | 3,862,073 | | 1.1150 | |
Apr-07 | | | 5,570,697 | | 5,089,254 | | 1.0946 | |
May-07 | | | 2,988,684 | | 2,621,883 | | 1.1399 | |
Jun-07 | | | 4,434,350 | | 3,698,065 | | 1.1991 | |
Jul-07 | | | 4,472,218 | | 3,618,007 | | 1.2361 | |
| | | | | | | | | | |
CLASS D
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | 1,334,000 | | 1,099,390 | | $ | 1.2134 | |
Feb-07 | | | — | | — | | 1.2452 | |
Mar-07 | | | 352,999 | | 298,570 | | 1.1823 | |
Apr-07 | | | — | | — | | 1.1631 | |
May-07 | | | 220,447 | | 181,632 | | 1.2137 | |
Jun-07 | | | 5,768,449 | | 4,508,362 | | 1.2795 | |
Jul-07 | | | — | | — | | 1.3217 | |
| | | | | | | | | | |
CLASS I
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | 94,948 | | 80,993 | | $ | 1.1723 | |
Feb-07 | | | 35,999 | | 29,952 | | 1.2019 | |
Mar-07 | | | 945,068 | | 828,861 | | 1.1402 | |
Apr-07 | | | 568,449 | | 507,272 | | 1.1206 | |
May-07 | | | 1,020,003 | | 873,066 | | 1.1683 | |
Jun-07 | | | 147,168 | | 119,610 | | 1.2304 | |
Jul-07 | | | 34,998 | | 27,560 | | 1.2699 | |
| | | | | | | | | | |
CLASS D-SM
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | — | | — | | $ | N/A | |
Feb-07 | | | — | | — | | N/A | |
Mar-07 | | | — | | — | | N/A | |
Apr-07 | | | 11,999,999 | | 10,317,255 | | 1.1631 | |
May-07 | | | — | | — | | 1.2137 | |
Jun-07 | | | — | | — | | 1.2795 | |
Jul-07 | | | 913,488 | | 691,146 | | 1.3217 | |
| | | | | | | | | | |
CLASS D-TF
| | Subscription
Amount | | Units | | NAV (1) | |
Jan-07 | | | $ | — | | — | | $ | N/A | |
Feb-07 | | | — | | — | | N/A | |
Mar-07 | | | — | | — | | N/A | |
Apr-07 | | | — | | — | | N/A | |
May-07 | | | — | | — | | N/A | |
Jun-07 | | | 116,922,598 | | 91,381,476 | | 1.2795 | |
Jul-07 | | | — | | — | | 1.3245 | |
| | | | | | | | | | |
(1) Net Asset Value for all other purposes
(b) None.
(c) None.
16
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are incorporated by reference or are filed herewith to this Quarterly Report on Form 10-Q:
31.01 and 31.02 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 31.01 and 31.02: Are filed herewith.
32.01 and 32.02 Section 1350 Certifications
Exhibit 32.01 and 32.02 Are filed herewith.
17
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.
| ML ASPECT FUTURESACCESS LLC |
| |
| |
| By: MERRILL LYNCH ALTERNATIVE |
| INVESTMENTS LLC |
| (Manager) |
| |
| |
Date: August 14, 2007 | By | /s/ Robert D. Ollwerther | |
| | Robert D. Ollwerther |
| | Chief Executive Officer and President |
| | (Principal Executive Officer) |
| | |
| |
Date: August 14, 2007 | |
| By | /s/ BARBRA E. KOCSIS | |
| | Barbra E. Kocsis |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
18
