UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
For the quarterly period ended June 30, 2009 | |
| |
OR | |
| |
o | 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 0-52384
SYSTEMATIC MOMENTUM II LLC
(Exact Name of Registrant as
specified in its charter)
Delaware |
| 20-5269618 |
(State or other jurisdiction of |
| (IRS Employer Identification No.) |
incorporation or organization) |
|
|
c/o Merrill Lynch Alternative Investments LLC
Two World Financial Center, 7th Floor
New York, New York 10281
(Address of principal executive offices)
(Zip Code)
212-236-2063
(Registrant’s telephone number, including area code)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer o |
|
|
|
Non-accelerated filer x |
| Small reporting company o |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2009, 38,754,955 units of membership were outstanding.
SYSTEMATIC MOMENTUM II LLC
QUARTERLY REPORT FOR JUNE 30, 2009 ON FORM 10-Q
|
| PAGE |
|
|
|
1 | ||
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
|
|
|
19 | ||
|
|
|
21 | ||
|
|
|
|
|
|
22 | ||
|
|
|
22 | ||
|
|
|
22 | ||
|
|
|
22 | ||
|
|
|
23 | ||
|
|
|
23 | ||
|
|
|
23 |
PART I - - FINANCIAL INFORMATION
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
(unaudited)
|
| June 30, |
| December 31, |
| ||
|
| 2009 |
| 2008 |
| ||
ASSETS: |
|
|
|
|
| ||
Investments in Systematic Momentum (cost $43,845,752 for 2009 and $52,795,442 for 2008) |
| $ | 41,949,499 |
| $ | 54,284,473 |
|
Due from Systematic Momentum |
| 615,969 |
| 3,752,667 |
| ||
Cash |
| 102,143 |
| 117,899 |
| ||
Accrued interest |
| 112 |
| 2,092 |
| ||
|
|
|
|
|
| ||
TOTAL ASSETS |
| $ | 42,667,723 |
| $ | 58,157,131 |
|
|
|
|
|
|
| ||
LIABILITIES AND MEMBERS’ CAPITAL: |
|
|
|
|
| ||
LIABILITIES: |
|
|
|
|
| ||
Sponsor fee payable |
| $ | 74,859 |
| $ | 96,219 |
|
Redemptions payable |
| 492,837 |
| 3,583,417 |
| ||
Other |
| 104,083 |
| 147,375 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 671,779 |
| 3,827,011 |
| ||
|
|
|
|
|
| ||
MEMBERS’ CAPITAL: |
|
|
|
|
| ||
Members’ Interest (Units 38,754,955 and 46,011,832 Units outstanding, unlimited Units authorized) |
| 41,995,944 |
| 54,330,120 |
| ||
Total members’ capital |
| 41,995,944 |
| 54,330,120 |
| ||
|
|
|
|
|
| ||
TOTAL LIABILITIES AND MEMBERS’ CAPITAL |
| $ | 42,667,723 |
| $ | 58,157,131 |
|
|
|
|
|
|
| ||
NET ASSET VALUE PER UNIT (SEE NOTE 4) |
|
|
|
|
|
See notes to financial statements.
1
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
(unaudited)
|
| For the three |
| For the three |
| For the six |
| For the six |
| ||||
|
| June 30, 2009 |
| June 30, 2008 |
| June 30, 2009 |
| June 30, 2008 |
| ||||
TRADING PROFIT (LOSS): |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Realized |
| $ | (104,243 | ) | $ | (616,166 | ) | $ | (30,468 | ) | $ | 11,666,434 |
|
Change in unrealized, net |
| (1,549,742 | ) | 5,428,848 |
| (3,385,011 | ) | 2,364,685 |
| ||||
Brokerage commissions |
| — |
| (80,706 | ) | — |
| (147,939 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total trading profit (loss) |
| (1,653,985 | ) | 4,731,976 |
| (3,415,479 | ) | 13,883,180 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INVESTMENT INCOME: |
|
|
|
|
|
|
|
|
| ||||
Interest |
| 457 |
| 408,339 |
| 8,126 |
| 948,832 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
EXPENSES: |
|
|
|
|
|
|
|
|
| ||||
Management fee |
| — |
| 376,215 |
| — |
| 707,462 |
| ||||
Sponsor fee |
| 233,316 |
| 413,584 |
| 501,575 |
| 725,321 |
| ||||
Performance fee |
| — |
| 642,841 |
| — |
| 1,957,770 |
| ||||
Other |
| 47,718 |
| 69,848 |
| 125,259 |
| 122,860 |
| ||||
Total expenses |
| 281,034 |
| 1,502,488 |
| 626,834 |
| 3,513,413 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INVESTMENT INCOME (LOSS) |
| (280,577 | ) | (1,094,149 | ) | (618,708 | ) | (2,564,581 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME (LOSS) |
| $ | (1,934,562 | ) | $ | 3,637,827 |
| $ | (4,034,187 | ) | $ | 11,318,599 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of Units outstanding |
|
|
|
|
|
|
|
|
| ||||
Class A |
| 6,055,856 |
| 7,462,429 |
| 6,216,738 |
| 6,878,870 |
| ||||
Class C |
| 28,680,202 |
| 41,495,408 |
| 29,918,589 |
| 36,032,121 |
| ||||
Class D |
| 1,448,290 |
| 13,917,641 |
| 1,597,407 |
| 16,887,640 |
| ||||
Class I |
| 4,110,217 |
| 15,579,439 |
| 4,498,855 |
| 14,156,802 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per weighted average Unit |
|
|
|
|
|
|
|
|
| ||||
Class A |
| $ | (0.0485 | ) | $ | 0.0452 |
| $ | (0.0956 | ) | $ | 0.1436 |
|
Class C |
| $ | (0.0489 | ) | $ | 0.0428 |
| $ | (0.0973 | ) | $ | 0.1328 |
|
Class D |
| $ | (0.0501 | ) | $ | 0.0552 |
| $ | (0.0933 | ) | $ | 0.2017 |
|
Class I |
| $ | (0.0470 | ) | $ | 0.0485 |
| $ | (0.0906 | ) | $ | 0.1511 |
|
See notes to financial statements.
2
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
For the six months ended June 30, 2009 and 2008
(unaudited in Units)
|
| Members’ Capital |
| Subscriptions |
| Redemptions |
| Members’ Capital June 30, 2008 |
| Members’ Capital |
| Subscriptions |
| Redemptions |
| Members’ Capital June |
|
Class A |
| 4,247,792 |
| 3,756,481 |
| (880,294 | ) | 7,123,979 |
| 6,501,601 |
| — |
| (793,316 | ) | 5,708,285 |
|
Class C |
| 23,461,920 |
| 22,360,292 |
| (2,721,614 | ) | 43,100,598 |
| 31,802,737 |
| 2,533 |
| (4,090,160 | ) | 27,715,110 |
|
Class D |
| 19,675,186 |
| 2,291,737 |
| (9,269,432 | ) | 12,697,491 |
| 1,746,524 |
| — |
| (447,351 | ) | 1,299,173 |
|
Class I |
| 8,783,678 |
| 7,601,289 |
| (1,543,370 | ) | 14,841,597 |
| 5,960,970 |
| — |
| (1,928,583 | ) | 4,032,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Members’ Units |
| 56,168,576 |
| 36,009,799 |
| (14,414,710 | ) | 77,763,665 |
| 46,011,832 |
| 2,533 |
| (7,259,410 | ) | 38,754,955 |
|
See notes to financial statements.
3
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
For the six months ended June 30, 2009 and 2008
(unaudited)
|
| Members’ Capital |
| Subscriptions |
| Redemptions |
| Net Income (Loss) |
| Members’ Capital June |
| Members’ Capital |
| Subscriptions |
| Redemptions |
| Net Income (Loss) |
| Members’ Capital June |
| ||||||||||
Class A |
| $ | 4,849,384 |
| $ | 4,580,879 |
| $ | (1,106,593 | ) | $ | 988,052 |
| $ | 9,311,722 |
| $ | 7,793,914 |
| $ | — |
| $ | (899,230 | ) | $ | (591,257 | ) | $ | 6,303,427 |
|
Class C |
| 26,459,564 |
| 27,323,078 |
| (3,371,814 | ) | 4,785,314 |
| 55,196,142 |
| 37,238,734 |
| 2,966 |
| (4,599,318 | ) | (2,905,112 | ) | 29,737,270 |
| ||||||||||
Class D |
| 22,237,106 |
| 2,823,057 |
| (11,741,846 | ) | 3,405,520 |
| 16,723,837 |
| 2,112,788 |
| — |
| (511,009 | ) | (131,973 | ) | 1,469,806 |
| ||||||||||
Class I |
| 10,022,992 |
| 9,239,706 |
| (2,001,538 | ) | 2,139,713 |
| 19,400,873 |
| 7,184,684 |
| — |
| (2,293,398 | ) | (405,845 | ) | 4,485,441 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Members’ Capital |
| $ | 63,569,046 |
| $ | 43,966,720 |
| $ | (18,221,791 | ) | $ | 11,318,599 |
| $ | 100,632,574 |
| $ | 54,330,120 |
| $ | 2,966 |
| $ | (8,302,955 | ) | $ | (4,034,187 | ) | $ | 41,995,944 |
|
See notes to financial statements.
4
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
FINANCIAL DATA HIGHLIGHTS
FOR THE THREE MONTHS ENDED JUNE 30, 2009
The following per Unit data and ratios have been derived from information provided in the financial statements.
|
| 2009 |
| 2009 |
| 2009 |
| 2009 |
| ||||
|
| Class A |
| Class C |
| Class D |
| Class I |
| ||||
Per Unit Operating Performance: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net asset value, beginning of period |
| $ | 1.1514 |
| $ | 1.1219 |
| $ | 1.1660 |
| $ | 1.1587 |
|
|
|
|
|
|
|
|
|
|
| ||||
Realized and change in unrealized trading profit (loss) |
| (0.0416 | ) | (0.0405 | ) | (0.0425 | ) | (0.0418 | ) | ||||
Brokerage commissions |
| — |
| — |
| — |
| — |
| ||||
Interest income |
| 0.0000 |
| 0.0000 |
| 0.0000 |
| 0.0000 |
| ||||
Expenses |
| (0.0055 | ) | (0.0084 | ) | 0.0078 |
| (0.0045 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net asset value, end of period |
| $ | 1.1043 |
| $ | 1.0730 |
| $ | 1.1313 |
| $ | 1.1124 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total Return: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total return before Performance fees |
| -4.13 | % | -4.37 | % | -3.77 | % | -4.04 | % | ||||
Performance fees |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Total return after Performance fees |
| -4.13 | % | -4.37 | % | -3.77 | % | -4.04 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Ratios to Average Members’ Capital: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Expenses (excluding Performance fees) |
| 0.54 | % | 0.79 | % | 0.17 | % | 0.44 | % | ||||
Performance fees |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expenses (including Performance fees) |
| 0.54 | % | 0.79 | % | 0.17 | % | 0.44 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net investment income (loss) |
| -0.54 | % | -0.79 | % | -0.17 | % | -0.44 | % |
*Class DS and was previously known as Class D-SM.
**Class DT was previously known as Class D-TF.
See notes to financial statements.
5
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
FINANCIAL DATA HIGHLIGHTS
FOR THE SIX MONTHS ENDED JUNE 30, 2009
The following per Unit data and ratios have been derived from information provided in the financial statements.
|
| 2009 |
| 2009 |
| 2009 |
| 2009 |
| ||||
|
| Class A |
| Class C |
| Class D |
| Class I |
| ||||
Per Unit Operating Performance: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net asset value, beginning of period |
| $ | 1.1988 |
| $ | 1.1709 |
| $ | 1.2097 |
| $ | 1.2053 |
|
|
|
|
|
|
|
|
|
|
| ||||
Realized and change in unrealized trading profit (loss) |
| (0.0829 | ) | (0.0807 | ) | (0.0845 | ) | (0.0834 | ) | ||||
Brokerage commissions |
| — |
| — |
| — |
| — |
| ||||
Interest income |
| 0.0002 |
| 0.0002 |
| 0.0002 |
| 0.0002 |
| ||||
Expenses |
| (0.0118 | ) | (0.0174 | ) | 0.0059 |
| (0.0097 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net asset value, end of period |
| $ | 1.1043 |
| $ | 1.0730 |
| $ | 1.1313 |
| $ | 1.1124 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total Return: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total return before Performance fees |
| -7.92 | % | -8.38 | % | -7.23 | % | -7.73 | % | ||||
Performance fees |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Total return after Performance fees |
| -7.92 | % | -8.38 | % | -7.23 | % | -7.73 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Ratios to Average Members’ Capital: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Expenses (excluding Performance fees) |
| 1.06 | % | 1.56 | % | 0.32 | % | 0.87 | % | ||||
Performance fees |
| 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||
Expenses (including Performance fees) |
| 1.06 | % | 1.56 | % | 0.32 | % | 0.87 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net investment income (loss) |
| -1.05 | % | -1.55 | % | -0.30 | % | -0.85 | % |
*Class DS and was previously known as Class D-SM.
**Class DT was previously known as Class D-TF.
See notes to financial statements.
6
SYSTEMATIC MOMENTUM II LLC
(a Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Systematic Momentum II LLC (the “Fund”) formerly known as ML APM Global Commodity FuturesAccess LLC, a Merrill Lynch FuturesAccess Program (the “Program”) fund, was organized under the Delaware Limited Liability Company Act on May 17, 2004 and commenced trading activities on December 1, 2006.
On October 22, 2008, MLAI issued an announcement regarding a restructuring of the Fund. Effective December 1, 2008 as part of the restructuring the following occurred:
· The Fund changed its name to SYSTEMATIC MOMENTUM II LLC
· The name change amendment was filed with the Secretary of States of Delaware, New Jersey and New York on December 1, 2008.
· The Fund’s assets were reinvested in ML Systematic Momentum FuturesAccess LLC (“Systematic Momentum”). Systematic Momentum invests into the following Funds: ML Altis FuturesAccess LLC (“Altis”), ML Aspect FuturesAccess LLC (“Aspect”), ML BlueTrend FuturesAccess LLC (“BlueTrend”), ML Chesapeake FuturesAccess LLC (“Chesapeake”), ML GSA FuturesAccess LLC (“GSA”), ML John Locke FuturesAccess LLC (“John Locke”), ML Transtrend DTP Enhanced FuturesAccess LLC (“Transtrend”) and ML Winton FuturesAccess LLC (“Winton”) and, (each a “Portfolio Fund”, collectively “Portfolio Funds”). The Portfolio Funds employ a variety of systematic models and the Fund no longer utilizes the services of Absolute Plus Management, LLC (“APM”) as a commodity trading advisor. Prior to the restructure, the Fund engaged in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Effective May 31, 2009, GSA was liquidated and the Fund no longer invests in GSA. The Sponsor reallocated the liquidation proceeds among the existing Portfolio Funds.
· The Portfolio Funds are a group of commodity pools sponsored by MLAI, each of which places substantially all of its assets in a managed futures and forward trading account managed by a single or multiple commodity trading advisors. Each of the Portfolio Funds implements a different trading strategy.
MLAI is the sponsor and the manager of the Fund. MLAI is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”). Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the commodity broker of the Portfolio Funds. On September 15, 2008, Merrill Lynch entered into an Agreement and Plan of Merger (as amended by Amendment No. 1 dated as of October 21, 2008, the “Merger Agreement”) with Bank of America Corporation (“Bank of America”). Pursuant to the Merger Agreement, on January 1, 2009, a wholly-owned subsidiary of Bank of America merged with and into Merrill Lynch, with Merrill Lynch continuing as the surviving corporation and a subsidiary of Bank of America.
7
In the opinion of management, these interim financial statements contain all adjustments necessary for a fair statement of the financial position of the Fund as of June 30, 2009 and the results of its operations for the three and six months ended June 30, 2009 and 2008. 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 (“U.S. GAAP”) have been omitted. These financial statements should 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, 2008.
The preparation of financial statements in conformity with U.S. 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.
The Fund invests substantially all of its assets in the Systematic Momentum. The financial statements of Systematic Momentum, including the schedule of investments, are presented as Exhibit 99 to this interim report on form 10-Q and should be read with the Fund’s financial statements. The percentage of Systematic Momentum owned by the Fund at June 30, 2009, was 5.80% and December 31, 2008 was 7.74%.
2. INVESTMENT IN SYSTEMATIC MOMENTUM
The Fund invests substantially all of its assets in Systematic Momentum. The investment transactions are accounted for on a trade date basis. Investment in Systematic Momentum is valued at fair value and reflected on the Statements of Financial Condition. In determining fair value, MLAI utilizes the net asset valuation of Systematic Momentum. The fair value of Systematic Momentum is net of all fees relating to Systematic Momentum, paid or accrued. Additionally, MLAI monitors the performance of the Portfolio Funds. Such monitoring procedures include, but are not limited to: monitoring market movements in Portfolio Funds’ investments, comparing performance to industry benchmarks, and in-depth conference calls and site visits with Portfolio Funds managers.
At June 30, 2009 and December 31, 2008 Investments in Portfolio Funds at fair value are as follows:
|
| June 30, 2009 |
| |||
|
| Percentage of |
| Fair Value |
| |
|
|
|
|
|
| |
Chesapeake |
| 10.73 | % | 4,499,515 |
| |
Transtrend |
| 19.24 | % | 8,072,350 |
| |
Altis |
| 13.75 | % | 5,769,350 |
| |
Winton |
| 19.31 | % | 8,098,836 |
| |
Aspect |
| 9.99 | % | 4,191,892 |
| |
John Locke |
| 19.54 | % | 8,198,367 |
| |
BlueTrend |
| 7.44 | % | 3,119,189 |
| |
GSA (a) |
| 0.00 | % | — |
| |
|
|
|
|
|
| |
|
| 100.00 | % | $ | 41,949,499 |
|
(a) In May, the GSA Portfolio was liquidated and Systematic Momentum no longer invests in the GSA Portfolio.
8
|
| December 31, 2008 |
| |||
|
| Percentage of |
| Fair Value |
| |
|
|
|
|
|
| |
Chesapeake |
| 10.09 | % | 5,480,117 |
| |
Transtrend |
| 15.93 | % | 8,653,456 |
| |
Altis |
| 13.32 | % | 7,238,009 |
| |
Winton |
| 15.82 | % | 8,595,311 |
| |
Aspect |
| 10.10 | % | 5,489,181 |
| |
John Locke |
| 14.90 | % | 8,092,870 |
| |
BlueTrend |
| 6.98 | % | 3,792,994 |
| |
GSA |
| 12.78 | % | 6,942,535 |
| |
|
|
|
|
|
| |
|
| 99.92 | % | $ | 54,284,473 |
|
3. FAIR VALUE OF INVESTMENTS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Fund adopted FAS 157 as of January 1, 2008. The adoption of FAS 157 did not have a material impact on the Fund’s financial statements.
Fair value of an investment is the amount that would be received to sell the investment in an orderly transaction between market participants at the measurement date (i.e. the exit price). Purchase and sale of investments is recorded on a trade date basis. Realized gains and losses on investments is recognized when the investments are sold. Any change in net unrealized gain or loss from the preceding period is reported on the Statement of Operations.
FAS 157 established a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level I — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded investments. As required by FAS 157, the Fund does not adjust the quoted price for these investments even in situations where the Fund holds a large position and a sale could reasonably impact the quoted price.
Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of generally accepted and understood models or other valuation methodologies. Investments which are generally included in this category are investments valued using market data.
Level III — Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment.
9
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Sponsor’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
Following is a description of the valuation methodologies used for investments, as well as the general classification of such investments pursuant to the valuation hierarchy.
Investments in other investment companies are valued using the net asset value reported by the investment company which management believes approximates fair value. These net asset values are the prices used to execute trades with these investment companies. If appropriate, adjustments to the reported net asset value may be made based on various factors, including, but not limited to, the attributes of the interest held, including the rights and obligations, and any restrictions or illiquidity.
Although there are monthly transactions in these investment company interests, the Net Asset Value (“NAV”) are materially based on portfolios of Level I and Level II assets and liabilities for which the Fund has transparency. As such, the Fund determined that its investments in these investment companies in this case, would be classified as Level II.
The following table summarizes the valuation of the Fund’s investment by the above FAS 157 fair value hierarchy levels as of December 31, 2008 and June 30, 2009:
|
| Total |
| Level I |
| Level II |
| Level III |
| ||
Investment in Portfolio Funds |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
December 31, 2008 |
| $ | 54,284,473 |
| N/A |
| $ | 54,284,473 |
| N/A |
|
|
|
|
|
|
|
|
|
|
| ||
June 30, 2009 |
| $ | 41,949,999 |
| N/A |
| $ | 41,949,999 |
| N/A |
|
The Fund adopted Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”) as of January 1, 2009 which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 only expands the disclosure requirements for derivative instruments and related hedging activities and has no impact on Statement of Financial Condition or Statement of Operations and Expenses and Members’ Capital. As the Fund invests only in other Portfolio Funds, it does not have any direct investments in derivative instruments.
10
4. NET ASSET VALUE PER UNIT
In conformity with U.S. GAAP, the Fund amortizes over a twelve-month period the total initial offering costs payable to MLAI for purposes of determining Net Asset Value. The Net Asset Value per Unit at June 30, 2009 and December 31, 2008 are as follows:
June 30, 2009 |
| |||
|
| |||
|
| Net Asset Value per Unit |
| |
Class A |
| $ | 1.1043 |
|
Class C |
| 1.0730 |
| |
Class D |
| 1.1313 |
| |
Class I |
| 1.1124 |
| |
December 31, 2008 |
| |||
|
| |||
|
| Net Asset Value per Unit |
| |
Class A |
| $ | 1.1988 |
|
Class C |
| 1.1709 |
| |
Class D |
| 1.2097 |
| |
Class I |
| 1.2053 |
| |
5. MARKET CREDIT AND CONCENTRATION RISKS
The nature of this Fund has certain risks, which cannot be presented on the financial statements. Additionally, the Fund invests in other commodity funds with similar market risk as mentioned below. 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 Net unrealized profit (loss) on such derivative instruments as reflected in the Statements of Financial Condition of the Portfolio Funds. The Fund’s exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Portfolio Funds as well as the volatility and liquidity of the markets in which the derivative instruments are traded. Investments in foreign markets may also entail legal and political risks.
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, if any, included in the Statements of Financial Condition of the Portfolio Funds. The Portfolio Funds attempt to mitigate this risk by dealing exclusively with Merrill Lynch entities as clearing brokers.
11
The Portfolio Funds, in their normal course of business, enter into various contracts, with MLPF&S acting as their 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 of the Portfolio Funds.
Concentration Risk
The Fund’s investments in the Portfolio Funds are subject to the market and credit risk of the Portfolio Funds. Because the majority of the Fund’s capital is invested in the Portfolio Funds, any changes in the market conditions that would adversely affect the Portfolio Funds could significantly impact the solvency of the Fund.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the accounting principles used in preparing financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. Currently, U.S. GAAP hierarchy is provided in the American Institute of Certified Public Accountants U.S. Auditing Standards (“AU”) Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“AU Section 411”). FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411. The Fund does not expect the adoption of FAS 162 to have an impact on its financial statements.
In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Fund does not expect the adoption of FAS 157-4 to have an impact on its financial statements.
In June 2008, the FASB issued Statement of Financial Account Standards No. 168, “The FASB Accounting Standards Codification and “The Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (“FAS 168”). FAS 168 identifies the sources of accounting principles and the framework for selecting the accounting principles used in preparing financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. FAS 168 will be effective for financial statements that cover interim and annual periods ending after September 15, 2009. The Fund does not expect the adoption of FAS 168 to have an impact on our financial statements
12
FASB issued FASB Statement No. 165, Subsequent Events (“FASB 165”), which is effective for interim and annual periods ending after June 15, 2009. FASB 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The Fund has performed an evaluation of subsequent events, as defined under FAS 165, through August 14, 2009, which is the date the financial statements were issued, and determined that there are no subsequent events that are required to be adjusted to, or disclosed in, the financial statements other than those disclosed in the subsequent event section in Note 7.
7. SUBSEQUENT EVENT
The following subsequent event occurred that requires disclosure under FAS 165.
1. Effective as of August 13, 2009, Paul Morton resigned as a Chief Executive Officer and President of MLAI and resigned as a member of MLAI’s Board of Managers.
2. Effective as of August 13, 2009, Thomas W. Lee resigned as a Vice President of MLAI and resigned as a member of MLAI’s Board of Managers.
3. Effective as of August 13, 2009, Justin C. Ferri, a Vice President and a member of MLAI’s Board of Managers, became the Chief Executive Officer and President of MLAI. He continues to serve as a member of MLAI’s Board of Managers, a position which he held prior to his appointment as the Chief Executive Officer and President.
4. Effective as of August 13, 2009, Deann Morgan, a Vice President of MLAI, became a member of MLAI’s Board of Managers. She continues to serve as a Vice President of MLAI, a position which she held prior to her appointment as a member of MLAI’s Board of Managers.
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MONTH-END NET ASSET VALUE PER UNIT
(NON U.S. 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 performance measure 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 financial reporting purposes, as discussed in Note 4 to the financial statements.
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May. |
| Jun. |
| ||||||
| 2008 |
| $ | 1.2225 |
| $ | 1.2945 |
| $ | 1.2606 |
| $ | 1.2385 |
| $ | 1.2576 |
| $ | 1.3075 |
|
| 2009 |
| $ | 1.1903 |
| $ | 1.1908 |
| $ | 1.1519 |
| $ | 1.1177 |
| $ | 1.1297 |
| $ | 1.1043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May. |
| Jun. |
| ||||||
| 2008 |
| $ | 1.2061 |
| $ | 1.2750 |
| $ | 1.2414 |
| $ | 1.2175 |
| $ | 1.2348 |
| $ | 1.2808 |
|
| 2009 |
| $ | 1.1614 |
| $ | 1.1609 |
| $ | 1.1220 |
| $ | 1.0878 |
| $ | 1.0986 |
| $ | 1.0730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May. |
| Jun. |
| ||||||
| 2008 |
| $ | 1.2119 |
| $ | 1.2852 |
| $ | 1.2590 |
| $ | 1.2445 |
| $ | 1.2656 |
| $ | 1.3185 |
|
| 2009 |
| $ | 1.2119 |
| $ | 1.2139 |
| $ | 1.1758 |
| $ | 1.1423 |
| $ | 1.1559 |
| $ | 1.1313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May. |
| Jun. |
| ||||||
| 2008 |
| $ | 1.2218 |
| $ | 1.2921 |
| $ | 1.2614 |
| $ | 1.2395 |
| $ | 1.2586 |
| $ | 1.3073 |
|
| 2009 |
| $ | 1.1971 |
| $ | 1.1979 |
| $ | 1.1592 |
| $ | 1.1251 |
| $ | 1.1376 |
| $ | 1.1124 |
|
Liquidity and Capital Resources
The Fund does not engage in the sale of goods or services. The Fund’s assets are it’s (i) investment in Funds and (ii) Cash. Because of the low margin deposits normally required in commodity futures trading relatively small price movements may result in substantial losses to the Fund. While substantial losses could lead to a material decrease in liquidity, no such material losses occurred during the second quarter of 2009.
The Fund’s capital consists of the capital contributions of the members as increased or decreased by gains or losses on trading, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
14
For the six months ended June 30, 2009, Fund capital decreased 22.70% from $54,330,120 to $41,995,944. This decrease was attributable to the net loss from operations of $4,034,187, coupled with the redemption of 7,259,410 Redeemable Units of Limited Fund Interest resulting in an outflow of $8,302,956. The cash outflow was offset with cash inflow of $2,966 due to subscription of 2,533 units. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent months.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“GAAP”‘) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.
Statement of Cash Flows
The Fund has elected not to provide a Statement of Cash Flows as permitted by Statement of Financial Accounting Standards No. 102 “Statement of Cash Flows-Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale” (“FAS 102”).
Investments
Fair value of an investment is the amount that would be received to sell the investment in an orderly transaction between market participants at measurement date (i.e. the exit price). Purchase and sale of investments is recorded on a trade date basis. Realized gains and losses on investments is recognized when the investments are sold. Any change in net unrealized gain or loss from the preceding period is reported on the Statement of Operations.
Fair Value Measurements
The Fund adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”) as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fund did not apply the deferral allowed by FASB Staff Positions No. FAS 157-2, for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis. For information on the Fund’s valuation policies, see Note 3. Fair Value of Investments.
Income Taxes
Income taxes have not been provided as each member is individually liable for the taxes, if any, on their share of the Fund’s income and expenses and Members’ Capital.
In 2007, the Fund adopted FASB interpretation No. 48 “Accounting for Uncertainty in income Taxes” (“FIN 48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Fund level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. MLAI has concluded that the adoption of FIN 48 had no impact on the operations of the Fund for the period ended June 30, 2009 and that no provision for income tax is required in the Fund’s financial statements
15
Results of Operations
January 1, 2009 to March 31, 2009
The Fund experienced a net trading loss in the first quarter of 2009 of $1,761,494.
Performance of the Portfolio Funds were mixed in January which reflected the choppy markets and diversification of the Portfolio Funds approach to trading. Winton was the best performer, while Altis and GSA performed the worst. The Portfolio Funds profited from falling equities, with long-term managers capturing more of the move. The Portfolio Funds also profited from a continuous down-trend in commodities. Largest losses were suffered in fixed income positions as the U.S. Treasury yields rallied and other global bonds shadowed the move.
Time horizon focus did not seem to be a driver of returns in the middle of the quarter, while asset allocation played a more significant role. The Portfolio Funds had small net short exposures to equity markets and thus registered gains in this asset class. In addition, most of the Portfolio Funds that had long positions in the U.S. dollar against various currencies posted profits. Some of the Portfolio Funds that had long positions in the Japanese yen vs. the U.S. dollar posted losses due to the Japanese yen ending the month down significantly relative to the U.S. dollar. Fixed income markets experienced volatile swings during the month as most of the Portfolio Funds ended with small losses in this sector.
At the start of March, most of the Portfolio Funds had long positions in the fixed income markets and kept this position throughout the month of March and benefited from falling yields. John Locke was the exception. As a shorter term manager, its positioning was influenced significantly by intra-month choppiness in fixed income markets, causing large losses.
All other sectors had posted losses in March as a result of significant reversals in many markets. During March, equity markets rallied following some positive corporate news in the first week. When the U.S. Federal Reserve announced the start of quantitative easing mid-month, the U.S. dollar began losing value against most major currencies and the commodity markets which are negatively correlated with the U.S. dollar and risk aversion moved up. Given that most managers in the vertical are medium to long term trend followers, they were not in a position to cut exposures very fast and were negatively affected by these reversals.
April 1, 2009 to June 30, 2009
The Fund experienced a net trading loss in the second quarter of 2009 of ($1,653,985).
The market environment that caused a loss for the Fund in March continued through April as well. The Portfolio Funds continued to be positioned against market moves and experienced losses in most of the sectors they traded. In March, being long fixed income helped to offset losses in equity indices, currencies and commodities. In April, the losses in equity indices, currencies and commodities were more muted as many Portfolio Funds had trimmed risk in those sectors; however, having long positions in fixed income proved to be a problem as global bond yields rose significantly, hurting those long positions. Overall, fixed income was the worst performing sector for the Portfolio Funds, followed by currencies. The Portfolio Funds approach to trading was mixed exposure in commodities, making money in some markets and losing money in others. In equities, positioning was more on the short side, but with extremely small exposures; losses thus were muted.
May was a continuation of March and April in terms of market direction and moves. Equities and commodities were up, and bonds and the U.S. dollar was down. These new trends gave many Portfolio Fund managers a reason to adjust their portfolios to match the new environment resulting in profits being posted to the Fund. Short and medium term Portfolio Funds were more in sync with markets given that they adjust faster to new trends, while longer term Portfolio Funds have held on to their pre-March positioning somewhat longer and were not able to avoid losses. So the main difference in May relative to
16
March and April was that many Portfolio Funds were now correctly positioned to take advantage of current trends. Short to medium term managers (John Locke, GSA, BlueTrend, Altis, Transtrend) had better performance than longer term managers (Winton, Chesapeake, Aspect). The shorter term managers have adjusted better to the current market environment where equities and commodities are doing well and the U.S. dollar and bonds performed poorly. Risk by asset class continues to be biased towards fixed income which has a roughly 50% risk allocation, down from more than 80% in April. Fixed income was the asset class with the fewest reversals recently and thus risk had moved there as equities, commodities and currencies experienced changes in trend during March. But now, the risk allocated to other asset classes is creeping up: commodities are about a third of the total and the remainder is split between currencies and equities.
March, April and May had been characterized by market moves most commonly seen during periods where investors are risk seeking. There were up moves in equities and commodities and down moves in bonds and the U.S. dollar. The Portfolio Fund managers were just beginning to adjust their portfolios to match these new market directions. After suffering losses during March and April (as they were not positioned for the new trends that began in early March), most managers had begun turning around their portfolios to be more in line with where markets were going and many were able to post gains in May. That came to a stop in June as several events took place. First, short term interest rates suffered a sharp reversal during the first week of the month and the U.S. dollar had a similar reversal, gaining against most currencies. Then, mid-month, the up trends in equities and commodities reversed, as sentiment became risk averse again. As a result of these moves, most asset classes ended the month with negative attribution. The worst were short term rates and commodities. The quarter ended with losses being posted to the Fund. The worst were short term rates and commodities. Medium term managers had the worst performance as they not only suffered from the rates and U.S. dollar moves, but also the reversals in equities and commodities. John Locke, the manager with the shortest time horizon was able to avoid big losses. Winton and Chesapeake, the longest term managers, had relatively smaller losses because the equity and commodity reversals were actually good for them since they were still holding on to their pre-March positions in those asset classes.
January 1, 2008 to March 31, 2008
The Fund posted profits in all sectors for the first quarter.
The agriculture sector posted profits for the Fund. Corn and soybeans had a strong January as South Korea, who is the 4th largest importer of U.S. corn, was reportedly looking to buy more corn off of the U.S. dollar’s weakness posting profits for the Fund. Soybeans surged on concerns that Chinese demand will reduce U.S. inventories mid-quarter. Wheat rose on reports that production will not keep pace with output and reports from the U.S. Department of Agriculture that show inventory at a 60 year low. Later in the month, wheat corrected as crops in the Northern Hemisphere appear in better condition than initially reported. Also wheat crops in the Ukraine and Russia look better than previously forecasted. The quarter ended with losses being posted to the Fund due to the following factors. Grains closed lower at –0.30% as both wheat and soybeans faced corrections while corn ended about flat. Softs also took away about –1.00% from returns as coffee and sugar both corrected for a total of –0.85%. Commodities sell off ended on March 20th with the biggest weekly decline in 50 years as expectations of slower economic growth impacted prices. China announced subsidies to farmers in an attempt to curb inflation at an 11-year high.
The metals sector posted profits for the Fund. The largest returns came from precious metals which were up by about 2% (gold +1.5% and silver +0.5%) at the beginning of the year posting profits to the Fund. Gold moved to a record level of over $942 on the back of the U.S. Federal Reserve’s aggressive move and the U.S. dollar’s weakness and copper rose on reports the supply is the lowest in seven months. The quarter ended with losses being posted to the Fund due to precious metals which fell -1.00% in March with gold mostly responsible, finishing down -0.70%.
17
The interest rate sector posted profits for the Fund. The U.S. Federal Reserve made a historical move of reducing rates at the beginning of the year by 125 basis points in nine days citing both growth and credit concerns and that credit has still tightened for households and businesses. Losses were posted to the Fund mid-quarter due to the volatility in the market as the fixed income ended slightly negative by roughly -0.80%. The quarter ended with profits being posted to the Fund as the U.S. Federal Reserve lowered overnight rates by 75 basis points to 2.25% which was the 6th reduction since September 2007.
The energy sector posted profits for the Fund. Losses were posted to the Fund at the beginning of the year as crude oil has corrected due to several factors such as fears of the U.S. hitting a recession, the OPEC Minister saying they are ready to increase production and an inventory surge for the week ending January 11, 2008, which all caused concern that current market levels cannot be maintained. Oil rose above $100 a barrel mid-quarter on supply concerns from loss of Nigerian output, pumping disruptions in Iraq and fire at a United Kingdom gas plant. Crude oil corrected as U.S. inventories rose for the 11 weeks out of the last 12 by 2.25 million barrels helped by an earlier than expected opening of Iraq export terminal.
April 1, 2008 to June 30, 2008
The Fund posted gains for the second quarter with the energy and agriculture sectors posting gains while metals and interest rate sectors posted losses.
The energy sector posted profits for the Fund. The continued concerns surrounding the supply of oil kept the energy sector strong at the beginning of the quarter. The recent move in the energy sector has brought the option deltas back to higher levels. The higher deltas mean that the price of the options will closely resemble the return of the underlying commodities in an up market. Profits continued to be posted to the Fund mid-quarter as oil hit $135 a barrel as OPEC ministers said they could do nothing to prevent high prices. Nigeria, Africa’s largest exporter of oil, experienced attacks on pumping stations. Oil corrected from highs as the Commodity Futures Trading Commission (“CFTC”) announced greater communication with other exchanges to share information on position limits of investors. Profits continued to be posted to the Fund at the end of the quarter. Oil hits record high of $143.67 a barrel as Israel talked about attacking Iran, Nigerian strikes in their oil fields and renewed dollar weakness. These bullish factors offset the bearish announcements of the Chinese suddenly raising the price of domestic gas and diesel by 17% and the United States government, with help from the exchanges, seeking measure to stem speculative activity in oil.
The agriculture sector posted profits for the Fund. Profits were posted to the Fund at the beginning of the quarter in spite of wheat tumbling due to a United States government report stating a larger amount of wheat crops being graded as good. Wheat has fallen about 38% from the highs made back in February of this year. Corn rose as wet weather in the United States would possibly delay the harvesting season. Losses were posted to the Fund mid-quarter as coffee fell when Brazil, the world’s largest exporter, produced more than originally planned. Hogs traded at a 14 month high on views that slaughterhouses have to increase purchases after Memorial Day weekend. A strong return was experienced as coffee and sugar provided most of the profits being posted to the Fund while cotton and cocoa fell slightly. Corn futures climbed on the news of continued severe rains in the Midwest which is expected to disrupt supplies and should further tighten supply and demand with reserves at 24 year lows as the quarter ended.
The metals sector posted losses for the Fund. Losses were posted at the beginning of the quarter due to the first monthly advance by the United States dollar against the Euro this year causing a sell off in gold. Losses continued to be posted to the Fund mid-quarter as gold futures continued to drop since mid April as the United States dollar stabilized. The quarter ended with profits posted to the Fund even through a volatile market.
18
The interest rate sector posted losses for the Fund. Losses were posted at the beginning of the quarter due to the fixed income closing down due to the performance of the United States Treasury market rates finishing April at a loss of -2.70% while Euro and Pacific Rim interest rates each took away about -0.50% from returns. Losses continued to be posted through mid-quarter as the United States interest rates rose. Higher oil prices and signs of economic strength sifted expectations towards a rate hike. The quarter ended with profits posted to the Fund as the European rates closed up +1.10, Japan and Australia finished at +0.10%, however, the United States interest rates subtracted from performance by finishing down -1.10%.
The Fund has no applicable off-balance sheet arrangements and tabular disclosure or contractual obligations of the type described in Items 303(a)(4) and 303(a)(5) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Fund is a fund of fund which invests in a speculative commodity pool Portfolio Funds. The market sensitive instruments held by the Portfolio Funds are acquired for speculative trading purposes and all or substantially all of the Portfolio Funds’ 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 Portfolio Fund’s main line of business.
Market movements result in frequent changes in the fair market value of the Portfolio Fund’s open positions and, consequently, in its earnings and cash flow. The Portfolio Funds’ 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 Portfolio Funds’ open positions and the liquidity of the markets in which it trades.
The Portfolio Funds, under the direction of their respective advisors, rapidly acquire and liquidate both long and short positions in 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 Portfolio Funds could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Portfolio Fund’s speculative trading and the recurrence in the markets traded by the Portfolio Funds 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 considered to constitute any assurance or representation that the Portfolio Fund’s losses in any market sector will be limited to Value at Risk or by the Portfolio 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 Portfolio 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 27A of 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.
19
The Portfolio Fund’s risk exposure in the various market sectors traded by the Portfolio Funds advisors is quantified below in terms of Value at Risk. Due to the Portfolio 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 of the Portfolio Funds have been used 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 Portfolio Funds), 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.
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 Portfolio Funds 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 Portfolio Funds 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.
20
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Fund’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Fund manages its primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Fund’s primary market risk exposures as well as the strategies used and to be used by MLAI and APM for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Fund’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Fund. There can be no assurance that the Fund’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Fund.
Item 4T. Controls and Procedures
MLAI, the Sponsor of Systematic Momentum II LLC, 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 during the latest fiscal quarter that has materially affected, or is reasonably likely to materially affect the Fund’s internal control over financial reporting.
21
Item 1. | ||
|
| |
|
| None. |
|
|
|
Item 1A. | ||
|
| |
There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008, filed March 31, 2009. | ||
|
| |
Item 2. | ||
|
| |
| (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-09 |
| $ | — |
| — |
| $ | 1.1992 |
|
Feb-09 |
| — |
| — |
| 1.1903 |
| ||
Mar-09 |
| — |
| — |
| 1.1908 |
| ||
Apr-09 |
| — |
| — |
| 1.1519 |
| ||
May-09 |
| — |
| — |
| 1.1177 |
| ||
Jun-09 |
| — |
| — |
| 1.1297 |
| ||
Jul-09 |
| — |
| — |
| 1.1043 |
| ||
CLASS C
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-09 |
| $ | 2,966 |
| 2,533 |
| $ | 1.1709 |
|
Feb-09 |
| — |
| — |
| 1.1614 |
| ||
Mar-09 |
| — |
| — |
| 1.1609 |
| ||
Apr-09 |
| — |
| — |
| 1.1220 |
| ||
May-09 |
| — |
| — |
| 1.0878 |
| ||
Jun-09 |
| — |
| — |
| 1.0986 |
| ||
Jul-09 |
| — |
| — |
| 1.0730 |
| ||
CLASS D
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-09 |
| $ | — |
| — |
| $ | 1.2195 |
|
Feb-09 |
| — |
| — |
| 1.2119 |
| ||
Mar-09 |
| — |
| — |
| 1.2139 |
| ||
Apr-09 |
| — |
| — |
| 1.1758 |
| ||
May-09 |
| — |
| — |
| 1.1423 |
| ||
Jun-09 |
| — |
| — |
| 1.1559 |
| ||
Jul-09 |
| — |
| — |
| 1.1313 |
| ||
CLASS I
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-09 |
| $ | — |
| — |
| $ | 1.2056 |
|
Feb-09 |
| — |
| — |
| 1.1971 |
| ||
Mar-09 |
| — |
| — |
| 1.1979 |
| ||
Apr-09 |
| — |
| — |
| 1.1592 |
| ||
May-09 |
| — |
| — |
| 1.1251 |
| ||
Jun-09 |
| — |
| — |
| 1.1376 |
| ||
Jul-09 |
| — |
| — |
| 1.1124 |
| ||
(1) Beginning of the month Net Asset Value for all other purposes
| (b) None. |
| (c) None. |
|
|
Item 3. | |
|
|
| None. |
22
Item 4. | |||
|
| ||
| None. | ||
|
| ||
Item 5. | |||
|
| ||
| None. | ||
|
| ||
Item 6. | |||
|
| ||
| 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. | |
|
|
| |
| Exhibit 99 | The financial statements of ML Systematic Momentum FuturesAccess LLC are filed herewith. | |
23
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.
|
| SYSTEMATIC MOMENTUM II LLC |
|
|
|
|
|
|
| By: | MERRILL LYNCH ALTERNATIVE |
|
| INVESTMENTS LLC |
|
| (Manager) |
|
|
|
|
|
|
Date: August 14, 2009 | By: | /s/ JUSTIN C. FERRI |
|
| Justin C. Ferri |
|
| Chief Executive Officer, President and Manager |
|
| (Principal Executive Officer) |
|
|
|
|
|
|
Date August 14, 2009 | By: | /s/ BARBRA E. KOCSIS |
|
| Barbra E. Kocsis |
|
| Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
24