UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2012
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-52505
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(Exact name of registrant as specified in its charter)
Delaware |
| 30-0408280 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
c/o Merrill Lynch Alternative Investments LLC
Four World Financial Center, 11th Floor
250 Vesey Street
New York, New York 10080
(Address of principal executive offices)
(Zip Code)
212-449-3517
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Classes A, C, D, I and M Units of Limited Liability Company Interest
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company “ in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer x |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No x
The Units of the limited liability company interest of the registrant are not publicly traded. Accordingly, there is no aggregate market value for the registrant’s outstanding equity that is readily determinable.
As of February 28, 2013 Units of limited liability company interest with a Net Asset Value of $495,268,862 were outstanding and held by non-affiliates.
Documents Incorporated by Reference
The registrant’s 2012 Annual Reports and Report of Independent Registered Public Accounting Firm, the annual report to security holders for the year ended December 31, 2012, is incorporated by reference into Part II, Item 8, and Part IV hereof and filed as an Exhibit herewith. Copies of the annual report are available free of charge by contacting Alternative Investments Client Services at 1-866-MER-ALTS.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
ANNUAL REPORT FOR 2012 ON FORM 10-K
Table of Contents
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PART I | |||
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Item 1. | Business |
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Item 1A. | Risk Factors |
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Item 1B. | Unresolved Staff Comments |
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Item 2. | Properties |
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Item 3. | Legal Proceedings |
| 27 |
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Item 4. | Mine Safety Disclosures |
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PART II | |||
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| 27 |
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Item 6. | Selected Financial Data |
| 29 |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 39 |
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. | Financial Statements and Supplementary Data |
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Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
| 59 |
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Item 9A. | Controls and Procedures |
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Item 9B. | Other Information |
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PART III | |||
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Item 10. | Directors, Executive Officers and Corporate Governance |
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Item 11. | Executive Compensation |
| 62 |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions and Director Independence |
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Item 14. | Principal Accounting Fees and Services |
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PART IV | |||
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Item 15. | Exhibits, Financial Statement Schedules |
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PART I
Item 1: Business
(a) General Development of Business:
Systematic Momentum FuturesAccess LLC (formerly ML Systematic Momentum FuturesAccess LLC) (the “Fund”), a Merrill Lynch FuturesAccessSM Program (the “FuturesAccess”) Fund, was organized under the Delaware Limited Liability Company Act on March 8, 2007 and commenced operations on April 2, 2007. The Fund operates as a “fund of funds”, allocating and reallocating its capital, under the direction of Merrill Lynch Alternative Investments LLC (“MLAI” or the “Sponsor”), the Sponsor of the Fund, among underlying FuturesAccess Funds (each a “Portfolio Fund”, and collectively the “Portfolio Funds”). Presently there are eight Portfolio Funds. MLAI is the sponsor of the Portfolio Funds.
MLAI is an indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America Corporation and its affiliates are referred to herein as “BAC”. Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) is currently the exclusive clearing broker of the Portfolio Funds. MLAI may select other parties as clearing broker(s). Merrill Lynch International Bank, Ltd. (“MLIB”) is the primary foreign exchange (“F/X”) forward prime broker of the Portfolio Funds. MLAI may select other parties as F/X or other over-the-counter (“OTC”) prime brokers, including Bank of America N.A. (“BANA”). MLPF&S, MLIB and BANA are BAC affiliates.
FuturesAccess is a group of commodity pools sponsored by MLAI (each pool is a “Futures Access Fund” or collectively, “FuturesAccess Funds”) each of which places substantially all of its assets in a managed futures or forward trading account managed by a single or multiple commodity trading advisors. Each FuturesAccess Fund is generally similar in terms of fees, although redemption terms may vary among FutuesAccess Funds. Each of the FuturesAccess Funds implements a different trading strategy.
FuturesAccess is exclusively available to investors that have investment accounts with Merrill Lynch Wealth Management, U.S. Trust, Bank of America Private Wealth Management and other divisions of BAC. Investors in FuturesAccess can select, allocate and reallocate capital among different FuturesAccess Funds, each advised by either a single trading advisor or by the Sponsor which then allocates capital among multiple commodity trading advisors. Each trading advisor participating in FuturesAccess employs different technical, fundamental, systematic and/or discretionary trading strategies.
The Portfolio Funds in which the Fund presently invests are specified below, and may change from time to time based on the investment discretion of MLAI. Each Portfolio Fund implements a systematic-based managed futures strategy under the direction of a trading advisor unaffiliated with MLAI (each a “Trading Advisor”). The Trading Advisors primarily employ systematic trading strategies, which seek to identify market and price trends and take positions in the direction of these trends. The Trading Advisors may also implement a variety of other pattern recognition and price movement trading systems. See “Portfolio Funds’ Trading Programs,” below. MLAI has full discretion over the selection of, and allocation and reallocation of Fund capital among the Portfolio Funds, see “Portfolio Funds—Selection and Allocations,” below.
Unless the context requires otherwise, references herein to the trading activities, cash management, expenses and portfolio of the Fund refer to the Fund’s indirect activities engaged in, cash management, expenses incurred and portfolio held through each Portfolio Fund, and reference to the Trading Advisor herein include each Trading Advisor. The term “Trading Program” includes the Fund’s overall approach as well as each Trading Advisor’s strategy, as applicable.
The Fund issues units of limited liability company interest (“Units”) which are privately offered pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).
The Fund calculates the Net Asset Value per Unit of each Class of Units as of the last calendar day of each month and as of any other dates MLAI may determine in its discretion (each, a “Calculation Date”). The Fund’s “Net Asset Value” as of any Calculation Date generally equals the value of the Fund’s interests in the Portfolio Funds as of that date plus any other assets held by the Fund, minus accrued Sponsor fees, any offering or operating costs and all other liabilities of the Fund. MLAI or its delegates are authorized to make all Net Asset Value determinations.
As of December 31, 2012 the Net Asset Value and the Net Asset Value per Unit in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) was $543,069,764 and $1.0689 for Class A, $1.0554 for Class C, $1.3008 for Class D, $1.1413 for Class I, $1.1609 for Class D1 and $0.9610 for Class M.
Since the Fund began trading activities the highest and lowest month-end Net Asset Value per Unit are listed below. The highest month-end Net Asset Value per Unit for Class A was $1.2561 (December 31, 2008) and the lowest was $0.9090 (August 31, 2007). The highest month-end Net Asset Value per Unit for Class C was $1.2909 (December 31, 2008) and the lowest was $0.9467 (August 31, 2007). The highest month-end Net Asset Value per Unit for Class D was $1.4900 (April 30, 2011) and the lowest was $1.0212 (August 31 2007). The highest month-end Net Asset Value per Unit for Class I was $1.3315 (April 30, 2011) and the lowest was $0.9500 (August 31, 2007). The highest month-end Net Asset Value per Unit for Class D1 was $1.3298 (April 30, 2011) and the lowest was $0.9113 (August 31, 2007). The highest month-end Net Asset Value per Unit for Class DA was $1.0282 (December 31, 2008) and the lowest was $0.9460 (July 31, 2009). The highest month-end Net Asset Value per Unit for Class M was $1.0460 (July 31, 2012) and the lowest was $.9481 (November 15, 2012).
(b) Financial Information about Segments:
The Fund’s business constitutes only one segment for financial reporting purposes, i.e., a speculative “commodity pool”. The Fund does not engage in sales of goods or services.
(c) Narrative Description of Business:
General
The investment objective of the Fund is to achieve superior risk-adjusted rates of return through a fund of funds approach focusing on, but not limited to, a single group of alternative investment strategies known as “systematic managed futures strategies.” Under the direction of MLAI, the Fund seeks to achieve this objective by allocating its capital among a group of underlying FuturesAccess Funds (each a Portfolio Fund) managed by trading advisors which, the MLAI believes, collectively have the ability to achieve substantial capital appreciation with controlled performance volatility and drawdowns.
Systematic trading generally assumes that a disciplined and automatic trading approach based on quantitative analysis without discretionary decision making can enable a trader to forecast price trends or other market dynamics and to take positions designed to profit from it. These systems can incur substantial losses when the market significantly deviates from its usual historical patterns; e.g., when weather-related catastrophes, international political disruptions, and unanticipated supply/demand imbalances unexpectedly dominate the market.
Systematic trading generally utilizes technical analysis. Technical analysis relies on information intrinsic to the market itself to determine trades, such as prices, price patterns, volume and volatility, unlike fundamental analysis, which is premised on the assumption that markets are not perfectly efficient, that informational advantages and mispricings do occur and that econometric analysis can identify trading opportunities.
Systematic technical trading systems share basic similarities, although the models which they apply to historical price data differ. These similarities imply that there will be certain market conditions which are likely to be adverse to all or substantially all of the underlying FuturesAccess Funds in the Fund’s portfolio.
Systematic trading strategies are speculative and involve substantial risk. By operating the Fund as a “fund of funds” and investing in a number of different underlying FuturesAccess Funds, MLAI attempts to mitigate the volatility and certain other risks of investing in a single FuturesAccess Fund. While diversifying among different trading advisors involves the risk of one manager’s loss frequently offsetting another’s profits, this same diversifying
effect also typically reduces overall performance volatility, potentially producing a risk/return profile for the Fund that may be more consistent with the portfolio objectives of investors than investing in a single FuturesAccess Fund.
The Portfolio Funds in which the Fund holds investments as of December 31, 2012 are: Altis FuturesAccess LLC (the “Altis Fund”), Aspect FuturesAccess LLC (the “Aspect Fund”), ML BlueTrend FuturesAccess LLC (the “BlueTrend Fund”), John Locke FuturesAccess LLC (the “John Locke Fund”), Lynx FuturesAccess LLC (the “Lynx Fund”), ML Transtrend DTP Enhanced FuturesAccess LLC (the “Transtrend Fund”), Tudor Tensor FuturesAccess LLC (the “Tudor Fund”), ML Winton FuturesAccess LLC (the “Winton Fund”). Each underlying Portfolio Fund has its own Trading Advisor.
Portfolio Funds—Selection and Allocations
MLAI is responsible for identifying and selecting the underlying FuturesAccess Funds as Portfolio Funds in which the Fund invests, as well as for allocating and rebalancing Fund capital among the Portfolio Funds in an effort to maintain target allocations established by MLAI.
MLAI may use quantitative performance criteria, analytical and statistical techniques, market experience, qualitative due diligence and the subjective judgment of MLAI personnel in reviewing and selecting prospective FuturesAccess Funds as Portfolio Funds for the Fund. Selecting FuturesAccess Funds for inclusion in the Fund’s portfolio ultimately involves the subjective evaluation of both quantitative and qualitative factors by MLAI’s personnel. In evaluating a trading advisor of a FuturesAccess Fund for possible inclusion in the Fund’s portfolio, MLAI considers a number of factors, which may include, but are not limited to, certain of the following factors: (i) the type of systematic-based trading strategy implemented and the time frames over which the systems operate; (ii) business acumen, organizational infrastructure and internal controls; (iii) assets under management and track record; (iv) quantitative performance analysis; (v) risk management controls and procedures; (vi) business terms; (vii) conflicts of interest; (viii) the professional background, reputation and experience of a trading advisor’s principals and key personnel; (ix) commitment of the personal assets of a trading advisor’s principals and key personnel to the FuturesAccess Fund; (x) the diversification potential of including the FuturesAccess Fund together with the other FuturesAccess Funds in the Fund’s portfolio; and (xi) the sophistication and depth of resources committed to ongoing research effort. MLAI may consider a variety of factors in allocating and reallocating the Fund’s capital among underlying FuturesAccess Funds, and the list above is illustrative only.
MLAI is limited in its trading advisor selections to the FuturesAccess Funds. There are currently only a limited number of FuturesAccess Funds available for investment by the Fund.
MLAI determines the target allocations and relative weightings among the FuturesAccess Funds selected for the Fund’s portfolio. MLAI makes allocation decisions based on a combination of factors, with emphasis on MLAI’s assessment of the long-term return and risk forecasts of the various Portfolio Funds. The relative allocation of Fund capital among the Portfolio Funds will vary over time due to target allocation levels, market appreciation/depreciation and other factors. In addition to assigning target allocations, MLAI may establish an allocation range for certain or all Portfolio Funds, which affects when, and the manner in which, MLAI rebalances the Fund’s portfolio.
MLAI periodically reviews Portfolio Fund performance as well as changes in market conditions to determine whether to terminate existing or to add new Portfolio Funds, and/or to adjust its target allocations and relative weightings among the existing Portfolio Funds.
There can be no assurance as to which factors MLAI may consider in making capital allocations for the Fund, or as to which allocations MLAI may make.
During the fiscal year ended December 31, 2012, MLAI did not terminate any of the Trading Advisors.
Portfolio Funds and Trading Advisors
(a) The Fund currently invests in the following underlying Portfolio Funds which are advised, respectively, by the Trading Advisors as indicated below:
Portfolio Funds |
| Trading Advisors |
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Altis FuturesAccess LLC |
| Altis Partners (Jersey) Limited |
(the “Altis Fund”) |
| (“Altis”) |
Aspect FuturesAccess LLC |
| Aspect Capital Limited* |
(the “Aspect Fund”) |
| (“Aspect”) |
ML Transtrend DTP Enhanced FuturesAccess LLC |
| Transtrend B.V. |
(the “Transtrend Fund”) |
| (“Transtrend”) |
ML Winton FuturesAccess LLC |
| Winton Capital Management Limited* |
(the “Winton Fund”) |
| (“Winton”) |
John Locke FuturesAccess LLC |
| John Locke Investments SA |
(the “John Locke Fund”) |
| (“John Locke”) |
ML BlueTrend FuturesAccess LLC |
| BlueCrest Capital Management, L.P.* |
(the “BlueTrend Fund”) |
| (“BlueTrend”) |
Tudor Tensor FuturesAccess LLC |
| Tudor Investment Corporation* |
(the “Tudor Fund”) |
| (“Tudor”) |
Lynx FuturesAccess LLC |
| Lynx Asset Management AB* |
(the “Lynx Fund”) |
| (“Lynx”) |
* This Trading Advisor is registered under the Investment Advisers Act of 1940.
(b) The allocation percentages of the Fund’s investment in the underlying Portfolio Funds as of December 31, 2012 are as follows:
Altis FuturesAccess LLC |
| 10.00 | % |
Aspect FuturesAccess LLC |
| 10.00 | % |
ML Transtrend FuturesAccess LLC |
| 16.00 | % |
ML Winton FuturesAccess LLC |
| 17.00 | % |
John Locke FuturesAccess LLC |
| 10.00 | % |
ML Bluetrend FuturesAccess LLC |
| 17.00 | % |
Tudor Tensor FuturesAccess LLC. |
| 10.00 | % |
Lynx FuturesAccess LLC |
| 10.00 | % |
(c) Each of the Portfolio Funds is managed by MLAI. Each Trading Advisor has entered into an advisory agreement with the relevant Portfolio Fund and MLAI. After the initial term of an advisory agreement, the advisory agreement generally will be automatically renewed for successive periods, on the same terms, unless terminated by either the Trading Advisor or the Portfolio Fund upon written notice to the other party. In addition, the advisory agreements may be terminated at any time upon the occurrence of certain events, such as the aggregate capitalization of a Portfolio Fund falling below a specified level or as a result of a material breach of an advisory agreement by any of the parties. An advisory agreement will also terminate immediately if the applicable Portfolio Fund is terminated and dissolved as determined by MLAI. The trading strategies and investment objectives of each of the Portfolio Funds are outlined in “Portfolio Funds’ Trading Programs,” below.
Portfolio Funds’ Trading Programs
Portfolio Funds
Altis trades its Global Futures Portfolio for the Altis Fund (the “Altis Trading Program”). Altis engages primarily in the management of futures, futures on options and F/X trading. The Altis Trading Program participates in over 140 worldwide futures markets over multiple maturities. The Altis Program is a systematic, automated trading program that builds on the market experience of Altis’ principals and employs an asset allocator. The portfolio management technology combines original, traditional and contrasting investment techniques into one
complete and comprehensive trading system. Investment changes are implemented after considering their effect on the whole portfolio, not just the individual markets concerned.
The Altis Trading Program is designed to give investors participation in broad sectors of the world economy. Altis trades in financial and commodity markets worldwide. Types of instruments traded include, but are not limited to, energies, metals, grains and livestock. Altis will also trade commodity indices, stock indices, currencies, F/X and other related futures and/or option contracts.
Aspect Fund
Aspect trades its Diversified Program for the Aspect Fund (the “Aspect Trading Program”). The Aspect Trading Program applies a systematic and broadly diversified global investment system, which deploys multiple investment strategies that, primarily through the use of listed futures and F/X OTC contracts, seek to identify and exploit directional moves in the market behavior of a broad range of financial instruments and other assets including, but not limited to, currencies; interest rates; equities; equity indices; debt securities, including bonds; and commodities, including energy, metal and agricultural commodities. By maintaining comparatively small exposure to any individual market and maintaining positions in a variety of contracts, Aspect aims to achieve long-term diversification.
The Aspect Trading Program employs an automated system to collect, process and analyze market data (including current and historical price data) and identify and exploit directional moves in market behavior. The Aspect Trading Program trades across a variety of frequencies to exploit trends over a range of timescales. Positions are taken according to the aggregate signal and are adjusted to control risk.
Generally, the Aspect Trading Program maintains positions in the majority of traded markets. Market concentration varies according to the strength of signals, volatility and liquidity, among other factors.
The core objectives of the Aspect Trading Program are to: produce strong medium-term capital growth; seek and exploit profit opportunities in both rising and falling markets using a quantitative and systematic investment process; seek long-term diversification away from overall movements in traditional bond and stock markets; and minimize risk by operating in a diverse range of markets and sectors using an investment process that adheres to pre-defined and monitored risk limits and determines market exposure in accordance with factors including, but not limited to, market correlation, volatility, liquidity and the cost of market access.
The Aspect Trading Program is not applied by Aspect with any pre-determined preference for any market. Rather, allocations to strategies and individual markets depend upon an analysis of a range of factors which may include liquidity, correlation and cost of execution. Allocations are currently made on a long-term average risk basis which takes into account varying levels of market volatility and intra-market correlation. These allocations are subject to regular review and may change from time to time at Aspect’s discretion.
A fundamental principle of Aspect’s investment approach is the importance of a risk management framework. Aspect’s risk management process has been formally organized into two risk management streams. The first stream relates to market and liquidity risk and the second stream relates to operational risk. With respect to market and liquidity risk, Aspect employs a value-at-risk methodology and other risk management procedures to monitor the exposure of the Aspect Trading Program to this risk within pre-defined guidelines. If risk exceeds the maximum prescribed level, risk reducing trades will be entered into. Additionally, Aspect has developed mechanisms designed to provide that risk is controlled at both an individual market and portfolio level. In seeking to control the risks of the Aspect Trading Program, Aspect may intervene in the risk management framework in extreme market situations where Aspect believes that an intervention may be in the best interests of the Aspect Fund. In terms of the second stream, Aspect has an Operational Risk Committee which is responsible for managing all operational risk affecting Aspect. Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people and systems or external events. It includes the risk of failure of a broker or other service provider, the risk of the loss of trading or operational capability at Aspect, the risk of breaches of intellectual property security and the risk of breaches of law or regulation.
BlueTrend Fund
BlueCrest trades its BlueTrend Program for the BlueTrend Fund (the “BlueTrend Trading Program”). The BlueTrend Trading Program is a systematic trend follower, but its decision-making inputs are 100% technical. BlueCrest aims to apply scientific techniques to the analysis and modeling of markets, thereby seeking to deliver reliable trading systems with absolute returns and superior risk and rewards. The BlueTrend Trading Program trades daily futures and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy, metals, agriculturals and soft commodities.
The BlueTrend Trading Program seeks to achieve long-term appreciation in the value of its assets and to maintain an exceptional risk/return ratio by focusing on continuous research and development. The BlueTrend Trading Program’s systematic trading team combines research, model development, implementation and execution functions. The BlueTrend Fund’s portfolio construction is regularly reviewed with a view to achieving its goal of delivering superior returns while maintaining diversity.
The trading strategy utilized by the BlueTrend Fund is a systematic trading model. Capital allocation decisions between the models, between the markets within a model and individual buy and sell decisions within such markets are made on a systematic basis using quantitative analysis.
John Locke Fund
John Locke trades its JLI Systematic Program (the “John Locke Trading Program”) for the John Locke Fund. The John Locke Trading Program’s investment objective is to achieve substantial long-term capital appreciation while offering an efficient diversified investment vehicle trading in futures contracts and forward markets.
Within a risk management policy, the investment program will get long, short or neutral exposure to the main world markets by systematically trading a large portfolio of futures contracts and forward markets. Investment decisions are purely technical and involve tick-by-tick and daily market data processing. Risk control tools such as real-time Value At Risk (“VaR”) evaluation will allow a secure use of leverage.
John Locke’s investment process is based on the systematic application of computerized trading strategies, qualified within a quantified risk management framework. The strategies are purely technical, based on in-depth analysis of market price movements.
The John Locke Trading Program seeks to minimize volatility and reduce risk by diversifying the portfolio to avoid significant concentration within any one security or industry group.
In managing the John Locke Trading Program, John Locke employs systematic application of computerized trading strategies within a quantified risk management framework. Typically, the investment objective is pursued through a portfolio of more than 70 markets.
While commodity trading can rely on either fundamental or technical analysis, or a mix of both, John Locke’s strategies are purely technical. These strategies are based on historical data analysis of a given market’s price movements.
In order to seek to optimize the risk/return ratio, the strategies implemented make use of a multidimensional diversification approach. Under this approach, a variety of commodity interests, futures and other financial instruments are employed in the primary economic sectors in markets located across broad geographic zones.
The John Locke Trading Program primarily invests in the following instrument types: currencies, fixed income instruments, stock indices, energy metals, grains, and other soft commodities.
A principal risk involved in trading a market is the volatility of that market. The John Locke Trading Program seeks to balance the long-term volatility of the overall portfolio by defining for each asset class a maximum number of contracts in which the John Locke Trading Program can be exposed. The John Locke Trading Program seeks to balance local volatility by adjusting current position sizes and using associated stop-loss orders. The John Locke Trading Program seeks to protect against catastrophic loss by employing VaR analysis by sector and capping the sector position size accordingly.
Lynx Fund
Lynx trades its Lynx Program for the Lynx Fund (the “Lynx Trading Program”). The Lynx Trading Program trades futures contracts on the global futures markets. The Lynx Trading Program is managed by applying a well-structured management process that includes a focus on risk management. Lynx uses systematic futures trading programs or models to produce trading signals on a largely automated basis to trade futures contracts in the equity, fixed income, commodity and F/X asset classes.
One of the most important aspects of Lynx’s management process is model development. Lynx believes that as financial markets are constantly developing, it is important to be continually improving the models used in the management of the program and developing new ones. Lynx has created databases containing historical price information for a wide variety of different financial instruments, in which the data series often go back thirty years or more. Ideas about how to improve the models in current use are tested on historical data using software developed by Lynx. Another important activity is to attempt to improve the portfolio structure by developing methods for allocating risk between different models and different markets.
The aim is for the models used in the management of the Lynx Trading Program to complement each other and contribute to greater diversification and a more uniform return. The models complement each other in terms of structure as well as the time horizons they operate within. In the very short-term models, the average duration of the positions typically is only a couple of hours, while in the models with the longest time horizon, the average life of a holding generally is several months.
Transtrend Fund
Transtrend trades its Diversified Trend Program (the “Transtrend Trading Program”) for the Transtrend Fund.
The Transtrend Trading Program trades the following instruments on U.S. and non-U.S. exchanges and markets: futures, options, options on futures, swaps, swaps on futures, and forward contracts on currencies, interest rates, interest rate instruments, commodities, equity-related indices and instruments, and other indices, in all cases traded on regulated markets, such as exchanges, and/or OTC markets. The instruments that Transtrend trades may also include other derivative, margined instruments, traded on regulated and/or OTC markets. The Transtrend Trading Program does not currently trade OTC F/X and derivatives on individual stocks for the Fund.
The applied principles of risk management play a dominant role in Transtrend’s trading methodology. The Transtrend Trading Program is designed to pursue capital growth within the limits of a defined risk tolerance. The Transtrend Trading Program is essentially based on quantitative analysis of signaled price behavior of instruments traded and therefore not on fundamental analysis. The Transtrend Trading Program is systematic by nature and requires a consistent application. Discretionary inputs are not essential to the effectiveness of the program.
The applied market approach does not forecast markets or price levels but participates in a systematic and dynamic way in signaled price patterns. The trading systems of the Transtrend Trading Program are designed to profit from recurring, non-random characteristics of price behavior in markets. In the trading systems there are elements which identify and respect the dominant market direction. The trading systems exploit directional price movement of single instruments and of intra-market and inter-market combinations, “synthetics,” of instruments.
While Transtrend generally will not use discretionary inputs in trading client accounts, in the event of exceptional market circumstances Transtrend may use discretion in an attempt to limit risk to a position or an account. The use of discretion by Transtrend may have a positive or negative impact on the performance of the Fund.
The Transtrend Trading Program may hold positions in different instruments with one or more trading systems. The simultaneous application of diverging trading systems, each with a positive profit expectancy over the course of time, can contribute to a different timing of both purchase and sale transactions, thus enhancing smoother performance characteristics when compared to a single trading system. However, the profitability of trading systems, individually or in combination, cannot be guaranteed and the Transtrend Fund may incur substantial losses.
The Transtrend Trading Program has two risk profiles: the Standard Risk Profile and the Enhanced Risk Profile, investable in various currencies. The Enhanced Risk Profile is approximately 1.5 times the leverage of the Standard Risk Profile. Transtrend will trade the Trading Program - Enhanced Risk Profile (USD) on behalf of the Transtrend Fund. The Transtrend Trading Program can at any time be net long, short or neutral in any given market.
Once the acceptable portfolio components have been defined for an account, Transtrend determines the relative proportions of all components within the portfolio on the basis of signaled correlation over the course of time, which is re-computed from time to time. Correlation analysis contributes to the estimation of the risk of coinciding trend reversals at a portfolio level.
The allocation to instruments, i.e., the determination of portfolio components and their relative proportions, varies over the course of time, because, among other reasons, of changes to the list of instruments traded in the Transtrend Trading Program and because of observed changes in price behavior, correlation and market liquidity.
The risk-estimate used by Transtrend is trade-based and takes volatility into account. This implies an internal risk evaluation by the applied trading systems, which may lead to adjustments of position sizes during the lifetime of a position. The initial risk evaluation determines the position size at the time of entry. Signaled price behavior may lead to a gradual addition to or reduction of the initial position. Significantly adverse price behavior may lead to a partial or full exit for all or a portion of the position, as applicable. Transtrend reserves the right to temporarily reduce individual or overall position sizes under extreme market conditions of any kind. These extreme conditions may be real or perceived. It is possible that such reductions, which have the sole intention of reducing risk, will reduce the profitability which could have been achieved otherwise.
The entry/exit tools used by Transtrend may contain both proprietary trend-following and contra-trend elements and include techniques of dynamic profit targets and dynamic stop levels for individual trades. The trading systems act at specific times or time intervals and upon specific price levels during a market session or during the day.
Tudor Fund
Tudor trades a customized version of the Tudor Tensor Strategy (the “Tudor Trading Program”) for the Tudor Fund. The principal investment objective of the Tudor Trading Program is to seek capital appreciation through global quantitative trading in the fixed income, currency, commodity and equity asset classes. Instruments traded in these classes include exchange traded futures contracts and OTC currencies. Additional instruments may be traded by the Tudor Trading Program at any time. Tudor seeks to achieve the investment objective by directing the Tudor Trading Program’s trading on U.S. and non-U.S. exchanges and markets, including emerging markets.
Tudor deploys quantitative strategies based on computerized mathematical and computational models, referred to as “trading systems” in this discussion, that produce automated computer-generated signals to trade on a worldwide basis, both long and short, in the fixed income, currency, commodity and equity asset classes through exchange-traded futures contracts and OTC currencies.
Tudor uses its discretion in portfolio management decisions (and the timing of any decisions) including, but limited to, the commencement of trading, determining which trading strategies and trading systems warrant participation in the Tudor Trading Program, allocating assets among trading strategies and trading systems, adding and removing trading strategies or trading systems, executing trades, establishing and liquidating positions, de-leveraging and re-leveraging trading strategies, trading systems or assets traded by trading systems, determining the Tudor Trading Program’s leverage, and hedging and other risk management decisions. In addition, Tudor may, in its sole discretion, override computer-generated trading signals in the event of extraordinary market conditions.
The Tudor Trading Program’s principal trading strategies include both technical and fundamental trading systems.
Technical trading systems involve the analysis of technical factors and historical trading patterns as a way to predict future price movements. Technical factors may be derived from daily or intraday price data. Price fluctuations, volume variations, market volatility and changes in open interest may also generate technical inputs or be used to size positions generated by other indicators. Technical trading systems may be based on fundamental
foundations but use only price inputs. The Tudor Trading Program’s technical trading strategies may include trend following, pattern recognition, and diversified short-term trading systems.
The Tudor Trading Program is subject to market and credit risk in connection with the Tudor Trading Program’s trading activities. Tudor takes an active role in managing the Tudor Trading Program’s market risks. Tudor reviews the Tudor Trading Program’s largest exposures and sensitivities to certain market stress scenarios at the individual risk factor level and at various levels of aggregation, and Tudor also performs stress tests on the Tudor Trading Program’s positions in the aggregate.
Winton Fund
Winton trades its Diversified Program (the “Winton Trading Program”) for the Winton Fund. The investment objective of the Winton Trading Program is to achieve long-term capital appreciation through compound growth. Winton seeks to achieve this goal by pursuing a diversified trading scheme that does not necessarily rely upon favorable conditions in any particular market, or on market direction.
The Winton Trading Program employs a computer-based system to engage in speculative trading in over 100 international futures, options and forwards markets, as well as certain OTC instruments, which may include F/X and interest rate forward contracts and swaps.
The Winton Trading Program employs what is traditionally known as a “systematic” approach to trading financial instruments. In this context, the term “systematic” implies that the vast majority of the trading decisions are executed, without discretion, either electronically or by a team responsible for the placement of orders, based upon the instructions generated by the Winton Computer Trading System (the “Winton Trading System”). The Winton Trading Program blends short-term trading with long-term trend following, using multiple time frames in addition to multiple models. The Winton Trading Program seeks to allocate for maximum diversification.
The Winton Trading Program can be thought of as more “technical” than “fundamental” in nature. The term “technical analysis” is generally used to refer to analysis based on data intrinsic to a market, such as price and volume. It is often contrasted with “fundamental analysis” which relies upon analysis of factors external to a market, such as crop conditions, the weather or supply and demand.
The Winton Trading Program relates the probability of the size and direction of future price movements with certain indicators derived from past price movements to produce algorithms that characterize the degree of trending of each market at any point in time.
In addition to its trend-following models, the Winton Trading Program contains certain “non-directional” models that derive their forecasts from factors often excluded by technical analysis. In these quantitative systems, the primary input is likely to be information about the yield curve or an economic variable rather than market price. These models work in the same way as those based on technical analysis, except that they use a different set of forecasting variables.
While discretionary inputs are generally not essential to the effectiveness of a “systematic” trading model, it is nonetheless important to recognize that given the often rapid and unpredictable nature of some market events, not every decision to change the Winton Trading System can be conceived as entirely “systematic” and some may be more “discretionary” in nature. Examples of discretionary actions might include decreasing the margin-to-equity ratio, liquidating all positions in certain markets or declining to execute an order generated by the Winton Trading System. This discretionary decision-making would normally only be taken in order to reduce risk and would generally be temporary in nature. These acts may not enhance the performance of the Winton Trading Program over what might have otherwise been achieved without the exercise of such discretion.
The management of risk is an integral part of the Winton Trading System. Winton’s focus within risk management is on targeting, measuring and managing risk. Owing to the leverage inherent in futures trading, position sizes are set according to Winton’s expectation of the risk that the positions will provide, rather than the amount of capital required funding the positions.
Employees
The Fund has no employees.
Use of Proceeds and Cash Management Income
Subscription Proceeds
The Fund’s cash is used as security for and to pay the Fund’s trading losses as well as its expenses and redemptions. The primary use of the proceeds of the sale of the Units is to permit the Portfolio Funds to trade on a speculative basis in a wide range of commodities on behalf of the Fund (through the Portfolio Funds). While being used for this purpose, the Fund’s assets are also generally available for cash management, as more fully described below under “Cash Management and Interest”.
Margin
When a futures or options on futures position is established, “initial margin” is calculated by the exchange on which the position is listed and deposited with a Futures Commission Merchant (“FCM”) that is a member of the clearinghouse through which transactions on the relevant exchange are cleared. An FCM must, in turn, deposit initial margin with the clearinghouse, as calculated by the clearinghouse, to secure its obligations to the clearinghouse with respect to the positions of its customers. The amount of both the trader’s initial margin payment to the FCM and the FCM’s initial margin payment to the clearinghouse are determined on the basis of risk, taking into account the price and volatility of the commodity underlying the position and, in certain cases, the offsetting risks that exist within a portfolio of positions. On most exchanges, at the close of each trading day “variation margin,” representing the unrealized gain or loss on the open positions, is either credited to or debited from a trader’s account. A trader must maintain a minimum margin level for each outstanding futures position known as “maintenance margin,” which is set by the relevant exchange and based on the risk of the futures position, often a set percentage of the “initial margin.” If “variation margin” payments cause a trader’s “initial margin” to fall below “maintenance margin” levels, a “margin call” is made, requiring the trader to deposit additional margin or have its position closed out. A clearinghouse likewise has “maintenance margin” requirements for member FCMs. An FCM may require a higher level of “initial margin” and “maintenance margin” from the trader than the clearinghouse requires from the FCM, but generally will not allow lower margin levels. Margin is also required to be posted with counterparties when making investments through forward, swaps or other OTC instruments. The counterparties calculate margin based on the risk of the underlying commodity and will deposit margin with each other based on a previously agreed upon schedule. In general, approximately 10% to 30% of the Portfolio Fund’s assets are expected to be committed as margin for futures or options on futures positions at any one time, although these amounts could occasionally be substantially higher. The Portfolio Fund’s exposure and liability are not limited to the amount placed on margin, but are based on the total value of the futures contracts being traded. Fund assets not committed to margin will be held in cash or cash equivalents and will earn interest as described below.
Custody of Assets
The Fund’s financial assets consist primarily of cash, futures and OTC FX forward and spot positions. In addition, the Fund has authority to trade options on futures and forwards and certain other OTC derivatives including swaps, but these contracts typically represent a small percentage of the Fund’s financial assets, if any are traded at all.
Futures and OTC forwards and other instruments typically constitute a predominant amount of the Fund’s investment risk, but the notional value of these instruments is not included on the Fund’s Statement of Financial Condition.
The vast majority of the net assets of the Fund is, and has historically been, held in the form of cash. The Fund’s cash is used in various ways. It can be:
· posted as margin with MLPF&S in segregated or secured accounts in connection with commodities trading on regulated exchanges;
· pledged as collateral to MLIB for OTC forwards or options on forwards or to other OTC prime brokers for other OTC investments;
· deposited in savings or demand deposit accounts with the Fund’s custodian or other banking institutions, both in the United States and internationally;
· held in securities brokerage accounts maintained with the MLPF&S; and
· invested in securities or other instruments generally viewed as cash equivalents, which are in turn held in segregated or secured accounts with MLPF&S.
Typically the vast majority of the Fund’s assets are held in segregated or secured accounts with MLPF&S. In general, approximately 10% to 30% of the Fund’s assets are expected to be required as margin or collateral at any one time. Approximately 90% of the Fund’s assets are held in customer segregated accounts at MLPF&S pursuant to applicable Commodity Futures Trading Commission (“CFTC”) regulations to margin U.S. exchange-traded futures contracts and options thereon, or in customer secured accounts at MLPF&S and used to margin futures trading on non-U.S. exchanges pursuant to CFTC regulations. The remaining approximately 10% is expected to be deposited with MLIB, other OTC prime brokers, or one or more third-party collateral custodians as margin for OTC trades. These amounts could be substantially higher or lower and there is no obligation to maintain margin or collateral within these or any other specific ranges.
Assets held in segregated or secured accounts at MLPF&S may be invested only in CFTC-permitted investments, which include U.S. government and government agency securities, commercial paper and corporate notes and bonds guaranteed by the U.S. government, and money market mutual funds. Under the applicable regulations, such permitted investments are subject to instrument and issuer based concentration and time to maturity limits and must be managed with the objectives of preserving principal and maintaining liquidity.
Cash deposited in savings or demand deposit accounts with the Fund’s custodian or other banking institutions may be in excess of the limits on federal insurance for deposits, and thus not insured by the Federal Deposit Insurance Corporation (“FDIC”), and would be subject to the risk of bank failure.
MLAI, as sponsor of the Fund, has a general policy of maintaining clearing and prime brokerage arrangements with its BAC affiliates, such as MLPF&S and the MLIB, although MLAI may, nevertheless, engage unaffiliated service providers as clearing brokers or prime brokers for the Fund. Other affiliates may from time to time be involved in the clearing, custody or investment of the Fund’s assets, including as prime brokers. However, the vast majority of the Fund’s assets are held with, and therefore subject to the credit risk of, MLPF&S. MLAI believes that its policy is in the best interest of Investors due to the enhanced dependability and quality of service provided by MLPF&S and MLIB to FuturesAccess as a result of MLAI’s relationship and shared corporate infrastructure with these affiliates. In addition, MLAI believes that MLPF&S is well capitalized and that the Fund benefits from the transparency provided to MLAI, as an affiliate of MLPF&S, into the controls MLPF&S has implemented to comply with the various regulatory requirements designed to protect customer funds. However, there nonetheless exists a substantial risk of loss with respect to each of the above custody arrangements in the event of the bankruptcy or insolvency of MLIB or MLPF&S if it does not properly segregate customer funds. See “Risk Factors — Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges” below for a more detailed discussion of these risks.
Subject to the interest income arrangements discussed below, each BAC entity holding Fund assets, including MLPF&S, retains the additional economic benefit derived from possession and investment of those assets for the entity’s own account.
Cash Management and Interest
MLAI is primarily responsible for the management of the Fund’s “cash assets” In exercising this responsibility, MLAI’s primary considerations are safety of assets, seeking interest income, and the services provided by custodians. A vast majority of the Fund’s cash has historically been held in futures brokerage accounts with affiliates. To a smaller degree, the Fund’s cash assets may be held with the Fund’s bank custodian, which is at present the administrator.
MLAI retains the ability to change its cash management practices at any time, including by transferring a majority of the Fund’s cash assets to the Fund’s custodial bank accounts or other bank accounts or by retaining an asset management firm to invest the Fund’s cash assets in U.S. government and money market securities.
Bank deposits may be in either savings accounts that pay interest, or demand deposit accounts, which may or may not pay interest and which may or may not be subject to FDIC insurance. Any of these banks or asset management firms may be affiliated with MLAI if MLAI believes that to be in the best interests of the investors in the Fund.
BAC’s “Interest Earning Program,” which offers interest on cash balances subject to a negotiated schedule, will apply to Fund cash assets during any time they are maintained by MLAI with its affiliates. The present interest rate under the Interest Earning Program on U.S. dollar cash balances is the daily effective federal funds rate less 20 basis points, recalculated and accrued daily, and subject to a floor of 0%. The daily effective federal funds rate is a volume-weighted average of rates on trades arranged by major brokers and is calculated by the Federal Reserve Bank of New York using data provided by the brokers. Interest is computed based upon the daily net equity balance of the Fund’s account and is posted to the Fund’s account on a monthly basis.
At present, due to the low interest rate environment that has prevailed in the United States since 2008, the Interest Earning Program’s U.S. dollar floor rate of 0% applies. In interest rate environments like the current one in which the Fund does not earn interest under the Interest Earning Program, MLAI may seek to transfer cash from affiliates if it believes that any interest earned on this cash was consistent with its goal of safely maintaining these assets and otherwise would offset the advantages of maintaining cash with its affiliates.
MLPF&S, in the course of acting as commodity broker for the Fund, will have use of Fund cash and earn interest and receive other economic benefits as a result. MLPF&S follows the same procedures for these transactions as it does with respect to the Interest Earning Program as discussed above.
Charges
The following table summarizes the charges incurred by the Fund for the years ended December 31, 2012, 2011 and 2010.
|
| 2012 |
| 2011 |
| 2010 |
| |||||||||
Charges |
| Dollar |
| % of Average |
| Dollar |
| % of Average |
| Dollar |
| % of Average |
| |||
Other Expenses |
| $ | 1,444,939 |
| 0.20 | % | $ | 1,518,474 |
| 0.15 | % | $ | 1,451,397 |
| 0.19 | % |
Sponsor fees |
| 15,170,255 |
| 2.14 | % | 20,592,497 |
| 2.04 | % | 18,769,349 |
| 2.43 | % | |||
Total |
| $ | 16,615,194 |
| 2.34 | % | $ | 22,110,971 |
| 2.19 | % | $ | 20,220,746 |
| 2.62 | % |
The foregoing table does not reflect: (i) the bid-ask spreads paid by the Portfolio Funds on their forward trading, (ii) brokerage commissions, (iii) the benefits which may be derived by BAC from the deposit of certain of the Portfolio Funds’ U.S. dollar assets maintained at MLPF&S, or (iv) sales commissions payable in connection with the sales of Class A, Class D and Class I Units of the Fund. Bid-ask spreads and brokerages commissions are components of the trading profit or loss of the Portfolio Fund rather than a distinct expense item separable from the Portfolio Fund’s trading; they are netted against realized and unrealized trading gains or losses in determining trading profit or loss. Benefits derived by BAC from the deposit of the Portfolio Fund’s assets at MLPF&S are neither a direct expense of the Fund nor readily quantifiable. Aggregate sales commissions are not included in the table of charges because they are not an expense of the Fund, but rather are paid to MLPF&S out of an investor’s subscription proceeds and therefore reduce the amount invested in the Fund by the investor.
Management fees and performance fees are not included in the above table of charges, because the Fund does not charge management fees or performance fees, but instead charges a “sponsor fee” which is set forth in the table. While the Trading Advisors to the Portfolio Funds in which the Fund invests do charge management fees and performance fees, these are not included in the table since such fees are not Fund expenses. However, such management fees and performance fees reduce the Net Asset Value of the Fund’s underlying investment in each Portfolio Fund.
Each Portfolio Fund pays the relevant Trading Advisor applicable performance fees and management fees. As an investor in the Portfolio Funds, the Fund’s investment in the Portfolio Funds is therefore reduced by the
performance fees and management fees paid by the Portfolio Fund to the Trading Advisor. As a result, the Fund’s returns are decreased by the performance and management fees paid by the Portfolio Funds. The Portfolio Funds generally pay the performance fees and management fees out of the cash held by them, although such fees can be paid by liquidating Portfolio Fund assets. The performance fees and management fees are not charged directly to the Fund or its members.
The Fund’s average month-end Net Asset Values during 2012, 2011, and 2010 equaled $708,964,217, $1,008,658,737 and $931,310,433, respectively.
During 2012, the Fund earned $0 in interest income, or approximately 0.0000 % of the Fund’s average month-end Net Asset Values. During 2011, the Fund earned $187 in interest income, or approximately 0.0000% of the Fund’s average month-end Net Asset Values. During 2010, the Fund earned $3,003 in interest income, or approximately 0.0003 % of the Fund’s average month-end Net Asset Values.
Description of Current Charges
Recipient |
| Nature of Payment |
| Amount of Payment |
MLPF&S |
| Use of assets |
| BAC may derive an economic benefit from the deposit of certain of the Portfolio Funds’ U.S. dollar assets in accounts maintained at MLPF&S. |
|
|
|
|
|
MLAI |
| Sponsor fees |
| A flat-rate monthly charge of 0.125% of 1% (1.50% annual rate) on Class A units, flat-rate monthly charge of 0.2083 of 1% (2.50% annual rate) on Class C Units, a flat-rate monthly charge of 0.0917 of 1% (1.10% annual rate) on Class I Units (including the monthly interest credit and before reduction for accrued month end redemptions, distributions, brokerage commissions, sponsor fees, management fees in each case as of the month of determination. Class D, Class D1, Class DA and Class M Units do not pay Sponsor fees. |
|
|
|
|
|
MLPF&S |
| Sales commissions |
| Class A Units are subject to sales commission paid to MLPF&S ranging from 1.0% to 2.5%. Class D and Class I Units are subject to sales commissions paid to MLPF&S up to 0.5%. The rate assessed to a given subscription is based upon the subscription amount. Sales commissions are deducted from proceeds prior to entering the fund. Shares purchased and reflected in the fund records are net of any commissions charged by MLPF&S. Class C, Class D1, Class DA and Class M Units are not subject to any sales commission. No sales commission is charged to Class M Units because investors purchasing Class M Units are subject to asset-based fees on the BAC managed accounts in which the Class M Units are held. |
|
|
|
|
|
Merrill Lynch International Bank (“MLIB”) (or an affiliate); Other counterparties |
| Bid–ask spreads |
| Bid–ask spreads are not accounted for separately as an accounting item because bid-ask spreads are an integral part of the price paid or received on all contracts for the purposes of generally accepted accounting principles. |
MLIB (or an affiliate); Other counterparties |
| EFP differentials |
| Certain of the Portfolio Funds’ currency trades may be executed in the form of “exchange of futures for physical” transactions, in which a counterparty (which may be MLIB or an affiliate) receives an additional “differential” spread for exchanging the Fund’s cash currency positions for equivalent futures positions. |
|
|
|
|
|
Others |
| Operating expense of Fund including audit, legal and tax services |
| Actual payments to third parties. |
|
|
|
|
|
MLPF&S; Others |
| Brokerage commissions |
| The aggregate brokerage commissions charges should equal approximately 0.50% per annum of each of the Portfolio Funds’ average month-end asset. No brokerage commission is charged to investors at the Fund level, although brokerage commissions are charged at the Portfolio Funds’ level to these parties, including the Fund, invested directly in the Portfolio Funds, and investors in the Fund will be indirectly subject to their pro rata share of such fees based on the investment of the Fund in such underlying Portfolio Funds. |
|
|
|
|
|
Trading Advisors and MLAI |
| Management fees |
| A flat monthly charge of 0.1667% of 1% of the Portfolio Funds’ month-end net assets (a 2% annual rate), other than in respect of the Lynx Fund which is charged a 1% annual rate. The Trading Advisors have agreed to share a portion of their respective management fees with MLAI, at 25% or 50% sharing rates which vary among the Portfolio Funds, in order to defray costs in connection with and in consideration of BAC’s providing certain administrative and support services for the Fund. |
|
|
|
|
|
Trading Advisors and MLAI |
| Annual Performance fees |
| Each Portfolio Fund pays an annual performance fee to its Trading Advisor, at 20% or 25% which rate varies among the Portfolio Funds, with respect to the Fund’s units in the Portfolio Fund. The Portfolio Fund calculates performance fees based on the aggregate performance of all classes subject to the same rate of performance fees (“Class Group”), rather than on the performance of the Portfolio Fund as a whole or of specific units of a particular class. The performance fee is also paid on net redemptions. The performance fee is based on New Trading Profits. “New Trading Profits” equal any increase in the net asset value, prior to reduction for any accrued performance fee or sponsor fees, as of the current performance fee calculation date over the High Water Mark in respect of the Class Group. The “High Water Mark” equals the highest net asset value after reduction for the performance fee then paid, as of any preceding performance fee calculation date. Net asset value for purposes of calculating the performance fee does not include any interest income earned by the Portfolio Fund. Some of the Trading Advisors have agreed to share 25% |
|
|
|
| of their respective performance fees with MLAI in order to defray costs in connection with and in consideration of BAC’s providing certain administrative and support services for the Portfolio Fund. |
Regulation
The CFTC has delegated to the National Futures Association responsibility for the registration of “commodity trading advisors,” “commodity pool operators,” “futures commission merchants,” “introducing brokers” and their respective associated persons, and “floor brokers” and “floor traders.” The Commodity Exchange Act (“CEA”) requires commodity pool operators such as MLAI, commodity trading advisors such as the Trading Advisor and commodity brokers or FCMs such as MLPF&S to be registered and to comply with various reporting and record keeping requirements. CFTC regulations also require FCMs to maintain a minimum level of net capital. In addition, the CFTC and certain commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options contracts traded on U.S. commodities exchanges. All accounts owned or managed by the Trading Advisor will be combined for position limit purposes. The Trading Advisor could be required to liquidate positions in order to comply with such limits. Any such liquidation could result in substantial costs to the Fund. In addition, many futures exchanges impose limits beyond which the price of a futures contract may not trade during the course of a trading day, and there is a potential for a futures contract to reach its daily price limit for several days in a row, making it impossible for the Trading Advisor to liquidate a position and thereby experiencing dramatic losses. Currency forward contacts are not regulated as “swaps” under the CEA, but are subject to governmental regulation such as mandatory reporting and business conduct standards for swap dealers and major swap participants to the extent otherwise applicable to swaps under the CEA and applicable rules of the CFTC, see Item 1A “Risk Factors—F/X Forward Trading” and “—Regulatory Changes Could Restrict the Fund’s Operations.”
Other than in respect of the registration requirements pertaining to the Fund’s securities under Section 12(g) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”), the Fund is generally not subject to regulation by the Securities and Exchange Commission (the “SEC”). However, MLAI itself is registered as an “investment adviser” under the Investment Advisers Act of 1940. MLPF&S is also regulated by the SEC and the Financial Industry Regulatory Authority (“FINRA”).
(d) Financial Information about Geographic Areas
The Portfolio Funds do not engage in material operations in foreign countries, nor is a material portion of the Fund’s revenue derived from customers in foreign countries.
The Portfolio Funds may trade on a number of foreign commodity exchanges. The Portfolio Funds and the Fund do not engage in the sales of goods or services.
Item 1A: Risk Factors
Past Performance Not Necessarily Indicative of Future Results
There can be no assurance that the Trading Program will produce profitable results. The past performance of the Fund or Trading Advisor is not necessarily indicative of how the Fund or the Trading Advisor may perform in the future. There can be no assurance that the Fund will achieve its investment objectives or avoid substantial or total loss. The Fund may sustain losses in the future under market conditions in which it achieved gains in the past.
Volatile Markets; Highly Leveraged Trading
Trading in the futures and OTC markets typically results in volatile performance. Market price levels fluctuate dramatically and may be materially affected by unpredictable factors such as weather and governmental intervention. The low margin requirements normally required in futures and OTC trading permit an extremely high degree of economic leverage. This combination of leverage and volatility creates a high degree of risk. Additionally, although the Trading Advisors may initiate stop-loss orders on certain positions to limit this risk, there can be no assurance that any stop-loss order will be executed or, even if executed, that it will be executed at the desired price or time.
Importance of General Market Conditions
Neither MLAI nor the Trading Advisors can predict or control overall market or economic conditions. These conditions, however, can be expected to have a material effect on the performance of a Trading Advisor’s Trading Program.
The Fund may incur major losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving. The financing available to the Fund from its banks, dealers and other counterparties is typically reduced in disrupted markets, which may result in substantial losses to the Fund. Market disruptions may from time to time cause dramatic losses for the Fund and can result in the Trading Advisors’ strategies performing with unprecedented volatility and risk.
Managed Futures Trading Strategies and Trading Systems
Trend-Following Systems
Many managed futures trading systems are trend-following systems generally anticipate that a majority of their trades will be unprofitable and seek to achieve overall profitability by substantial gains made on a limited number of positions. These strategies are generally only successful in markets in which strong price trends occur. In stagnant markets in which these trends do not occur, or in “whipsaw markets” in which apparent trends develop but then quickly reverse, trend-following trading systems are likely to incur substantial losses. Furthermore, the profit potential of trend-following systems may be diminished by the changing character of the markets, which may make historical price data, on which technical trading systems are based, only marginally relevant to future market patterns.
Discretionary Strategies
The Trading Advisor may utilize a discretionary, rather than systematic, trading strategy. Discretionary trading advisors may allow emotion to affect trading decisions and may exhibit a lack of discipline in their trading that systematic strategies are designed to avoid. Relying on subjective trading judgment may produce less consistent results than those obtained by more systematic approaches.
Technical Analysis and Trading Systems
The Trading Advisor may employ technical analysis and/or technical trading systems. Technical strategies rely on information intrinsic to the market itself to determine trades, such as prices, price patterns, volume and volatility. These strategies can incur major losses when factors exogenous to the markets themselves, including political events, natural catastrophes, acts of war or terrorism, dominate the markets. The widespread use of technical trading systems frequently results in numerous managers’ attempting to execute similar trades at or about the same time, altering trading patterns and affecting market liquidity.
Fundamental Analysis
The Trading Advisor’s strategy may rely on fundamental analysis. Fundamental analysis is premised on the assumption that markets are not perfectly efficient, that informational advantages and mispricings do occur and
that econometric analysis can identify trading opportunities. Fundamental analysis may result in substantial losses if these economic factors are not correctly analyzed, not all relevant factors are identified and/or market forces cause mispricings to continue despite the traders having correctly identified mispricings. Fundamental analysis may also be more subject to human error and emotional factors than technical analysis.
Quantitative Trading
The Trading Advisor may engage in quantitative trading. Quantitative trading strategies are highly complex, and, for their successful application, require relatively sophisticated mathematical calculations and relatively complex computer programs. These programs anticipate that many of their trades may be unprofitable, seeking to achieve overall profitability through recognizing major profits on a limited number of positions while cutting losing positions quickly. These trading strategies are dependent upon various computer and telecommunications technologies and upon adequate liquidity in the markets traded. The successful execution of these strategies could be severely compromised by, among other things, a diminution in the liquidity of the markets traded, telecommunications failures, power loss and software-related “system crashes.” There are also periods when even an otherwise highly successful system incurs major losses due to external factors dominating the market, such as natural catastrophes and political interventions. Due to the high trading volume of quantitative trading strategies, the resulting transaction costs may be significant. In addition, the difference between the expected price of a trade and the price a trade is executed at, or “slippage,” may be significant and may result in losses.
Importance of Market Judgment
Although the Trading Advisor may use systematic or quantitative valuation models in evaluating the economic components of many prospective trades, the market judgment and discretion of the Trading Advisor’s personnel are often fundamental to the implementation of the Trading Program. The greater the importance of subjective factors, the more unpredictable a trading strategy becomes. The Trading Advisor may not have the same access to market information as do certain of its competitors, and the market decisions made by the Trading Advisor will, accordingly, often be based on less information and analysis than those available to competing investors.
F/X Forward Trading
The Fund may trade currencies in the F/X markets (“F/X Markets”), in addition to its trading in the futures markets. Prospective investors must recognize that the Fund’s OTC currency trading takes place in largely unregulated markets, rather than on futures exchanges, and may, but does not now, take place through “retail” F/X Markets subject to the jurisdiction of the CFTC or other regulatory bodies. The responsibility for performing under a particular transaction currently rests solely with the counterparties to that transaction, not with any exchange or clearinghouse. As a result, the Fund is exposed to the credit risk of the OTC counterparties with which it trades and deposits collateral, including that of MLIB as the F/X prime broker. See “Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges,” below.
The Fund is also subject to the risk that a forward counterparty may not settle a transaction in accordance with its terms, because the counterparty is unwilling or unable to do so, potentially resulting in significant losses. A counterparty’s failure to perform could occur in respect of an offsetting forward contract on which the Fund remains obligated to perform. The Fund will not, however, be excused from performance under any forward contracts into which it has entered due to defaults under other forward contracts. In addition, counterparties generally have the right to terminate trades under a number of circumstances including, for example, declines in the Fund’s net assets and certain “key person” events. Any premature termination of the Fund’s currency forward trades could result in significant losses for the Fund, because the Fund may be unable to quickly re-establish those trades and may only be able to do so at disadvantageous prices. Forward market counterparties are under no obligation to enter into forward transactions with the Fund, including transactions through which the Fund is attempting to liquidate open positions. In addition, the prices offered for the same forward contract may vary significantly among different forward market participants.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) amended the definition of “eligible contract participant,” and the Fund expects to meet the amended definition so long as its total assets exceed $10 million. If the Fund does not meet the definition of “eligible contract participant,” it could lead to the Fund’s bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees. “Retail forex” markets could also be significantly less liquid than the interbank market.
Moreover, the creditworthiness of the counterparties with whom the Fund may be required to trade could be significantly weaker than the creditworthiness of MLIB and the currency forward counterparties with which the Fund would otherwise engage for its currency forward transactions.
The imposition of credit controls by governmental authorities or the implementation of regulations pursuant to the Reform Act might limit forward trading to less than that which MLAI would otherwise recommend, to the possible detriment of the Fund.
Derivatives Risks Generally
The Trading Advisor uses derivative instruments, primarily futures and OTC F/X forwards, in implementing the Trading Program. The market for many types of these derivative instruments is comparatively illiquid and inefficient, creating the potential for substantial mispricings, as well as sustained deviations between theoretical and market value. In addition, the derivatives market is, in comparison to other markets, a relatively new market, and the events of 2008 and 2009, including the bailout of American International Group, Inc., demonstrated that even the most sophisticated market participants may misunderstand how the market in derivatives will perform during periods of unusual price volatility or instability, market illiquidity, or credit distress. The primary risks associated with the use of derivatives are model risk, market risk and counterparty risk.
The Fund’s investments in OTC derivatives are subject to greater risk of counterparty default and less liquidity than exchange-traded derivatives, although exchange-traded derivatives are subject to risk of failure of the exchange on which they are traded and the clearinghouse through which they are guaranteed. Counterparty risk includes not only the risk of default and failure to pay mark-to-market amounts and return risk premium, if any, but also the risk that the market value of OTC derivatives will fall if the creditworthiness of the counterparties to those derivatives weakens.
In addition, there are increased risks associated with offshore OTC trading, including the risk that assets held by offshore brokers and unregulated trading counterparties may not benefit from the protection afforded to customer funds deposited with regulated FCMs or broker-dealers.
The prices of derivative instruments can be highly volatile. Price movements of derivative instruments are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. In addition, governments from time to time intervene, directly and by regulation, in certain markets. This intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations.
There was substantial disruption in the derivatives markets related to the bankruptcy of Lehman Brothers Holdings, Inc. and uncertainty relating to the government bailout of American International Group, Inc. This disruption and uncertainty can cause substantial losses if transactions are prematurely terminated, especially due to default when payment may be delayed or completely lost. Uncertainties in the derivatives markets continue due to proposed regulatory initiatives, new regulations requiring OTC derivatives clearing, and allegations of inappropriate behavior by market participants to cause or avoid payments under credit default swaps. See “Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges” in this section below.
Trading in Options
The Trading Advisor may trade options on futures contracts or options on F/X forward contracts. Although successful options trading requires many of the same skills as successful futures and forward trading, the risks involved are different. For example, the assessment of near-term market volatility, which is directly reflected in the price of outstanding options, can be of much greater significance in trading options than it is in many long-term futures strategies. The use of options can be extremely expensive if market volatility is incorrectly predicted. A purchaser of options is exposed to the risk of loss of the entire premium paid; a seller, or writer, of call options is exposed to the risk of theoretically unlimited loss, and the seller of put options is exposed to the risk of substantial loss far in excess of the premium received.
Exchange of Futures for Physicals
The Trading Advisor may engage in exchange of futures for physical (“EFP”) transactions on behalf of the Fund. As is the case with executing a transaction purely on an exchange or purely in the OTC market, EFP transactions, which are done partially on a futures exchange and partially in the OTC market, involve higher transaction costs.
Physical Commodities Trading in General
The Trading Advisor may engage in transactions that involve taking delivery of physical commodity assets such as agricultural commodities, freight, coal, oil, gas and electric power. These investments are subject to risks that are not typically directly applicable to other financial instruments, such as: destruction; loss; industry-specific regulation, such as pollution control regulation; operating failures; and work stoppages.
Physical commodities trading, as opposed to commodity futures trading, is substantially unregulated, and if the Fund engages in this type of trading, it will not be assured the same access to these markets as it might have in a regulated context.
Exchange Rate Risks; Currency Hedging
The Fund may invest and trade in currencies for speculative and/or hedging purposes. In addition, the Units are denominated, and the Fund values its assets, in U.S. dollars and the Fund may trade and invest in assets denominated in non-U.S. currencies.
Currency-related investments are subject to the risk that the value of a particular currency will change in relation to the U.S. dollar, and the exchange rates of currencies may be highly volatile. Among the factors that may affect currency values are direct government intervention, which is often intended specifically to change currency values, trade balances, the level of short-term interest rates, differences in the relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments.
While the Trading Advisor may from time-to-time hedge a certain amount of risks associated with currency trading, it is under no obligation to do so. Even if it chooses to do so, it is not economically feasible and often simply not possible to fully or effectively hedge exchange-rate risks. In a number of cases, otherwise highly successful investment funds have incurred significant, and in certain instances total, losses due to the decline in the value of the currencies in which their investments were denominated or in which they were invested for speculative purposes.
Off-Balance Sheet Risk
The Fund may invest in financial instruments with off-balance sheet risk. These instruments include futures and forward contracts, swaps and options contracts sold short. In entering into these contracts, there exists a market risk that the contracts may be significantly influenced by conditions, such as interest rate volatility, resulting in the contracts’ becoming less valuable. An off-balance sheet risk is associated with a financial instrument if it exposes the investor to a loss in excess of the investor’s recognized asset carrying value in the financial instrument, if any, or if the ultimate liability associated with the financial instrument has the potential to exceed the amount that the investor recognizes as a liability in the investor’s statement of assets and liabilities.
Recently it has been alleged that certain interest rate benchmarks that underlie various swap agreements have been manipulated. In entering into swap agreements, the Fund relies on the integrity of interest rates and other benchmarks. If the level of these benchmarks is artificially influenced by market participants, the Fund could suffer losses.
Increased Assets Under Management
There appears to be a tendency for the rates of return achieved by managed futures advisors to decline as assets under management increase. The Trading Advisor has not agreed to limit the amount of additional equity which it may manage and may be at or near its all-time high in assets under management.
The aggregate capital committed to the managed futures sector in general is also at an all-time high.
The more capital that is traded in these markets, or that is committed to any one particular strategy, the greater the competition for a finite number of positions and the less the profit potential for all strategies or for any particular strategy.
Dependence on Key Individuals
The success of the Fund is significantly dependent upon the expertise of one or more of the Trading Advisor’s principals. The loss of any one of these principal’s services may have a substantial impact on the performance of the Fund and may result in liquidation of the Fund which, if made at an inopportune time, may result in losses for the Fund.
Trading Advisor Risk
The Fund is subject to the risk of the bad judgment, negligence or misconduct of the Trading Advisor. There have been a number of instances in recent years in which private investment funds have incurred substantial losses due to manager misconduct.
Redemptions by Other Trading Advisor Fund Investors
Investors in other funds or accounts implementing the Trading Program or similar strategies may be able to redeem their investments more frequently or on less prior notice than Investors in the Fund. Redemptions by investors in these funds or withdrawals from accounts that have less restrictive redemption terms could have a material adverse impact on the Fund’s portfolio and could disadvantage Investors in certain circumstances.
Trade Execution Risk
The Trading Advisor may use executing brokers unaffiliated with BAC. In the event of a trading error, the Fund may have no effective remedy against these executing brokers.
Changes in Trading Program
The Trading Advisor may make material changes to the Trading Program without the knowledge of MLAI. It is virtually impossible for MLAI to detect these changes, particularly given the confidential, proprietary, systematic and/or quantitative nature of the Trading Program strategies, customarily referred to as “black box strategies.”
Illiquid Markets
Certain positions held by the Portfolio Funds may become illiquid, preventing a Trading Advisor from acquiring positions otherwise indicated by its Trading Program or making it impossible for the Trading Advisor to close out positions against which the market is moving.
Most U.S. futures exchanges limit fluctuations in some futures contract prices during a single day by regulations referred to as “daily price limits.” During a single trading day no trades may be executed in these contracts at prices beyond the daily price limit. Once the price of a futures contract has increased or decreased to the limit point, positions can be neither taken nor liquidated. Futures prices have occasionally moved to the daily limit for several consecutive days with little or no trading. Similar occurrences could prevent the Fund from promptly liquidating unfavorable positions and subject the Fund to substantial losses. Also, the CFTC or exchanges may suspend or limit trading. Trading on non-U.S. exchanges may also be subject to price fluctuation limits and subject to periods of significant illiquidity. Trading in the F/X Markets and other OTC markets is not subject to daily limits, although OTC trading is also subject to periods of significant illiquidity.
Possible Effects of Speculative Position Limits
The CFTC and U.S. commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options on futures contracts traded on U.S. commodities exchanges. All proprietary or client accounts owned or managed by each Trading Advisor are combined for purposes of calculating position limits. A
Trading Advisor could be required to liquidate positions held for the Fund, or may not be able to fully implement its Trading Program, in order to comply with such limits, even though the positions attributable to the Fund do not themselves trigger the position limits or are a small portion of the aggregate positions directed by the Trading Advisor. Position limits could force the Fund to liquidate profitable positions, result in a tracking error between the Fund’s portfolio and the Trading Advisor’s standard trading program and cause the Fund to incur substantial transaction costs.
In October 2011, the CFTC adopted rules that, among other things, established a separate position limits regime for 28 so-called “exempt,” i.e., metals and energy, and agricultural futures and options contracts and their economically equivalent swap contracts. Position limits in spot months are generally set at 25% of the official estimated deliverable supply of the underlying commodity while position limits related to non-spot months are generally set at 10% of open interest in the first 25,000 contracts and 2.5% of the open interest thereafter. On September 28, 2012, the United States District Court for the District of Columbia issued an opinion that vacated these rules. There remains considerable uncertainty about what, if any, actions the CFTC may take in response to the court’s decision and whether the CFTC will publish any future rulemakings addressing “exempt” futures and options contracts and their economically equivalent swap contracts. In addition, the Reform Act significantly expands the CFTC’s authority to impose position limits with respect to futures contracts, options on futures contracts, swaps that are economically equivalent to futures or options on futures, swaps that are traded on a regulated exchange and certain swaps that perform a significant price discovery function.
MLAI is subject to CFTC-imposed position limits through its control of the Fund, and will have to aggregate positions of certain FuturesAccess Funds in determining whether the position limits are reached. The rules adopted by the CFTC in October 2011, in addition to expanding the contracts subject to CFTC-imposed position limits, narrow certain exemptions from the aggregation requirements, making it more likely that a party such as the Fund hiring multiple trading advisors may be required to aggregate the positions controlled by the various trading advisors. Although MLAI may claim exemption from the aggregation requirements for the majority of FuturesAccess Funds, the aggregation of certain FuturesAccess Funds is required. If the aggregation is required in the Fund’s case, the Trading Advisor may not be able to implement the Trading Program for the Fund in the same manner as for its other clients, causing the Fund to underperform other accounts utilizing the Trading Program, or the Fund may have to liquidate trading positions when the Trading Advisor would otherwise not advise doing so, resulting in losses to the Fund.
Any of the regulations discussed above could adversely affect the Fund in certain circumstances.
Trading on Non-U.S. Exchanges
The Trading Advisors may trade on futures exchanges outside the United States on behalf of the Fund. Trading on non-U.S. exchanges is not regulated by any U.S. government agency and may involve certain risks not applicable to trading on U.S. exchanges.
For example, some non-U.S. exchanges, in contrast to U.S. exchanges, are “principals’ markets” similar to the forward markets in which performance is the responsibility only of the individual member with whom the Fund has entered into a futures contract and not of any exchange or clearing corporation. In these cases, the Fund will be subject to the risk of the inability or refusal to perform with respect the individual member with whom the Fund has entered into a futures contract.
Trading on non-U.S. exchanges may involve the additional risks of expropriation, burdensome or confiscatory taxation (including taxes on specific trading activities), moratoriums, exchange or investment controls and political or diplomatic disruptions, each of which might materially adversely affect the Fund’s trading activities. The Fund could incur substantial losses trading on non-U.S. exchanges to which it would not have been subject had the Trading Advisors limited their trading to U.S. markets.
The U.S. tax treatment of non-U.S. futures trading may be adverse compared to the tax treatment of U.S. futures trading. The profits and losses derived from trading non-U.S. futures and options will generally be denominated in non-U.S. currencies. Consequently, the Fund will be subject to exchange-rate risk in trading those contracts.
Foreign Exchange Controls
Governments in non-U.S. markets may impose F/X controls at will, making it impossible to convert local currency into other currencies. Should the Fund trade on futures exchanges outside the United States or otherwise invest in non-U.S. markets, these controls may effectively prevent Fund capital from being removed from a country where its futures contracts and other investments are traded. In addition, certain countries do not have fully convertible currencies as a matter of policy, adding cost or delay to the trading of currency investments by the Fund. The imposition of currency controls by a non-U.S. government may negatively affect performance and liquidity in the Fund as capital becomes trapped in that country.
Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges
The Fund is exposed to the risk that the bankruptcy or insolvency of its trading counterparties and other entities holding Fund assets — such as broker-dealers, FCMs, futures exchanges, clearinghouses, banks or other financial institutions, particularly MLPF&S, MLIB and their affiliates — could result in all or a substantial portion of the Fund’s assets being lost permanently or impounded for a matter of years pending the final disposition of legal proceedings. A bankruptcy or insolvency of this kind, or the threat of one, may cause MLAI to decide to liquidate the Fund or suspend, limit or otherwise alter trading, perhaps causing the Fund to miss significant profit opportunities.
MLAI has historically preferred BAC affiliates in clearing and prime brokerage relationships, and as a result has maintained the vast majority of its cash in futures brokerage accounts with its affiliates. This policy exposes the Fund to the specific credit risk of these BAC affiliates because balances in these accounts are not subject to FDIC or other form of deposit insurance against loss from failure of the BAC affiliate. Balances maintained with clearing brokers are, however, subject to the protections for customer segregated and secured accounts discussed below.
MLAI’s policy that the Trading Advisor use MLPF&S and MLIB may increase the risks of insolvency described above by preventing the diversification of brokers and counterparties used by the Fund.
Although the Fund must use MLPF&S and MLIB, in certain circumstances MLAI may have limited control over the selection of counterparties by the Fund. The Fund also may not be restricted from dealing with any particular counterparty, regulated or unregulated, or from concentrating any or all of its transactions with a single counterparty or limited number of counterparties or from initially transacting, clearing or brokering with a non-BAC broker and from “giving up” those trades to MLPF&S or the MLIB. In addition, to the extent assets are held at entities other than MLPF&S and the MLIB, MLAI may have limited ability to assess the extent to which the Trading Advisor maintains the Fund’s assets in unregulated accounts subject to the bankruptcy of the counterparties holding such assets.
The following paragraphs discuss the various uses of the Fund’s assets and the risks of loss — in addition to losses from trading — associated with each use.
Margin for Commodities Trading. Although MLAI believes that MLPF&S is appropriately capitalized to function as the Fund’s FCM, cash posted as margin for commodities trading with MLPF&S is nevertheless subject to the risk of insolvency of MLPF&S. The Fund maintains cash deposits with MLPF&S in segregated accounts, which are required by CFTC regulations to be separate from its proprietary assets for futures and options trading on U.S. exchanges. Funds held in segregated accounts are intended to be readily identifiable as customer funds in the event of MLPF&S’s bankruptcy and are expected to be reserved for distribution to customers of MLPF&S. If MLPF&S did not comply with the segregation requirement, however, the assets of the Fund might not be fully protected. Even given proper segregation, the Fund may be subject to a risk of loss of its funds because, although CFTC regulations require that FCMs invest customer funds only in certain types of interest bearing financial instruments, these instruments are still subject to credit and market risk. As a result, if the instruments in which customer segregated funds are invested lose value, there would be a shortfall in customer segregated funds held by MLPF&S in the event of MLPF&S’s insolvency.
In addition, there may be a shortfall in customer segregated funds held by MLPF&S in the event of a substantial default by one or more of MLPF&S’s other customers. If MLPF&S becomes insolvent, only a pro rata share of all property available for distribution to all of MLPF&S’s customers would be recovered, whether or not another customer also defaults and even if this property is held in segregated accounts.
In addition, if BAC directly or indirectly owns 10% or more of the Fund, which would typically result from BAC’s providing seed capital to the Fund to help ensure that the Fund has enough capital to commence trading activities, the Fund’s account at MLPF&S would be considered a “proprietary account” under CFTC regulations and
the Fund’s assets, including assets used to margin U.S. exchange-traded futures and options, would not be protected as “customer funds.” If MLPF&S became insolvent at a time when the Fund’s assets on deposit with MLPF&S were not considered customer funds, the Fund would likely lose significantly more as a result of the bankruptcy than would otherwise be the case. Where BAC provides seed capital it also establishes a regular redemption schedule providing for withdrawal of the capital when the Fund capitalization reaches a certain level. Once BAC’s ownership of a FuturesAccess Fund falls below 10%, the account of the FuturesAccess Fund will be considered a customer account rather than a proprietary account.
MLPF&S is required by CFTC regulations to maintain in a secured account the amount required to margin futures and options positions established on non-U.S. futures exchanges in order to protect customer funds in the event of MLPF&S’s bankruptcy. While the secured account requirement relating to trading non-U.S. futures exchanges is similar in some respects to the segregation requirement relating to trading on U.S. futures exchanges, they are not identical and there are special risks associated with funds maintained in a secured account. Funds held in a secured account may be commingled with funds of non-U.S. persons and, because they are by necessity held in a non-U.S. jurisdiction, are subject to different insolvency laws and customer protection regulations, which may be less favorable than U.S. laws and regulations. Moreover, funds transferred from a secured account to a non-U.S. FCM, exchange or clearing agency to margin trading on non-U.S. futures exchanges are not subject to the same limitations on permissible investments as funds held by U.S. FCMs. In addition to these special risks, funds held in a secured account are subject to risks comparable to those applicable to funds in a segregated account, namely that MLPF&S will not comply with the relevant regulations, that investments in the account will decline in value, of a shortfall in the event of the default by another customer, and that, if, BAC owns 10% or more of the Fund, the Fund’s assets will not be protected as “customer funds.”
If the Fund deposits assets with a particular entity and those assets are not held in segregation or in a secured account as “customer funds” for any of the reasons discussed above, in the event of the entity’s insolvency the Fund could be a general creditor of the entity even with regard to property specifically traceable to the Fund’s account. As a result, the Fund’s claim would be paid along with the claims of other general creditors and the Fund would be subject to the loss of its entire deposit with the party.
Collateral for OTC Transactions. Cash pledged as collateral with MLIB or any other OTC prime broker for OTC trades is subject to the risk of the insolvency of the prime broker. Unlike cash posted as margin for commodities trading on regulated exchanges is not required to be segregated or held in a secured account.
Bank Deposits. The vast majority of the cash deposited with banks would be in excess of the limits on federal insurance for deposits, and thus not insured by the FDIC, and would be subject to the risk of bank failure. However, amounts held in non-interest bearing demand deposit accounts are fully insured under current law through the end of 2012. Beginning in January 2013, only up to $250,000 held in non-interest bearing demand deposit accounts will be insured under the FDIC’s general deposit insurance rules.
Cash in Securities Brokerage Accounts. Cash in securities brokerage accounts with MLPF&S is subject to the risk of insolvency of MLPF&S. While brokers are required to keep customer cash in a special reserve account for the benefit of customers, it is possible that a shortfall could exist in this account, in which case the Fund, along with other customers, would suffer losses. The Securities Investor Protection Corporation provides protection against these losses, up to a limit, but the cash deposited by the Fund in a securities brokerage account would far exceed the limit.
Direct Investments. Fund investments in U.S. government securities are backed by the full faith and credit of the U.S. government. To the extent the Fund makes investments in non-government securities it would be subject to a risk of loss that depended on the type of security.
Recent events underscore the risks described above. Significant losses incurred by many investment funds in relation to the bankruptcy and/or administration of Lehman Brothers Holdings Inc. and its affiliates illustrate the risks incurred in both derivatives trading and custody/brokerage arrangements. The ongoing bankruptcy liquidation of MF Global Inc. also demonstrates that even customer funds subject to segregation requirements may be difficult for an FCM to locate, and customer funds held by an FCM in bankruptcy may not be distributed promptly and may be subject to a lengthy claims process.
Insolvency of Dual-Registered Entities
MLPF&S is registered as both an FCM with the CFTC and as a broker-dealer with the SEC. Other counterparties and entities holding Fund assets may also be entities registered with both the SEC and the CFTC. In the event of an insolvency of a dual-registered entity, the distribution of CFTC regulated customer funds would be governed by the CFTC’s bankruptcy rules and Chapter 7 of the U.S. Bankruptcy Code, while the distribution of SEC regulated customer funds would be governed by the Securities Investor Protection Act of 1970 and applicable provisions of the U.S. Bankruptcy Code. Uncertainty exists regarding the application of the two separate insolvency regimes to the insolvency of a single entity.
Risk of Loss Due to Trading Errors and the Failure of Trading Systems
The Fund is subject to the risk of failures or inaccuracies in the trading systems of the Trading Advisors. Trades for the Portfolio Funds may be placed or executed in error due to technical errors such as coding or programming errors in software, hardware problems and inaccurate pricing information provided by third parties or execution errors such as keystroke, typographic or inadvertent drafting errors. Many exchanges have adopted “obvious error” rules that prevent the entry and execution of trades more than a specified amount away from the current best price on the exchange. However, these rules may not be in place on the exchanges on which the Trading Advisors trade on behalf of the Fund and may not be enforced even if in effect. These rules likely would not prevent the entry and execution of a trade entered close to the market price but at the wrong size.
The Fund is subject to the risk of the unavailability or failure of the computer systems of the exchanges on which the Trading Advisors trade. Any such errors or failures could subject the Fund to substantial losses.
Market Disruptions; Government Intervention
The global financial markets have recently experienced pervasive and fundamental disruptions that have led to extensive and unprecedented governmental intervention. Government intervention has in certain cases been implemented on an “emergency” basis, suddenly and substantially eliminating market participants’ ability, at least on a temporary basis, to continue to implement certain strategies or manage the risk of their outstanding positions. In addition, as one would expect given the complexities of the financial markets and the limited time frame within which governments have taken action, these interventions typically have been difficult to interpret and unclear in scope and application, resulting in confusion and uncertainty. This confusion and uncertainty in itself has been materially detrimental to the efficient functioning of the markets as well as previously successful investment strategies.
The Fund may incur substantial losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted, the availability of credit is restricted or the ability to trade or invest capital, including exiting existing positions, is otherwise impaired. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving. The financing available to private investment funds such as the Fund from banks, dealers and other counterparties is typically reduced in disrupted markets. Any reduction may result in substantial losses to the Fund. Market disruptions may from time to time cause dramatic losses for the Fund and these events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
Regulatory Changes Could Restrict the Fund’s Operations
The Fund implements speculative, highly leveraged strategies. From time to time there is governmental scrutiny of these types of strategies and political pressure to regulate their activities. The CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of futures, forward and options transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, as described in further detail above under “Possible Effects of Speculative Position Limits,” the U.S. Congress and the CFTC have expressed the concern that speculative traders, and commodity funds in particular, may be responsible for unwarranted and dramatic swings in the prices of commodities and the CFTC enacted position limits designed to address such speculative trading. Non-U.S. governments have from time to time blamed the declines of their currencies
on speculative currency trading and imposed restrictions on speculative trading in certain markets.
Regulatory changes could adversely affect the Fund by restricting the markets in which it trades, otherwise limiting its trading and/or increasing the taxes to which Investors are subject. Adverse regulatory initiatives could develop suddenly and without notice.
The Reform Act includes provisions that substantially increase the regulation of the OTC derivatives markets. Regulations implementing the Reform Act may require that a substantial portion of derivatives currently traded over the counter be executed in regulated markets and submitted for clearing to regulated clearinghouses. Those OTC derivatives may include OTC F/X forwards and swaps which may be traded by the Fund.
The U.S. Treasury has determined that F/X forwards and swaps will not be regulated as ‘swaps” under the CEA, although these will remain subject to mandatory reporting and business conduct standards for swap dealers and major swap participants to the extent otherwise applicable to swaps under the CEA and applicable rules of the CFTC. However, the Reform Act may require other OTC derivatives traded by the Fund, if any, to be cleared or traded on a regulated exchange. This may subject the Fund, the Trading Advisor, MLAI and/or the Fund’s counterparties to additional regulatory requirements including minimum initial and variation margin requirements, minimum capital requirements, registration with the SEC and/or the CFTC, new business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest and other regulatory burdens. Certain of these regulatory requirements could impact the Fund, the Trading Advisor, or MLAI directly, while others could impact the Fund, the Trading Advisor or MLAI indirectly due to the impact of the requirements on the Fund’s counterparties. These new regulatory burdens would further increase the counterparties’ costs, which are expected to be passed through to other market participants such as the Fund in the form of higher fees and less favorable dealer marks. They may also render certain strategies in which the Trading Advisor might otherwise engage impossible, or so costly that they will no longer be economical, to implement.
Banking Regulation
BAC is subject to certain U.S. banking laws, including the Bank Holding Company Act of 1956, and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). If BAC directly, or indirectly through its subsidiaries, makes capital contributions to the Fund in an aggregate amount such that BAC may be deemed to control the Fund for purposes of the BHCA, or if BAC is otherwise deemed to control the Fund for purposes of the BHCA, the Fund may be subject to certain investment and other limitations.
In addition, recent legislative changes in the United States are relevant to BAC, the Fund and its investors. On July 21, 2010, President Obama signed into law the Reform Act. The Reform Act includes certain provisions (known as the “Volcker Rule”) that restrict a banking entity, such as BAC, from acquiring or retaining any equity, partnership or other ownership interest in, or sponsoring, a Covered Fund, such as the Fund, and prohibit certain transactions between Covered Funds, on the one hand, and BAC, on the other. The Reform Act includes certain provisions known as the “Volcker Rule” that restricts a banking entity, such as BAC, from acquiring or retaining any equity, partnership or other ownership interest in, or sponsoring a private equity fund or hedge fund or similar fund as the regulatory agencies may determine (each a “Covered Fund”), such as the Fund, unless permitted under a special exemption. The Volcker Rule prohibits certain transactions between Covered Funds, on the one hand, and BAC, on the other.
However, the Volcker Rule permits a banking entity, such as BAC, to organize and offer Covered Funds, including serving as a general partner, managing member or trustee of such fund and in any manner selecting or controlling (or having employees, officers, directors or agents who constitute) a majority of the directors, trustees or management of such fund, if certain conditions are cumulatively satisfied. Those conditions include, among other things, the requirements that: (a) the banking entity provides bona fide trust, fiduciary or investment advisory services; (b) the Covered Fund is organized and offered only in connection with the provision of bona fide trust, fiduciary or investment advisory services and is offered only to persons that are customers of such services of the banking entity; (c) the banking entity does not acquire or retain an equity interest, partnership interest or other ownership interest in the Covered Fund except for a de minimis investment (generally an investment by a banking entity in a Covered Fund will be considered de minimis if the investment is not more than 3% of the total ownership interest of the fund and is immaterial to the banking entity (as defined by rule), but in no case may the aggregate of all of the interests of the banking entity in all such funds exceed 3% of the Tier 1 capital of the banking entity); (d) (i) neither the banking entity that serves, directly or indirectly, as the investment manager, investment adviser or sponsor to a Covered Fund or that organizes and offers a Covered Fund, nor any affiliate of the banking entity, may enter into a transaction with the
Covered Fund or with any other Covered Fund that is controlled by such Covered Fund, that would be a “covered transaction”, as defined in section 23A of the Federal Reserve Act (including, among other things, a loan or extension of credit to an affiliate, a purchase of or an investment in securities issued by an affiliate, a purchase of assets from an affiliate, and the issuance of a guarantee or letter of credit on behalf of an affiliate), with the Covered Fund, as if the banking entity and the affiliate thereof were a member bank and the Covered Fund were an affiliate thereof and (ii) the banking entity that serves, directly or indirectly, as the investment manager, investment adviser or sponsor to a Covered Fund or that organizes and offers a Covered Fund complies with section 23B of the Federal Reserve Act (which generally requires that the terms of transactions be substantially the same, or at least as favorable to the banking entity, as those prevailing at the time for comparable transactions with non-affiliated companies) as if the banking entity were a member bank and such Covered Fund were an affiliate thereof; (e) the banking entity does not, directly or indirectly, guarantee, assume or otherwise insure the obligations or performance of the Covered Fund or of any fund in which the Covered Fund invests; (f) the banking entity does not share with the Covered Fund, for corporate, marketing, promotional or other purposes, the same name or a variation of the same name; (g) no director or employee of the banking entity takes or retains an equity interest, partnership interest or other ownership interest in the Covered Fund, except for any director or employee of the banking entity who is directly engaged in providing investment advisory or other services to the Covered Fund; and (h) the banking entity discloses to prospective and actual investors in the Covered Fund, in writing, that any losses in such fund are borne solely by investors in the Covered Fund and not by the banking entity, and otherwise complies with any additional rules designed to ensure that losses in the Covered Fund are borne solely by investors in such fund and not by the banking entity.
In addition, no transaction, class of transactions or activity that is otherwise allowed under the Volcker Rule will be permitted by a banking entity if it would (i) involve or result in a material conflict of interest (as such term will be defined by rule) between the banking entity and its clients, customers or counterparties; (ii) result, directly or indirectly, in a material exposure by the banking entity to high-risk assets or high-risk trading strategies (both such terms, as will be defined by rule); (iii) pose a threat to the safety and soundness of such banking entity; or (iv) pose a threat to the financial stability of the United States.
On October 11, 2011, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC and the SEC issued for public comment a joint notice containing the proposed rule. Though the final Volcker Rule has not yet been issued, the effective date was July 21, 2012. Within two years after the effective date, a banking entity is required to bring its activities and investments into compliance with the Volcker Rule. The Federal Reserve may grant up to three one-year extensions of the compliance transition period if the extension would be consistent with the purposes of the Volcker Rule and would not be detrimental to the public interest. For certain “illiquid funds”, an additional extension of up to five-years may be available to the extent necessary to fulfill a contractual obligation that was in effect on May 1, 2010.
Although it is not certain what form the final rules will take or the impact such final rules will have on the Fund or BAC’s relationship to the Fund, certain impacts are likely. At the termination of the applicable compliance transition period, all activities and investments of BAC will have to comply with the Volcker Rule. That means, for example, that some or all of the following changes may have to be implemented: (1) BAC’s investment in the Fund will have to be reduced to no more than 3% of the ownership interests in the Fund, if applicable; (2) BAC will have to reduce its aggregate investments in all Covered Funds to the maximum amount permitted by the final rules, which amount cannot be more than 3% of BAC’s Tier 1 capital; (3) to the extent that any directors or employees of BAC not directly engaged in providing investment advisory or other services to the Fund hold any Units in the Fund, those Units will have to be redeemed or transferred; and/or (4) any “covered transactions” between the Fund, on the one hand, and BAC, on the other, will have to be terminated. In addition, the trading and other investment opportunities of the Fund may be limited in order to comply with the restriction on material conflicts of interest, or to prevent a material exposure by BAC to high-risk assets or high-risk strategies.
Redemptions by BAC or certain of its employees as a result of, or in connection with, the Volcker Rule could require the Fund to liquidate positions sooner than would otherwise be desirable, which could adversely affect the performance of the Fund. In addition, regardless of the period of time in which such redemptions occur, the resulting reduction in the Fund’s net assets, and thus in its equity bases, could make it more difficult for the Fund to diversify its holdings and achieve its investment objective. Substantial redemptions by BAC or certain of its employees could cause the Fund to distribute a considerable percentage of its liquid assets, leaving the Fund’s remaining assets, and its remaining Units, comparatively less liquid, and could significantly increase the remaining Investors’ pro rata shares of the Fund’s expenses. Similarly, BAC or certain of its employees may be required to transfer their Units to a
third party as a result of, or in connection with, the Volcker Rule and such transfers may have an adverse effect on the Fund.
In addition to the changes in the regulation of U.S. markets described above, it is impossible to predict what additional interim or permanent governmental regulations, restrictions or limitations may be imposed, whether in the U.S. or non-U.S. markets, on, for example: (x) the markets in which the Fund invests and the strategies of the Fund; and (y) BAC. Such measures could have a material and adverse effect on the Fund, including expenses that result from increased compliance requirements.
Concerns Regarding the Downgrade of the U.S. Credit Rating and the Sovereign Debt Crisis in Europe
On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. This downgrade could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on the investments made by the Fund and thereby the Fund’s financial condition and liquidity. The ultimate impact on global markets and the Fund’s business is unpredictable.
Global markets and economic conditions have been negatively affected by the ability of E.U. member states to service their sovereign debt obligations. The continued uncertainty over the outcome of the E.U.’s financial support programs and financial troubles could have an adverse effect on the Fund.
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2: Properties
The Fund and the Portfolio Funds do not use any physical properties in the conduct of their business.
The Fund’s offices are the administrative offices of MLAI (Merrill Lynch Alternative Investments LLC, Four World Financial Center, 11TH. Floor, 250 Vesey Street, New York, New York 10080). MLAI performs administrative services for the Fund from MLAI’s offices.
Item 3: Legal Proceedings
None
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 5(a)
(a) Market Information:
There is no established public trading market for the Units, and none is likely to develop. Investors generally may redeem any or all of their Units, in whole or fractional Units, effective as of the 15th calendar day of each
month and/or (ii) the last calendar day of each month (each a “Redemption Date”) upon providing notice eight business days prior to the 1st and 16th day of the month. MLAI, at any time in its discretion, may discontinue allowing redemptions as of the 15th calendar day of each month on a going forward basis.
(b) Holders:
As of December 31, 2012, there were 7,752 holders of Units, none of whom owned 5% or more of the Fund’s Units.
(c) Dividends:
Fund has not made and does not contemplate making any distributions on the Units.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
(e) Performance Graph
Not applicable.
(f) Recent Sales of Unregistered Securities:
Units are privately offered and sold to “accredited investors” (as defined in Rule 501(a) under the Securities Act in reliance on the exemption from registration provided by Section 4(2) of the Securities act and Rule 506 thereunder. The selling agent of the Units was MLPF&S.
CLASS A
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | 619,671 |
| 541,103 |
| $ | 1.1452 |
|
Feb-12 |
| 689,320 |
| 600,453 |
| 1.1480 |
| ||
Mar-12 |
| 817,050 |
| 702,960 |
| 1.1623 |
| ||
Apr-12 |
| 318,825 |
| 280,557 |
| 1.1364 |
| ||
May-12 |
| 616,200 |
| 538,213 |
| 1.1449 |
| ||
Jun-12 |
| 1,039,350 |
| 887,574 |
| 1.1710 |
| ||
Jul-12 |
| 323,700 |
| 290,419 |
| 1.1146 |
| ||
Aug-12 |
| 73,125 |
| 62,463 |
| 1.1707 |
| ||
Sep-12 |
| 818,025 |
| 709,905 |
| 1.1523 |
| ||
Oct-12 |
| 70,200 |
| 62,813 |
| 1.1176 |
| ||
Nov-12 |
| 1,097,741 |
| 1,034,936 |
| 1.0655 |
| ||
Dec-12 |
| 80,784 |
| 75,917 |
| 1.0617 |
| ||
Jan-13 |
| 186,225 |
| 174,221 |
| 1.0689 |
| ||
Feb-13 |
| 68,250 |
| 62,420 |
| 1.0934 |
| ||
CLASS C
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | 2,910,402 |
| 2,548,290 |
| $ | 1.1421 |
|
Feb-12 |
| 3,476,983 |
| 3,039,587 |
| 1.1439 |
| ||
Mar-12 |
| 1,919,000 |
| 1,658,313 |
| 1.1572 |
| ||
Apr-12 |
| 2,955,000 |
| 2,614,119 |
| 1.1304 |
| ||
May-12 |
| 1,928,000 |
| 1,694,200 |
| 1.1380 |
| ||
Jun-12 |
| 1,164,005 |
| 1,000,951 |
| 1.1629 |
| ||
Jul-12 |
| 1,402,060 |
| 1,267,685 |
| 1.1060 |
| ||
Aug-12 |
| 380,000 |
| 327,389 |
| 1.1607 |
| ||
Sep-12 |
| 1,532,441 |
| 1,342,480 |
| 1.1415 |
| ||
Oct-12 |
| 764,000 |
| 690,653 |
| 1.1062 |
| ||
Nov-12 |
| 832,667 |
| 793,932 |
| 1.0538 |
| ||
Dec-12 |
| 1,192,616 |
| 1,132,611 |
| 1.0491 |
| ||
Jan-13 |
| 383,000 |
| 362,896 |
| 1.0554 |
| ||
Feb-13 |
| 1,181,000 |
| 1,094,938 |
| 1.0786 |
| ||
CLASS D
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | — |
| — |
| $ | 1.3729 |
|
Feb-12 |
| 1,500,000 |
| 1,088,534 |
| 1.3780 |
| ||
Mar-12 |
| — |
| — |
| 1.3969 |
| ||
Apr-12 |
| 50,000 |
| 36,566 |
| 1.3674 |
| ||
May-12 |
| — |
| — |
| 1.3794 |
| ||
Jun-12 |
| — |
| — |
| 1.4126 |
| ||
Jul-12 |
| — |
| — |
| 1.3462 |
| ||
Aug-12 |
| — |
| — |
| 1.4158 |
| ||
Sep-12 |
| — |
| — |
| 1.3952 |
| ||
Oct-12 |
| — |
| — |
| 1.3549 |
| ||
Nov-12 |
| 2,003,408 |
| 1,548,947 |
| 1.2934 |
| ||
Dec-12 |
| — |
| — |
| 1.2904 |
| ||
Jan-13 |
| — |
| — |
| 1.3008 |
| ||
Feb-13 |
| — |
| — |
| 1.3322 |
| ||
CLASS I
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | 9,999 |
| 8,210 |
| $ | 1.2179 |
|
Feb-12 |
| 154,996 |
| 126,911 |
| 1.2213 |
| ||
Mar-12 |
| 72,117 |
| 58,304 |
| 1.2369 |
| ||
Apr-12 |
| 340,000 |
| 281,061 |
| 1.2097 |
| ||
May-12 |
| 15,000 |
| 12,303 |
| 1.2192 |
| ||
Jun-12 |
| 1,158,821 |
| 928,990 |
| 1.2474 |
| ||
Jul-12 |
| 15,000 |
| 12,630 |
| 1.1877 |
| ||
Aug-12 |
| 14,925 |
| 11,960 |
| 1.2479 |
| ||
Sep-12 |
| — |
| — |
| 1.2286 |
| ||
Oct-12 |
| — |
| — |
| 1.1921 |
| ||
Nov-12 |
| 10,017 |
| 8,811 |
| 1.1369 |
| ||
Dec-12 |
| 39,956 |
| 35,208 |
| 1.1332 |
| ||
Jan-13 |
| — |
| — |
| 1.1413 |
| ||
Feb-13 |
| 10,000 |
| 8,563 |
| 1.1678 |
| ||
CLASS D1
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | — |
| — |
| $ | 1.2253 |
|
Feb-12 |
| — |
| — |
| 1.2298 |
| ||
Mar-12 |
| — |
| — |
| 1.2467 |
| ||
Apr-12 |
| — |
| — |
| 1.2204 |
| ||
May-12 |
| — |
| — |
| 1.2311 |
| ||
Jun-12 |
| — |
| — |
| 1.2607 |
| ||
Jul-12 |
| — |
| — |
| 1.2014 |
| ||
Aug-12 |
| — |
| — |
| 1.2635 |
| ||
Sep-12 |
| — |
| — |
| 1.2452 |
| ||
Oct-12 |
| — |
| — |
| 1.2092 |
| ||
Nov-12 |
| — |
| — |
| 1.1543 |
| ||
Dec-12 |
| — |
| — |
| 1.1516 |
| ||
Jan-13 |
| — |
| — |
| 1.1609 |
| ||
Feb-13 |
| — |
| — |
| 1.1890 |
| ||
CLASS M
|
| Subscription |
|
|
| ||||
|
| Amount |
| Units |
| NAV (1) |
| ||
Jan-12 |
| $ | 409,999 |
| 404,219 |
| $ | 1.0143 |
|
Feb-12 |
| — |
| — |
| 1.0180 |
| ||
Mar-12 |
| — |
| — |
| 1.0320 |
| ||
Apr-12 |
| — |
| — |
| 1.0102 |
| ||
May-12 |
| — |
| — |
| 1.0191 |
| ||
Jun-12 |
| — |
| — |
| 1.0436 |
| ||
Jul-12 |
| — |
| — |
| 0.9946 |
| ||
Aug-12 |
| — |
| — |
| 1.0460 |
| ||
Sep-12 |
| — |
| — |
| 1.0308 |
| ||
Oct-12 |
| — |
| — |
| 1.0010 |
| ||
Nov-12 |
| — |
| — |
| 0.9556 |
| ||
Dec-12 |
| 11,988,232 |
| 12,575,508 |
| 0.9533 |
| ||
Jan-13 |
| — |
| — |
| 0.9610 |
| ||
Feb-13 |
| — |
| — |
| 0.9842 |
| ||
(1) Beginning of the month Net Asset Value
Item 5(b)
Not applicable.
Item 5(c)
Not applicable.
Item 6: Selected Financial Data
The following selected financial data has been derived from the financial statements of the Fund.
Statement of Operations |
| For the year ended |
| For the year ended |
| For the year ended |
| For the year ended |
| For the year ended |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Trading profit (loss) |
|
|
|
|
|
|
|
|
|
|
| |||||
Realized, net |
| $ | 20,681,999 |
| $ | 15,968,361 |
| $ | 16,360,846 |
| $ | (4,551,852 | ) | $ | 9,202,478 |
|
Change in unrealized, net |
| (51,734,232 | ) | (92,022,075 | ) | 92,218,885 |
| (57,300,048 | ) | 71,910,257 |
| |||||
Total trading profit (loss) |
| (31,052,233 | ) | (76,053,714 | ) | 108,579,731 |
| (61,851,900 | ) | 81,112,735 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
INVESTMENT INCOME: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest |
| — |
| 187 |
| 3,003 |
| 100,827 |
| 97,972 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
| |||||
Sponsor fees |
| 15,170,255 |
| 20,592,497 |
| 18,769,349 |
| 14,993,578 |
| 6,953,728 |
| |||||
Other |
| 1,444,939 |
| 1,518,474 |
| 1,451,397 |
| 1,066,617 |
| 651,887 |
| |||||
Total Expenses |
| 16,615,194 |
| 22,110,971 |
| 20,220,746 |
| 16,060,195 |
| 7,605,615 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
NET INVESTMENT INCOME (LOSS) |
| (16,615,194 | ) | (22,110,784 | ) | (20,217,743 | ) | (15,959,368 | ) | (7,507,643 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
NET INCOME (LOSS) |
| $ | (47,667,427 | ) | $ | (98,164,498 | ) | $ | 88,361,988 |
| $ | (77,811,268 | ) | $ | 73,605,092 |
|
Balance Sheet Data |
| December 31, 2012 |
| December 31, 2011 |
| December 31, 2010 |
| December 31, 2009 |
| December 31, 2008 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Members’ Capital |
| $ | 543,069,764 |
| $ | 909,115,762 |
| $ | 1,027,411,886 |
| $ | 868,301,244 |
| $ | 678,698,088 |
|
Net Asset Value per Class A Unit |
| 1.0689 |
| 1.1452 |
| 1.2523 |
| 1.1397 |
| 1.2561 |
| |||||
Net Asset Value per Class C Unit |
| 1.0554 |
| 1.1421 |
| 1.2615 |
| 1.1596 |
| 1.2908 |
| |||||
Net Asset Value per Class D Unit |
| 1.3008 |
| 1.3729 |
| 1.4789 |
| 1.3259 |
| 1.4379 |
| |||||
Net Asset Value per Class I Unit |
| 1.1413 |
| 1.2179 |
| 1.3265 |
| 1.2024 |
| 1.3197 |
| |||||
Net Asset Value per Class D1 Unit |
| 1.1609 |
| 1.2253 |
| 1.3199 |
| 1.1833 |
| 1.2847 |
| |||||
Net Asset Value per Class DA Unit |
| — |
| — |
| — |
| — |
| 1.0282 |
| |||||
Net Asset Value per Class M Unit |
| 0.9610 |
| 1.0143 |
| — |
| — |
| — |
| |||||
See notes to financial statements
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and report performance to investors throughout the year is useful information for the members of the Fund.
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2007 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 0.9588 |
| $ | 0.9090 |
| $ | 0.9705 |
| $ | 1.0272 |
| $ | 1.0093 |
| $ | 1.0278 |
| ||||||
2008 |
| $ | 1.0416 |
| $ | 1.1508 |
| $ | 1.1243 |
| $ | 1.1183 |
| $ | 1.1597 |
| $ | 1.2164 |
| $ | 1.1364 |
| $ | 1.1075 |
| $ | 1.1220 |
| $ | 1.1807 |
| $ | 1.2232 |
| $ | 1.2561 |
|
2009 |
| $ | 1.2473 |
| $ | 1.2484 |
| $ | 1.2081 |
| $ | 1.1729 |
| $ | 1.1861 |
| $ | 1.1601 |
| $ | 1.1456 |
| $ | 1.1597 |
| $ | 1.1737 |
| $ | 1.1342 |
| $ | 1.1797 |
| $ | 1.1397 |
|
2010 |
| $ | 1.1036 |
| $ | 1.1154 |
| $ | 1.1686 |
| $ | 1.1825 |
| $ | 1.1447 |
| $ | 1.1423 |
| $ | 1.1244 |
| $ | 1.1654 |
| $ | 1.1926 |
| $ | 1.2352 |
| $ | 1.1991 |
| $ | 1.2523 |
|
2011 |
| $ | 1.2333 |
| $ | 1.2546 |
| $ | 1.2138 |
| $ | 1.2554 |
| $ | 1.1959 |
| $ | 1.1576 |
| $ | 1.1988 |
| $ | 1.1885 |
| $ | 1.1825 |
| $ | 1.1281 |
| $ | 1.1305 |
| $ | 1.1452 |
|
2012 |
| $ | 1.1480 |
| $ | 1.1623 |
| $ | 1.1364 |
| $ | 1.1449 |
| $ | 1.1710 |
| $ | 1.1146 |
| $ | 1.1707 |
| $ | 1.1523 |
| $ | 1.1176 |
| $ | 1.0655 |
| $ | 1.0617 |
| $ | 1.0689 |
|
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2007 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 1.0432 |
| $ | 0.9993 |
| $ | 0.9467 |
| $ | 1.0099 |
| $ | 1.0680 |
| $ | 1.0486 |
| $ | 1.0668 |
| |||||
2008 |
| $ | 1.0803 |
| $ | 1.1926 |
| $ | 1.1642 |
| $ | 1.1570 |
| $ | 1.1988 |
| $ | 1.2564 |
| $ | 1.1727 |
| $ | 1.1420 |
| $ | 1.1559 |
| $ | 1.2154 |
| $ | 1.2581 |
| $ | 1.2909 |
|
2009 |
| $ | 1.2807 |
| $ | 1.2808 |
| $ | 1.2385 |
| $ | 1.2014 |
| $ | 1.2139 |
| $ | 1.1863 |
| $ | 1.1705 |
| $ | 1.1839 |
| $ | 1.1972 |
| $ | 1.1559 |
| $ | 1.2012 |
| $ | 1.1596 |
|
2010 |
| $ | 1.1220 |
| $ | 1.1329 |
| $ | 1.1860 |
| $ | 1.1991 |
| $ | 1.1598 |
| $ | 1.1564 |
| $ | 1.1374 |
| $ | 1.1779 |
| $ | 1.2043 |
| $ | 1.2463 |
| $ | 1.2089 |
| $ | 1.2615 |
|
2011 |
| $ | 1.2413 |
| $ | 1.2617 |
| $ | 1.2196 |
| $ | 1.2604 |
| $ | 1.1997 |
| $ | 1.1602 |
| $ | 1.2005 |
| $ | 1.1892 |
| $ | 1.1822 |
| $ | 1.1269 |
| $ | 1.1283 |
| $ | 1.1421 |
|
2012 |
| $ | 1.1439 |
| $ | 1.1572 |
| $ | 1.1304 |
| $ | 1.1380 |
| $ | 1.1629 |
| $ | 1.1060 |
| $ | 1.1607 |
| $ | 1.1415 |
| $ | 1.1062 |
| $ | 1.0538 |
| $ | 1.0491 |
| $ | 1.0554 |
|
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2007 |
| n/a |
| n/a |
| n/a |
| $ | 1.0339 |
| $ | 1.0719 |
| $ | 1.1206 |
| $ | 1.0757 |
| $ | 1.0212 |
| $ | 1.0916 |
| $ | 1.1569 |
| $ | 1.1381 |
| $ | 1.1603 |
| |||
2008 |
| $ | 1.1774 |
| $ | 1.3025 |
| $ | 1.2741 |
| $ | 1.2689 |
| $ | 1.3175 |
| $ | 1.3836 |
| $ | 1.2942 |
| $ | 1.2629 |
| $ | 1.2810 |
| $ | 1.3497 |
| $ | 1.4001 |
| $ | 1.4396 |
|
2009 |
| $ | 1.4312 |
| $ | 1.4343 |
| $ | 1.3898 |
| $ | 1.3509 |
| $ | 1.3679 |
| $ | 1.3395 |
| $ | 1.3244 |
| $ | 1.3424 |
| $ | 1.3603 |
| $ | 1.3161 |
| $ | 1.3706 |
| $ | 1.3259 |
|
2010 |
| $ | 1.2855 |
| $ | 1.3008 |
| $ | 1.3645 |
| $ | 1.3825 |
| $ | 1.3400 |
| $ | 1.3389 |
| $ | 1.3196 |
| $ | 1.3694 |
| $ | 1.4031 |
| $ | 1.4551 |
| $ | 1.4143 |
| $ | 1.4789 |
|
2011 |
| $ | 1.4583 |
| $ | 1.4854 |
| $ | 1.4388 |
| $ | 1.4900 |
| $ | 1.4212 |
| $ | 1.3773 |
| $ | 1.4281 |
| $ | 1.4176 |
| $ | 1.4123 |
| $ | 1.3490 |
| $ | 1.3535 |
| $ | 1.3729 |
|
2012 |
| $ | 1.3780 |
| $ | 1.3969 |
| $ | 1.3674 |
| $ | 1.3794 |
| $ | 1.4126 |
| $ | 1.3462 |
| $ | 1.4158 |
| $ | 1.3952 |
| $ | 1.3549 |
| $ | 1.2934 |
| $ | 1.2904 |
| $ | 1.3008 |
|
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2007 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 1.0444 |
| $ | 1.0017 |
| $ | 0.9500 |
| $ | 1.0146 |
| $ | 1.0743 |
| $ | 1.0559 |
| $ | 1.0756 |
| |||||
2008 |
| $ | 1.0905 |
| $ | 1.2052 |
| $ | 1.1779 |
| $ | 1.1719 |
| $ | 1.2157 |
| $ | 1.2756 |
| $ | 1.1920 |
| $ | 1.1622 |
| $ | 1.1777 |
| $ | 1.2397 |
| $ | 1.2848 |
| $ | 1.3199 |
|
2009 |
| $ | 1.3110 |
| $ | 1.3126 |
| $ | 1.2708 |
| $ | 1.2341 |
| $ | 1.2484 |
| $ | 1.2214 |
| $ | 1.2066 |
| $ | 1.2219 |
| $ | 1.2370 |
| $ | 1.1957 |
| $ | 1.2440 |
| $ | 1.2024 |
|
2010 |
| $ | 1.1647 |
| $ | 1.1774 |
| $ | 1.2340 |
| $ | 1.2492 |
| $ | 1.2096 |
| $ | 1.2075 |
| $ | 1.1890 |
| $ | 1.2328 |
| $ | 1.2619 |
| $ | 1.3075 |
| $ | 1.2696 |
| $ | 1.3265 |
|
2011 |
| $ | 1.3068 |
| $ | 1.3298 |
| $ | 1.2870 |
| $ | 1.3315 |
| $ | 1.2688 |
| $ | 1.2286 |
| $ | 1.2727 |
| $ | 1.2622 |
| $ | 1.2563 |
| $ | 1.1989 |
| $ | 1.2018 |
| $ | 1.2179 |
|
2012 |
| $ | 1.2213 |
| $ | 1.2369 |
| $ | 1.2097 |
| $ | 1.2192 |
| $ | 1.2474 |
| $ | 1.1877 |
| $ | 1.2479 |
| $ | 1.2286 |
| $ | 1.1921 |
| $ | 1.1369 |
| $ | 1.1332 |
| $ | 1.1413 |
|
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2007 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 0.9600 |
| $ | 0.9113 |
| $ | 0.9741 |
| $ | 1.0324 |
| $ | 1.0157 |
| $ | 1.0356 |
| ||||||
2008 |
| $ | 1.0508 |
| $ | 1.1624 |
| $ | 1.1371 |
| $ | 1.1324 |
| $ | 1.1758 |
| $ | 1.2348 |
| $ | 1.1550 |
| $ | 1.1271 |
| $ | 1.1432 |
| $ | 1.2045 |
| $ | 1.2495 |
| $ | 1.2848 |
|
2009 |
| $ | 1.2773 |
| $ | 1.2800 |
| $ | 1.2403 |
| $ | 1.2057 |
| $ | 1.2208 |
| $ | 1.1955 |
| $ | 1.1820 |
| $ | 1.1981 |
| $ | 1.2141 |
| $ | 1.1746 |
| $ | 1.2233 |
| $ | 1.1833 |
|
2010 |
| $ | 1.1473 |
| $ | 1.1609 |
| $ | 1.2178 |
| $ | 1.2339 |
| $ | 1.1959 |
| $ | 1.1949 |
| $ | 1.1777 |
| $ | 1.2222 |
| $ | 1.2522 |
| $ | 1.2986 |
| $ | 1.2623 |
| $ | 1.3199 |
|
2011 |
| $ | 1.3015 |
| $ | 1.3257 |
| $ | 1.2841 |
| $ | 1.3298 |
| $ | 1.2684 |
| $ | 1.2292 |
| $ | 1.2746 |
| $ | 1.2652 |
| $ | 1.2604 |
| $ | 1.2040 |
| $ | 1.2080 |
| $ | 1.2253 |
|
2012 |
| $ | 1.2298 |
| $ | 1.2467 |
| $ | 1.2204 |
| $ | 1.2311 |
| $ | 1.2607 |
| $ | 1.2014 |
| $ | 1.2635 |
| $ | 1.2452 |
| $ | 1.2092 |
| $ | 1.1543 |
| $ | 1.1516 |
| $ | 1.1609 |
|
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS DA
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||
2008 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 1.0282 |
| |||||||||
2009 |
| $ | 1.0222 |
| $ | 1.0244 |
| $ | 0.9927 |
| $ | 0.9649 |
| $ | 0.9770 |
| $ | 0.9568 |
| $ | 0.9460 |
| $ | 0.9588 |
| $ | 0.9716 |
| n/a |
| n/a |
| n/a |
| |
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS M
|
| Jan. |
| Feb. |
| Mar. |
| Apr. |
| May |
| June |
| July |
| Aug. |
| Sept. |
| Oct. |
| Nov. |
| Dec. |
| ||||||||||||
2011 |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| $ | 1.0143 |
| |||||||||||
2012 |
| $ | 1.0180 |
| $ | 1.0320 |
| $ | 1.0102 |
| $ | 1.0191 |
| $ | 1.0436 |
| $ | 0.9946 |
| $ | 1.0460 |
| $ | 1.0308 |
| $ | 1.0010 |
| $ | 0.9556 |
| $ | 0.9533 |
| $ | 0.9610 |
|
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: July 1, 2007
Aggregate Subscriptions $230,770,947
Current Capitalization: $85,424,977
Worst Monthly Drawdown(2): (6.58)% (July 2008)
Worst Peak-to-Valley Drawdown(3): (15.47)% (January 2009 - December 2012)
Net Asset Value per Unit for Class A, December 31, 2012: $1.0689
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| 2008 |
|
January |
| 0.24 | % | (1.52 | )% | (3.17 | )% | 0.70 | % | 1.34 | % |
February |
| 1.25 |
| 1.73 |
| 1.07 |
| 0.09 |
| 10.48 |
|
March |
| (2.23 | ) | (3.25 | ) | 4.77 |
| (3.22 | ) | (2.29 | ) |
April |
| 0.75 |
| 3.43 |
| 1.19 |
| (2.92 | ) | (0.54 | ) |
May |
| 2.28 |
| (4.74 | ) | (3.20 | ) | 1.13 |
| 3.70 |
|
June |
| (4.82 | ) | (3.21 | ) | (0.21 | ) | (2.19 | ) | 4.89 |
|
July |
| 5.04 |
| 3.56 |
| (1.57 | ) | (1.25 | ) | (6.58 | ) |
August |
| (1.58 | ) | (0.86 | ) | 3.65 |
| 1.23 |
| (2.54 | ) |
September |
| (3.01 | ) | (0.50 | ) | 2.33 |
| 1.21 |
| 1.31 |
|
October |
| (4.82 | ) | (4.60 | ) | 3.57 |
| (3.37 | ) | 5.23 |
|
November |
| (0.19 | ) | 0.21 |
| (2.92 | ) | 4.01 |
| 3.60 |
|
December |
| 0.68 |
| 1.31 |
| 4.44 |
| (3.39 | ) | 2.69 |
|
Compound Annual |
| (6.66 | )% | (8.55 | )% | 9.88 | % | (9.27 | )% | 22.21 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since July 1, 2007 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since July 1, 2007 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is 6.89%.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: June 1, 2007
Aggregate Subscriptions: $1,010,471,832
Current Capitalization: $362,231,029
Worst Monthly Drawdown(2): (6.66)% (July 2008)
Worst Peak-to-Valley Drawdown(3): (18.73)% (January 2009 - December 2012)
Net Asset Value per Unit for Class C, December 31, 2012: $1.0554
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| 2008 |
|
January |
| 0.16 | % | (1.60 | )% | (3.24 | )% | (0.79 | )% | 1.27 | % |
February |
| 1.16 |
| 1.64 |
| 0.97 |
| 0.01 |
| 10.40 |
|
March |
| (2.32 | ) | (3.33 | ) | 4.69 |
| (3.30 | ) | (2.38 | ) |
April |
| 0.67 |
| 3.34 |
| 1.10 |
| (3.00 | ) | (0.62 | ) |
May |
| 2.19 |
| (4.82 | ) | (3.28 | ) | 1.04 |
| 3.61 |
|
June |
| (4.89 | ) | (3.29 | ) | (0.29 | ) | (2.27 | ) | 4.80 |
|
July |
| 4.95 |
| 3.47 |
| (1.64 | ) | (1.33 | ) | (6.66 | ) |
August |
| (1.66 | ) | (0.94 | ) | 3.56 |
| 1.14 |
| (2.62 | ) |
September |
| (3.09 | ) | (0.58 | ) | 2.24 |
| 1.12 |
| 1.22 |
|
October |
| (4.90 | ) | (4.68 | ) | 3.49 |
| (3.45 | ) | 5.15 |
|
November |
| (0.28 | ) | 0.12 |
| (3.00 | ) | 3.92 |
| 3.51 |
|
December |
| 0.60 |
| 1.22 |
| 4.35 |
| (3.46 | ) | 2.61 |
|
Compound Annual |
| (7.59 | )% | (9.46 | )% | 8.79 | % | (10.17 | )% | 21.00 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since June 1, 2007 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since June 1, 2007 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is 5.54%.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2, 2007
Aggregate Subscriptions: $173,962,921
Current Capitalization: $26,839,468
Worst Monthly Drawdown(2): (6.46)% (July 2008)
Worst Peak-to-Valley Drawdown(3): (13.40)% (May 2011 - December 2012)
Net Asset Value per Unit for Class D, December 31, 2012: $1.3008
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| 2008 |
|
January |
| 0.37 | % | (1.39 | )% | (3.05 | )% | (0.58 | )% | 1.47 | % |
February |
| 1.37 |
| 1.86 |
| 1.19 |
| 0.22 |
| 10.63 |
|
March |
| (2.11 | ) | (3.13 | ) | 4.90 |
| (3.10 | ) | (2.18 | ) |
April |
| 0.88 |
| 3.56 |
| 1.32 |
| (2.80 | ) | (0.41 | ) |
May |
| 2.41 |
| (4.62 | ) | (3.07 | ) | 1.26 |
| 3.83 |
|
June |
| (4.70 | ) | (3.09 | ) | (0.08 | ) | (2.08 | ) | 5.02 |
|
July |
| 5.17 |
| 3.69 |
| (1.44 | ) | (1.13 | ) | (6.46 | ) |
August |
| (1.45 | ) | (0.74 | ) | 3.77 |
| 1.36 |
| (2.42 | ) |
September |
| (2.89 | ) | (0.38 | ) | 2.46 |
| 1.33 |
| 1.43 |
|
October |
| (4.70 | ) | (4.48 | ) | 3.71 |
| (3.25 | ) | 5.36 |
|
November |
| (0.06 | ) | 0.33 |
| (2.80 | ) | 4.14 |
| 3.73 |
|
December |
| 0.81 |
| 1.43 |
| 4.57 |
| (3.26 | ) | 2.82 |
|
Compound Annual |
| (5.25 | )% | (7.17 | )% | 11.54 | % | (7.90 | )% | 24.06 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 2, 2007 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 2, 2007 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is 30.08%.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: June 1, 2007
Aggregate Subscriptions: $149,422,131
Current Capitalization: $42,987,295
Worst Monthly Drawdown(2): (6.55)% (July 2008)
Worst Peak-to-Valley Drawdown(3): (14.89)% (May 2011 - December 2012)
Net Asset Value per Unit for Class I, December 31, 2012: $1.1413
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| 2008 |
|
January |
| 0.28 | % | (1.48 | )% | (3.14 | )% | (0.67 | )% | 1.39 | % |
February |
| 1.28 |
| 1.76 |
| 1.09 |
| 0.12 |
| 10.52 |
|
March |
| (2.20 | ) | (3.22 | ) | 4.81 |
| (3.18 | ) | (2.27 | ) |
April |
| 0.79 |
| 3.46 |
| 1.23 |
| (2.89 | ) | (0.51 | ) |
May |
| 2.31 |
| (4.71 | ) | (3.17 | ) | 1.16 |
| 3.74 |
|
June |
| (4.79 | ) | (3.18 | ) | (0.17 | ) | (2.16 | ) | 4.93 |
|
July |
| 5.07 |
| 3.59 |
| (1.53 | ) | (1.21 | ) | (6.55 | ) |
August |
| (1.54 | ) | (0.83 | ) | 3.68 |
| 1.27 |
| (2.50 | ) |
September |
| (2.98 | ) | (0.47 | ) | 2.36 |
| 1.24 |
| 1.33 |
|
October |
| (4.79 | ) | (4.57 | ) | 3.61 |
| (3.34 | ) | 5.26 |
|
November |
| (0.16 | ) | 0.24 |
| (2.89 | ) | 4.05 |
| 3.65 |
|
December |
| 0.71 |
| 1.34 |
| 4.47 |
| (3.35 | ) | 2.72 |
|
Compound Annual |
| (6.29 | )% | (8.18 | )% | 10.32 | % | (8.90 | )% | 22.71 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since June 1, 2007 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since June 1, 2007 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is 14.13%.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS D1 UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: July 1, 2007
Aggregate Subscriptions: $54,534,373
Current Capitalization: $13,615,676
Worst Monthly Drawdown(2): (6.46)% (July 2008)
Worst Peak-to-Valley Drawdown(3): (13.40)% (May 2011 - December 2012)
Net Asset Value per Unit for Class D1, December 31, 2012: $1.1609
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
| 2010 |
| 2009 |
| 2008 |
|
January |
| 0.37 | % | (1.39 | )% | (3.04 | )% | (0.58 | )% | 1.47 | % |
February |
| 1.37 |
| 1.86 |
| 1.19 |
| 0.21 |
| 10.62 |
|
March |
| (2.11 | ) | (3.13 | ) | 4.90 |
| (3.10 | ) | (2.18 | ) |
April |
| 0.88 |
| 3.56 |
| 1.32 |
| (2.79 | ) | (0.41 | ) |
May |
| 2.40 |
| (4.62 | ) | (3.08 | ) | 1.25 |
| 3.83 |
|
June |
| (4.70 | ) | (3.09 | ) | (0.08 | ) | (2.07 | ) | 5.02 |
|
July |
| 5.17 |
| 3.69 |
| (1.44 | ) | (1.13 | ) | (6.46 | ) |
August |
| (1.45 | ) | (0.74 | ) | 3.78 |
| 1.36 |
| (2.42 | ) |
September |
| (2.89 | ) | (0.38 | ) | 2.45 |
| 1.34 |
| 1.43 |
|
October |
| (4.70 | ) | (4.48 | ) | 3.71 |
| (3.25 | ) | 5.36 |
|
November |
| (0.07 | ) | 0.33 |
| (2.80 | ) | 4.15 |
| 3.74 |
|
December |
| 0.81 |
| 1.43 |
| 4.56 |
| (3.27 | ) | 2.83 |
|
Compound Annual |
| (5.26 | )% | (7.17 | )% | 11.54 | % | (7.90 | )% | 24.07 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since July 1, 2007 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since July 1, 2007 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is 16.09%.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS DA UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: December 1, 2008
Aggregate Subscriptions: $56,445,187
Current Capitalization: $ 0
Worst Monthly Drawdown(2): (3.09)% (March 2009)
Worst Peak-to-Valley Drawdown(3): (7.99)% (January 2009 - September 2009)
Net Asset Value per Unit for Class DA, December 31, 2012: $0
Monthly Rates of Return (4)
Month |
| 2009 |
| 2008 |
|
January |
| (0.58 | )% | — |
|
February |
| 0.22 |
| — |
|
March |
| (3.09 | ) | — |
|
April |
| (2.80 | ) | — |
|
May |
| 1.25 |
| — |
|
June |
| (2.07 | ) | — |
|
July |
| (1.13 | ) | — |
|
August |
| 1.35 |
| — |
|
September |
| 1.34 |
| — |
|
October |
| — |
| — |
|
November |
| — |
| — |
|
December |
| — |
| 2.82 | % |
Compound Annual |
| (5.50 | )% | 2.82 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since December 1, 2008 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since December 1, 2008 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date of liquidation total return is (2.84)%. Class DA was liquidated on September 30, 2009.
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
(CLASS M UNITS) (5)
December 31, 2012
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: December 1, 2011
Aggregate Subscriptions: $12,593,306
Current Capitalization: $11,971,319
Worst Monthly Drawdown(2): (4.70)% (October 2012)
Worst Peak-to-Valley Drawdown(3): (8.86)% (August 2012 - December 2012)
Net Asset Value per Unit for Class M, December 31, 2012: $0.9610
Monthly Rates of Return (4)
Month |
| 2012 |
| 2011 |
|
January |
| 0.36 | % | — |
|
February |
| 1.38 |
| — |
|
March |
| (2.11 | ) | — |
|
April |
| 0.88 |
| — |
|
May |
| 2.40 |
| — |
|
June |
| (4.70 | ) | — |
|
July |
| 5.17 |
| — |
|
August |
| (1.45 | ) | — |
|
September |
| (2.89 | ) | — |
|
October |
| (4.70 | ) | — |
|
November |
| (0.07 | ) | — |
|
December |
| 0.81 |
| 1.43 | % |
Compound Annual |
| (5.25 | )% | 1.43 | % |
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since December 1, 2011 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since December 1, 2011 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit . The inception to date total return is (3.90)%.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operational Overview
The Portfolio Funds are unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses, as well as gains.
The following table is an allocation by sector as a percentage of net unrealized profits and losses on open positions for the Fund as a whole taking into account the positions at the underlying Portfolio Fund Level and the allocation to each underlying Portfolio Fund.
December 31, 2012
|
|
|
| Percent of |
| |
|
| Net Unrealized |
| Net Unrealized |
| |
Commodity Industry |
| Profit (Loss) |
| Profit (Loss) |
| |
Sector |
| on Open Positions |
| on Open Positions |
| |
|
|
|
|
|
| |
Agriculture |
| 122,139 |
| 2.10 | % | |
Currencies |
| 4,200,764 |
| 72.08 | % | |
Energy |
| 952,845 |
| 16.35 | % | |
Interest rates |
| 1,171,251 |
| 20.10 | % | |
Metals |
| (3,602,935 | ) | -61.83 | % | |
Stock indices |
| 2,983,895 |
| 51.20 | % | |
|
|
|
|
|
| |
Total |
| $ | 5,827,959 |
| 100.00 | % |
While there can be no assurance that the Portfolio Funds will be profitable under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Portfolio Funds and consequently the Fund.
Results of Operations/Performance Summary
This performance summary is an outline description of how the Fund performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time.
Year ended December 31, 2012
|
| Total Trading |
| |
|
| Profit (Loss) |
| |
Transtrend |
| $ | 1,952,715 |
|
Altis |
| (7,127,827 | ) | |
Winton |
| (6,017,214 | ) | |
Aspect |
| (6,877,343 | ) | |
John Locke |
| (3,772,153 | ) | |
BlueTrend |
| (1,622,871 | ) | |
Tudor |
| (2,593,904 | ) | |
Lynx |
| (4,993,636 | ) | |
|
|
|
| |
|
| $ | (31,052,233 | ) |
The Fund experienced a net trading loss for the year ended December 31, 2012 of $31,052,233.
In the first two months of 2012, the investment environment was one of risk seeking. Equities and commodities generally rallied and the U.S. dollar was down. Despite a bias towards risk, fixed income did not sell off in any significant way. The Portfolio Fund Trading Advisors generally spent part of January adjusting to this environment. By February, their portfolios were well positioned to take advantage of these trends. The Fund was up 1.3% in these two months. At the start of March, the Fund continued to be long risk assets and long fixed income. The only exceptions to the rule were short positions in natural gas, the euro, and some industrial metal and agricultural markets. This positioning suffered losses in March due to reversals. The most significant reversal in March was seen in fixed income, at the longer end of the curve. Yields on notes and bonds jumped higher in the middle of the month and given that most of the Portfolio Funds had sizeable positions resulted in losses. While yields backed down towards month end, the damage was done as many Portfolio Funds Trading Advisors had already reduced positions, failing to benefit from the latter moves. Currencies also saw some reversals as the U.S. dollar generally strengthened, in particular against commodity currencies such as the Australian dollar and the Canadian dollar. With Portfolio Funds typically holding long positions in these currencies, losses were posted to the Fund. Short positions in the euro were generally unprofitable as the currency ended relatively flat against the U.S. dollar despite poor economic performance in the Eurozone. Many commodities joined the reversal theme. Following two good months, commodity markets fell in March. These included many oil markets and precious metals, two sectors where the Portfolio Funds Trading Advisors had built up long positions, as a result, the reversals posted losses. In other sectors, trends seem to continue. Natural gas, where the Portfolio Funds Trading Advisors have been short for a while, had another very big leg down. For many of the Portfolio Funds Trading Advisors, this was the best performing market. Some industrial metal and agricultural markets also experienced profits from short positions due to falling prices. Equity indices generally saw positive performance. The Portfolio Funds Trading Advisors tended to be long, with the largest allocations to the U.S. and European indices. U.S. equity prices were up for the quarter, continuing the trend and producing gains. But equity prices in Europe were not able to keep up the momentum and fell, posting losses. The Portfolio Funds Trading Advisors also saw some profits from long positions in Japan and Asia.
The Fund started the second quarter long risk assets and long fixed income. April and May were positive months, thanks to strong gains in fixed income, small gains in currencies and relatively smaller losses in equity indices and commodities. The Portfolio Funds Trading Advisors repositioned their portfolios during these two months to match the prevailing investment environment, shorting risk assets and increasing long positions in fixed income. June saw reversals in every asset class causing significant losses across asset classes that erased the gains from April and May. In fixed income, the Portfolio Funds Trading Advisors started the second quarter long most markets. As the economic outlook began to deteriorate in April, yields started to head lower. In response, the Portfolio Funds Trading Advisors pushed their bets by adding to their long positions, resulting in strong gains as yields continued to make new lows. Gains were especially strong in May, as many fixed income markets reached new lows in yields. June saw a slight give back of these profits as yields backed-up due to improving sentiment. In the three remaining asset classes, trend followers generally lost money, with equities posting the worst returns. As a result of strong upward trends in the first quarter, the Portfolio Funds Trading Advisors were positioned long equities in several geographies. In April, global equity indices were down, driven by growing debt related concerns in Europe as well as signs of slowing in various economies. These downward moves continued during May, accelerating in many markets. As the Portfolio Funds posted losses, the Portfolio Funds Trading Advisors started to reduce their long positions. Given that most trend-followers in the Fund use medium- to long-term signals, their reaction to reversals is not immediate and it takes some time to fully switch direction. It was not until late May that most Portfolio Funds Trading Advisors had finally exited most of their losing long positions and to go short. In June, equities recovered some, just as the Portfolio Funds Trading Advisors had established short positioning, adding to losses in this asset class. Commodities suffered losses as well and followed a similar path as equity indices. The Portfolio Funds Trading Advisors started the quarter with a long bias. The big reversals in May caused losses and the Portfolio Funds Trading Advisors spent the month repositioning for a new bearish environment. As the markets recovered in June, Portfolio Funds sustained further losses on the newly initiated short positions. The biggest losses came in May from long positions in oil, metals and agricultural markets. Smaller losses were sustained in June in a choppy market environment. Foreign exchange trading was also unprofitable. Starting the quarter, exposure to currencies was relatively low. In May, as the U.S. dollar rallied in a safe-haven play, the Portfolio Funds Trading Advisors adopted a long bias. Initially, this served them well in May as several currencies depreciated against the U.S. dollar. However, June saw a reversal as the European Union moved in a positive direction. As risk seeking returned to markets, the euro rallied against the U.S. dollar. The Portfolio Funds Trading Advisors had accumulated sizeable euro shorts in May, as it had exhibited a strong downward trend. With most currencies rallying
against the U.S. dollar in June, losses were sustained. The asset class as a whole ended the quarter with negative performance, primarily due to euro losses.
The Fund started the third quarter with a bearish, risk-off posture. Overall exposure levels were moderate and the largest exposures were in long fixed income positions. In foreign exchange, short positions in the euro were the dominant exposure. Other foreign exchange exposure included small short positions in the Canadian dollar, British pound, and Swiss franc and small long positions in the Japanese yen and Australian dollar. Equity exposure was limited, but long biased due to long positions in the U.S. Elsewhere, equity exposure was more mixed with a combination of long and short positions resulting in a small net long position in European equities and a small net short position in Asian equities. Commodity exposure was short biased in most sectors except grains. Fixed income was the largest exposure and best-performing asset class during the third quarter. Within fixed income, the most common exposures and largest contributors to performance were long positions. In July, long positions in both bonds and shorter-dated instruments were profitable. As yields backed-up later in the quarter, long bond positions resulted in losses in both August and September, but gains still outweighed losses. The Portfolio Funds remained long biased throughout the quarter. However, the size of positions was reduced as reversals made this a more challenging sector. Equities, on the other hand, offered a very different exposure and return profile. The Fund came into the quarter with limited equity exposure but a net long bias. While fixed income exposure was reduced over the course of the quarter, equity exposure increased in response to accommodative central bank policies. Long positions in the U.S. and Europe generated gains in August and September. Foreign exchange contributed positively to performance early in the quarter but suffered losses later on as markets reversed. Within foreign exchange, the most common trade was short positions in the euro. These trades were positive contributors in July but incurred losses in August and September in connection with European Central Bank President Draghi’s comment “to do whatever it takes to preserve the euro” propelled the currency higher. Short euro positions, in fact, were one of the largest detractors in August. By the quarter’s end, short euro positions still remained in the portfolio, but they had been significantly reduced. The portfolio held other positions in foreign exchange, including short positions in the British pound and long positions in the Japanese yen and Australian and Canadian dollars but in much smaller size. Commodity trading contributed positively to performance in July and August, but the sector had the greatest impact on the Portfolio Funds in September. During that month a series of reversals resulted in sizable losses. While long positions in precious metals generated gains, the Portfolio Funds experienced losses in other sectors. Long positions in oil, which generated some gains in August, were hurt by September’s sell-off. Conversely, short positions in natural gas were hurt by rising prices in that sector. Short positions in industrial metals suffered losses as accommodative central bank policies diminished global growth concerns. Long positions in grains, which had been profitable earlier in quarter, were hurt as signs that the U.S. harvest might be better than originally expected resulted in a steep retracement.
The Portfolio Funds started the fourth quarter positioned long most markets and asset classes. Choppiness in fixed income and commodities resulted in losses and those positions were reduced. The Trading Advisors continue to be long fixed income, but in smaller size. In commodities, they were net long metals and oil markets, but switched to a net short posture in grains, crops and natural gas. Positions were smaller across the board. Since equities and FX were the winning asset classes in the fourth quarter, the Trading Advisors increased their long exposures to both. The Japanese yen was the exception, where the Trading Advisors were short the currency coming into 2013. Coming into October, the Fund was positioned long in most sectors and markets. Unfortunately, most markets trended lower as the International Monetary Fund (IMF) cut its growth forecasts for most developed economies. In addition, the U.S. Federal Reserve’s (Fed) comment on the strains in the world economy as well as disappointing third-quarter corporate earnings in the U.S. added to the negative sentiment. Even as risk assets sold off and the dollar strengthened, there was no significant flight to safety. Most sectors and asset classes suffered small losses adding up to a large negative number as the Fund declined in October. Risk appetite rebounded in November, but erratic price action in commodities caused losses. In December, commodities were still choppy, but gains from rising equities and currencies generated sufficient profits for a positive month. Commodities were the worst-performing asset class as a poor trading environment caused losses in each month during the quarter. Small-scale reversals in grains, energy markets such as oil and natural gas, precious metals and industrial metals all caused losses where no sector was profitable. In response to the difficult trading environment, the Trading Advisors reduced risk over the course of the quarter. In fixed income, the Trading Advisors were positioned long almost all markets. Yields generally bottomed mid-summer and have moved sideways in the second half of the year. Since yields moved in tight range, it resulted in mixed performance with some months showing gains and some months showing losses. There has not been a big reversal so the Trading Advisors have not yet shifted direction, but they have reduced risk and position sizes given the choppiness. In the fourth quarter, yields were up initially, then down, then up again to generally end the quarter higher. As a result, long positions saw losses and fixed income was a negative contributor to performance. Despite the
choppiness seen in commodities and fixed income, the fourth quarter was generally characterized by risk seeking. In this environment, equity indices rallied while the U.S. dollar weakened, especially toward year end. In addition, political and policy developments in Japan led to a declining yen and sharply higher equity prices. The Trading Advisors generally made money by being long equity indices and foreign currencies against the U.S. dollar, with the exception of the yen where many managers had profitable short positions. Overall, the losses in commodities, and to a lesser extent fixed income, dominated the attribution profile of trend-followers in the fourth quarter. Gains in equity indices and currencies were insufficient to make up for these losses.
December 31, 2011
Year ended December 31, 2011
|
| Total Trading |
| |
|
| Profit (Loss) |
| |
Transtrend |
| $ | (19,424,860 | ) |
Altis |
| (44,402,871 | ) | |
Winton |
| 9,917,494 |
| |
Aspect |
| 5,314,184 |
| |
John Locke |
| (11,808,229 | ) | |
BlueTrend |
| (2,353,478 | ) | |
Tudor |
| (13,295,954 | ) | |
|
|
|
| |
|
| $ | (76,053,714 | ) |
The Fund experienced a net trading loss for the year ended December 31, 2011of $76,053,714.
Overall, the quarter started poorly in January, the Portfolio Funds were profitable in February only to give it all back and then some in March. Coming into the first quarter, the Portfolio Funds were generally positioned for a rally in equities and commodities. Additionally, a short U.S. dollar bias was highly prevalent in the portfolio. The majority of the Portfolio Funds had reduced their exposure to fixed income positions going into the year, with smaller allocations remaining on the long side. In January, managed futures strategies generally suffered from a rally in the U.S. dollar and a substantial retracement in gold. In February, this positioning was able to generate positive performance when long positions in equities and energy rallied. However, while February’s gains offset January’s losses to a large extent, it was not enough to carry the strategy for the quarter. March was characterized by volatile trading conditions across several markets, creating losses for the month and putting Systematic Momentum in negative territory for the year. During March, most trend-following strategies were whipsawed by the sharp selloffs following the earthquake and tsunami in Japan and the sharp rebounds in the weeks afterwards. As a result, losses in agricultural commodities as well as global equity indices offset any gains from energy and currency positions. While it was generally a challenging first quarter for Fund as a whole, the individual Portfolio Fund returns varied. Five managers had negative returns while only two ended the quarter with positive performance. For the most part, the Portfolio Funds that used higher leverage and a shorter-term time frame tended to underperform. Shorter-term trading strategies found market conditions in March especially problematic since they were the first to react to downward moves in most markets by closing out of long positions. When markets rebounded later in the month, many of these programs did not generate buy signals soon enough to capture the rally. Conversely, longer-term strategies retained their positions and benefited from the subsequent rally in equities and some commodities. The best performing Portfolio Fund over the first three months was BlueTrend. While the Portfolio Fund encountered many of same difficulties as others in the quarter, BlueTrend did a better job of capturing the upside in energy. The lagging performer in the portfolio was Altis which incurred losses primarily due to poor positioning in the currency and energy markets. Altis operates with a higher volatility target than other constituent programs so it was not unexpected that the Portfolio Fund generated higher losses in a difficult trading environment.
During the second quarter, the Portfolio Funds were focused on equity, commodity, and foreign exchange markets while fixed income exposure was generally limited. Long positions in commodities and equity indices in addition to short positions in the U.S. dollar were common themes across the portfolio. This positioning proved profitable in the first month of the quarter. With equities and commodities rallying and the U.S. dollar depreciating, profits were posted to the Fund in April, erasing its losses from the first quarter. However, April’s gains were swiftly retracted as the same positioning that produced profits in April led to losses for the remainder of the quarter. The
Portfolio Funds suffered losses in long equity and short U.S. dollar positions as these markets endured sharp reversals. Significant pullbacks in commodities, particularly in the energy, agricultural, and the precious metal sectors also made for a difficult quarter. While managed futures managers typically adapt their exposures to changing market dynamics, severe and abrupt market reversals can be rather problematic as there is insufficient time for managers to adjust their portfolios. The second quarter was one of those challenging environments. In fact, May and June ranked among the worst 15 months for the Dow Jones-Credit Suisse AllHedge Managed Futures Index since January 2005. In addition to being a difficult period for the strategy as a whole, the second quarter proved to be a challenging environment for all of the Portfolio Funds in the Fund. For the second quarter, the Portfolio Funds posted losses for the Fund. As a result, only one of the Portfolio Funds in the portfolio remains in positive territory for the year. For the most part, longer-term programs and the Portfolio Funds who utilize less leverage tended to outperform while the Portfolio Funds with shorter-term programs found the recent environment extremely difficult. For much of this year, the Portfolio Funds have allocated significant capital to long commodity positions. Programs suffered significant losses as oil markets, precious metals (particularly silver), and agricultural markets reversed direction and declined in May and June. In addition to commodities, the Portfolio Funds had a favorable bias toward equities at the outset of the quarter. In fact, the Portfolio Funds have held long positions in equity indices for some time. In the last two months of the second quarter, this sector experienced a significant sell off as uncertainty regarding the European debt crisis and the global economy weighed heavily on the markets. In currencies, the Portfolio Funds generally began the quarter positioned for U.S. dollar depreciation. However, short positions in the U.S. dollar against a variety of currencies resulted in losses as the dollar rallied in May. Allocations to fixed income were small at the beginning of the second quarter, but have increased considerably by the end of the quarter.
Coming into the third quarter, the Fund was positioned with a short bias toward the U.S. dollar and a long bias in fixed income. The Portfolio Funds still favored long positions in equity indices and commodities; however, these positions were much smaller than they had been earlier in the year. At the same time, the Portfolio Funds exposure to fixed income was growing as strong trends emerged in this asset class. At the outset of the quarter, the underlying Portfolio Funds were operating at slightly lower risk levels as several sharp reversals experienced in the second quarter brought down exposures. July was a favorable month for the Portfolio Funds as gains from long fixed income positions outweighed losses from the other asset classes. For the rest of the third quarter, long fixed income positions continued to generate strong profits while most other asset classes resulted in losses. Generally, foreign exchange, equities, and commodities incurred losses, eventually forcing the Portfolio Funds to shift their portfolios to reflect a more defensive environment Across the portfolio, the Portfolio Funds returns were generally positive. Asset class weighting was a key driver of performance this quarter. The Portfolio Funds with sizeable long fixed income exposures performed well as trends consolidated in this asset class. The duration of the types of programs used by the Portfolio Funds also had a direct influence on performance. The Portfolio Funds that use shorter-term signals and systems outperformed longer-term programs as they were able to identify market inflection points more quickly and adjust their portfolios. The best performing Portfolio Fund for the quarter was John Locke, as the trading advisor’s shorter time horizon was better able to navigate market reversals. The worst performing Portfolio Fund for the quarter was Altis. Altis’ underperformance may be partially explained by the design of its trading programs. Altis tends to operate with a higher degree of leverage and its historical volatility is generally higher than other Portfolio Funds in the portfolio. Altis’ program is designed to seek opportunities in markets that are less correlated. As a result, compared with the other Portfolio Funds, Altis lacked a sizeable allocation to fixed income, the best performing asset class, hurting its performance. At the same time, Altis maintained a higher weighting to commodities, which was a difficult asset class to trade in this quarter. Fixed income trading accounted for the largest share of profits in the third quarter as the Portfolio Funds were long both bonds and notes (or their derivatives), taking advantage of a strong downward trend in yields. While fixed income trading was profitable, most other asset classes incurred losses. Currencies were extremely difficult to trade as short positions in the U.S. dollar suffered as the European debt crisis deepened. In commodities, precious metals and energy trading were volatile, leading managers to reduce their long positions, and in some cases going short. Equity indices also detracted from performance as stocks reversed and sold off through most of the third quarter.
The Portfolio Funds declined in the fourth quarter and was negative for the full year. Losses were significant in October and only slightly made back by gains in November and December. The majority of losses were incurred in equity index positions where the Portfolio Funds were short and were hurt by the October rebound in stocks. Other losses came from currency trading where the Portfolio Funds had negative attribution from long U.S. dollar positioning in October, but made some money back being short the Euro through the rest of the fourth quarter. In commodities, attribution was mixed as the Portfolio Funds made some money in markets that continued to trend, for example energy contracts like crude oil and natural gas, but lost money in other markets, such as gold which reversed its long-term up-trend in December. Performance from fixed income markets was flat as most interest rates remained stable
with little volatility. As a result of a shift in investor sentiment starting in May, the Portfolio Funds were positioned for a more risk-averse environment coming into the post summer period. Whereas trends, and as a result the Portfolio Funds positioning, were towards the upside in the first half of the year in risk assets, many markets experienced reversals causing the Portfolio Funds to shift their positions throughout the summer. Hence, coming out of September trend following Portfolio Funds were generally: long bond and rate contracts, net short equity indices, long the U.S. dollar against a variety of currencies, and net short most commodities. In October risk assets, particularly equities, experienced significant gains as markets once again reversed the course they had been on for the preceding few months. These reversals caused sizeable losses for the Portfolio Funds and forced them to remove much of the risk from their bearish stance. Throughout the rest of the fourth quarter, the Portfolio Fund risk levels were lower than historic averages and attribution was mixed though most Portfolio Funds did make a little money back to end the year. Most Portfolio Funds had negative performance. The shorter-term Portfolio Funds tended to underperform in the fourth quarter giving up the outperformance they had accumulated in the previous quarter. As risk sentiment shifted throughout the summer, the shorter-term Portfolio Funds were able to more quickly change positioning and became more allocated to a bearish posture. Hence, these Portfolio Funds incurred greater losses when risk asset prices turned significantly higher in October.
Year ended December 31, 2010
|
| Total Trading |
| |
|
| Profit (Loss) |
| |
Chesapeake* |
| $ | (2,598,008 | ) |
Transtrend |
| 29,487,583 |
| |
Altis |
| 12,597,945 |
| |
Winton |
| 20,913,669 |
| |
Aspect |
| 14,049,609 |
| |
John Locke |
| 10,500,284 |
| |
BlueTrend |
| 18,370,900 |
| |
Tudor |
| 5,257,749 |
| |
|
|
|
| |
|
| $ | 108,579,731 |
|
* Liquidated as of January 31, 2010.
The Fund experienced a net trading profit for the year ended December 31, 2010 of $108,579,731
The Portfolio Funds’ long positions in equities, commodities and short positions in the U.S. dollar resulted in profits posted to the Fund in the beginning of January. Markets then reversed and losses were posted in each of these asset classes and all gains accumulated through the middle of the month were given back in these various markets. Fixed income was one asset class where existing positioning were profitable. Long positions in short term interest rate contracts posted gains however, these gains were not enough to offset losses in the three other major asset classes resulting in losses being posted to the Fund at the beginning of the first quarter. Five of the seven Portfolio Funds had positive performance in February resulting in profits being posted to the Fund. These were the medium and long term trend followers: Altis, Aspect, BlueTrend, Transtrend and Winton. Long positions in fixed income drove performance. Yields generally moved lower over the course of the month and the Trading Advisors benefited from having long exposure to both bonds and short term interest rate contracts. The Portfolio Funds’ benefited from short positions in European currency exposure due to the Euro and British pound losing value against the U.S. dollar. In other asset classes, some choppiness and a lack of significant trends meant that equity indices and commodities did not have much of an impact on the month’s returns. These two Trading Advisors, John Locke and Tudor Tensor, had negative performance in the month of February. These two Trading Advisors utilize trend following as an important allocation and made money in similar areas as other trend followers. However, John Locke and Tudor Tensor also allocate capital to shorter term strategies. One of these strategies, pattern recognition, suffered large losses in several markets that showed significant choppiness in February which was not enough to offset the profits posted to the Fund in the middle of the first quarter. All of the Portfolio Funds had positive performance in March resulting in profits being posted to the Fund at the end of the first quarter. Equity indices drove performance for most Portfolio Funds’ Trading Advisors. Positioning was firmly on the long side due to the strength of the current up trends in global equity indices. Commodities were also profitable across the board due to long positions in oil and metals and short positions in natural gas and grains. Positioning was spot on in most of these sub sectors. Oil and metals generally rose and natural gas and grains declined in March. Currencies also posted profits to the Fund. The Euro and British pound ended the month down, benefiting short positions in these currencies. On the other hand the Canadian and Australian dollars rose,
resulting in profits due to their long positions in these currencies. Fixed income was the only losing asset class. Short term interest rate contracts generally stayed flat, but yields on longer term government bonds rose during the month, causing some losses to long positions in those instruments. Overall, the yield moves were not very large, so losses were contained.
Most Portfolio Funds had positive performance in April resulting in profits being posted to the Fund at the beginning of the second quarter. The Trading Advisors who are medium and long term trend followers: Altis, Aspect, BlueTrend Transtrend and Winton performed well. In fixed income, falling overall G7 (Canada, France, Germany, Italy, Japan, United Kingdom and United States) yields meant that long positions were profitable. In currencies, a balanced posture with short European currencies against long positions in commodity and emerging markets currencies posted profits to the Fund. In commodities, some sectors lost money which was offset by gains in the energies and metals sectors. While U.S. equity indices ended the month up, European and Asian markets generally ended the month lower. All Trading Advisors were long in global equity indices with profits or losses dependent upon their relative size in various geographies. The Portfolio Funds had overall losses in May resulting in losses posted to the Fund in the middle of the second quarter. Medium and long term trend followers did not perform well as they were seriously affected by reversals in multiple markets. The Trading Advisors with shorter time horizons were better able to navigate these reversals and adjust their portfolios quickly. Equities, oil, natural gas and industrial metals all saw reversals with some markets moving more than 10% in the opposite direction of the trend. By the end of May, most Trading Advisors were very light in equities (but still long) and slightly short positions in energies. Other losing commodity positions were curtailed, the remaining long exposure generally being in precious metals. Currencies performance varied as some Trading Advisors posted profits and some lost money in the asset class. Performance depended on the relative size of short European currency positions vs. long positions in commodities and emerging markets currency positions. The Trading Advisors with larger short positions in European currencies managed to make money in the asset class. Fixed income yields came down during the month of May as investors sought safety in government securities. The Trading Advisors long positioning benefited from these moves however, the gains were not enough to offset losses in other portfolio areas. In June the Portfolio Funds posted losses to the Fund as performance was quite mixed among Trading Advisors. Equities and many commodity sectors had suffered significant reversals with the Trading Advisors being caught on the wrong side of trades. As a result, they had moved to cut risk in those asset classes. Coming into June, the Trading Advisors still had on some long equity exposure. They were also long precious metals, short grains and neutral in the energy sector. But in general, position sizes tended to be small. When equities continued to move downward during June and commodities continued to experience some moves that were adverse to positioning, losses were suffered but these losses were quite contained. In June, currencies were generally the worst performing asset class for the Trading Advisors. Having significant short European currency exposure was bad for performance as two major currencies, the British pound and Swiss franc rallied. There were some gains from short euro positions, but these were not enough to counter losses felt from reversals in the British pound and Swiss franc. Fixed income was a solid winning asset class for the Trading Advisors. Long positions across the yield curve generated positive returns as yields came down as a result of stronger risk adverse sentiment, especially in the second half of June. Fixed income also happened to be a portfolio area where risk was relatively greater than in other asset classes, so gains here were able to counter losses or mixed performance in all other sectors. Altis’ performance was weakest among the Trading Advisors in Systematic Momentum. Its losses in equity indices and currencies were greater than its peers. However, Winton’s lower level of risk taking in reversing asset classes as well as more sizable long precious metals positions relative to other Trading Advisors resulted in it being the best performer in June.
The Portfolio Funds posted losses to the Fund at the beginning of the third quarter as performance was quite mixed among Trading Advisors, following a difficult May and June. The only significant and consistent exposure was that all of the Trading Advisors had long positions fixed income. This was a result of a long term down trend in yields across the board. In July, yields generally continued their downward trend. This meant that both short term interest rates contracts and bond futures appreciated in value, generating profits for the Trading Advisors who had long positions in these contracts. In addition, equities showed some volatility intra month, but ended July higher. The Trading Advisors generally benefited from these moves as they still had long positions in equity indices remaining despite the reversals from May and June. The gains from fixed income were healthy, but equity indices contributed little to performance given a relatively smaller risk allocation. Currencies and commodities detracted from performance. European currencies broke the trend and moved up during July as concerns relating to European growth and bank health subsided. This caused losses to short positions in those currencies. Gold fell in July and wheat rose due to supply and weather concerns. Since these were significant commodity exposures for most of the Trading Advisors, the Portfolio Funds posted losses. The best performing trading advisor was BlueTrend due to long positions in equity and energy allocations where the trend was up. Most of the other Trading Advisors were closer to being neutral in both sectors.
Winton had been the best performer coming into the second half of the year, but incurred losses in July. Winton’s loss was larger than several other trend followers due to its long positions in gold, short positions in grains and short euro positions.
The Portfolio Funds posted profits to the Fund in the middle of the third quarter. May, June and July were generally characterized by reversals and choppiness in all asset classes except fixed income. As a result, coming into August, the Fund’s main exposure was to be long fixed income. This positioning did very well as yields generally continued their long term down trend during the month. With risk aversion the dominant sentiment in August, fixed income yields moved significantly lower across the curve, benefiting the Trading Advisors with long exposure. An absence of trends in equities, currencies and commodities meant that risk in those asset classes was not very significant. The main exposures in those sectors were small long positions in equity indices, short positions in the euro against long positions in most other major currencies, and relatively neutral positions in commodities (short positions in natural gas, long positions in oil, metals and agricultural). These positions came in flat during August. The short positions in euro and natural gas and long positions in metals resulted in profits posted to the Fund. However, long positions in equities, oil and FX lost money. Having little risk on in these sectors meant that gains and losses were small, and they generally canceled each other out. Aspect and Altis had strong returns in August due as their risk allocation to fixed income was greater than the other Portfolio Funds and in the case of Altis, short positions in oil and natural gas also contributed strongly to the return. BlueTrend and Tudor Tensor experienced small losses in August. BlueTrend’s long positioning in commodities and equities posted losses for the Fund, offsetting profits from fixed income. For Tudor Tensor, short term intra-month market fluctuations hurt the Fund’s non-trend systems. The Portfolio Funds posted profits to the Fund at the end of the third quarter. Coming into August, the Fund’s main exposure was long fixed income and that positioning performed well as yields generally continued their long term down trend during the month. In September, a similar positioning produced good results, but for different reasons. Fixed income was the dominant exposure for most Trading Advisors at the start of September as yields initially moved higher. This was due to improving investor optimism, following strong manufacturing numbers out of China and the United States. Then mid-month, the Federal Reserve talked about the possibility of a further round of quantitative easing. Yields reversed, ending the month close to where they started, and the Portfolio Funds recouped most of their losses from earlier in the month. They also profited from long positions in equity indices, as global equity markets had a strong month. In commodities, long positions in precious metals and agricultural gained as up trends continued. In currencies, overall short positions in the U.S. dollar generated profits and lost money in fixed income. Tudor Tensor was the best performer in September partly due to the non-trend diversification. Winton had the weakest return with smaller risk allocations to the equity, FX and commodity sectors resulted in close to flat performance.
Profits were posted to the Fund at the beginning of the fourth quarter. Commodities were the best performer as most sectors continued in their up trend. Grains, softs and metals all rose, with some markets making very strong gains. The Trading Advisors generally took advantage of these moves. Some remaining short exposure in the energy sector caused losses as oil reversed and rose during the month of October, but these losses were minimal. In equity indices, the global rally that began in September continued unabated in most geographies and Trading Advisors who had long positions benefited. Finally, the risk seeking trade manifested itself in the currency sector as well and the U.S. dollar continued to depreciate. Long positions held broadly by all the Trading Advisors in major foreign currencies benefited from this. Long positions in fixed income posted losses for the Portfolio Funds in October. After strong moves in August, yields generally bottomed in early September and have been rising slightly in a volatile manner since. Tudor Tensor was the best performer in October. Tudor has roughly a third of its portfolio allocated to medium term trend following and another two thirds in non-trend models like pattern recognition and fundamentally based FX strategies. All strategy groups performed very well in October. Winton had the weakest return. While the return was positive, it lagged the other Portfolio Funds. Winton has a lower volatility target and has less leverage in its portfolio. In strongly trending environments, it will typically underperform its peers. This is the cost of having a more conservative risk taking approach. Losses were posted to the Fund in the middle of the fourth quarter as a result of numerous reversals across markets. The first few days of November generally saw existing trends extend themselves. The rally in risk assets continued unabated while yields were down resulting in profits being posted to the Fund. Starting in the second week of November, markets began to shift and many of the trends that had been in place for the last few months reversed. The most violent moves were seen in fixed income and currencies as yields shot up and foreign currencies began losing value against the U.S. dollar. These moves represented sharp reversals and all Trading Advisors who had long positions posted losses. In addition, equity indices and many agricultural markets also reversed, giving up profits for the month. Only precious metals continued the trend. At month end, returns from trading equity indices were slightly negative for many of the Portfolio Funds and commodities slightly positive thanks to markets like gold and silver. Transtrend was the best performer in November reducing fixed income exposure as well as switching to a short
positioning in European currencies. Aspect was the worst performer due to the risk allocation to fixed income and FX coming into November and suffered when those two asset classes suffered the worst reversals. Profits were posted to the Fund at the end of the fourth quarter. Systematic Momentum performed quite well with this portfolio. During December, commodities and equities continued to move up, generating strong profits for the Fund. In general, the U.S. dollar lost value. This was positive for long positions in the currency sector, but there were some losses from the short European currency positions. Finally, in fixed income, yields continued to move up during the month and that was negative for the Fund’s long bias in the sector. Overall, the gains from the commodity and equity run up were much greater and the Fund ended the month posting profits. BlueTrend was the best performer in December. The Fund had most of the risk allocated to equity indices and the energy sector. Both areas did extremely well during the month as global equities and oil rose in line with existing trends. Tudor Tensor was the weakest performer in December. The Fund had only a 30% allocation to medium term trend following. That strategy performed very strongly; however, Tudor’s remaining non-trend strategies, while positive, did not do as well. Those strategies are shorter term and have found the trading environment more difficult to navigate.
Variables Affecting Performance
The principal variables that determine the net performance of the Fund are gross profitability from the Portfolio Funds’ trading activities and interest income.
The Fund currently earns interest based on the prevailing Fed Funds rate plus a spread for short cash positions and minus a spread for long cash positions. The current short term interest rates have remained extremely low when compared with historical rates and thus has contributed negligible amounts to overall Fund performance.
During all periods set forth above in “Selected Financial Data”, the interest rates in many countries were at unusually low levels. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund’s profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Fund’s Sponsor Fees are a constant percentage of the Fund’s assets.
Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Portfolio Funds are highly liquid and can be closed out at any time.
Except in unusual circumstances, factors—regulatory approvals, cost of goods sold, employee relations and the like—which often materially affect an operating business, have no material impact on the Fund.
Liquidity; Capital Resources
The Portfolio Funds borrow only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Portfolio Funds’ assets are held in cash. The net asset value of the Portfolio Funds’ cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the profit potential generally increases. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow. A Portfolio Fund should be able to close out its open trading positions and liquidate its holdings relatively quickly and at market prices, except in unusual circumstances. This permits the Portfolio Fund to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so.
Investors in the Fund generally may redeem any or all of their Units at Net Asset Value, effective as of (i) the 15th calendar day of each month and/or (ii) the last calendar day of each month (each a “Redemption Date”), upon providing notice eight business days prior to the 1st and 16th day of the month. MLAI, at any time in its discretion, may discontinue allowing redemptions as of the 15th calendar day of each month on a going forward basis.
Investors will remain exposed to fluctuations in Net Asset Value during the period between submission of their redemption requests and the applicable Redemption Date.
(The Portfolio Funds and the Fund have no applicable off-balance sheet arrangements or tabular disclosure of contractual obligations of the type described in Items 3.03(a)(4) and 3.03(a)(5) of Regulation S-K.)
Recent Accounting Developments
Recent accounting developments are discussed in Exhibit 13.01.
Item 7A: Quantitative and Qualitative Disclosures About Market Risks
Introduction
The Portfolio Funds are speculative commodity pools. The market sensitive instruments held by the Portfolio Funds 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 Portfolio Fund’s open positions and, consequently, in its earnings and cash flow. The Portfolio 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 Portfolio Fund’s open positions and the liquidity of the markets in which it trades.
The Portfolio Funds, under the direction of their respective Trading Advisors, rapidly acquire and liquidate both long and short positions in currency markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the 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 Funds’ 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 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 Funds’ losses in any market sector will be limited to Value at Risk or by each Portfolio Funds’ 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 from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act). 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 Portfolio Fund’s risk exposure in the various market sectors traded by the advisors is quantified below in terms of Value at Risk. Due to the Portfolio Fund’s fair value accounting, any loss in the fair value of the Portfolio Fund’s open positions is directly reflected in the Portfolio 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.
The Fund’s Trading Value at Risk in Different Market Sectors
The following information with respect to Value at Risk (“VAR”) is set forth in respect of Portfolio Funds separately, rather than for the Fund on a stand alone basis.
Altis Class DS (1)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,857,069 |
| 2.39 | % | $ | 3,511,512 |
| $ | 618,042 |
|
Energy |
| 2,173,733 |
| 2.80 | % | 4,029,618 |
| 10,119 |
| |||
Interest Rates |
| 1,189,169 |
| 1.53 | % | 2,333,254 |
| 68,791 |
| |||
Metals |
| 2,131,662 |
| 2.74 | % | 4,276,043 |
| 1,428,860 |
| |||
Stock Indices |
| 704,334 |
| 0.91 | % | 1,323,230 |
| 176,778 |
| |||
Currencies |
| 1,520,971 |
| 1.96 | % | 2,032,275 |
| 898,332 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 9,576,938 |
| 12.33 | % | $ | 17,505,932 |
| $ | 3,200,922 |
|
(1) Average capitalization of Altis Class DS is $77,707,043.
Altis Class DS (1)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,246,722 |
| 0.99 | % | $ | 2,524,793 |
| $ | 27,921 |
|
Energy |
| 3,234,043 |
| 2.56 | % | 8,793,444 |
| 740,402 |
| |||
Interest Rates |
| 1,398,585 |
| 1.11 | % | 2,739,606 |
| 537,011 |
| |||
Metals |
| 3,925,458 |
| 3.11 | % | 4,773,454 |
| 2,642,365 |
| |||
Stock Indices |
| 2,313,962 |
| 1.83 | % | 6,962,534 |
| 329,023 |
| |||
Currencies |
| 3,343,358 |
| 2.65 | % | 7,232,723 |
| 268,027 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 15,462,128 |
| 12.25 | % | $ | 33,026,554 |
| $ | 4,544,749 |
|
(1) Average capitalization of Altis Class DS is $126,166,026.
Transtrend Class DS (2)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,776,837 |
| 1.53 | % | $ | 2,905,495 |
| $ | 81,935 |
|
Energy |
| 4,023,417 |
| 3.47 | % | 7,114,444 |
| 63,074 |
| |||
Interest Rates |
| 1,343,413 |
| 1.16 | % | 3,453,764 |
| 211,496 |
| |||
Metals |
| 1,950,368 |
| 1.68 | % | 3,275,464 |
| 985,800 |
| |||
Stock Indices |
| 2,533,454 |
| 2.18 | % | 6,113,573 |
| 499,946 |
| |||
Currencies |
| 978,813 |
| 0.84 | % | 1,782,991 |
| 425,070 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 12,606,302 |
| 10.86 | % | $ | 24,645,731 |
| $ | 2,267,321 |
|
(2) Average capitalization of Transtrend Class DS is $116,055,285.
Transtrend Class DS (2)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,642,454 |
| 0.93 | % | $ | 3,398,855 |
| $ | 465,217 |
|
Energy |
| 2,566,856 |
| 1.45 | % | 6,361,665 |
| 742,656 |
| |||
Interest Rates |
| 1,734,019 |
| 0.98 | % | 3,934,613 |
| 226,987 |
| |||
Metals |
| 3,260,463 |
| 1.84 | % | 7,180,732 |
| 1,117,579 |
| |||
Stock Indices |
| 2,327,552 |
| 1.31 | % | 6,022,118 |
| 94,232 |
| |||
Currencies |
| 3,194,131 |
| 1.80 | % | 7,968,192 |
| 303,778 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 14,725,475 |
| 8.31 | % | $ | 34,866,175 |
| $ | 2,950,449 |
|
(2) Average capitalization of Transtrend Class DS is $177,375,360.
Aspect Class DS (3)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,091,245 |
| 1.59 | % | $ | 1,751,993 |
| $ | 574,568 |
|
Energy |
| 1,047,342 |
| 1.53 | % | 2,280,888 |
| 194,539 |
| |||
Interest Rates |
| 1,045,052 |
| 1.52 | % | 1,735,868 |
| 526,065 |
| |||
Metals |
| 271,836 |
| 0.40 | % | 488,030 |
| 54,654 |
| |||
Stock Indices |
| 1,683,280 |
| 2.45 | % | 2,662,219 |
| 170,713 |
| |||
Currencies |
| 274,658 |
| 0.40 | % | 900,894 |
| 17,188 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 5,413,413 |
| 7.89 | % | $ | 9,819,892 |
| $ | 1,537,727 |
|
(3) Average Capitalization of Aspect Class DS is $68,659,420.
Aspect Class DS (3)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 320,684 |
| 0.32 | % | $ | 795,361 |
| $ | 6,896 |
|
Energy |
| 2,033,899 |
| 2.05 | % | 2,620,674 |
| 1,413,702 |
| |||
Interest Rates |
| 1,369,710 |
| 1.38 | % | 3,290,330 |
| 20,677 |
| |||
Metals |
| 408,601 |
| 0.41 | % | 797,498 |
| 8,569 |
| |||
Stock Indices |
| 694,953 |
| 0.70 | % | 1,088,938 |
| 431,639 |
| |||
Currencies |
| 1,153,008 |
| 1.16 | % | 1,880,476 |
| 236,213 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 5,980,855 |
| 6.02 | % | $ | 10,473,277 |
| $ | 2,117,696 |
|
(3) Average Capitalization of Aspect Class DS is $98,985,768.
Winton Class DS (5)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 467,291 |
| 0.39 | % | $ | 857,123 |
| $ | 73,469 |
|
Energy |
| 368,664 |
| 0.31 | % | 874,813 |
| 11,799 |
| |||
Interest Rates |
| 2,097,111 |
| 1.75 | % | 4,292,387 |
| 285,472 |
| |||
Metals |
| 1,015,937 |
| 0.85 | % | 1,627,464 |
| 455,447 |
| |||
Stock Indices |
| 1,773,838 |
| 1.48 | % | 3,436,520 |
| 473,238 |
| |||
Currencies |
| 1,179,031 |
| 0.98 | % | 2,016,534 |
| 225,888 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 6,901,872 |
| 5.76 | % | $ | 13,104,841 |
| $ | 1,525,313 |
|
(5) Average capitalization of Winton Class DS is $120,002,120.
Winton Class DS (5)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 688,924 |
| 0.39 | % | $ | 1,392,789 |
| $ | 282,121 |
|
Energy |
| 1,109,250 |
| 0.62 | % | 1,757,888 |
| 423,304 |
| |||
Interest Rates |
| 968,173 |
| 0.54 | % | 2,326,046 |
| 55,100 |
| |||
Metals |
| 1,395,666 |
| 0.79 | % | 2,327,782 |
| 292,901 |
| |||
Stock Indices |
| 1,158,640 |
| 0.65 | % | 2,251,809 |
| 317,394 |
| |||
Currencies |
| 1,926,365 |
| 1.08 | % | 4,143,830 |
| 324,828 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 7,247,018 |
| 4.07 | % | $ | 14,200,144 |
| $ | 1,695,648 |
|
(5) Average capitalization of Winton Class DS is $177,702,496.
John Locke Class DS (6)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,812,772 |
| 2.25 | % | $ | 4,796,195 |
| $ | 127,673 |
|
Energy |
| 1,277,429 |
| 1.58 | % | 2,450,551 |
| 434,437 |
| |||
Interest Rates |
| 1,005,404 |
| 1.25 | % | 1,904,936 |
| 123,814 |
| |||
Metals |
| 1,748,930 |
| 2.17 | % | 2,981,899 |
| 460,036 |
| |||
Stock Indices |
| 2,537,272 |
| 3.15 | % | 3,905,755 |
| 1,454,923 |
| |||
Currencies |
| 1,084,660 |
| 1.34 | % | 1,879,736 |
| 333,031 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 9,466,467 |
| 11.74 | % | $ | 17,919,072 |
| $ | 2,933,914 |
|
(6) Average capitalization of John Locke Class DS is $80,676,029.
John Locke Class DS (6)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 2,585,411 |
| 1.88 | % | $ | 4,832,956 |
| $ | 732,787 |
|
Energy |
| 3,849,275 |
| 2.79 | % | 7,775,344 |
| 528,355 |
| |||
Interest Rates |
| 1,793,722 |
| 1.30 | % | 3,992,249 |
| 266,488 |
| |||
Metals |
| 3,016,347 |
| 2.19 | % | 7,460,069 |
| 1,376,098 |
| |||
Stock Indices |
| 822,361 |
| 0.60 | % | 1,347,426 |
| 189,489 |
| |||
Currencies |
| 988,157 |
| 0.72 | % | 2,859,194 |
| 157,592 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 13,055,273 |
| 9.48 | % | $ | 28,267,238 |
| $ | 3,250,809 |
|
(6) Average capitalization of John Locke Class DS is $137,789,282.
BlueTrend Class DS (8)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 831,347 |
| 0.61 | % | $ | 2,050,960 |
| $ | 195,753 |
|
Energy |
| 1,640,634 |
| 1.20 | % | 4,043,873 |
| 386,003 |
| |||
Interest Rates |
| 3,343,828 |
| 2.44 | % | 10,151,884 |
| 275,936 |
| |||
Metals |
| 1,218,834 |
| 0.89 | % | 2,036,992 |
| 243,884 |
| |||
Stock Indices |
| 2,277,676 |
| 1.66 | % | 5,808,961 |
| 40,575 |
| |||
Currencies |
| 3,145,117 |
| 2.29 | % | 6,737,462 |
| 143,600 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 12,457,436 |
| 9.09 | % | $ | 30,830,132 |
| $ | 1,285,751 |
|
(8) Average capitalization of BlueTrend Class DS is $137,202,410.
BlueTrend Class DS (8)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,509,850 |
| 0.88 | % | $ | 3,765,895 |
| $ | 41,870 |
|
Energy |
| 3,309,708 |
| 1.94 | % | 6,646,329 |
| 466,091 |
| |||
Interest Rates |
| 2,766,379 |
| 1.62 | % | 9,972,435 |
| 420,141 |
| |||
Metals |
| 3,132,167 |
| 1.83 | % | 10,064,344 |
| 24,803 |
| |||
Stock Indices |
| 4,225,642 |
| 2.47 | % | 8,750,375 |
| 1,011,393 |
| |||
Currencies |
| 1,849,722 |
| 1.08 | % | 3,233,507 |
| 878,197 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 16,793,468 |
| 9.82 | % | $ | 42,432,885 |
| $ | 2,842,495 |
|
(8) Average capitalization of BlueTrend Class DS is $170,739,961.
Tudor Tensor Class DS (7)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 543,813 |
| 0.70 | % | $ | 723,005 |
| $ | 286,960 |
|
Energy |
| 832,391 |
| 1.07 | % | 2,281,980 |
| 64,669 |
| |||
Interest Rates |
| 768,123 |
| 0.99 | % | 2,510,971 |
| 132,766 |
| |||
Metals |
| 1,081,480 |
| 1.39 | % | 3,065,063 |
| 157,964 |
| |||
Stock Indices |
| 1,649,472 |
| 2.12 | % | 3,155,567 |
| 771,668 |
| |||
Currencies |
| 3,058,624 |
| 3.94 | % | 6,066,754 |
| 921,826 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 7,933,903 |
| 10.21 | % | $ | 17,803,340 |
| $ | 2,335,853 |
|
(7) Average capitalization of Tudor Tensor Class DS is $77,707,616.
Tudor Tensor Class DS (7)
|
| December 31, 2011 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 1,504,723 |
| 1.18 | % | $ | 2,379,200 |
| $ | 797,582 |
|
Energy |
| 2,588,447 |
| 2.03 | % | 4,933,750 |
| 1,190,081 |
| |||
Interest Rates |
| 2,278,696 |
| 1.78 | % | 4,208,264 |
| 990,433 |
| |||
Metals |
| 1,097,870 |
| 0.86 | % | 1,977,389 |
| 370,078 |
| |||
Stock Indices |
| 571,520 |
| 0.45 | % | 1,187,311 |
| 62,733 |
| |||
Currencies |
| 2,047,621 |
| 1.60 | % | 6,394,328 |
| 473,792 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 10,088,877 |
| 7.90 | % | $ | 21,080,242 |
| $ | 3,884,699 |
|
(7) Average capitalization of Tudor Tensor Class DS is $127,677,085.
Lynx Class DS (4)
|
| December 31, 2012 |
| |||||||||
|
| Average |
| % of Average |
| Highest Value |
| Lowest Value |
| |||
Market Sector |
| Value at Risk |
| Capitalization |
| At Risk |
| At Risk |
| |||
|
|
|
|
|
|
|
|
|
| |||
Agricultural Commodities |
| $ | 353,778 |
| 0.57 | % | $ | 426,033 |
| 276,948 |
| |
Energy |
| 612,255 |
| 0.99 | % | 753,616 |
| 464,672 |
| |||
Interest Rates |
| 2,904,378 |
| 4.70 | % | 3,394,980 |
| 2,365,570 |
| |||
Metals |
| 1,199,429 |
| 1.94 | % | 1,514,532 |
| 876,101 |
| |||
Stock Indices |
| 2,419,840 |
| 3.92 | % | 2,771,611 |
| 2,289,970 |
| |||
Currencies |
| 1,025,615 |
| 1.66 | % | 1,540,924 |
| 528,806 |
| |||
|
|
|
|
|
|
|
|
|
| |||
TOTAL |
| $ | 8,515,295 |
| 13.78 | % | $ | 10,401,696 |
| $ | 6,802,067 |
|
(4) Average capitalization of Lynx Class DS is $61,740,377.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Portfolio Funds are 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 Portfolio Funds. The magnitude of the Portfolio Funds’ 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 Portfolio Funds to incur severe losses over a short period of time. The foregoing Value at Risk table — as well as the past performance of the Portfolio Funds — gives no indication of this “risk of ruin.”
Non-Trading Risk
The Portfolio Funds have non-trading market risk on their foreign cash balances not needed for margin.
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 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 the Portfolio Funds’ advisors 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.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
Trading Risk
MLAI has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. While MLAI does not itself intervene in the markets to hedge or diversify the Portfolio Funds’ market exposure, MLAI may urge the Portfolio Funds’ advisors to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual, except in cases in which it appears that the advisors have begun to deviate from past practice and trading policies or to be trading erratically, MLAI’s basic control procedures consist of simply of the ongoing process of monitoring the advisors with the market risk controls being applied by the advisors themselves.
Risk Management
Portfolio Funds attempt to control risk in all aspects of the investment process — from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. Portfolio Funds double check the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, Portfolio Funds seek to control overall risk as well as the risk of any one position, and Portfolio Funds trade only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. Portfolio Funds factor the point of exit into the decision to enter (stop loss). The size of Portfolio Fund’s positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.
Non-Trading Risk
The Fund and the Portfolio Funds control the non-trading exchange rate risk by regularly converting foreign currency balances back into U.S. dollars at least once per week and more frequently if a particular foreign currency balance becomes unusually high.
The Fund and the Portfolio Funds have cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the Fund in order to facilitate margin payments and pay expenses and redemptions. MLAI does not take any steps to limit the cash flow risk on the cash held on deposit at MLPF&S.
Item 8: Financial Statements and Supplementary Data
Net Income (Loss) by Quarter
Eight Quarters through December 31, 2012
|
| Fourth |
| Third |
| Second |
| First |
| Fourth |
| Third |
| Second |
| First |
| ||||||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||||||
|
| 2012 |
| 2012 |
| 2012 |
| 2012 |
| 2011 |
| 2011 |
| 2011 |
| 2011 |
| ||||||||
Total Income (Loss) |
| $ | (25,746,718 | ) | $ | 6,925,873 |
| $ | (9,916,361 | ) | $ | (2,315,027 | ) | $ | (28,340,634 | ) | $ | 26,644,306 |
| $ | (45,535,216 | ) | $ | (28,821,983 | ) |
Total Expenses |
| 3,363,887 |
| 3,967,116 |
| 4,399,348 |
| 4,884,843 |
| 5,176,053 |
| 5,627,244 |
| 5,693,889 |
| 5,613,785 |
| ||||||||
Net Income (Loss) |
| $ | (29,110,605 | ) | $ | 2,958,757 |
| $ | (14,315,709 | ) | $ | (7,199,870 | ) | $ | (33,516,687 | ) | $ | 21,017,062 |
| $ | (51,229,105 | ) | $ | (34,435,768 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net Income (Loss) per weighted average Unit (a) |
| $ | (0.0530 | ) | $ | 0.0048 |
| $ | (0.0208 | ) | $ | (0.0094 | ) | $ | (0.0405 | ) | $ | 0.0244 |
| $ | (0.0593 | ) | $ | (0.0414 | ) |
(a) The Net Income (Loss) per weighted average Unit is based on the weighted average of the total Units for each quarter.
The financial statements required by this Item are included in Exhibit 13.01.
The supplementary financial information (“information about oil and gas producing activities”) specified by Item 302(b) of Regulation S-K is not applicable.
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) u under the Securities Exchange Act) with respect to the Fund as of and for the year ended December 31, 2012, and, based on its evaluation, has concluded that these disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Fund’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Fund’s internal control over financial reporting is a process designed under the supervision of MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund and is effected by management, other personnel and service providers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and included those policy and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Fund.
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Fund are being made only in accordance with authorizations of management and directors of the Fund; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Fund’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
The Fund’s management assessed the effectiveness of the Funds’ internal control over financial reporting as of December 31, 2012 In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework”.
Based on its assessment the Fund’s management concluded that at December 31, 2012, the Fund’s internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting (in connection with Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act) occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonable likely to materially affect, the Fund’s internal control over financial reporting.
Item 9B: Other Information
Not applicable.
PART III
Item 10: Directors, Executive Officers and Corporate Governance to be updated
10(a) and 10(b) Identification of Directors and Executive Officers:
As a limited liability company, the Fund has no officers or directors and is managed by MLAI. Trading decisions are made by the Trading Advisors on behalf of the Portfolio Funds.
The managers and executive officers of MLAI and their respective business backgrounds are as follows:
Deann Morgan |
| Chief Executive Officer, President and Manager |
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Barbra E. Kocsis |
| Chief Financial Officer and Vice President |
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James L. Costabile |
| Vice President and Manager |
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Colleen R. Rusch |
| Vice President and Manager |
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Steven L. Suss |
| Vice President and Manager |
Deann Morgan, age 43, has been the Chief Executive Officer and President of MLAI since June 2012 and is a Managing Director within the Global Wealth and Retirement Solutions group (“GWRS”) which is a business unit within the BAC Global Wealth & Investment Management group (“GWIM”), a division of BAC. As a Vice President of MLAI from March 2008 through June 2012, Ms. Morgan was responsible for overseeing GWRS Alternative Investments Origination. From April 2006 until December 2008, Ms. Morgan was a Director for BAC’s Investments, Wealth Management & Insurance group, where she was responsible for origination of private equity and listed alternative investments. She received her M.B.A. from the University of Chicago and her B.B.A. from University of Michigan and is a Chartered Financial Analyst (CFA) charterholder. Ms. Morgan has been registered with the CFTC as an associated person and listed as a principal of MLAI since August 21, 2009. Ms. Morgan has also been registered with the CFTC as an associated person of MLPF&S since April 13, 2009.
Barbra E. Kocsis, age 46, is the Chief Financial Officer for MLAI, has been listed with the CFTC as a principal of MLAI since May 21, 2007 and is a Director within BAC’s Global Wealth Investment Management Technology and Operations group, a position she has held since October 2006. Ms. Kocsis’ responsibilities include providing a full range of specialized financial and tax accounting services for the Alternative Investment products offered through MLPF&S and US Trust. She graduated cum laude from Monmouth College with a Bachelor of Science in Business Administration/Accounting.
James L. Costabile, age 37, has been a Vice President of MLAI and a Managing Director within GWRS responsible for alternative investment distribution for BAC since July 2007 and U.S. Trust since January 2009. U.S. Trust is a division of BAC. Mr. Costabile has been listed as a principal of MLAI since July 14, 2010. He has also been registered with the CFTC as an associated person of the MLPF&S since August 20, 2007. Mr. Costabile received a B.S. from Fordham University and holds the Chartered Alternative Investment Analyst designation.
Colleen R. Rusch, age 45, is a Managing Director and Head of Alternative Investments Platform Management within the Global Wealth and Retirement Solutions Group (“GWRS”) and has been a Vice President of MLAI and a Director within GWRS since January 2008. She is responsible for overseeing GWRS Alternative Investments operations, service and trading platform since January 2008. From December 2007 to February 2012, she was a Director of MLAI. Ms. Rusch has been listed as a principal of MLAI since September 14, 2010. Ms. Rusch holds a B.S. degree in Business Administration from Saint Peter’s College.
Steven L. Suss, age 53, has been a Vice President of MLAI since June 2012. He has been a Managing Director within GWIM’s Alternative Investments Group, a division within BAC that provides advisory and
other services to high net worth clients, since January 2008, responsible for managing finance, operational and other business aspects of BAC’s alternative investment platform. Mr. Suss has been listed as a principal of MLAI since June 12, 2012. Mr. Suss is also a director and the President of BACAP Alternative Advisors Inc. (“BACAP”), an alternative investment advisor affiliated with BAC. He has held these positions at BACAP since July 1, 2007, and is responsible for the management and supervision of the overall business of BACAP. Mr. Suss has also served as Senior Vice President of Bank of America Capital Advisors LLC (“BACA”) since July 2007. BACA is an investment advisor focusing on alternative investment products and Mr. Suss is responsible within that entity for the management of financial reporting and the operational affairs of the investment vehicles managed by BACA. Prior to these existing roles, Mr. Suss has performed various other roles within BAC: he has served as Senior Vice President at Banc of America Investment Advisors Inc. (“BAIA”), another alternative investment advisor affiliated with BAC, from July 2007 to March 2010; he was Senior Vice President of U.S. Trust Hedge Fund Management, Inc., a hedge fund manager associated with BAC, from June 2007 to March 2010, and served as its Chief Financial Officer and Treasurer from October 2007 to March 2010; and he was Senior Vice President of UST Advisers, Inc., an investment adviser associated with BAC, from July 2007 to May 2008. In the above roles with BAIA, U.S. Trust Hedge Fund Management, Inc. and UST Advisers, Inc., Mr. Suss was responsible for the management of financial reporting and operational matters of alternative investment funds managed by those entities. Mr. Suss received a B.B.A. from the University of Texas at Austin.
As of December 31, 2012, the principals of MLAI had no investment in the Fund, and MLAI’s sponsor interest in the Fund was valued at $0.
MLAI acts as the sponsor, general partner or manager to ten public futures funds whose units of limited partnership or limited liability company interests are registered under the Securities Exchange Act: Aspect Futures Access LLC, ML BlueTrend FuturesAccess LLC, Highbridge Commodities FuturesAccess LLC, Man AHL FuturesAccess LLC, Ortus Currency FuturesAccess LLC, ML Select Futures I L.P., Systematic Momentum FuturesAccess LLC, ML Transtrend DTP Enhanced FuturesAccess LLC, ML Trend-Following Futures Fund L.P, and ML Winton FuturesAccess LLC. Because MLAI serves as the sole sponsor, general partner or manager of each of these funds, the officers and managers of MLAI effectively manage them as officers and directors of such funds.
(c) Identification of Certain Significant Employees:
None.
(d) Family Relationships:
None.
(e) Business Experience:
See Item 10(a) and (b) above.
(f) Involvement in Certain Legal Proceedings:
None.
(g) Promoters and Control Persons:
Not applicable.
(h) Section 16(a) Beneficial Ownership Reporting Compliance:
Not contained herein.
Code of Ethics:
MLAI and BAC have adopted a code of ethics which applies to the Fund’s (MLAI’s) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Fund. A copy of the code of ethics is available to any person, without charge, upon request by calling 1-866-MER-ALTS.
Nominating Committee:
Not applicable. (Neither the Fund nor MLAI has nominating committee.)
Audit Committee: Audit Committee Financial Expert:
Not applicable. (Neither the Fund nor MLAI has an audit committee. There are no listed shares of the Fund or MLAI.)
Item 11: Executive Compensation
The managers and officers of MLAI are remunerated by BAC in their respective positions. The Fund does not have any officers, managers or employees. The Funds pay Sponsor fees to MLAI. The Portfolio Funds pay brokerage commissions to MLPF&S, which is a BAC affiliate. MLAI also receives a portion of the management fees from the Portfolio Funds, and a portion of the performance fees from some Portfolio Funds. MLAI or its affiliates may also receive certain economic benefits from possession of the Fund’s and Portfolio Funds’ U.S. dollar assets. The managers and officers receive no “other compensation” from the Fund, and the managers receive no compensation for serving as managers of MLAI. There are no compensation plans or arrangements relating to a change in control of either the Fund or MLAI.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners:
Not applicable. (The Units represent limited liability company interests. The Fund is managed by, its manager, MLAI.)
(b) Security Ownership of Management:
As of December 31, 2012, MLAI owned no Unit-equivalent member interests, and the principals of MLAI did not own any Units.
(c) Changes in Control:
None.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
Item 13: Certain Relationships and Related Transactions and Director Independence
(a) Transactions between BAC and the Fund
Many of the primary service providers to the Fund are BAC affiliates, including MLPF&S and MLIB. The fees paid by the Fund to any BAC parties were established by the BAC parties based on rates charged to similarly-situated customers rather than being negotiated. These fees are likely higher than would have been obtained in arms-length bargaining.
The Portfolio Funds pay BAC substantial brokerage commissions as well as prime brokerage fees and bid-ask spreads on F/X and other OTC trades. The Portfolio Funds pay MLAI management fees and some Portfolio Funds pay MLAI Sponsor fees.
The Portfolio Funds maintain, cash, collateral and margin balances with MLFP&S and MLIB, providing these BAC affiliates funding benefits from possession of the Fund’s capital.
No loans have been, outstanding between MLAI or any of its principals and the Fund.
MLAI pays selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI is ultimately paid back for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Fund.
In 2012, the Fund directly expensed (i) Sponsor fees of $15,170,255 earned by MLAI.
See Item 1(c), “Narrative Description of Business — Charges” and “— Description of Current Charges” for a discussion of other business dealings between MLAI affiliates and the Fund.
(c) Indebtedness of Management:
None.
(d) Transactions with Promoters:
Not applicable.
(e) Director Independence
No person who served as a manager of MLAI during 2012 would be considered independent (based on the definition of an independent director under the NASDAQ rules.)
Item 14: Principal Accounting Fees and Services
(a) Audit Fees
Aggregate fees billed directly to the Fund for professional services rendered by the principal accountant PricewaterhouseCoopers LLP, for the audit of the Fund’s annual financial statements and review of financial statements included in the Fund’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the years ended December 31, 2012 and 2011 were $163,000 and $162,750, respectively.
(b) Audit-Related Fees
There were no other audit-related fees billed for the years ended December 31, 2012 and 2011 related to the Fund.
(c) Tax Fees
No fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers and their respective affiliates for the years ended December 31, 2012 and 2011 and for professional services rendered to the fund in connection with tax compliance, tax advice and tax planning.
(d) All Other Fees
No fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers and their respective affiliates for the years ended December 31, 2012 and 2011 for professional services rendered to the Fund.
Neither the Fund nor MLAI has an audit committee to pre-approve principal accountant fees and services. In lieu of an audit committee, the managers and the principal financial officer pre-approve all billings prior to the commencement of services.
PART IV
Item 15: Exhibits and Financial Statement Schedules
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| 1. | Financial Statements |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 2 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011. | 3 |
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| Statements of Operations for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 5 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 7 |
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| Notes to Financial Statements | 10 |
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| 2. | Financial Statement Schedules: |
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| (a) | Financial Statements of Altis FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2012 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 6 |
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| Notes to Financial Statements | 9 |
| (b) | Financial Statements of Aspect FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2012 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 6 |
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| Notes to Financial Statements | 9 |
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| (c) | Financial Statements of Bluetrend FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2012 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 6 |
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| Notes to Financial Statements | 9 |
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| (d) | Financial Statements of John Locke FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2012 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 5 |
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| Notes to Financial Statements | 8 |
| (e) | Financial Statements of Lynx FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statement of Financial Condition as of December 31, 2012 | 2 |
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| Statement of Operations for the period July 1, 2012 (Commencement of Operations) to December 31, 2012, | 3 |
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| Statements of Changes in Members’ Capital for the period July 1, 2012 (Commencement of Operations) to December 31, 2012 | 4 |
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| Financial Data Highlights for the period July 1, 2012 (Commencement of Operations) to December 31, 2012, | 5 |
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| Notes to Financial Statements | 6 |
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| (f) | Financial Statements of ML Transtrend DTP Enhanced FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2011 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 6 |
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| Notes to Financial Statements | 9 |
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| (g) | Financial Statements of Tudor Tensor FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2011 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 5 |
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| Notes to Financial Statements | 8 |
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| (h) | Financial Statements of Winton FuturesAccess LLC |
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| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 1 |
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| FINANCIAL STATEMENTS: |
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| Statements of Financial Condition as of December 31, 2012 and 2011 | 2 |
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| Statements of Operations for the years ended December 31, 2012, 2011 and 2010 | 3 |
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| Statements of Changes in Members’ Capital for the years ended December 31, 2012, 2011 and 2010 | 4 |
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| Financial Data Highlights for the years ended December 31, 2012, 2011 and 2010 | 6 |
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| Notes to Financial Statements | 9 |
| 3. | Exhibits: |
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| The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K: |
Designation |
| Description |
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3.01 |
| Amended and Restated Certificate of Formation of Systematic Momentum FuturesAccess LLC. |
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Exhibit 3.01: |
| Is incorporated by reference from Exhibit 3.01 contained in the registrant’s Report on Form 8-K filed on February 14, 2012. |
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3.02 |
| Third Amended and Restated Limited Liability Company Operating Agreement of Systematic Momentum FuturesAccess LLC. |
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Exhibit 3.02 |
| Is incorporated by reference from Exhibit 3.02 contained in the registrant’s Report on Form 8-K, filed on December 6, 2012. |
13.01 |
| 2012 Annual Report and Report of Independent Registered Public Accounting Firm. |
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13.02 |
| Financial Statements of Altis FuturesAccess LLC |
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13.03 |
| Financial Statements of Aspect FuturesAccess LLC |
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13.04 |
| Financial Statements of ML Bleutrend FuturesAccess LLC |
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13.05 |
| Financial Statements of John Locke FuturesAccess LLC |
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13.06 |
| Financial Statements of Lynx FuturesAccess LLC |
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13.07 |
| Financial Statements of ML Transtrend DTP Enhanced FuturesAccess LLC |
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13.08 |
| Financial Statements of Tudor Tensor FuturesAccess LLC |
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13.09 |
| Financial Statements of ML Winton FuturesAccess LLC |
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Exhibit 13.01 |
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Exhibit 13.02: |
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Exhibit 13.03: |
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Exhibit 13.04 |
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Exhibit 13.05 |
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Exhibit 13.06 |
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Exhibit 13.07 |
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Exhibit 13.08 |
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Exhibit 13.09 |
| Are filed herewith. |
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31.01 and 31.02 |
| Rule 13a-14(a)/15d-14(a) Certifications |
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Exhibit 31.01 |
| Are filed herewith. |
and 31.02: |
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32.01 and 32.02 |
| Section 1350 Certifications. |
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Exhibit 32.01 |
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and 32.02: |
| Are filed herewith. |
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Exhibit 101 |
| The following materials from the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition (ii) Statements of Operations (iii) Statements of Changes in Members’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text. |
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Exhibit 101 |
| Is filed herewith. |
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99.1 |
| Amended and Restated Selling Agreement effective as of July 8, 2011 between Merrill Lynch Alternative Investments LLC (for itself, and as sponsor on behalf of the investment funds listed therein) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (as selling agent). |
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Exhibit 99.1: |
| Is incorporated by reference from Exhibit 99.1 contained in the registrant’s Report on Form 8-K filed on July 11, 2011. |
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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 FUTURESACCESS LLC | ||
By: MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC, Manager | ||
By: | /s/Deann Morgan |
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Deann Morgan |
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Chief Executive Officer, President and Manager |
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(Principal Executive Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/s/Deann Morgan |
| Chief Executive Officer, President and Manager |
| March 27, 2013 |
Deann Morgan |
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/s/ Barbra E. Kocsis |
| Chief Financial Officer and Vice President |
| March 27, 2013 |
Barbra E. Kocsis |
| (Principal Financial and Accounting Officer) |
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/s/Steven L. Suss |
| Vice President and Manager |
| March 27, 2013 |
Steven L. Suss |
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/s/James L. Costabile |
| Vice President and Manager |
| March 27, 2013 |
James L. Costabile |
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/s/Colleen R. Rusch |
| Vice President and Manager |
| March 27, 2013 |
Colleen R. Rusch |
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(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
SYSTEMATIC MOMENTUM FUTURESACCESS LLC
2012 FORM 10-K
INDEX TO EXHIBITS
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| Exhibit |
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Exhibit 13.01 |
| 2012 Annual Report and Report of Independent Registered Public Accounting Firm |
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Exhibit 13.02 |
| Altis FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012 and 2011 and 2010 and Report of Independent Auditors |
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Exhibit 13.03 |
| Aspect FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012, 2011 and 2010 and Report of Independent Registered Public Accounting Firms |
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Exhibit 13.04 |
| ML BlueTrend FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012, 2011 and 2010 and Report of Independent Registered Public Accounting Firms |
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Exhibit 13.05 |
| John Locke FuturesAccess LLC (Formerly ML John Locke FuturesAccess LLC) Financial Statements as of and for the years ended December 31, 2012, 2011 and 2010 |
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Exhibit 13.06 |
| Lynx FuturesAccess LLC Financial Statements as of December 31, 2012 and for the period ended July 1, 2012 (Commencement of Operations) to December 31, 2012 and 2011 and Report of Independent Auditors |
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Exhibit 13.07 |
| ML Transtrend DTP Enhanced FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012, 2011 and 2010 and Report of Independent Registered Public Accounting Firms |
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Exhibit 13.08 |
| Tudor Tensor FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012, 2011and 2011 and Report of Independent Registered Public Accounting Firms |
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Exhibit 13.09 |
| ML Winton FuturesAccess LLC Financial Statements as of and for the years ended December 31, 2012, 2011 and 2010 and Report of Independent Registered Public Accounting Firms |
Exhibit 31.01 and 31.02 |
| Rule 13a - 14(a) / 15d - 14(a) Certifications |
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Exhibit 32.01 and 32.02 |
| Sections 1350 Certifications |
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Exhibit 101 |
| The following materials from the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition (ii) Statements of Operations (iii) Statements of Changes in Members’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text. |