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EXCEL - IDEA: XBRL DOCUMENT - ML TREND-FOLLOWING FUTURES FUND L.P.Financial_Report.xls
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EX-32.01 - EX-32.01 - ML TREND-FOLLOWING FUTURES FUND L.P.a11-26138_1ex32d01.htm
EX-31.01 - EX-31.01 - ML TREND-FOLLOWING FUTURES FUND L.P.a11-26138_1ex31d01.htm
EX-31.02 - EX-31.02 - ML TREND-FOLLOWING FUTURES FUND L.P.a11-26138_1ex31d02.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2011

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                

 

Commission File Number 0-28928

 

ML TREND-FOLLOWING FUTURES FUND L.P.

(Exact Name of Registrant as specified in its charter)

 

Delaware

 

13-3887922

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

c/o Merrill Lynch Alternative Investments LLC

Four World Financial Center, 10th 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)

 

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 website 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Small reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of September 30, 2011, 1,032,863 units of limited partnership interest were outstanding.

 

 

 



 

ML TREND-FOLLOWING FUTURES FUND L.P.

 

QUARTERLY REPORT FOR SEPTEMBER 30, 2011 ON FORM 10-Q

 

 

 

 

 

PAGE

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

Item 2.

 

Unregistered Sales of Securities and Use of Proceeds

 

30

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

31

 

 

 

 

 

Item 4.

 

(Removed and Reserved)

 

31

 

 

 

 

 

Item 5.

 

Other Information

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

31

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

307,308

 

$

310,535

 

Investments in Portfolio Funds (cost $151,077,956 for 2011 and cost $177,007,802 for 2010)

 

193,875,418

 

227,833,196

 

Due from Portfolio Funds

 

2,915,379

 

2,958,005

 

Accrued interest receivable

 

26

 

81

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

197,098,131

 

$

231,101,817

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Wrap fee payable

 

$

656,994

 

$

770,339

 

Redemptions payable

 

2,164,202

 

2,781,701

 

 

 

 

 

 

 

Total liabilities

 

2,821,196

 

3,552,040

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

General Partner (41,734 Units and 41,734 Units)

 

7,849,982

 

8,063,381

 

Limited Partners (991,129 Units and 1,135,971 Units)

 

186,426,953

 

219,486,396

 

 

 

 

 

 

 

Total partners’ capital

 

194,276,935

 

227,549,777

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL:

 

$

197,098,131

 

$

231,101,817

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT

 

 

 

 

 

(Based on 1,032,863 and 1,177,705 Units outstanding; unlimited Units authorized)

 

$

188.0956

 

$

193.2146

 

 

See notes to financial statements.

 

3



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the three

 

For the three

 

For the nine

 

For the nine

 

 

 

months ended

 

months ended

 

months ended

 

months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

TRADING PROFIT (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

2,656,348

 

$

10,901,054

 

$

8,797,975

 

$

23,950,278

 

Change in unrealized, net

 

4,485,225

 

(1,511,063

)

(8,027,930

)

(4,412,064

)

Total trading profit (loss)

 

7,141,573

 

9,389,991

 

770,045

 

19,538,214

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME (LOSS)

 

 

 

 

 

 

 

 

 

Interest

 

63

 

419

 

330

 

795

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Wrap fee

 

2,012,518

 

2,303,858

 

6,358,263

 

7,217,636

 

Administrative and filing fees

 

 

 

 

13,710

 

Total expenses

 

2,012,518

 

2,303,858

 

6,358,263

 

7,231,346

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(2,012,455

)

(2,303,439

)

(6,357,933

)

(7,230,551

)

 

 

 

 

 

 

 

 

 

 

NET PROFIT (LOSS)

 

5,129,118

 

$

7,086,552

 

$

(5,587,888

)

$

12,307,663

 

 

 

 

 

 

 

 

 

 

 

NET PROFIT (LOSS) PER UNIT:

 

 

 

 

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

1,058,878

 

1,265,084

 

$

1,108,060

 

1,336,160

 

 

 

 

 

 

 

 

 

 

 

Net income(loss) per weighted average General Partner and Limited Partner Unit

 

$

4.84

 

$

5.60

 

$

(5.04

)

$

9.21

 

 

See notes to  financial statements.

 

4



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

For the nine months ended September 30, 2011 and 2010

(unaudited)

 

 

 

Units

 

General
Partner

 

Limited
Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2009

 

1,432,093

 

$

8,313,413

 

$

243,610,504

 

$

251,923,917

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

20,461

 

 

3,629,659

 

3,629,659

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

 

12,307,663

 

12,307,663

 

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(220,846

)

 

(39,717,981

)

(39,717,981

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, September 30, 2010

 

1,231,708

 

$

8,313,413

 

$

219,829,845

 

$

228,143,258

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2010

 

1,177,705

 

$

8,063,381

 

$

219,486,396

 

$

227,549,777

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

16,682

 

 

3,196,984

 

3,196,984

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

(213,399

)

(5,374,489

)

(5,587,888

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(161,524

)

 

(30,881,938

)

(30,881,938

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, September 30, 2011

 

1,032,863

 

$

7,849,982

 

$

186,426,953

 

$

194,276,935

 

 

See notes to  financial statements.

 

5



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(A Delaware Limited Partnership)

 

FINANCIAL DATA HIGHLIGHTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 (unaudited)

 

The following per Unit data and ratios have been derived from information provided in the financial statements.

 

Per Unit Operating Performance:

 

Three months ended
September 30, 2011

 

Nine months ended
September 30, 2011

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

183.3753

 

$

193.2146

 

 

 

 

 

 

 

Net Realized and net unrealized change in trading profit (loss)

 

6.6206

 

0.6165

 

Interest income

 

0.0001

 

0.0003

 

Expenses (1)

 

(1.9004

)

(5.7358

)

 

 

 

 

 

 

Net asset value, end of period

 

$

188.0956

 

$

188.0956

 

 

 

 

 

 

 

Total Return: (3)

 

 

 

 

 

 

 

 

 

 

 

Total return

 

2.57

%

-2.65

%

 

 

 

 

 

 

Ratios to Average Net Assets: (1),(2)

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

1.01

%

3.01

%

 

 

 

 

 

 

Net investment profit (loss)

 

2.62

%

-2.34

%

 


(1) Includes the impact of brokerage commission expense.

(2) The ratios do not reflect the proportionate share of income and expense of the Portfolio Funds.

(3) The total return calculations are based on compounded monthly returns and are calculated for each class taken as a whole. An individual partners’ return may vary from these returns based on timing of capital transactions.

 

See notes to financial statements.

 

6



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(A Delaware Limited Partnership)

 

FINANCIAL DATA HIGHLIGHTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (unaudited)

 

The following per Unit data and ratios have been derived from information provided in the financial statements.

 

Per Unit Operating Performance:

 

Three months ended
September 30, 2010

 

Nine months ended
September 30, 2010

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

179.5466

 

$

175.9131

 

 

 

 

 

 

 

Net Realized and net unrealized change in trading profit (loss)

 

7.5000

 

14.7251

 

Expenses (1)

 

(1.8215

)

(5.4131

)

 

 

 

 

 

 

Net asset value, end of period

 

$

185.2251

 

$

185.2251

 

 

 

 

 

 

 

Total Return: (3)

 

 

 

 

 

 

 

 

 

 

 

Total return

 

3.16

%

5.29

%

 

 

 

 

 

 

Ratios to Average Net Assets: (1),(2)

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

1.01

%

3.02

%

 

 

 

 

 

 

Net investment profit (loss)

 

3.19

%

5.60

%

 


(1) Includes the impact of brokerage commission expense.

(2) The ratios do not reflect the proportionate share of income and expense of the Portfolio Funds.

(3) The total return calculations are based on compounded monthly returns and are calculated for each class taken as a whole. An individual partners’ return may vary from these returns based on timing of capital transactions.

 

See notes to financial statements.

 

7



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

ML Trend-Following Futures Fund L.P. (the “Partnership”) formerly known as ML JWH Strategic Allocation Fund L.P was organized under the Delaware Revised Uniform Limited Partnership Act on December 11, 1995 and commenced trading on July 15, 1996.  The Partnership operates as a “fund of funds”, allocating and reallocating its capital, under the discretion of Merrill Lynch Alternative Investments LLC (“MLAI”) the general partner of the Partnership, among five underlying FuturesAccess Funds (each a “Portfolio Fund” and collectively the “Portfolio Funds”) (See Note 2).

 

MLAI, the sponsor (“Sponsor”) and general partner of the Partnership, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”).  Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the Partnership’s commodity broker. As used herein, the capitalized term “MLAI” also refers to the general partner at times when its name was MLIM Alternative Strategies LLC, as applicable. Merrill Lynch is a wholly-owned subsidiary of Bank of America Corporation.

 

Interests in the Partnership are not insured or otherwise protected by the Federal Deposit Insurance Corporation or any other government authority.  Interests are not deposits or other obligations of, and are not guaranteed by, Bank of America Corporation or any of its affiliates or by any bank.  Interests are subject to investment risks, including the possible loss of the full amount invested.

 

In the opinion of management, these interim financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of  the financial position of the Partnership as of September 30, 2011 and the results of its operations for the three and nine months ended September 30, 2011  and  2010. However, the operating results for the interim periods may not be indicative of the results for the full year.

 

Certain information and footnote disclosures normally included in annual financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010.

 

Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and such differences could be material.

 

8



 

2.               INVESTMENTS IN PORTFOLIO FUNDS

 

The five funds (each a “Portfolio Fund” and collectively “Portfolio Funds”) in which the Partnership is invested in as of September 30, 2011 are; ML Aspect FuturesAccess LLC (“Aspect”), ML BlueTrend FuturesAccess LLC (“BlueTrend”), MAN AHL FuturesAccess LLC (“MAN”), ML Transtrend DTP Enhanced FuturesAccess LLC (“Transtrend”) and ML Winton FuturesAccess LLC (“Winton”). On August 2, 2010 MAN was added to the Portfolio Funds. MLAI may, in its discretion, change Portfolio Funds at any time. MLAI may vary the percentage of the Partnership’s total portfolio allocated to the different Portfolio Funds at MLAI’s discretion. There is no pre-established range for the minimum and maximum allocations that may be made to any given Portfolio Funds.

 

The investment transactions were accounted for on the trade date. The investments in the Portfolio Funds were valued at fair value and are reflected in the Statements of Financial Condition. In determining fair value, MLAI utilized the net asset value of the underlying Portfolio Funds which approximates fair value. The fair value was net of all fees relating to the Portfolio Funds, paid or accrued. Additionally, MLAI monitored the performance of the Portfolio Funds. Such monitoring procedures included, but were not limited to: monitoring market movements in Portfolio Funds’ investments, comparing performance to industry benchmarks, and in-depth conference calls and site visits with the Portfolio Funds’ Managers.

 

The Investment in Portfolio Funds at and for the period ended September 30, 2011 and at and for the year ended December 31, 2010 are as follows:

 

September 30, 2011

 

 

 

Fair Value

 

Percentage of
 Partners’ Capital

 

Profit (Loss)

 

Cost @ 9/30/11

 

Management
Fee

 

Performance
Fee

 

Redemptions
Permitted

 

ML Winton FuturesAccess LLC

 

$

38,842,748

 

19.99

%

$

2,620,943

 

$

24,957,382

 

$

(482,295

)

$

 

Monthly

 

ML Aspect FuturesAccess LLC

 

38,842,750

 

19.99

%

2,719,471

 

26,597,685

 

(482,186

)

 

Monthly

 

ML Transtrend DTP Enhanced FuturesAccess LLC

 

38,504,418

 

19.82

%

(4,330,268

)

28,693,516

 

(314,370

)

 

Monthly

 

ML Bluetrend FuturesAccess LLC

 

38,842,753

 

19.99

%

1,320,772

 

32,559,839

 

(322,367

)

 

Monthly

 

ML Man AHL FuturesAccess LLC

 

38,842,749

 

19.99

%

(1,560,873

)

38,269,534

 

(316,285

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

193,875,418

 

99.78

%

$

770,045

 

$

151,077,956

 

$

(1,917,503

)

$

 

 

 

 

December 31, 2010

 

 

 

Fair Value

 

Percentage of
Partners’ Capital

 

Profit (Loss)

 

Cost @ 12/31/10

 

Management
Fee

 

Performance
Fee

 

Redemptions
Permitted

 

ML Winton FuturesAccess LLC

 

$

45,566,639

 

20.02

%

$

6,679,492

 

$

31,131,698

 

$

 

(822,385

)

$

 

Monthly

 

ML Aspect FuturesAccess LLC

 

45,566,639

 

20.02

 

7,463,239

 

33,112,629

 

(822,235

)

 

Monthly

 

ML Transtrend DTP Enhanced FuturesAccess LLC

 

45,566,639

 

20.02

 

8,748,727

 

30,230,119

 

(548,851

)

 

Monthly

 

ML Bluetrend FuturesAccess LLC

 

45,566,640

 

20.02

 

7,922,163

 

39,168,453

 

(507,761

)

 

Monthly

 

ML Man AHL FuturesAccess LLC

 

45,566,639

 

20.02

 

2,256,117

 

43,364,903

 

(192,201

)

 

Monthly

 

ML Chesapeake FuturesAccess LLC*

 

 

0.00

 

(1,787,343

)

 

(51,094

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

227,833,196

 

100.10

%

$

31,282,395

 

$

177,007,802

 

$

 

(2,944,527

)

$

 

 

 

 

 


* Liquidated as of January 31, 2010.

 

9



 

These investments are recorded at fair value. In accordance with Regulation S-X, the following is summarized financial information for each of the Portfolio Funds which require disclosure.

 

 

 

As of September 30, 2011

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

 

 

 

Winton

 

$

1,115,466,794

 

$

31,200,033

 

$

1,084,266,761

 

 

 

 

Aspect

 

322,374,140

 

13,682,012

 

308,692,128

 

 

 

 

Transtrend

 

249,421,102

 

2,739,777

 

246,681,325

 

 

 

 

Bluetrend

 

278,884,515

 

12,322,072

 

266,562,443

 

 

 

 

Man AHL

 

65,422,179

 

8,199,149

 

57,223,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,031,568,730

 

$

68,143,043

 

$

1,963,425,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

 

 

 

Winton

 

$

917,058,733

 

$

19,588,425

 

$

897,470,308

 

 

 

 

Aspect

 

287,826,784

 

6,395,411

 

281,431,373

 

 

 

 

Transtrend

 

258,918,312

 

2,958,512

 

255,959,800

 

 

 

 

Bluetrend

 

278,017,566

 

16,683,618

 

261,333,948

 

 

 

 

Man AHL

 

54,869,253

 

5,140,402

 

49,728,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,796,690,648

 

$

50,766,368

 

$

1,745,924,280

 

 

 

 

 

 

 

For the nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Net

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Income (Loss)

 

Winton

 

$

3,646,642

 

$

(33,531

)

$

(992,168

)

$

2,620,943

 

Aspect

 

3,822,756

 

(73,453

)

(1,029,831

)

2,719,472

 

Transtrend

 

(3,767,158

)

(140,686

)

(422,425

)

(4,330,269

)

Bluetrend

 

2,271,339

 

(113,458

)

(837,109

)

1,320,772

 

Man AHL

 

(762,864

)

(264,354

)

(533,655

)

(1,560,873

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,210,715

 

$

(625,482

)

$

(3,815,188

)

$

770,045

 

 

 

 

For the nine months ended September 30, 2010

 

 

 

 

 

 

 

 

 

Net

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Income (Loss)

 

Winton

 

$

5,910,126

 

$

(53,882

)

$

(887,753

)

$

4,968,491

 

Aspect

 

5,988,248

 

(101,378

)

(739,409

)

5,147,461

 

Transtrend

 

5,794,574

 

(248,140

)

(528,253

)

5,018,181

 

Chesapeake*

 

(1,716,301

)

(5,817

)

(65,225

)

(1,787,343

)

Bluetrend

 

7,147,579

 

(143,873

)

(1,866,224

)

5,137,482

 

Man AHL

 

1,554,365

 

(76,768

)

(423,655

)

1,053,942

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

24,678,591

 

$

(629,858

)

$

(4,510,519

)

$

19,538,214

 

 


* Liquidated as of January 31, 2010.

 

10



 

3.               FAIR VALUE OF INVESTMENTS

 

The Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) which provides authoritative guidance on fair value measurement. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

Fair value of an investment is the amount that would be received to sell the investment in an orderly transaction between market participants at measurement date (i.e. the exit price). Purchase and sale of investments is recorded on a trade date basis. Realized gains and losses on investments is recognized when the investments are sold. Any change in net unrealized gain or loss from the preceding period is reported on the Statements of Operations.

 

The fair value measurement guidance established a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

 

Level I — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded investments. As required by the fair market value measurement guidance, the Partnership does not adjust the quoted price for these investments even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.

 

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of generally accepted and understood models or other valuation methodologies. Investments which are generally included in this category are investments valued using market data.

 

Level III — Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair value for these investments is determined using valuation methodologies that consider a range of factors, including but not limited to the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. MLAI’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

Following is a description of the valuation methodologies used for investments, as well as the general classification of such investments pursuant to the valuation hierarchy.

 

11



 

Investments in Portfolio Funds are valued using the net asset value reported by the Portfolio Funds, as a practical expedient which management believes approximates fair value. These net asset values are the prices used to execute trades with these Portfolio Funds.

 

Although there are monthly transactions in these Portfolio Funds interests, the Net Asset Value’s (“NAV”) are materially based on portfolios of Level I and Level II assets and liabilities for which the Partnership has transparency. As such the Partnership determined that its investments in these Portfolio Funds in this case, would be classified as Level II.

 

The following table summarizes the valuation of the Partnership’s investments by the above fair value hierarchy levels as of September 30, 2011 and December 31, 2010:

 

Investment in 

 

 

 

 

 

 

 

 

 

Portfolio Funds

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

$

193,875,418

 

$

 

$

193,875,418

 

$

 

December 31, 2010

 

$

227,833,196

 

$

 

$

227,833,196

 

$

 

 

There were no transfers to or from Level I or II during the quarter ended September 30, 2011.

 

4.               MARKET, CREDIT AND CONCENTRATION RISKS

 

The nature of this Partnership has certain risks, which cannot be presented on the financial statements. Additionally, the Partnership invests in the Portfolio Funds which have similar market risk as mentioned below. The following summarizes some of those risks.

 

Market Risk

 

Derivative instruments involve varying degrees of market risk.  Changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Portfolio Funds’ Net unrealized profit (loss) on such derivative instruments as reflected in the Portfolio Funds’ Statements of Financial Condition.  The Portfolio Funds’ exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Portfolio Funds as well as the volatility and liquidity of the markets in which the derivative instruments are traded. Investments in foreign markets may also entail legal and political risks.

 

MLAI has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so.  These procedures focus primarily on monitoring the trading of the Portfolio Funds, calculating the Net Asset Value of the Partnership and the Portfolio Funds as of the close of business on each day and reviewing outstanding positions for over-concentrations.  While MLAI does not intervene in the markets to hedge or diversify the Portfolio Funds’ market exposure, MLAI may urge the respective trading advisors to reallocate positions in an attempt to avoid over-concentrations.  However, such interventions are expected to be unusual.  It is expected that MLAI’s basic risk control procedures which consist simply of the ongoing process of advisor monitoring, along with monitoring the market risk controls being applied by respective trading advisors is sufficient to detect any such intervention is needed.

 

12



 

Credit Risk

 

The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange.  In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties.  Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may also require margin in the over-the-counter markets.

 

The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit on open contracts, if any, included in the Portfolio Funds’ Statements of Financial Condition. The Portfolio Funds attempt to mitigate this risk by dealing exclusively with Merrill Lynch entities as clearing brokers.

 

The Portfolio Funds, in their normal course of business, enter into various contracts, with Merrill Lynch Pierce Fenner & Smith Inc. (“MLPF&S”) acting as their commodity broker.  Pursuant to the brokerage arrangement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, these receivables and payables are offset and reported as a net receivable or payable and included in Net unrealized profit (loss) on open contracts on the Portfolio Funds’ Statements of Financial Condition.

 

Concentration Risk

 

The Partnership’s investments in the Portfolio Funds are subject to the market and credit risk of the Portfolio Funds. Because the majority of the Partnership’s capital is invested in the Portfolio Funds, any changes in the market conditions that would adversely affect the Portfolio Funds could significantly impact the solvency of the Partnership.

 

Indemnifications

 

In the normal course of business, the Partnership has entered, or may in the future enter, into agreements that obligate the Partnership to indemnify third parties, including affiliates of the Partnership, for breach of certain representations and warranties made by the Partnership. No claims have actually been made with respect to such indemnities and any quantification would involve hypothetical claims that have not been made. Based on the Partnership’s experience, MLAI expected the risk of loss to be remote and, therefore, no provision has been recorded.

 

5.               RELATED PARTY TRANSACTIONS

 

Starting in June of 2010, the Partnership entered into a transfer agency and investor services agreement with Financial Data Services, Inc. (the “Transfer Agent”), a related party of Merrill Lynch through MLAI. The agreement calls for a fee to be paid based on the collective net assets of funds managed or sponsored by MLAI with a minimum annual fee of $2,700,000. The fee rate ranges from 0.016% to 0.02% based on aggregate net assets. The fee is payable monthly in arrears. MLAI allocates the Transfer Agent fees to each of the managed/sponsored funds on a monthly basis based on the Partnership’s net assets. The Transfer Agent fee, which was determined at 0.02% of aggregate asset level, allocated to the Partnership for the quarter ended September  30, 2011 are paid on behalf of the Partnership by the Sponsor.

 

13



 

6.               RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2011, the FASB issued an update to requirements relating to Fair Value Measurement which represents amendments to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. The amendments are of two types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.

 

The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements relate to (i) measuring the fair value of the financial instruments that are managed within a portfolio; (ii) application of premium and discount in a fair value measurement; and (iii) additional disclosures about fair value measurements. The update is effective for annual periods beginning after December 15, 2011. MLAI does not believe the adoption of this update will have a material impact on the Partnership’s financial statements.

 

7.               SUBSEQUENT EVENTS

 

Management has evaluated the impact of subsequent events on the Partnership and has determined that there were no subsequent events that require adjustments to, or disclosure in, the financial statements.

 

Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Partnership calculates the Net Asset Value per unit of each class of units as of the close of business on the last business day of each calendar month and such other dates as MLAI may determine in its discretion.  The Partnership’s “Net Asset Value” as of any calculation date will generally equal the value of the Partnership’s investments in the underlying funds as of such date, plus any other assets held by the Partnership, minus accrued brokerage commissions, sponsor’s, management and performance fees, organizational expense amortization and any operating costs and other liabilities of the Partnership. MLAI is authorized to make all Net Asset Value determinations.

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT

 

 

 

Jan.

 

Feb.

 

Mar.

 

April

 

May

 

June

 

July

 

August

 

September

 

2010

 

$

169.6232

 

$

173.3194

 

$

183.5183

 

$

186.8689

 

$

178.8380

 

$

179.5466

 

$

176.6927

 

$

182.7091

 

$

185.2251

 

2011

 

$

190.8217

 

$

194.3375

 

$

190.6906

 

$

198.0035

 

$

189.6097

 

$

183.3753

 

$

190.7027

 

$

189.4490

 

$

188.0956

 

 

Liquidity and Capital Resources

 

The Partnership does not engage in the sale of goods or services.  The Partnership’s assets are its (i) investment in Funds and (ii) Cash.  Because of the low margin deposits normally required in commodity futures trading relatively small price movements may result in substantial losses to the Partnership.  While substantial losses could lead to a material decrease in liquidity, no such material losses occurred during the third quarter of 2011 and there was no impact on the Fund’s liquidity.

 

The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

 

For the nine months ended September 30, 2011 Partnership capital decreased 14.62% from $227,549,777 to $194,276,935.  This decrease was attributable to the net loss from operations of $5,587,888, coupled with the redemption of 161,524 Redeemable Units resulting in an outflow of $30,881,938. The cash outflow was offset with cash inflow of $3,196,984 due to subscriptions of 16,682 units. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent months.

 

14



 

Critical Accounting Policies

 

Statement of Cash Flows

 

The Partnership is not required to provide a Statement of Cash Flows.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  For more information on our treatment of fair value see Note 3, Fair Value of Investments.

 

Investments in other investment companies are valued using the net asset value reported by the investment company. If appropriate, adjustments to the reported net asset value may be made based on various factors, including, but not limited to, the attributes of the interest held, including the rights and obligations, and any restrictions or illiquidity.

 

Where the Partnership believes that quoted market prices are not available or that the market is not active, fair values are estimated by using quoted prices of securities with similar characteristics, pricing models or matrix pricing, observable net asset values and these are generally classified as Level II securities the Partnership determined that its investments in other investment funds would be classified as Level II.

 

Cash and Cash Equivalents

 

The Partnership considers all highly liquid investments, with a maturity of three months or less when acquired, to be cash equivalents. Cash equivalents were recorded at amortized cost, as provided by the investment manager of the cash equivalent, which approximated fair value (Level II see Note 3).  Cash was held at a nationally recognized financial institution.

 

Interest Rates and Income

 

The Partnership 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 Partnership performance.

 

Income Taxes

 

No provision for income taxes has been made in the accompanying financial statements as each Partner is individually responsible for reporting income or loss based on such Partner’s respective share of the Partnership’s income and expenses as reported for income tax purposes.

 

The Partnership follows the ASC guidance issued for accounting for uncertainty in income taxes.  This guidance provides how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements.  This guidance also requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority.  Tax positions with respect to tax at the partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year.  The General Partner has analyzed the Partnership’s tax positions and has concluded that no provision for income tax is required in the Partnership’s financial statements. The following are the major tax jurisdictions for the Partnership and the earliest tax year subject to examination: United States — 2007.

 

15



 

Reform Act

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) was signed into law on July 21, 2010. The Reform Act enacts financial regulatory reform, and may alter the way in which the Partnership conducts certain trading activities.   The Reform Act includes measures to broaden the scope of derivative instruments subject to regulation, including by requiring clearing and exchange trading of certain derivatives, imposing new capital and margin reporting, registration and business conduct requirements for certain market participants and imposing position limits on certain over-the-counter derivatives. The Reform Act grants the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission substantial new authority and requires numerous rulemakings by these agencies. The ultimate impact of these derivatives regulations, and the time it will take to comply, remains uncertain. The final regulations may impose additional operational and compliance costs on the Partnership.

 

Results of Operations

 

January 1, 2011 to September 30, 2011

 

January 1, 2011 to March 31, 2011

 

The Partnership experienced a net trading loss for the quarter ended March 31, 2011 of $657,731.

 

The Partnership (Trend-Following Futures) declined by more than 1% in the first quarter of 2011 while the Dow Jones-Credit Suisse AllHedge Managed Futures Index lost 2.1%. Market conditions were generally not conducive to trend-following strategies as many markets experienced severe reversals. Overall, the quarter started poorly in January, and 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 Trend-Following Futures 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 quarter for Trend-Following Futures as a whole, individual Portfolio Funds returns varied considerably, ranging from -6.9% to +2.4%. Three Portfolio Funds had negative returns while two ended the quarter with positive performance.

 

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, Man-AHL, incurred losses primarily due to poor positioning in the equity and commodity markets, in particular energy and metals market

 

16



 

April 1, 2011 to June 30, 2011

 

The Partnership experienced a net trading loss for the quarter ended June 30, 2011 of $5,713,797.

 

The Partnership (Trend-Following Futures) lost -3.8% in the second quarter of 2011, bringing its year-to-date return to -5.1%. The Dow Jones-Credit Suisse AllHedge Managed Futures Index lost -2.2% for the same period and has returned -4.3% year-to-date. The quarter began with gains in April, but the Portfolio Funds suffered losses in the subsequent two months.

 

Coming into 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, Trend-Following Futures returned +3.3% 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 rank 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 Trend-Following Futures. For the quarter, underlying Portfolio Funds returns ranged from -2.2% to -7%. As a result, only one Portfolio Fund in the portfolio remains in positive territory for the year. For the most part, longer-term programs and Portfolio Funds who utilize less leverage tended to outperform while Portfolio Funds with shorter-term programs found the recent environment extremely difficult.

 

The best performing Portfolio Fund for the quarter navigated the market’s volatility better than its peers. The worst performing Portfolio Fund suffered losses as their positioning in commodities and equities was more detrimental to their performance relative to the other Portfolio Funds.

 

Exposure and Attribution by Asset Class

 

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 that have been held long positions in equity indices for some time.  In the last two months of the quarter, this sector experienced a significant selloff 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.

 

17



 

July 1, 2011 to September 30, 2011

 

The Partnership experienced a net trading gain for the quarter ended September 30, 2011 of $7,141,573.

 

The Partnership (Trend-Following) gained 2.6% in the third quarter of 2011, bringing its year-to-date return to -2.7%. The Dow Jones-Credit Suisse AllHedge Managed Futures Index returned 4.6% for the same period and has returned 0.5% year-to-date.  The quarter began with gains in July but managers generally had negative returns in the subsequent two months.

 

Throughout much of the first half of the year the Portfolio Funds maintained a more risk seeking posture with long positions in commodities, equity indices, and short U.S. dollar against a variety of currencies.  This shifted through the second quarter as markets reversed and portfolio risk was reduced.  Coming into the third quarter, risk was more muted as a result of the reversals in several markets and the Portfolio Funds reduced their exposures.  Simultaneously, the Portfolio Funds began building long fixed income exposure as bond and rate contracts appreciated.  This positioning proved profitable in July as gains in fixed income positions outweighed losses in other asset classes.  For the rest of the quarter, gains continued in long rates and bond positions while losses were incurred in most other sectors.  Currencies, equity index, and commodity positions continued to lose money for the Portfolio Funds who eventual shifted their portfolios to reflect a more defensive environment.

 

Most of the Portfolio Funds had a profitable third quarter with only a single Portfolio Fund in the Partnership having a negative return.  Returns for the third quarter ranged from 0.0% to 8.3%.  Generally, two factors contributed to outperformance: 1) shorter-term systems were better able to capture the inflection point and hence performed better, and 2) the Portfolio Funds who had sizeable long fixed income exposure performed well as trends consolidated in these markets.

 

The best performing Portfolio Fund for the third quarter was Aspect.  Aspect was able to generate positive returns from sizeable long fixed income exposure.  The worst performing Portfolio Fund was Transtrend. underperformed may be attributable to: 1) one of Transtrend’s four modules has not worked well in the current environment, and 2) Transtrend will generally allocate more to uncorrelated markets and in the short-term, these allocations have generated losses.

 

Exposure and Attribution by Asset Class

 

The majority of gains were made in fixed income positions where the Portfolio Funds were long both short and long term instruments.

 

The Portfolio Funds lost money in most other asset classes for the quarter.  Currencies were extremely difficult to trade: The Portfolio Funds were marginally long most currencies versus U.S. dollar but uncertainty over the European debt crisis caused a flight to safe-haven assets and a rally in the U.S. dollar.  In commodities, precious metals and energies have been volatile leading to the Portfolio Funds reducing their long positions, in some cases going short.  Equity indices also detracted from performance as stocks reversed and sold off through most of the quarter.

 

18



 

January 1, 2010 to September 30, 2010

 

January 1, 2010 to March 31, 2010

 

The Partnership experienced a net trading profit of $12,904,261 for the first quarter of 2010.

 

The Portfolio Funds’ long positions in equities, commodities and short positions in the U.S. dollar resulted in profits posted to the Partnership at 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 Partnership at the end of January.

 

The Portfolio Funds had positive performance in February resulting in profits being posted to the Partnership. Long positions in fixed income drove performance. Yields generally moved lower over the course of the month and the Portfolio Funds benefited from having long exposure to both bonds and short term interest rate contracts. The managers 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.

 

The Portfolio Funds had positive performance in March resulting in profits being posted to the Partnership. 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 Partnership. 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.

 

April 1, 2010 to June 30, 2010

 

The Partnership experienced a net trading loss of $2,756,038 for the second quarter of 2010.

 

The Portfolio Funds had positive performance in April resulting in profits being posted to the Partnership. 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 Partnership. 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 a negative performance in May posting losses to the Partnership.  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 Portfolio Funds were very light in equities (but still long) and slightly short positions in energies. Other losing commodity positions were also cut, with the only remaining long exposure

 

19



 

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.

 

The Portfolio Funds posted losses to the Fund as performance was quite mixed among trading advisors. Equities and many commodity sectors incurred 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 incurred. 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 incurred 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.

 

July 1, 2010 to September 30, 2010

 

The Partnership experienced a net trading profit of $9,389,991 for the third quarter of 2010.

 

In July, the Portfolio Funds posted losses to the Partnership 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.

 

In August, the Portfolio Funds posted profits to the Partnership. 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 Partnership’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, small short positions in the euro against long positions in most other major currencies, and relatively neutral positions in

 

20



 

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 Partnership.  However, long positions in equities, oil and FX lost money. Having little risk in these sectors meant that gains and losses were small, and they generally canceled each other out. Aspect was the best performing trading advisor due to its risk allocation to fixed income was greater than the other Portfolio Funds. BlueTrend posted losses in August due to its long positioning in commodities and equities, offsetting profits from fixed income.

 

In September the Portfolio Funds posted profits to the Partnership. Coming into August, the Partnership’s main exposure was to be 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.

 

The Partnership has no applicable off-balance sheet arrangements or tabular disclosure of contractual obligations of the type described in Items 303(a)(4) and 303(a)(5) of Regulation S-K.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

The 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 Portfolio Funds’ assets are subject to the risk of trading loss.  Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

 

Market movements result in frequent changes in the fair market value of the Portfolio Funds’ open positions and, consequently, in their earnings and cash flow.  The Portfolio Funds’ market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Portfolio Funds’ open positions and the liquidity of the markets in which they trade.

 

The Portfolio Funds’ under the direction of their respective Trading Advisors rapidly acquire and liquidate both long and short positions in a wide range of different markets.  Consequently, it is not possible to predict how a possible future market scenario will affect performance, and the Partnership’s and the Portfolio Funds’ 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 Portfolio Funds’ 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 inclusion of the quantification 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 the Portfolio Funds’ attempts to manage their market risks.

 

21



 

Quantifying the Partnership’s Trading Value at Risk

 

Quantitative Forward-Looking Statements

 

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” 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 of 1933 and Section 21E of the Securities Exchange Act of 1934).  All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

 

Due to the Partnership’s fund of funds structure, the following statements are related to the Portfolio Funds.

 

Exchange maintenance margin requirements have been used by the Portfolio Funds as the measure of their 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% to 99% of the one-day time periods included in the historical sample (approximately one year, generally) 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. n 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 (which would reduce the Value at Risk estimates) resulting from the fact that the Portfolio Funds’ positions are rarely, if ever, 100% positively correlated have not been reflected.

 

The following information with respect to Value At Risk (VAR) is set forth in respect of the Portfolio Funds separately, rather than for the Partnership on a stand-alone basis.

 

The Partnership’s Trading Value at Risk in Different Market Sectors

 

The following table indicates the average, highest, and lowest trading Value at Risk which is the sum of the individual Portfolio Funds’ tables. The Value at Risk table is also associated with the Partnership’s open positions by market category for the nine months ended September 30, 2011 and 2010.

 

22



 

Aspect Class DT (3)

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

95,298

 

0.23

%

$

300,173

 

$

3,085

 

Energy

 

896,978

 

2.14

%

1,115,896

 

632,495

 

Interest Rates

 

419,935

 

1.00

%

714,447

 

9,251

 

Metals

 

242,174

 

0.58

%

356,804

 

97,745

 

Stock Indices

 

334,004

 

0.80

%

487,195

 

193,117

 

Currencies

 

644,486

 

1.54

%

841,332

 

519,872

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,632,875

 

6.29

%

$

3,815,847

 

$

1,455,565

 

 


(3) Average Capitalization of Aspect Class DT is $41,962,895.

 

Aspect Class DT (3)

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

335,355

 

0.60

%

$

512,705

 

$

211,034

 

Energy

 

430,120

 

0.77

%

702,154

 

203,067

 

Interest Rates

 

1,123,846

 

2.01

%

1,914,283

 

576,702

 

Metals

 

542,409

 

0.97

%

801,823

 

350,913

 

Stock Indices

 

369,177

 

0.66

%

721,873

 

86,490

 

Currencies

 

815,664

 

1.46

%

1,571,751

 

67,944

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,616,571

 

6.47

%

$

6,224,589

 

$

1,496,150

 

 


(3) Average Capitalization of Aspect Class DT is $55,849,286.

 

23



 

Transtrend Class DT (2)

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

262,455

 

0.63

%

$

452,668

 

$

103,782

 

Energy

 

551,792

 

1.32

%

1,419,180

 

165,674

 

Interest Rates

 

254,053

 

0.61

%

605,345

 

50,637

 

Metals

 

871,395

 

2.08

%

1,601,900

 

519,583

 

Stock Indices

 

658,447

 

1.57

%

1,343,433

 

21,022

 

Currencies

 

867,292

 

2.07

%

1,777,569

 

67,768

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,465,434

 

8.28

%

$

7,200,095

 

$

928,466

 

 


(2) Average capitalization of Transtrend Class DT is $41,864,934.

 

Transtrend Class DT (2)

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

339,263

 

0.61

%

$

685,658

 

$

146,498

 

Energy

 

1,450,914

 

2.60

%

2,480,797

 

763,874

 

Interest Rates

 

718,573

 

1.29

%

1,419,020

 

176,726

 

Metals

 

359,494

 

0.64

%

700,306

 

68,613

 

Stock Indices

 

429,896

 

0.77

%

866,037

 

143,950

 

Currencies

 

1,404,927

 

2.52

%

2,312,978

 

751,912

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

4,703,067

 

8.43

%

$

8,464,796

 

$

2,051,573

 

 


(2) Average capitalization of Transtrend Class DT is $55,797,606.

 

24



 

Winton Class DT (5)

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

207,073

 

0.49

%

$

361,026

 

$

102,999

 

Energy

 

336,815

 

0.80

%

455,664

 

226,636

 

Interest Rates

 

218,189

 

0.52

%

602,936

 

14,283

 

Metals

 

374,544

 

0.89

%

603,386

 

75,923

 

Stock Indices

 

340,800

 

0.81

%

583,693

 

82,272

 

Currencies

 

374,571

 

0.89

%

563,526

 

84,199

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

1,851,992

 

4.40

%

$

3,170,231

 

$

586,312

 

 


(5) Average capitalization of Winton Class DT is $41,962,895.

 

Winton Class DT (5)

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

227,591

 

0.41

%

$

405,865

 

$

92,910

 

Energy

 

152,329

 

0.27

%

265,658

 

63,387

 

Interest Rates

 

642,827

 

1.15

%

983,314

 

353,652

 

Metals

 

784,157

 

1.40

%

1,279,703

 

553,572

 

Stock Indices

 

359,530

 

0.64

%

743,881

 

20,587

 

Currencies

 

606,927

 

1.09

%

1,037,187

 

364,618

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,773,361

 

4.96

%

$

4,715,608

 

$

1,448,726

 

 


(5) Average capitalization of Winton Class DT is $55,849,286.

 

25



 

Bluetrend Class DT (2)

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

262,400

 

0.63

%

$

821,362

 

$

9,132

 

Energy

 

897,038

 

2.14

%

1,449,600

 

101,657

 

Interest Rates

 

182,229

 

0.43

%

320,952

 

91,635

 

Metals

 

765,441

 

1.82

%

2,195,087

 

5,410

 

Stock Indices

 

1,137,021

 

2.71

%

1,908,503

 

265,439

 

Currencies

 

416,470

 

0.99

%

705,245

 

191,539

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,660,599

 

8.72

%

$

7,400,749

 

$

664,812

 

 


(2) Average capitalization of Bluetrend Class DT is $41,950,375.

 

Bluetrend Class DT (2)

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

144,047

 

0.33

%

$

273,269

 

$

69,329

 

Energy

 

829,218

 

1.90

%

2,340,474

 

130,447

 

Interest Rates

 

1,097,855

 

2.51

%

1,942,768

 

622,613

 

Metals

 

256,074

 

0.59

%

530,458

 

80,277

 

Stock Futures

 

1,114,555

 

2.55

%

1,768,398

 

408,532

 

Currencies

 

1,005,105

 

2.30

%

1,990,662

 

27,397

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

4,446,854

 

10.18

%

$

8,846,029

 

$

1,338,595

 

 


(2) Average capitalization of Bluetrend Class DT is $43,737,470.

 

26



 

Man AHL LLC Class DT (5)

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

132,395

 

0.32

%

$

328,622

 

$

39,156

 

Energy

 

544,184

 

1.30

%

916,780

 

309,175

 

Interest Rates

 

467,549

 

1.12

%

661,617

 

219,491

 

Metals

 

202,107

 

0.48

%

289,700

 

90,133

 

Stock Indices

 

157,814

 

0.38

%

303,794

 

62,598

 

Currencies

 

1,026,365

 

2.45

%

1,703,199

 

451,106

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,530,414

 

6.05

%

$

4,203,712

 

$

1,171,659

 

 


(5) Average capitalization of Man AHL LLC Class DT is $41,907,532.

 

Man AHL LLC Class DT (5)

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

 Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

322,957

 

0.71

%

$

324,646

 

$

321,268

 

Energy

 

725,513

 

1.59

%

729,307

 

721,719

 

Interest Rates

 

938,649

 

2.05

%

943,557

 

933,740

 

Metals

 

743,527

 

1.63

%

747,414

 

739,639

 

Stock Indices

 

49,284

 

0.11

%

49,541

 

49,026

 

Currencies

 

1,690,466

 

3.70

%

1,699,305

 

1,681,627

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

4,470,396

 

9.79

%

$

4,493,770

 

$

4,447,019

 

 


(5) Average capitalization of Man AHL LLC Class DT is $45,524,569.

 

Material Limitations on Value at Risk as an Assessment of Market Risk

 

The face value of the market sector instruments held by the Partnership and 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 Partnership and the Portfolio Funds.  The magnitude of the Partnership’s and 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 Partnership and the Portfolio Funds to incur severe losses over a short period of time.   Even comparatively minor losses could cause MLAI to further deleverage or terminate the Partnership’s and the Portfolio Funds’ trading. The

 

27



 

foregoing Value at Risk table — as well as the past performance of the Partnership and the Portfolio Funds — gives no indication of this “risk of ruin.”

 

Non-Trading Risk

 

Foreign Currency Balances; Cash on Deposit with MLPF&S

 

The Portfolio Funds have non-trading market risk on its foreign cash balances not needed for margin. These balances (as well as the market risk they represent) are generally immaterial.

 

The Portfolio Funds also have non-trading market risk on the approximately 90-95% of its assets which are held in cash at MLPF&S or BlackRock.  The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies.

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

The following qualitative disclosures regarding the Partnership’s market risk exposures through the Portfolio Funds after the change in structure— except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership 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 Partnership’s primary market risk exposures as well as the strategies used and to be used by MLAI and the trading advisors of the Portfolio Funds for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the risk controls for the Partnership and for the trading conducted through Portfolio Funds 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 Partnership.  There can be no assurance that the Partnership’s 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 value of their investment in the Partnership.

 

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 intervene in the markets to hedge or diversify the Partnership’s market exposure; MLAI may urge the Portfolio Funds to reallocate positions in an attempt to avoid over-concentrations.  However, such interventions are unusual.  Except in cases in which it appears that the Portfolio Funds has begun to deviate from past practice and trading policies or to be trading erratically, MLAI basic risk control procedures consist simply of the ongoing process of monitoring the Portfolio Funds with the market risk controls being applied by the Portfolio Funds.

 

28



 

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.

 

To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the Portfolio Funds investment strategies.  Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance.  In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts for a program, or a change in position size in relation to account equity.  The weighting of capital committed to various markets in the investment programs is dynamic, and Portfolio Funds may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant.

 

Portfolio Funds may determine that risks arise when markets are illiquid or erratic, which may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events.  In such cases, Portfolio Funds at its sole discretion may override computer-generated signals and may at times use discretion in the application of its quantitative models, which may affect performance positively or negatively.

 

Adjustments in position size in relation to account equity have been and continue to be an integral part of Portfolio Fund’s investment strategy.  At its discretion, Portfolio Funds may adjust the size of a position in relation to equity in certain markets or entire programs.  Such adjustments may be made at certain times for some programs but not for others.  Factors which may affect the decision to adjust the size of a position in relation to account equity include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions.

 

Non-Trading Risk

 

The Partnership 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 Partnership 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 Partnership 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 and in the BlackRock sponsored money market fund.

 

Item 4. Controls and Procedures

 

MLAI, the general partner of the Partnership with the participation of MLAI’s Chief Executive Officer and the Chief Financial Officer, 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) under the Securities Exchange Act of 1934) with respect to the Partnership as of the end of the period  covered by this quarterly report, and, based on this

 

29



 

evaluation, has concluded that these disclosure controls and procedures are effective.  No change in internal control over financial reporting (in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934) occurred during the quarter ended  September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

None.

 

Item 1A:  Risk Factors

 

There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 15, 2011.

 

Item 2.                Unregistered Sales of Securities and Use of Proceeds

 

(a)  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 of the Units was MLPF&S.

 

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV

 

Jan-11

 

$

593,355

 

3,071

 

193.2146

 

Feb-11

 

441,752

 

2,315

 

190.8217

 

Mar-11

 

424,044

 

2,182

 

194.3375

 

Apr-11

 

460,702

 

2,416

 

190.6906

 

May-11

 

202,360

 

1,022

 

198.0035

 

Jun-11

 

351,158

 

1,852

 

189.6097

 

Jul-11

 

135,696

 

740

 

183.3753

 

Aug-11

 

556,279

 

2,917

 

190.7027

 

Sep-11

 

31,638

 

167

 

189.4490

 

Oct-11

 

244,333

 

1,299

 

188.0956

 

 

(b) Not applicable.

(c) Not applicable.

 

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Item 3.

Defaults Upon Senior Securities

 

 

 

None.

 

 

Item 4.

(Removed and Reserved)

 

 

Item 5.

Other Information

 

 

 

None.

 

 

Item 6.

Exhibits

 

 

 

The following exhibits are filed herewith to this Quarterly Report on Form 10-Q:

 

 

 

 

31.01 and 31.02

Rule 13a-14(a)/15d-14(a) Certifications

 

 

 

 

Exhibit 31.01 and 31.02

Are filed herewith.

 

 

 

 

32.01 and 32.02

Section 1350 Certifications

 

 

 

 

Exhibit 32.01 and 32.02

Are filed herewith.

 

 

 

 

Exhibit 101

Are filed herewith.

 

The following materials from the Partnership’s quarterly Report on Form 10-Q for the three and nine month periods ended September 30, 2011 formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition (ii) Statements of Operations (iii) Statements of  Changes in Partners’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text. (1)

 


(1)  These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

31



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by