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EX-32.02 - EX-32.02 - ML TREND-FOLLOWING FUTURES FUND L.P.a12-21027_1ex32d02.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, 2012

 

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 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 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.:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller 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, 2012, 770,678 units of limited partnership interest were outstanding.

 

 

 



 

ML TREND-FOLLOWING FUTURES FUND L.P.

 

QUARTERLY REPORT FOR SEPTEMBER 30, 2012 ON FORM 10-Q

 

Table of Contents

 

 

PAGE

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

29

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

30

 

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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Cash

 

$

311,363

 

$

307,906

 

Investments in Portfolio Funds (cost $109,854,260 for 2012 and cost $136,008,811 for 2011)

 

134,827,092

 

170,657,787

 

Due from Portfolio Funds

 

4,025,713

 

13,937,314

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

139,164,168

 

$

184,903,007

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL LIABILITIES:

 

 

 

 

 

Wrap fee payable

 

$

463,252

 

$

616,342

 

Redemptions payable

 

3,571,664

 

13,457,625

 

 

 

 

 

 

 

Total liabilities

 

4,034,916

 

14,073,967

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

General Partner (9 Units and 9 Units)

 

1,578

 

1,650

 

Limited Partners (770,669 Units and 931,833 Units)

 

135,127,674

 

170,827,390

 

 

 

 

 

 

 

Total partners’ capital

 

135,129,252

 

170,829,040

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL:

 

$

139,164,168

 

$

184,903,007

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT

 

 

 

 

 

(Based on 770,678 and 931,842 Units outstanding; unlimited Units authorized)

 

$

175.3381

 

$

183.3240

 

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

TRADING PROFIT (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

2,057,567

 

$

2,656,348

 

$

7,940,703

 

$

8,797,975

 

Change in unrealized, net

 

(1,047,292

)

4,485,225

 

(9,676,144

)

(8,027,930

)

Total trading profit (loss), net

 

1,010,275

 

7,141,573

 

(1,735,441

)

770,045

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME (LOSS)

 

 

 

 

 

 

 

 

 

Interest, net

 

 

63

 

 

330

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Wrap fee

 

1,454,943

 

2,012,518

 

4,707,107

 

6,358,263

 

Total expenses

 

1,454,943

 

2,012,518

 

4,707,107

 

6,358,263

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(1,454,943

)

(2,012,455

)

(4,707,107

)

(6,357,933

)

 

 

 

 

 

 

 

 

 

 

NET PROFIT (LOSS)

 

(444,668

)

$

5,129,118

 

$

(6,442,548

)

$

(5,587,888

)

 

 

 

 

 

 

 

 

 

 

NET PROFIT (LOSS) PER UNIT:

 

 

 

 

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

807,066

 

1,058,878

 

$

861,304

 

1,108,060

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.55

)

$

4.84

 

$

(7.48

)

$

(5.04

)

 

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, 2012 AND 2011

(unaudited)

 

 

 

Units

 

General
Partner

 

Limited
Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2011

 

931,842

 

$

1,650

 

$

170,827,390

 

$

170,829,040

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

3,999

 

 

730,304

 

730,304

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

(72

)

(6,442,476

)

(6,442,548

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(165,163

)

 

(29,987,544

)

(29,987,544

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, September 30, 2012

 

770,678

 

$

1,578

 

$

135,127,674

 

$

135,129,252

 

 

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, 2012 (unaudited)

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2012

 

September 30, 2012

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

176.1164

 

$

183.3240

 

 

 

 

 

 

 

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

 

1.0236

 

(2.5251

)

Expenses (1)

 

(1.8019

)

(5.4608

)

 

 

 

 

 

 

Net asset value, end of period

 

$

175.3381

 

$

175.3381

 

 

 

 

 

 

 

Total Return: (3)

 

 

 

 

 

 

 

 

 

 

 

Total return

 

-0.44

%

-4.36

%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

1.00

%

3.00

%

 

 

 

 

 

 

Net investment profit (loss)

 

-1.00

%

-3.00

%

 


(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 partner’s 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, 2011 (unaudited)

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2011

 

September 30, 2011

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

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)

 

-1.01

%

-3.01

%

 


(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 partner’s 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”) was organized under the Delaware Revised Uniform Limited Partnership Act on December 11, 1995 and commenced trading on July 15, 1996.  The Partnership issues new units of limited partner interest (“Units”) at Net Asset Value per unit as of the beginning of each calendar month (see Item 2 for discussion of net asset value and net asset value per unit for subscription and redemption purposes hereinafter referred to as Net Asset Value and Net Asset Value Unit). The Partnership operates as a “fund of funds”, allocating and reallocating its capital, under the discretion of Merrill Lynch Alternative Investments LLC (“MLAI” or “General Partner”) the General Partner of the Partnership, among five underlying Merrill Lynch FuturesAccessSM Program Funds (each a “Portfolio Fund” and collectively the “Portfolio Funds”) (See Note 2).

 

MLAI is an indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America Corporation and its affiliates are sometimes referred to herein as “BAC”. Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) is currently the exclusive futures clearing broker for the Portfolio Funds.  The Sponsor may select other parties as futures clearing broker(s). Merrill Lynch International Bank Ltd. (“MLIB”) is the primary foreign exchange (“F/X”) forward prime broker for the Portfolio Funds.  The Sponsor 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.

 

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, BAC 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, 2012 and December 31, 2011 and the results of its operations for the three and nine months ended September 30, 2012  and  2011. However, the operating results for the interim periods may not be indicative of the results for the full year.

 

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011.

 

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



 

Revision

 

During the quarter, the Partnership identified that it miscalculated its net investment income ratio during the quarters from 2009 through first quarter 2012.  However, this miscalculation did not affect the Partnership’s annual reports.  The Partnership had been showing net income over average assets rather than the applicable net investment income over average assets.  As a result, the 2011 presentation of the net investment income ratio has been revised here to show the appropriate ratio.

 

2.              INVESTMENTS IN PORTFOLIO FUNDS

 

The five funds in which the Partnership is invested in as of September 30, 2012 are; Aspect FuturesAccess LLC (“Aspect”) (formerly ML Aspect FuturesAccess LLC), ML BlueTrend FuturesAccess LLC (“BlueTrend”), Man AHL FuturesAccess LLC (“MAN”), ML Transtrend DTP Enhanced FuturesAccess LLC (“Transtrend”) and ML Winton FuturesAccess LLC (“Winton”).  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 individual Portfolio Funds.

 

The investment transactions were accounted for on 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 details of investments in Portfolio Funds at and for the period ended September 30, 2012 are as follows:

 

September 30, 2012

 

 

 

Fair Value

 

Percentage of
Partners’ Capital

 

Profit (Loss)

 

Cost @ 9/30/12

 

Management
Fee

 

Performance
Fee

 

Redemptions
Permitted

 

Winton

 

$

26,965,417

 

19.96

%

$

(1,188,236

)

$

18,066,101

 

$

(351,764

)

$

(519

)

Monthly

 

Aspect

 

26,965,418

 

19.96

%

(1,474,385

)

19,823,418

 

(352,170

)

(15,340

)

Monthly

 

Transtrend

 

26,965,419

 

19.96

%

1,929,924

 

19,440,283

 

(237,262

)

(37,953

)

Monthly

 

Bluetrend

 

26,965,420

 

19.96

%

740,742

 

22,790,136

 

(236,455

)

(127,421

)

Monthly

 

Man

 

26,965,418

 

19.96

%

(1,743,486

)

29,734,322

 

(233,920

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

134,827,092

 

99.80

%

$

(1,735,441

)

$

109,854,260

 

$

(1,411,571

)

$

(181,233

)

 

 

 

The details of investments in Portfolio Funds at and for the year ended December 31, 2011 are as follows:

 

December 31, 2011

 

 

 

Fair Value

 

Percentage of
Partners’ Capital

 

Profit (Loss)

 

Cost @ 12/31/11

 

Management
Fee

 

Performance
Fee

 

Redemptions
Permitted

 

Winton

 

$

34,131,627

 

19.98

%

$

2,578,630

 

$

21,952,689

 

$

(623,365

)

$

(454,941

)

Monthly

 

Aspect

 

34,131,941

 

19.98

 

2,458,921

 

23,597,609

 

(622,769

)

(437,689

)

Monthly

 

Transtrend

 

34,131,695

 

19.98

 

(3,905,862

)

25,364,344

 

(407,955

)

(29,056

)

Monthly

 

Bluetrend

 

34,131,105

 

19.98

 

192,520

 

29,491,911

 

(414,658

)

(166,926

)

Monthly

 

Man

 

34,131,419

 

19.98

 

(3,718,173

)

35,602,258

 

(407,717

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

170,657,787

 

99.90

%

$

(2,393,964

)

$

136,008,811

 

$

(2,476,464

)

$

(1,088,612

)

 

 

 

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, 2012

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

Winton

 

$

1,159,252,756

 

$

29,878,255

 

$

1,129,374,501

 

Aspect

 

313,124,949

 

12,713,037

 

300,411,912

 

Transtrend

 

172,188,248

 

3,988,644

 

168,199,604

 

Bluetrend

 

202,164,116

 

12,576,278

 

189,587,838

 

Man

 

43,184,888

 

5,380,718

 

37,804,170

 

 

 

 

 

 

 

 

 

Total

 

$

1,889,914,957

 

$

64,536,932

 

$

1,825,378,025

 

 

 

 

As of December 31, 2011

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

Winton

 

$

1,165,044,597

 

$

45,943,206

 

$

1,119,101,391

 

Aspect

 

330,934,407

 

25,416,723

 

305,517,684

 

Transtrend

 

234,879,250

 

13,832,941

 

221,046,309

 

Bluetrend

 

261,062,613

 

5,355,684

 

255,706,929

 

Man

 

57,971,592

 

3,904,627

 

54,066,965

 

 

 

 

 

 

 

 

 

Total

 

$

2,049,892,459

 

$

94,453,181

 

$

1,955,439,278

 

 

 

 

For the nine months ended September 30, 2012

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Net
Income (Loss)

 

Winton

 

$

(767,505

)

$

(31,900

)

$

(388,831

)

$

(1,188,236

)

Aspect

 

(978,714

)

(63,031

)

(432,640

)

(1,474,385

)

Transtrend

 

2,412,633

 

(131,726

)

(350,983

)

1,929,924

 

Bluetrend

 

1,248,847

 

(90,870

)

(417,235

)

740,742

 

Man

 

(1,301,360

)

(74,356

)

(367,770

)

(1,743,486

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

613,901

 

$

(391,883

)

$

(1,957,459

)

$

(1,735,441

)

 

 

 

For the nine months ended September 30, 2011

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Net
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

 

(762,864

)

(264,354

)

(533,655

)

(1,560,873

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,210,715

 

$

(625,482

)

$

(3,815,188

)

$

770,045

 

 

3.              FAIR VALUE OF INVESTMENTS

 

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

 

The fair value measurement guidance established a hierarchical 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

 

10



 

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.  The investments in Portfolio Funds, as discussed below, are also included in this category.

 

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. Investments that are generally included in this category are privately held debt and equity securities.

 

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.

 

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 net asset value of the Portfolio Funds.

 

Although there are monthly transactions in these Portfolio Funds, 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. There were no transfers to or from any level during the three and nine months ended September 30, 2012.

 

The following table summarizes the valuation of the Partnership’s investments by the above fair value hierarchy levels as of September 30, 2012 and December 31, 2011:

 

Investment in 

 

 

 

 

 

 

 

 

 

Portfolio Funds

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

$

134,827,092

 

$

 

$

134,827,092

 

$

 

December 31, 2011

 

$

170,657,787

 

$

 

$

170,657,787

 

$

 

 

11



 

4.                MARKET, CREDIT AND CONCENTRATION RISKS

 

The nature of this Partnership has certain risks, which cannot all be presented on the financial statements as 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 open contracts 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 trading advisor monitoring, along with monitoring the market risk controls being applied by the respective trading advisors is sufficient to detect if any such intervention is needed.

 

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 (loss) 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 BAC entities as clearing brokers.

 

The Portfolio Funds, in the normal course of business, enters into various contracts, with MLPF&S acting as the futures clearing broker and MLIB as the foreign currency forward counterpart.  Pursuant to the arrangements with MLPF&S and MLIB (which each includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S or MLIB, respectively, the receivables and payables are offset and reported as unrealized profit or loss on open futures contracts for MLPF&S and as unrealized profit or loss on forward contracts for MLIB on the Statements of Financial Condition.

 

12



 

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 expects the risk of loss to be remote and, therefore, no provision has been recorded.

 

5.              RELATED PARTY TRANSACTIONS

 

MLAI and the Partnership have entered into a transfer agency and investor services agreement with Financial Data Services, Inc. (the “Registrar and Transfer Agent”), a wholly-owned subsidiary of BAC and affiliate of MLAI. The Registrar and Transfer Agent performs the transfer agent and investor services functions for the Partnership.  The agreement with the Registrar and Transfer Agent calls for a fee to be paid based on the collective net asset of funds managed or sponsored by MLAI with the minimum annual fee of $2,700,000.  The fee rate ranges from 0.016% to 0.02% based on aggregate net assets.  MLAI allocates the Registrar and Transfer Agent fees to each of the managed/sponsored funds on a monthly basis based on the Partnership’s net assets and the fee is payable monthly in arrears. The Registrar and Transfer Agent fee, which ranged between 0.018% and 0.02% of aggregate asset level, allocated to the Partnership for the three and nine months ended September 30, 2012 are paid on behalf of the Partnership by the Sponsor. These fees are included in the wrap fee.

 

6.              SUBSEQUENT EVENTS

 

The General Partner has evaluated the impact of subsequent events on the Partnership through the date the financials were able to be issued 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

 

MONTH-END NET ASSET VALUE PER UNIT

 

MLAI believes that the Net Asset Value used to calculate subscription and redemption value and to report performance to investors throughout the period is a useful performance measure for the investors of the Partnership.  Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for financial reporting purposes.

 

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 generally equals the value of the Partnership’s interests in the underlying Portfolio Funds as of such date, plus any other assets held by the Partnership, minus accrued wrap fees and all 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

 

2011

 

$

190.8217

 

$

194.3375

 

$

190.6906

 

$

198.0035

 

$

189.6097

 

$

183.3753

 

$

190.7027

 

$

189.4490

 

$

188.0956

 

2012

 

$

183.7531

 

$

185.8545

 

$

181.1093

 

$

182.0269

 

$

185.1992

 

$

176.1164

 

$

183.6088

 

$

179.9176

 

$

175.3381

 

 

13



 

Liquidity and Capital Resources

 

The Partnership does not engage in the sale of goods or services.  The Partnership’s assets generally 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 three or nine months ended September 30, 2012 and there was no impact on the Partnership’s liquidity.

 

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

 

For the nine months ended September 30, 2012 Partnership capital decreased 20.90% from $170,829,040 to $135,129,252.  This decrease was attributable to the net loss from operations of $6,442,548, coupled with the redemption of 165,163 Redeemable Units resulting in an outflow of $29,987,544. The cash outflow was offset with cash inflow of $730,304 due to subscriptions of 3,999 Units. Future redemptions could impact the amount of funds available for investment in the Portfolio Funds in subsequent months.

 

Critical Accounting Policies

 

Statement of Cash Flows

 

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

 

Investments

 

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

 

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. As of September 30, 2012 the Partnership holds no cash equivalents. Cash was held at a nationally recognized financial institution.

 

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 the Partnership’s treatment of fair value see Note 3, Fair Value of Investments.

 

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

 

14



 

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 is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States — 2009.

 

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, 2012 to September 30, 2012

 

January 1, 2012 to March 31, 2012

 

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 as of March 31, 2012:

 

March 31, 2012

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

521,147

 

-810.03

%

Currencies

 

(728,043

)

1131.62

%

Energy

 

(48,746

)

75.77

%

Interest rates

 

(114,326

)

177.70

%

Metals

 

(229,882

)

357.31

%

Stock indices

 

535,514

 

-832.37

%

 

 

 

 

 

 

Total

 

$

(64,336

)

100.00

%

 

The Partnership experienced a net trading loss for the quarter ended March 31, 2012 of $252,058.

 

The Partnership returned an estimated -2.6% in March, bringing its quarter and year to date performance to -1.2%. In comparison, the DJ CS AllHedge Managed Futures Index was down an estimated -2.4% in March and is up 0.7% YTD. Performance was negative for all the Portfolio Funds. Returns ranged from -1.0% to -4.3%.

 

Coming into March, the Partnership continued to be long most markets and asset classes. In equity indices, the year started with a strong rally that spanned several global equity markets. Following strong up moves in both January and February, the Portfolio Funds built up large long equity index positions across several geographies.

 

15



 

These positions tended to be the biggest in the U.S. and Europe, with somewhat smaller long positions in Japan and Asia. Commodities represented another significant risk allocation. The Portfolio Funds tended to have large long positions in oil and oil products as well as precious metals and short positions in natural gas. In crops, grains and industrial metals, positions were close to neutral, with longs and short balancing each other. Within currencies, a few large positions dominated, including shorts in the euro and longs in the Australian dollar. In other currencies, the Portfolio Funds generally had small long exposure. Finally, fixed income exposure was on the long side, in both rates and bonds.

 

This positioning produced negative results in March and the Partnership swung from positive performance in the first two months to being negative for the quarter. March saw reversals in many markets and the Portfolio Funds posted losses as a result. The biggest reversals came mid-month in the bonds sector. With the U.S. Federal Reserve raising its U.S. economic outlook, bonds sold off globally. Given that the Portfolio Funds had large long positions, they suffered losses and moved to cut positions. Currencies also saw losses. Foreign currencies generally depreciated against the U.S. dollar following good economic numbers in the U.S. The euro, where the Portfolio Funds were short, ended the month slightly higher, adding to losses and profits in equity indices. The Portfolio Funds had large long positions in U.S. and Asian indices which proved profitable. European indices generally fell in March due to the negative impact from the debt crisis and recessions, offsetting some profits and commodities generally proved profitable. Short natural gas positions made money when the price of natural gas fell over -20%. There were some profits in industrial metals and agricultural markets from short positions.

 

April 1, 2012 to June 30, 2012

 

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 as of June 30, 2012:

 

June 30, 2012

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

(211,450

)

26.37

%

Currencies

 

(691,462

)

86.24

%

Energy

 

(638,715

)

79.66

%

Interest rates

 

885,268

 

-110.41

%

Metals

 

103,153

 

-12.86

%

Stock indices

 

(248,571

)

31.00

%

 

 

 

 

 

 

Total

 

$

(801,777

)

100.00

%

 

The Partnership experienced a net trading loss for the quarter ended June 30, 2012 of $2,493,658.

 

The Partnership returned an estimated -2.8% for the second quarter, bringing its year to date performance to -3.9%. In comparison, the DJ CS AllHedge Managed Futures Index was down an estimated -1.4% in Q2 and is down -1.8% YTD. 4 out of 5 managers in the Partnership had negative returns.  Returns ranged from +2.1% to -4.3%.

 

The Partnership 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 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

 

16



 

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 started the second quarter long most markets. As the economic outlook began to deteriorate in April, yields started to head lower. In response, Portfolio Funds 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 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, they started to reduce their long positions. Given that most trend-followers in the Partnership 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 had finally exited most of their losing long positions and to go short. In June, equities recovered some, just as the Portfolio Funds 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 started the quarter with a long bias. The big reversals in May caused losses and the Portfolio Funds spent the month repositioning for a new bearish environment. As the markets recovered in June, the 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, Portfolio Funds 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 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.

 

July 1, 2012 to September 30, 2012

 

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 as of September 30, 2012:

 

September 30, 2012

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

(196,362

)

-49.16

%

Currencies

 

384,103

 

96.16

%

Energy

 

(263,007

)

-65.84

%

Interest rates

 

1,910,326

 

478.25

%

Metals

 

(351,830

)

-88.08

%

Stock indices

 

(1,083,791

)

-271.33

%

 

 

 

 

 

 

Total

 

$

399,439

 

100.00

%

 

17



 

The Partnership experienced a net trading gain for the quarter ended September 30, 2012 of $1,010,275.

 

The Partnership returned an estimated -0.4% for the third quarter, bringing its year to date performance to -4.4%. Four out of the five Portfolio Funds had negative returns for the quarter, ranging from +5.2% to -2.1%.

 

The Partnership started the 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 shorts in the Canadian dollar, British pound, and Swiss franc and small long positions in the Japanese yen and Australian dollar.  Equity exposure was short biased.  Net long positions in the U.S. were offset by net short positions in Europe and Asia.  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 term interest rates were profitable. As yields backed-up later in the third quarter, long bond positions resulted in losses in both August and September.  On the whole, gains in this sector were still greater than losses, but the retracement in August and September were costly.  The Partnership remained long biased throughout the quarter, but the size of positions was reduced as reversals made this a more challenging sector to trade.

 

Equities, on the other hand, offered a very different exposure and return profile.  The Partnership came into the quarter with limited equity exposure and a net short bias. While fixed income exposure was reduced over the course of the quarter, equity exposure increased in response to accommodative Central Bank policy.  The Portfolio Funds moved to a net long bias over the quarter and equities generated gains in September.

 

Foreign exchange was another positive contributor to performance early in the quarter that suffered losses on the heels of reversals later in the quarter.  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 in connection with European Central Bank President Draghi’s comment “to do whatever it takes to preserve the euro” propelled the single 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.

 

Commodity trading positively contributed to performance in July, but the sector had the greatest impact on the Partnership in September.  During that month a series of reversals resulted in sizeable losses.  While long positions in precious metals generated gains as the U.S. Fed’s QE3 and the European Central Bank’s Outright Monetary Transactions program fueled currency debasement concerns, the Partnership experienced losses in other sectors.  Long positions in oil 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 policy diminished global growth concerns.  Finally, long positions in grains which had been profitable earlier in the quarter were hurt as signs that the U.S. harvest might be better than originally expected resulted in a steep retracement.

 

18



 

January 1, 2011 to September 30, 2011

 

January 1, 2011 to March 31, 2011

 

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 as of March 31, 2011:

 

March 31, 2011

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

168,480

 

3.62

%

Currencies

 

1,584,188

 

34.04

%

Energy

 

1,260,216

 

27.08

%

Interest rates

 

(178,106

)

-3.83

%

Metals

 

202,186

 

4.34

%

Stock indices

 

1,616,373

 

34.75

%

 

 

 

 

 

 

Total

 

$

4,653,337

 

100.00

%

 

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 profits 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 profits 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

 

19



 

April 1, 2011 to June 30, 2011

 

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 as of June 30, 2011:

 

June 30, 2011

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

155,562

 

-23.87

%

Currencies

 

(165,209

)

25.35

%

Energy

 

(247,053

)

37.90

%

Interest rates

 

209,820

 

-32.19

%

Metals

 

(964,489

)

147.97

%

Stock indices

 

359,550

 

-55.16

%

 

 

 

 

 

 

Total

 

$

(651,819

)

100.00

%

 

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.

 

20



 

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.

 

July 1, 2011 to September 30, 2011

 

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 as of September 30, 2011:

 

September 30, 2011

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss)

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

573,307

 

25.36

%

Currencies

 

(367,792

)

-16.27

%

Energy

 

906,170

 

40.08

%

Interest rates

 

1,055,001

 

46.66

%

Metals

 

68,259

 

3.02

%

Stock indices

 

26,034

 

1.15

%

 

 

 

 

 

 

Total

 

$

2,260,979

 

100.00

%

 

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

 

21



 

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.

 

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 it trades.

 

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 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 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 quantification 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 Fund’s attempts to manage its market risk.

 

22



 

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.

 

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 (in the case of exchange-traded contracts in which profits and losses on open positions are cash settled daily through variation margin).

 

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

 

Exchange maintenance margin requirements of the Portfolio Funds have been used 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 (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 (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 tables indicate the average, highest, and lowest trading Value at Risk associated with the Portfolio Funds’ open positions by market category for the nine months ended September 30, 2012 and 2011.

 

23



 

Aspect Class DT (3)

September 30, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

 Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

547,456

 

1.77

%

$

787,524

 

$

258,269

 

Energy

 

597,903

 

1.93

%

1,025,263

 

323,512

 

Interest Rates

 

454,312

 

1.47

%

780,276

 

236,467

 

Metals

 

154,547

 

0.50

%

219,370

 

65,957

 

Stock Indices

 

624,743

 

2.02

%

983,450

 

76,736

 

Currencies

 

161,979

 

0.52

%

404,953

 

38,425

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,540,940

 

8.21

%

$

4,200,836

 

$

999,366

 

 


(3) Average Capitalization of Aspect Class DT is $30,918,004.

 

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.

 

24



 

Transtrend Class DT (2)

September 30, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

 Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

507,105

 

1.64

%

$

798,195

 

$

22,509

 

Energy

 

1,164,282

 

3.77

%

1,954,475

 

17,328

 

Interest Rates

 

466,290

 

1.51

%

948,815

 

181,539

 

Metals

 

458,280

 

1.48

%

722,010

 

270,818

 

Stock Indices

 

731,782

 

2.37

%

1,679,516

 

137,345

 

Currencies

 

306,694

 

0.99

%

489,822

 

144,357

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,634,433

 

11.76

%

$

6,592,833

 

$

773,896

 

 


(2) Average capitalization of Transtrend Class DT is $30,915,932.

 

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.

 

25



 

Winton Class DT (5)

September 30, 2012

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

168,416

 

0.54

%

$

241,896

 

$

60,909

 

Energy

 

137,533

 

0.44

%

246,888

 

62,895

 

Interest Rates

 

488,479

 

1.58

%

1,211,389

 

80,565

 

Metals

 

336,282

 

1.09

%

459,300

 

264,043

 

Stock Indices

 

508,021

 

1.64

%

969,848

 

133,556

 

Currencies

 

261,296

 

0.85

%

518,122

 

63,750

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

1,900,027

 

6.14

%

$

3,647,443

 

$

665,718

 

 


(5) Average capitalization of Winton Class DT is $30,917,972.

 

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.

 

26



 

Bluetrend Class DT (2)

September 30, 2012

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

265,903

 

0.86

%

$

537,550

 

$

51,306

 

Energy

 

534,148

 

1.73

%

1,059,886

 

101,170

 

Interest Rates

 

813,509

 

2.63

%

2,660,775

 

72,322

 

Metals

 

401,819

 

1.30

%

533,889

 

257,439

 

Stock Indices

 

439,824

 

1.42

%

1,522,509

 

10,635

 

Currencies

 

903,219

 

2.92

%

1,765,866

 

37,637

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,358,422

 

10.86

%

$

8,080,475

 

$

530,509

 

 


(2) Average capitalization of Bluetrend Class DT is $30,917,920.

 

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.

 

27



 

Man AHL LLC Class DT (5)

September 30, 2012

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

221,402

 

0.72

%

$

455,133

 

$

20,831

 

Energy

 

234,993

 

0.76

%

424,393

 

159,527

 

Interest Rates

 

546,744

 

1.77

%

858,790

 

310,300

 

Metals

 

313,307

 

1.01

%

635,680

 

16,943

 

Stock Indices

 

465,469

 

1.51

%

895,709

 

154,514

 

Currencies

 

838,953

 

2.71

%

1,619,296

 

106,249

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,620,868

 

8.48

%

$

4,889,001

 

$

768,364

 

 


(5) Average capitalization of Man AHL LLC Class DT is $30,909,892.

 

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.

 

28



 

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.  Even comparatively minor losses could cause MLAI to further deleverage or terminate the Partnership’s and the Portfolio Funds’ trading. The 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 and MLIB

 

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 and MLIB.  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 time 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.

 

29



 

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