Attached files
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 quarter ended: | June 30, 2016 |
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: | 000-53816 |
KMP FUTURES FUND I LLC |
(Exact name of the Registrant as specified in its charter) |
Delaware | 20-5914530 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
680 Fifth Avenue, Suite# 1901, New York, New York | 10019 |
(Address of principal executive offices) | (Zip Code) |
(914) 307-7000 |
(The Registrants telephone number, including area code) |
(Former name, former address and former fiscal year, if changed since last report) |
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 definition of accelerated filer, large 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 | Smaller Reporting Company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
KMP FUTURES FUND I LLC
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2016
2
PART I – FINANCIAL INFORMATION
Item 1. | Condensed Financial Statements |
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK;
CONDENSED FINANCIAL STATEMENTS TO FOLLOW]
3
CONDENSED FINANCIAL STATEMENTS
June 30, 2016 (Unaudited)
4
KMP FUTURES FUND I LLC |
CONDENSED STATEMENTS OF FINANCIAL CONDITION |
June 30, 2016 (Unaudited) and December 31, 2015 |
June 30, 2016 | December 31, 2015 | |||||||
ASSETS | ||||||||
Cash and cash equivalents (see Note 2) | $ | 206,475 | $ | 160,928 | ||||
Receivable from Managing Member | 32,235 | 162,151 | ||||||
Investment in security, at fair value (cost $1,628,954 and $1,312,913 at June 30, 2016 and December 31, 2015, respectively) | 1,635,445 | 1,296,166 | ||||||
Investment in Affiliated Investment Funds, at fair value (see Note 7) | 4,501,622 | 0 | ||||||
Receivable from Affiliated Investment Funds | 0 | 5,987,304 | ||||||
Total assets | $ | 6,375,777 | $ | 7,606,549 | ||||
LIABILITIES | ||||||||
Management fees payable to Managing Member | $ | 8,240 | $ | 10,314 | ||||
Interest payable to Managing Member | 15,294 | 0 | ||||||
Accrued expenses payable | 40,582 | 93,634 | ||||||
Service fees payable | 15,790 | 19,550 | ||||||
Redemptions payable | 34,101 | 146,795 | ||||||
Total liabilities | 114,007 | 270,293 | ||||||
MEMBERS’ CAPITAL (Net Asset Value) | 6,261,770 | 7,336,256 | ||||||
Total liabilities and members’ capital | $ | 6,375,777 | $ | 7,606,549 |
See accompanying notes.
5
KMP FUTURES FUND I LLC |
CONDENSED SCHEDULES OF INVESTMENTS |
June 30, 2016 (Unaudited) and December 31, 2015 |
June 30, 2016 | December 31, 2015 | |||||||||||||||
Fair
Value as a % of Members’ Capital | Fair Value | Fair
Value as a % of Members’ Capital | Fair Value | |||||||||||||
Investment in securities: | ||||||||||||||||
Publicly-traded mutual fund: | ||||||||||||||||
DoubleLine Low Duration Bond Fund Class I (shares 162,730.84 and 129,746.316 at June 30, 2016 and December 31, 2015, respectively) | 26.12 | % | 1,635,445 | 17.67 | % | 1,296,166 | ||||||||||
Investment in Affiliated Investment Funds: | ||||||||||||||||
CTA Choice ISAT | 17.85 | % | $ | 1,117,745 | 0.00 | % | $ | 0 | ||||||||
CTA Choice KEY | 54.04 | % | 3,383,877 | 0.00 | % | 0 | ||||||||||
Total investment in Affiliated Investment Funds | 71.89 | % | $ | 4,501,622 | 0.00 | % | $ | 0 |
June 30, 2016 | ||||||||
Description | Fair Value as a % of Members’ Capital | Fair Value | ||||||
Proportional Share of Investments of Affiliated Investment Funds: | ||||||||
Proportional Share of Investments in DoubleLine | ||||||||
Low Duration Bond Fund (shares 164,862.32 at June 30, 2016) | 26.46 | % | $ | 1,654,866 |
See accompanying notes.
6
KMP FUTURES FUND I LLC |
CONDENSED STATEMENTS OF OPERATIONS |
For the Three Months and Six Months Ended June 30, 2016 and 2015 (Unaudited) |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
INVESTMENT INCOME | ||||||||||||||||
Interest income | $ | 0 | $ | 6 | $ | 7 | $ | 7 | ||||||||
Dividend income | 11,278 | 1,840 | 11,689 | 17,805 | ||||||||||||
Total investment income | 11,278 | 1,846 | 11,696 | 17,812 | ||||||||||||
EXPENSES | ||||||||||||||||
Management fees to Managing Member | 48,511 | 69,285 | 102,479 | 142,411 | ||||||||||||
Managing Member interest earned on Certain Investment Funds (see Note 4) | 17,113 | 1,840 | 17,525 | 9,743 | ||||||||||||
Service fees (see Note 6) | 50,607 | 78,330 | 107,820 | 161,549 | ||||||||||||
Operating expenses | 31,311 | 84,229 | 84,810 | 148,222 | ||||||||||||
Total expenses | 147,542 | 233,684 | 312,634 | 461,925 | ||||||||||||
General and administrative expenses borne by the Managing Member and affiliates | (6,532 | ) | (47,325 | ) | (32,235 | ) | (72,231 | ) | ||||||||
Net expenses | 141,010 | 186,359 | 280,399 | 389,694 | ||||||||||||
Net investment loss | (129,732 | ) | (184,513 | ) | (268,703 | ) | (371,882 | ) | ||||||||
REALIZED AND UNREALIZED GAIN OR (LOSS) ON INVESTMENTS | ||||||||||||||||
Net realized gain (loss) on investment in securities | 388 | (32,977 | ) | (15,618 | ) | (37,651 | ) | |||||||||
Net change in unrealized appreciation on investment in securities | 7,231 | 32,977 | 23,238 | 73,781 | ||||||||||||
Net gain from investment in securities | 7,619 | 0 | 7,620 | 36,130 | ||||||||||||
Net gain (loss) from investment in Affiliated Investment Funds | (351,601 | ) | (456,018 | ) | (444,048 | ) | 93,738 | |||||||||
Total realized and unrealized gain (loss) on Investments | (343,982 | ) | (456,018 | ) | (436,428 | ) | 129,868 | |||||||||
NET (LOSS) | $ | (473,714 | ) | $ | (640,531 | ) | $ | (705,131 | ) | $ | (242,014 | ) |
See accompanying notes.
7
KMP FUTURES FUND I LLC
CONDENSED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)
For the Six Months Ended June 30, 2016 and 2015 (Unaudited)
Members’ Capital | ||||
Six months ended June 30, 2016 | ||||
Members’ capital at December 31, 2015 | $ | 7,336,256 | ||
Redemptions | (369,355 | ) | ||
Net (loss) | (705,131 | ) | ||
Members’ capital at June 30, 2016 | $ | 6,261,770 | ||
Six months ended June 30, 2015 | ||||
Members’ capital at December 31, 2014 | $ | 10,192,361 | ||
Redemptions | (1,037,339 | ) | ||
Net (loss) | (242,014 | ) | ||
Members’ capital at June 30, 2015 | $ | 8,913,008 |
See accompanying notes.
8
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. | ORGANIZATION |
A. | General Description of the Company |
KMP Futures Fund I LLC (the Company) is a limited liability company organized under the laws of Delaware on November 20, 2006 which commenced operations on January 1, 2007. The Company will terminate on December 31, 2056 unless terminated sooner under the provisions of the limited liability company agreement of the Company (the Operating Agreement). The Company was formed to engage in the direct or indirect speculative trading of a diversified portfolio of futures contracts, options on futures contracts and forward currency contracts and may, from time to time, engage in cash and spot transactions. Investors holding interests in the Company are collectively referred to as the Members or the Individual Members. The fiscal year end of the Company is December 31.
Kenmar Preferred Investments, LLC (Kenmar Preferred or the Managing Member), a Delaware limited liability company, is the Managing Member of the Company and has been delegated administrative authority over the operations of the Company.
The Company is a reporting company pursuant to the Securities Exchange Act of 1934. Moreover, as a commodity pool, the Company is subject to the record keeping and reporting requirements of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The Company meets the definition of an investment company in accordance with guidance under Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
The Company allocates a portion of its net assets (Allocated Assets) to commodity Trading Advisors (each, a Trading Advisor and collectively, the Trading Advisors) through various series of CTA Choice Fund LLC (CTA Choice), a Delaware limited liability company, for which such allocations are rebalanced quarterly. Each Trading Advisor manages the portion of the assets of the Company allocated to such Trading Advisor and makes the trading decisions in respect of the assets allocated to such Trading Advisor. The Managing Member may terminate any current Trading Advisor or select new Trading Advisors from time to time in its sole discretion. In the future, the Managing Member may determine to access certain Trading Advisors through separate investee pools.
Clarity Managed Account & Analytics Platform, LLC (Clarity), an affiliate of Kenmar Preferred, serves as the managing member for CTA Choice. CTA Choice consists of multiple segregated series, each established pursuant to a separate Certificate of Designation prepared by Clarity. CTA Choice is an umbrella fund having multiple series, each of which is referred to as an Affiliated Investment Fund. Each Affiliated Investment Fund has its own clearly-defined investment objective and strategies that are implemented by a trading advisor.
9
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. | ORGANIZATION (CONTINUED) |
A. | General Description of the Company (Continued) |
Kenmar Global Investment Management, LLC (the Asset Allocator), an affiliate of the Managing Member, is the Asset Allocator of CTA Choice. Pursuant to the Asset Allocation Agreements between the Managing Member, the Asset Allocator, and each interestholder, the Asset Allocator determines the trading level of each interestholders assets and reallocates among the separate series of CTA Choice as agreed upon with the Trading Advisors. Effective December 31, 2015, Kenmar Global Investment Management, LLC was put into liquidation and Clarity was appointed as the Asset Allocator of the Company. While the Asset Allocator receives no fees for such services from the Company, the Asset Allocator is paid management and incentive fees directly from the interestholders pursuant to each interestholders Asset Allocation Agreement. The Company pays no management or incentive fees to the Asset Allocator.
Effective January 1, 2016, the Company allocates approximately one-half of its Allocated Assets to each of CTA Choice ISAT (ISAT) and CTA Choice KEY (KEY), both segregated series of CTA Choice. Deep Field Capital AG (Deep Field) is the Trading Advisor for ISAT and manages the assets pursuant to its Singularity Managed Futures Program. KeyQuant S.A.S (KeyQuant) is the Trading Advisor for KEY and manages the assets pursuant to its Key Trends Program.
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A. | Basis of Accounting |
The condensed statements of financial condition, including the condensed schedules of investments, as of June 30, 2016, the condensed statements of operations for the three months ended June 30, 2016 (Second Quarter 2016), for the six months ended June 30, 2016 (Year-To-Date 2016), for the three months ended June 30, 2015 (Second Quarter 2015) and for the six months ended June 30, 2015 (Year-To-Date 2015) and the condensed statements of changes in members capital for the Year-To-Date 2016 and the Year-To-Date 2015 are unaudited.
Certain amounts in the Second Quarter 2015 and Year-To-Date 2015 condensed financial statements were reclassified to conform with Second Quarter 2016 and Year-To-Date 2016 presentation. The reclassification did not have any material impact on the condensed financial statements.
In the opinion of the Managing Member, the condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of the Company as of June 30, 2016 and the results of its operations for the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015. The operating results for these interim periods may not be indicative of the results expected for a full year.
The condensed financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Such principles require the Managing Member to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
10
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
A. | Basis of Accounting (Continued) |
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Companys annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2015.
Investment in securities consists of publicly-traded mutual funds, which are valued using the quoted price per share on the last day of the period. Realized gains and losses from investment in securities are determined using the identified cost method. Any change in net unrealized gain or loss from the preceding period is reported in the condensed statements of operations. Dividends are recorded on the ex-dividend date.
The Company has elected not to provide a statement of cash flows since substantially all of the Companys investments are carried at fair value and classified as Level 1 or Level 2 measurements in the fair value hierarchy table, the Company has little or no debt and a condensed statement of changes in members capital (Net Asset Value) is provided.
Consistent with standard business practice in the normal course of business, the Company has provided general indemnifications to the Managing Member, the Trading Advisors and others when they act, in good faith, in the best interests of the Company. The Company is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.
The Company accounts for financial assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: quoted market prices in active markets for identical assets and liabilities (Level 1), inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (Level 2), and unobservable inputs for the asset or liability (Level 3).
The Company considers its investments in publicly-traded mutual funds to be based on quoted prices in active markets for identical assets (Level 1).
There are no Level 3 investments as of June 30, 2016 or December 31, 2015, nor any portion of the interim periods.
The following tables summarize the assets measured at fair value using the fair value hierarchy:
June 30, 2016 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Investment in securities, at fair value | $ | 1,635,445 | $ | 0 | $ | 0 | $ | 1,635,445 |
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Investment in securities, at fair value | $ | 1,296,166 | $ | 0 | $ | 0 | $ | 1,296,166 |
11
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
B. | Cash and Cash Equivalents |
Cash and cash equivalents include cash and investments in overnight deposits. Interest income, if any, includes interest on cash and overnight deposits. In the event of a financial institutions insolvency, recovery of cash on deposit may be limited to account insurance or other protections afforded such deposits. The Company has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Members bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, redemptions received.
C. | Income Taxes |
The Company is treated as a partnership for U.S. federal income tax purposes. As such, the Company is not required to provide for, or pay, any U.S. federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Company may be subject to other state and local taxes in jurisdictions in which it operates.
The Company appropriately recognizes and discloses uncertain tax provisions in their financial statements. Recognition is permitted for each position if, based on its technical merits, it is more likely than not that the position will be upheld under audit by tax authorities. The Managing Member has reviewed the Companys tax positions for all open years and concluded that no provision for income taxes or expense is required in these condensed financial statements. The Company has elected an accounting policy to classify interest and penalties related to income taxes as interest or other expense.
There have been no differences between the tax basis and book basis of assets, liabilities or Members capital since inception of the Company.
D. | Capital Accounts |
The Company accounts for subscriptions, allocations and redemptions on a per Member capital account basis. The Company allocates profits and losses, for both financial and tax reporting purposes to its Members monthly on a pro rata basis based on each Members capital in the Company during the month. Distributions (other than redemptions of capital) may be made at the sole discretion of the Managing Member on a pro rata basis in accordance with the Members respective capital balances. The Managing Member has not and does not presently intend to make any distributions.
E. | Interest and Dividends |
Interest is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.
F. | Redemptions Payable |
For purposes of both financial reporting and calculation of redemption value, Net Asset Value is calculated per each Members capital account balance after allocations of net income (loss) to such Members account.
12
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
G. | Investment in Affiliated Investment Funds |
The investment in Affiliated Investment Funds is reported at fair value in the Companys condensed statements of financial condition. Fair value ordinarily is the funds net asset value as determined for the Affiliated Investment Funds in accordance with the funds valuation policies and reported at the time of the Companys valuation by the management of the funds. Generally, the fair value of the Companys investment in the Affiliated Investment Funds represents the amount that the Company could reasonably expect to receive from the funds if the Companys investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that the Company believes to be reliable.
H. | New Accounting Pronouncement |
In May, 2015, the FASB issued Accounting Standards Update No. 2015-07 (ASU 2015-07), Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using net asset value per share as a practical expedient. The Managing Member of the Company adopted ASU 2015-07 as of January 1, 2015. The adoption of ASU 2015-07 did not have a material impact on the Companys financial statements.
Note 3. | COSTS, FEES AND EXPENSES |
A. | Operating Expenses |
Operating expenses of the Company are paid for by the Company, subject to an operating expense cap of 1.5% of the Companys Net Asset Value per annum. Operating expenses include legal, accounting, registrar, transfer and assignment functions, investor communications, printing, and other administrative services.
B. | Trading Advisor Management and Incentive Fees |
The Company indirectly through its investment in Affiliated Investment Funds pays the following Trading Advisor management fees (based on the Companys Allocated Assets as of each standard allocation date) and incentive fees for achieving New High Net Trading Profits, in the Companys capital accounts within the Affiliated Investment Funds as defined in their respective advisory agreements:
Affiliated Investment Fund | Management Fee | Incentive Fee | ||
CTA Choice ISAT | 0.25% | 30.00% | ||
CTA Choice KEY | 1.00% | 20.00% | ||
CTA Choice QNTM** | 1.00% | 25.00% | ||
CTA Choice EGLG* | 2.00% | 25.00% | ||
CTA Choice WTN** | 1.50% | 20.00% |
* | The Company fully redeemed from CTA Choice EGLG as of April 30, 2015. |
** | The Company fully redeemed from CTA Choice QNTM and CTA Choice WTN as of December 31, 2015. |
13
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3. | COSTS, FEES AND EXPENSES (CONTINUED) |
B. | Trading Advisor Management and Incentive Fees (Continued) |
For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the Trading Advisor management fees paid indirectly within each Affiliated Investment Fund based on the Companys Allocated Assets as of each standard allocation date, totaled $12,473, $41,999, $26,307 and $88,431, respectively.
For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the Trading Advisor incentive fees paid indirectly within the Companys investment in Affiliated Investment Funds totaled $19,990, $13,962, $31,826 and $67,750, respectively.
C. | Commissions |
The Company, indirectly through the commodity trading activity of the Affiliated Investment Funds, is obligated to pay all floor brokerage expenses, give-up charges and NFA clearing and exchange fees. These activities are reflected within the respective net asset value of each of the Affiliated Investment Funds.
Note 4. | MANAGING MEMBER AND AFFILIATES |
The Companys management fees to the Managing Member and operating expense cap are both calculated on the Net Asset Value of the Company at rates of 6.0% and 1.5% per annum, respectively. In addition, the Service Fees, which are paid by the Company, are deducted from the management fee to be paid by the Company to the Managing Member.
The Company invests a portion of the excess cash balances not required for margin through certain investment funds which invest in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rules and regulations (collectively, Certain Investment Funds). The objective is to obtain a rate of return for the Company that balances risk and return relative to the historically low yields on short-term cash deposits with banks and/or brokerage firms. There is no guarantee that the Managing Member will be successful in investing the excess cash successfully to obtain a greater yield than available on short-term cash deposits with banks and/or brokerage firms.
The Managing Member is paid monthly 1/12th of 50% of the first 1% of the positive returns earned on the Companys investments in Certain Investment Funds. The calculation is based on the Companys average annualized Net Asset Value, and any losses related to returns on Certain Investment Funds must first be recovered through subsequent positive returns prior to the Managing Member receiving a payment. After the calculation of the amount payable to the Managing Member, the Company will be credited with all additional positive returns (or 100% of any losses) on the Companys investments in Certain Investment Funds. If at the end of any calendar year, a loss has been incurred on the returns for Certain Investment Funds, then the loss carry-forward will reset to zero for the next calendar year with regards to the calculation of the Managing Members portion of Certain Investment Funds income. As of June 30, 2016, the loss carry-forward amounted to $0. For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the Managing Members portion of interest earned on Certain Investment Funds amounted to $17,113, $1,840, $17,525 and $9,743, respectively.
14
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4. | MANAGING MEMBER AND AFFILIATES (CONTINUED) |
The Company pays a monthly administrative services fee to Clarity for risk management and related services with respect to monitoring the Trading Advisors, indirectly through its investment in Affiliated Investment Funds based on their respective beginning of month Allocated Assets. For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the administrative services fee earned indirectly totaled $4,938, $7,385, $10,428 and $13,898, respectively.
Note 5. | ADMINISTRATOR |
SS&C GlobeOp Financial Services LLC (SS&C GlobeOp or the Administrator), a Delaware limited liability company, served as the Administrator of the Company through January 31, 2016. The Administrator performs or supervises the performance of services necessary for the operation and administration of the Company (other than making investment decisions), including administrative and accounting services. The Administrator also calculates the Companys Net Asset Value. In addition, the Administrator maintains certain books and records of the Company, including certain books and records required by CFTC Rule 4.23(a). SS&C GlobeOp also serves as the administrator of the Affiliated Investment Funds. Effective February 1, 2016, Gemini Hedge Fund Services, LLC (Gemini or the Administrator), a Nebraska limited liability company, was appointed as the Administrator of the Company and the Affiliated Investment Funds.
The Company indirectly pays its pro-rata share of administrator fees through its investment in Affiliated Investment Funds. For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the Company indirectly paid administrator fees totaling $7,967, $18,978, $20,020 and $26,462, respectively.
The Company also pays administrator fees directly to the Administrators. For the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015, the Company directly paid the Administrators administrator fees of $1,500, $6,250, $5,083 and $12,500, respectively.
Note 6. | SERVICE FEES |
The service fee disclosed in the condensed statements of operations represents the monthly on-going trailing compensation paid to service providers ranging from 1/12th of 3.5% (3.5% per annum) to 1/12th of 4.0% (4.0% per annum) of the beginning of month Net Asset Value of the applicable Member interests. The services fees are paid by the Company and are deducted from the management fee paid to the Managing Member.
Note 7. | INVESTMENT IN AFFILIATED INVESTMENT FUNDS |
The Company invests a portion of its assets in Affiliated Investment Funds. The Companys investment in Affiliated Investment Funds represents 71.89% and 0% of the Net Asset Value of the Company at June 30, 2016 and December 31, 2015, respectively.
The investment in Affiliated Investment Funds is reported in the Companys condensed statements of financial condition at fair value. The Company records its proportionate share of income or loss in the condensed statements of operations. The investments are subject to the terms of the organizational and offering documents of the Affiliated Investment Funds.
15
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 7. | INVESTMENT IN AFFILIATED INVESTMENT FUNDS (CONTINUED) |
The following tables summarize the change in net asset value (fair value) of the Companys investment in Affiliated Investment Funds for the Year-To-Date 2016 and the Year-To-Date 2015:
Net
Asset Value December 31, 2015 | Purchases | Gain (Loss) | Redemptions | Net
Asset Value June 30, 2016 | ||||||||||||||||
CTA Choice ISAT | $ | 0 | $ | 3,914,631 | $ | (552,710 | ) | $ | (2,244,176 | ) | $ | 1,117,745 | ||||||||
CTA Choice KEY | 0 | 3,640,420 | 108,662 | (365,205 | ) | 3,383,877 | ||||||||||||||
Total | $ | 0 | $ | 7,555,051 | $ | (444,048 | ) | $ | (2,609,381 | ) | $ | 4,501,622 | ||||||||
Net
Asset Value December 31, 2014 | Purchases | Gain (Loss) | Redemptions | Net
Asset Value June 30, 2015 | ||||||||||||||||
CTA Choice EGLG | $ | 1,399,957 | $ | 3,501,000 | $ | 256,302 | $ | (5,157,259 | ) | $ | 0 | |||||||||
CTA Choice QNTM | 0 | 2,981,115 | 41,024 | (197,596 | ) | 2,824,543 | ||||||||||||||
CTA Choice WTN | 1,133,759 | 4,737,904 | (203,588 | ) | (1,177,692 | ) | 4,490,383 | |||||||||||||
Total | $ | 2,533,716 | $ | 11,220,019 | $ | 93,738 | $ | (6,532,547 | ) | $ | 7,314,926 |
The Affiliated Investment Funds are redeemable monthly and require a redemption notice of 1-5 days. The Company may make additional contributions to or redemptions from the Affiliated Investment Funds on a standard allocation date. The Affiliated Investment Funds engage in trading commodity futures including agricultural, currency, energy, interest rates and stock indices among other types, foreign currency forward contracts and options on futures contracts.
The Company records its proportionate share of income or loss in the condensed statements of operations.
Prior to May 1, 2015, the Companys investment in Affiliated Investment Funds was not fully funded, but was subject to additional capital calls up to the full amount of the capital commitment. Effective May 1, 2015, in accordance with the amendment to CTA Choices Private Placement Memorandum, the full amount of the Companys capital contribution to an Affiliated Investment Fund will be funded by each Trading Advisor pursuant to its trading strategy at the Affiliated Investment Funds Investment Level Factor. An Affiliated Investment Funds Investment Level Factor multiplied by the capital contribution of the Company to an Affiliated Investment Fund shall equal the Companys Investment Level.
An Affiliated Investment Funds Investment Level Factor is the trading leverage factor of an Affiliated Investment Fund, as designated by Clarity from time to time for such Affiliated Investment Fund, and reflects the level at which a Trading Advisor is instructed to trade the Affiliated Investment Funds assets. Clarity may increase or decrease the Affiliated Investment Funds Investment Level Factor in its sole discretion.
The following table sets out the total capital contribution and Investment Level split between net asset value:
Total
capital contribution June 30, 2016 | Total
investment level June 30, 2016 | |||||||
CTA Choice ISAT | $ | 1,117,745 | $ | 3,528,772 | ||||
CTA Choice KEY | 3,383,877 | 4,030,750 | ||||||
Total | $ | 4,501,622 | $ | 7,559,522 |
16
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 7. | INVESTMENT IN AFFILIATED INVESTMENT FUNDS (CONTINUED) |
The Company did not hold any investment in Affiliated Investment Funds at December 31, 2015.
The Companys investment in Affiliated Investment Funds is subject to the market and credit risks of securities held or sold short by their respective Affiliated Investment Fund. Clarity has established procedures to monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The interestholders within CTA Choice bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.
Note 8. | RELATED PARTIES |
The Company reimburses Kenmar Preferred and its affiliates for services it performs for the Company, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, postage, printing, and other administrative services.
The expenses incurred by the Company for services performed by Kenmar Preferred and its affiliates for the Company were as follows:
Three
months ended June 30, | Six
months ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Management fees to Managing Member | $ | 48,511 | $ | 69,285 | $ | 102,479 | $ | 142,411 | ||||||||
Managing Member interest earned on Certain Investment Funds | 17,113 | 1,840 | 17,525 | 9,743 | ||||||||||||
Operating expenses | 12,108 | 37,512 | 36,608 | 56,148 | ||||||||||||
77,732 | 108,637 | 156,612 | 208,302 | |||||||||||||
General and administrative expenses borne by the Managing Member and its affiliates | (6,532 | ) | (47,325 | ) | (32,235 | ) | (72,231 | ) | ||||||||
Total | $ | 71,200 | $ | 61,312 | $ | 124,377 | $ | 136,071 |
Expenses payable to the Managing Member and its affiliates, which are included in accrued expenses payable in the condensed statements of financial condition as of June 30, 2016 and December 31, 2015, were $5,325 and $37,924, respectively.
Note 9. | SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS |
Investments in the Company are made subject to the terms of the Operating Agreement.
A Member is able to request and receive redemption of capital, subject to the terms in the Operating Agreement.
17
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 10. | DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS |
No derivative instruments were directly held by the Company as of June 30, 2016 and December 31, 2015. Derivative trading activity is conducted within the Affiliated Investment Funds.
The Companys investment in Affiliated Investment Funds is subject to the market and credit risks of the futures contracts, options on futures contracts, forward currency contracts and other financial instruments held or sold short by them. The Company bears the risk of loss only to the extent of the capital commitment of its investment and, in certain specific circumstances, distributions and redemptions received.
The Company is exposed to various types of risks associated with the derivative instruments and related markets in which it indirectly invests through its investment in Affiliated Investment Funds. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Companys investment activities (credit risk), including investment in Affiliated Investment Funds.
The Managing Member has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Members bear the risk of loss only to the extent of the market value of their respective interests in the Company and, in certain specific circumstances, distributions and redemptions received.
Market Risk
Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Company holds and the liquidity and inherent volatility of the markets in which the Company indirectly invests through its ownership in Affiliated Investment Funds.
Credit Risk
The Managing Member attempts to minimize both credit and market risks by requiring the Company and its Trading Advisors to abide by various trading limitations and policies. The Managing Member monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.
18
KMP
FUTURES FUND I LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 11. | FINANCIAL HIGHLIGHTS |
The following information presents the financial highlights of the Company for the Second Quarter 2016, Second Quarter 2015, Year-To-Date 2016 and Year-To-Date 2015. This information has been derived from information presented in the condensed financial statements:
Three
months ended | Six
months ended | Three
months ended | Six
months ended | |||||||||||||
June 30, 2016 | June 30, 2015 | |||||||||||||||
Total Return(1),(3),(5) | (6.87 | )% | (9.85 | )% | (6.39 | )% | (2.76 | )% | ||||||||
Total expenses(2),(5) | 8.65 | % | 8.13 | % | 7.76 | % | 7.83 | % | ||||||||
Net investment loss(2),(4),(5) | (7.96 | )% | (7.79 | )% | (7.68 | )% | (7.47 | )% |
Total return is calculated based on the change in value of Members capital during the period. An individual Members total return and ratios may vary from the above total return and ratios based on the timing of subscriptions and redemptions.
(1) | Not Annualized. |
(2) | Annualized. |
(3) | Includes realized and unrealized gains (losses) on securities transactions. |
(4) | Represents interest and dividend income less total expenses. |
(5) | Net of general and administrative expenses borne by the Managing Member and affiliates. |
Note 12. | SUBSEQUENT EVENTS |
From July 1, 2016 through August 12, 2016, there were subscriptions of $0 and redemptions of approximately $25,000.
19
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This report on Form 10-Q (the Report) for the quarter ending June 30, 2016 (Second Quarter 2016) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments, LLC, the Managing Member of KMP Futures Fund I LLC, about the future results, performance, prospects and opportunities of the Registrant. The Managing Member has tried to identify these forward-looking statements by using words such as may, will, expect, anticipate, believe, intend, should and estimate or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Member and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause the Registrants actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the managing member undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Introduction
General
KMP Futures Fund I LLC (the Registrant) is a limited liability company organized under the laws of Delaware on November 20, 2006 which commenced operations on January 1, 2007. The Registrant will terminate on December 31, 2056 unless terminated sooner under the provisions of the limited liability company agreement of the Registrant (the Operating Agreement). The Registrant was formed to engage in the direct or indirect speculative trading of a diversified portfolio of futures contracts, options on futures contracts and forward currency contracts and may, from time to time, engage in cash and spot transactions. Investors holding interests in the Registrant are collectively referred to herein as the Members or the Individual Members. The fiscal year end of the Registrant is December 31.
Effective November, 2009, the Registrant became a reporting company pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). Moreover, as a commodity pool, the Registrant became subject to the record keeping and reporting requirements of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
The Registrants Objectives
The Registrants objectives are:
● | Significant profits over time; |
● | Performance volatility commensurate with profit potential; |
● | Controlled risk of loss; and |
● | Diversification within a traditional portfolio, typically consisting entirely of long equity and debt positions and reduced dependence on a single nations economy, by accessing global financial, commodity and other non-financial futures markets. |
The Registrants potential for aggressive capital growth arises from the profit possibilities offered by the global futures, forward and options markets and the skills of the professional trading organization(s) selected to manage the assets of the Registrant. The fact that the Registrant can profit from both rising and falling markets adds an element of profit potential that is not present in long-only strategies. However, the Registrant can also incur losses from both rising and falling markets that adds to the risk of loss. In addition to its profit potential and risk of loss, the Registrant also could help reduce the overall volatility, or risk, of a portfolio. By investing in markets that operate independently from U.S. stock and bond markets (and therefore, may be considered as non-correlated), the Registrant may provide positive returns even when U.S. stock and bond markets are experiencing flat to negative performance and may provide negative returns even when U.S. stock and bond markets are experiencing flat to positive performance. Non-correlation should not be confused with negative correlation, where the performance would be exactly opposite between the Registrant and U.S. stock and bond markets.
The Managing Member makes no guarantee that the investment objectives for the Registrant will be achieved.
Past performance is not necessarily indicative of future results.
20
Managing Member and its Affiliates
Kenmar Preferred Investments, LLC (Kenmar Preferred or the Managing Member) is the managing member of the Registrant, and has administrative authority over the operations of the Registrant.
The Managing Members predecessor and affiliates have been sponsoring and managing single and multi-advisor funds for over two decades. Effective April 1, 2016, the principal office of the Registrant is c/o Kenmar Preferred Investments, LLC, 680 Fifth Avenue, Suite 1901, New York, New York 10019. Prior to April 1, 2016, the principal office of the Registrant was 1211 Avenue of the Americas, Suite 2701, New York, New York 10036. The telephone number of the Registrant and the Managing Member is (914) 307-7000.
The Managing Member has substantial experience in selecting and monitoring Trading Advisors, asset allocation and overall portfolio design using quantitative and qualitative methods.
The Managing Member monitors the trading activity and performance of the Trading Advisors and adjusts the overall leverage at which the Registrant trades. The commitment of the Registrant to the Trading Advisors may exceed 100% of the Registrants total equity if the Managing Member decides to strategically allocate notional equity to such Trading Advisors. This may result in increased profits or larger losses than would otherwise result. There likely will be periods in the markets during which it is unlikely that the Trading Advisors will be profitable. By having the ability to deleverage the Registrants market commitment to below its actual equity during such periods, the Managing Member could help preserve capital while awaiting more favorable market cycles.
The Managing Member also performs ongoing due diligence with respect to the Trading Advisors. If the Managing Member determines that the Trading Advisors have departed from its program or stated trading methodology or has exceeded its stated risk parameters, the Managing Member, on behalf of the Registrant, will take such actions as it deems appropriate, which may include terminating the Trading Advisors. Similarly, if the Managing Members ongoing due diligence leads the Managing Member to determine that it is in the best interests of the Registrant to add an additional trading advisor; it will do so in its sole discretion. If the Managing Member concludes, based upon its perception of market or economic conditions, that it is appropriate to allocate assets of the Registrant to a different trading program run by the Trading Advisors, it will do so. The Managing Member may select a replacement if any of the Trading Advisors resign or are terminated, or may select additional Trading Advisors at its discretion.
The Trading Advisors
The Registrant allocates a portion of its net assets (Allocated Assets) to commodity Trading Advisors (each, a Trading Advisor and collectively, the Trading Advisors). Each Trading Advisor manages the portion of the assets of the Registrant allocated to such Trading Advisor and makes the trading decisions in respect of the assets allocated to such Trading Advisor. The Managing Member may terminate any current Trading Advisor or select new Trading Advisors from time to time in its sole discretion. In the future, the Managing Member may determine to access certain Trading Advisors through separate investee pools.
In general, the Registrant expects to access the Trading Advisors through various series of CTA Choice Fund LLC (CTA Choice). CTA Choice is an umbrella fund having multiple segregated series, each of which is referred to herein as a CTA Fund or an Affiliated Investment Fund. Each CTA Fund has its own clearly-defined investment objective and strategies that are implemented by a Trading Advisor. Clarity Managed Account & Analytics Platform, LLC (Clarity) an affiliate of Kenmar Preferred, serves as the managing member for CTA Choice. Until April 30, 2015, the Registrant allocated approximately one-half of its Allocated Assets to each of the following CTA Funds:
● | CTA Choice WTN (WTN), managed by Winton Capital Management Limited (Winton), pursuant to its Diversified Program, which is a systematic, technical diversified program; and |
● | CTA Choice EGLG (EGLG), managed by Eagle Trading Systems Inc. (Eagle), pursuant to its Global Program, which is a systematic, technical long term diversified program. |
21
Effective May 1, 2015, the Registrant allocates approximately one-half of its Allocated Assets to each WTN and CTA Choice QNTM (QNTM), which is managed by Quantmetrics Capital Management LLP (Quantmetrics) pursuant to its QM Multi Strategy Program, after fully redeeming from EGLG.
Effective January 1, 2016, the Registrant allocates approximately one-half of its Allocated Assets to each CTA Choice ISAT (ISAT) managed by Deep Field Capital AG (Deep Field), pursuant to its Singularity Managed Futures Program and CTA Choice KEY (KEY), managed by KeyQuant S.A.S (KeyQuant), pursuant to its Key Trends Program, after fully redeeming from QNTM and WTN on December 31, 2015.
Wintons Diversified Program employs a computer-based system to engage in the speculative trading of international futures, options and forwards markets, government securities such as bonds, as well as certain over the counter (OTC) instruments, which may include foreign exchange and interest rate forward contracts and swaps. Winton seeks to combine highly liquid financial instruments offering positive but low Sharpe ratios (meaning that profits have been achieved with a certain level of risk) and generally low correlation over the long term to other markets such as equities and fixed income.
Eagles Global Program is a technical, trend-following system developed, based on Eagles extensive experience in observing and trading the global markets, to capture a well-structured trading philosophy. The trading philosophy incorporates trend following elements, money management principles, predetermined risk parameters and volatility adjustment features. The system is designed to trade in a wide range of global futures markets - currencies, fixed income, energies, commodities and stock indices - that exhibit orderly intermediate and long-term trends, and adjust to changes in market environment with no predetermined allocation to any one sector. Eagle analyzes typical behavior and volatility patterns of various markets. The system seeks markets with potentially good risk/reward profiles while attempting to avoid markets characterized by excessive volatility and sharp price corrections. An attempt is made to participate in markets which exhibit favorable signal to noise characteristics. Money management and risk control disciplines serve to attempt to limit downside risk.
Quantmetrics QM Multi Strategy Program follows the QM Directional Strategy and the QM Premier Strategy. The QM Directional Strategy is a quantitative short term directional futures strategy. The strategy trades futures and foreign exchange with a holding period ranging from 5 minutes to a few days. The aim is to provide investors with long-term capital appreciation by realizing many short-term gains across a number of different asset classes. The investment approach identifies and captures market inefficiencies using statistical and econometric models. As the models selectively choose the timing of the trades, it is ideally positioned to benefit from liquidity driven price shocks. The QM Premier Strategy is a quantitative market neutral futures strategy. The strategy trades futures with a holding period from 20 minutes to 1 day. The aim is to provide investors with long-term capital appreciation by seeking to profit from short term liquidity imbalances in pairs of equity index futures. The investment approach identifies and captures market inefficiencies using statistical and econometric models. Disciplined risk management is built into each trading algorithm, with time stops strictly adhered to.
KeyQuants Key Trends program is a medium to long-term trend following trading program. Analysis allows capturing major economic cycles. The Trading Program aims to profit more from market trends thanks to its continuous analysis of trends. Moreover, the Trading Program offers a unique portfolio allocation mechanism known as the GEF. In the case of an uncertain economic scenario, the GEF systematically adjusts the volatility target downwards to account for uncertainty in trends.
Deep Fields Singularity Managed Futures Program is a fully automated managed futures program which executes a purely systematic trading approach using quantitative analysis of real-time price data to detect market trends. The highly reactive system trades liquid futures markets, across all asset classes: equities, fixed income, commodities and FX. Singularity Managed Futures Programs objective is to achieve appreciation of clients assets through speculative trading in the US and non-US futures contracts. The investment strategies employed in the Program are technical rather than fundamental in nature, i.e., they are developed from analysis of patterns of actual monthly, weekly, and daily price movements and are not based on analysis of fundamental factors such as supply and demand, general economic conditions or anticipated world events. The Program relies on historical analysis of these price patterns to interpret current market behaviour and to evaluate technical indicators for trade initiations and liquidations.
The Administrator
SS&C GlobeOp Financial Services LLC (SS&C GlobeOp or the Administrator), a Delaware limited liability company located at One South Road, Harrison, NY 10528, has been retained by the Registrant to serve as the Registrants administrator and provide certain administration and accounting services. Effective February 1, 2016, Gemini Hedge Fund Services LLC (Gemini or the Administrator), a Nebraska limited liability company located at 80 Arkay Drive, Hauppauge, NY 11788, was appointed by the Registrant to serve as the Registrants administrator and provide certain administration and accounting services.
The Administrator performs or supervises the performance of services necessary for the operation and administration of the Registrant (other than making investment decisions), including administrative and accounting services. The Administrator also calculates the Registrants Net Asset Value. In addition, the Administrator maintains certain books and records of the Registrant, including certain books and records required by CFTC Rule 4.23(a).
22
Fees and Expenses
Management Fee
The Registrant pays the Managing Member in advance a monthly management fee equal to 1/12th of 6.00% (6.00% per annum) of the Registrants Net Asset Value (defined below) at the beginning of each month, See Note 4 of the Registrants financial statements included in its annual report for the year ended December 31, 2015 (the Registrants 2015 Annual Report), which is filed as an exhibit to the Registrants Form 10-K for the fiscal year ended December 31, 2015.
Net Asset Value is the total assets of the Registrant less total liabilities of the Registrant, each determined on the basis of accounting principles generally accepted in the United States of America.
The Registrant, indirectly through its investment in Affiliated Investment Funds, pays a monthly administrative services fee in the amount of 1/12th of 0.25% (0.25% per annum) of the respective CTA Funds beginning of month Allocated Assets to Clarity for risk management and related services with respect to monitoring the Trading Advisors.
Trading Advisors Fees
The Registrant, indirectly through its investment in the Affiliated Investment Funds, pays Deep Field, KeyQuant, Winton, Eagle and Quantmetrics monthly management fees at an annual rate of 0.25%, 1%, 1.5%, 2% and 1%, respectively, as defined in their respective Trading Advisory Agreements.
The Registrant, indirectly through its investment in the Affiliated Investment Funds, pays Deep Field, KeyQuant, Winton, Eagle and Quantmetrics an incentive fee accrued monthly and paid quarterly of 30%, 20%, 20%, 25% and 25%, respectively, for achieving New High Net Trading Profits as defined below.
New High Net Trading Profits (for purposes of calculating a Trading Advisors incentive fees) will be accrued monthly and paid as of the close of business of the last day of each calendar quarter (the Incentive Measurement Date) and will include such profits (as outlined below) since the immediately preceding Incentive Measurement Date (or, with respect to the first Incentive Measurement Date, since commencement of operations of the Registrant or the date the Trading Advisor commenced trading activities for the Registrant), each an Incentive Measurement Period. New High Net Trading Profits for any Incentive Measurement Period will be the net profits, if any, from the Trading Advisors trading during such period (including (i) realized trading profit (loss) plus or minus (ii) the change in unrealized trading profit (loss) on open positions), and will be calculated after the determination of certain transaction costs attributable to the Trading Advisors trading activities, operating expenses and the Trading Advisors management fee, but before deduction of any incentive fees payable during the Incentive Measurement Period. New High Net Trading Profits will not include interest earned or credited on the assets allocated to the Trading Advisor.
New High Net Trading Profits will be generated only to the extent that the cumulative New High Net Trading Profits achieved by the Trading Advisor exceed the highest level of cumulative New High Net Trading Profits achieved by such Trading Advisor as of a previous Incentive Measurement Date. Except as set forth below, net losses from prior months must be recouped before New High Net Trading Profits can again be generated.
If a withdrawal or distribution occurs or if a Trading Advisors advisory agreement with the relevant CTA Fund is terminated at any date that is not an Incentive Measurement Date, the date of the withdrawal or distribution or termination will be treated as if it were an Incentive Measurement Date. New High Net Trading Profits for an Incentive Measurement Period shall exclude capital contributions allocated to the Trading Advisor in an Incentive Measurement Period, distributions or redemptions paid or payable from the Trading Advisors account during an Incentive Measurement Period and any loss carry-forward attributable to the Trading Advisor will be reduced in the same proportion that the value of the assets allocated away from the Trading Advisor comprises of the value of the assets allocated to the Trading Advisor prior to such allocation away from the Trading Advisor. In calculating New High Net Trading Profits, incentive fees paid for a previous Incentive Measurement Period will not reduce cumulative New High Net Trading Profits in subsequent periods.
23
Brokerage Commissions and Fees
The Registrant indirectly pays to the clearing brokers all brokerage commissions, including applicable exchange fees, National Futures Association (NFA) fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with the Registrants trading activities. These activities are charged indirectly through the Registrants Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds. On average, total charges paid to the clearing brokers are expected to be less than $10.00 per round-turn trade, although the clearing brokers brokerage commissions and trading fees will be determined on a contract-by-contract basis. The exact amount of such brokerage commissions and trading fees to be incurred is impossible to estimate and will vary based upon a number of factors including the trading frequency of each Trading Advisor, the types of instruments traded, transaction sizes, degree of leverage employed and transaction rates in effect from time to time.
Routine Operational, Administrative and Other Ordinary Expenses
The Registrant pays directly or indirectly all of its routine operational, administrative and other ordinary expenses, including, but not limited to, (i) legal, bookkeeping, accounting, custodial, administration (including, without limitation, the costs and expenses of the Administrator), auditing, tax preparation charges and related charges of the Registrant (including reimbursement of the Managing Member on a reasonable time-spent basis, for certain legal, accounting, administrative and registrar and transfer agent work performed by certain of the Managing Members personnel for and on behalf of the Registrant), as well as printing and other related expenses, (ii) investment related expenses, including, but not limited to brokerage commissions, bid-ask spreads, mark-ups, margin interest and other transactional charges and clearing fees, as well as banking, sales and purchase commissions and charges and exchange fees, fees and charges of other custodians and clearing agencies, interest and commitment fees on loans and debit balances, income taxes, withholding taxes, transfer taxes and other governmental charges and duties, and other transactional charges and clearing fees incurred by the Trading Advisor on behalf of the Registrant, the Registrants pro rata share of the expenses of any Affiliated Investment Fund into which it invests, and any due diligence expenses incurred in selecting and monitoring the Trading Advisor and any Affiliated Investment Fund, (iii) operational and overhead expenses of the Registrant, including but not limited to, photocopying, postage, and telephone expenses, (iv) preparation of monthly, quarterly, annual and other reports required by applicable Federal and state regulatory authorities, (v) the Registrants meetings and preparing, printing and mailing of proxy statements and reports to Members, (vi) client relations and services, and (vii) computer equipment, system maintenance and other technology-related expenses.
Extraordinary Fees and Expenses
The Registrant pays all its extraordinary fees and expenses, if any, and its allocable portion of all extraordinary fees and expenses of the Registrant generally, if any, as determined by the Managing Member. Extraordinary fees and expenses are fees and expenses that are non-recurring and unusual in nature, such as legal claims and liabilities and litigation costs and any permitted indemnification payments related thereto. Extraordinary fees and expenses shall also include material expenses that are not currently anticipated obligations of the Registrant or of managed futures funds in general, such as the payment of partnership taxes or governmental fees associated with payment of such taxes. Routine operational, administrative and other ordinary expenses will not be deemed extraordinary expenses. Any fees and expenses imposed on the Registrant due to the status of an individual shall be paid by such individual or the Registrant, not the Managing Member.
Expense Cap
Routine operational, administrative and other ordinary expenses, other than the Managing Members management fee, the fees to be paid to the Registrants Trading Advisor(s), Brokerage Commissions and extraordinary fees and expenses, are limited to 1.50% of average Net Asset Value per annum, See Note 3 of the Registrants 2015 Annual Report, which is filed as an exhibit to the Registrants Form 10-K for the fiscal year ended December 31, 2015. In the event fees and expenses for such items exceed such amount, the Managing Member will pay such amounts.
Redemption Charge
There is no redemption charge in respect of interests.
Competition
The Registrant competes with other private and publicly offered commodity pools, as well as other alternative investments such as REITs and oil and gas limited partnerships and hedge funds. The Registrant operates in a competitive environment in which it faces several forms of competition, including, without limitation:
● | The Registrant competes with other commodity pools and other investment vehicles for Members. |
● | The Trading Advisor may compete with other traders in the markets in establishing or liquidating positions on behalf of the Registrant. |
24
Employees
The Registrant has no employees. Management and administrative services for the Registrant are performed by the Managing Member or third parties pursuant to the LLC Operating Agreement, as further discussed in Notes 3 and 4 of the Registrants 2015 Annual Report, which is filed as an exhibit to the Registrants Form 10-K for the fiscal year ended December 31, 2015.
Financial Information about Segments
The Registrants business constitutes only one segment for financial reporting purposes. The Registrant does not engage in the production or sale of any goods or services. The objective of the Registrants business is appreciation of its assets through speculative trading in commodity interests. Financial information about the Registrants business, as of June 30, 2016, is set forth under Items 2 and 3 herein.
Financial Information about Geographic Areas
Although the Registrant has indirect exposure to the global futures, forward and option markets, it does not have operations outside of the United States.
Available Information
The Registrant files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission (the SEC). You may read and copy any document filed by the Registrant at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The Registrant does not maintain an internet website; however, the Registrants SEC filings are available to the public from the EDGAR database on the SECs website at http://www.sec.gov. The Registrants CIK number is 0001474307.
Critical Accounting Policies
General
Preparation of the condensed financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires the application of appropriate accounting rules and guidance. Applying these policies requires the Managing Member to make judgments, estimates and assumptions in connection with the preparation of the Registrants condensed financial statements. Actual results may differ from the estimates used.
The Managing Member has evaluated the Registrants condensed financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For further discussion of the Registrants significant accounting policies, see Note 2 of the Registrants 2015 Annual Report, which is filed as an exhibit to the Registrants Form 10-K for the fiscal year ended December 31, 2015.
The Registrant records all investments at fair value in its condensed financial statements, with changes in fair value reported in the condensed statements of operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price. The Registrant considers its investments in publicly-traded mutual funds, to be based on quoted prices in active markets for identical assets (Level 1). Level 3 inputs reflect the Registrants assumptions that it believes market participants would use in pricing the asset or liability. The Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or the Registrants proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data. The Registrant does not currently have any investments valued using Level 3 inputs.
25
Of the Registrants investments at June 30, 2016, $1,635,445 or 26.12% of Net Asset Value were classified as Level 1 and a majority of the remainder of Net Asset Value was invested in Affiliated Investment Funds. Of the Registrants investments at December 31, 2015, $1,296,166 or 17.67% of Net Asset Value were classified as Level 1. There were no Level 2 investments at December 31, 2015. There were no Level 3 investments at June 30, 2016 or December 31, 2015, nor any portion of the interim periods. Fair value ordinarily is the value determined for the Affiliated Investment Funds in accordance with the funds valuation policies and reported at the time of the Registrants valuation by the management of the fund. Generally, the fair value of the Registrants investment in the Affiliated Investment Funds represents the amount that the Registrant could reasonably expect to receive from the funds if the Registrants investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that the Registrant believes to be reliable.
The Registrant invests a portion of the excess cash balances not required for margin through certain investment funds which invest in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rules and regulations (collectively, Certain Investment Funds). The objective is to obtain a rate of return for the Registrant that balances risk and return relative to the historically low yields on short term cash deposits with banks and/or brokerage firms. There is no guarantee that the Managing Member will be successful in investing the excess cash successfully to obtain a greater yield than available on short term cash deposits with banks and/or brokerage firms. The Managing Member is paid monthly 1/12 of 50% of the first 1% of the positive returns earned on the Registrants investments in Certain Investment Funds. The calculation is based on the Registrants average annualized Net Asset Value, and any losses related to returns on the Certain Investment Funds must first be recovered through subsequent positive returns prior to the Managing Member receiving a payment. After the calculation of the amount payable to the Managing Member, the Registrant will be credited with all additional positive returns (or 100% of any losses) on the Registrants investment in Certain Investment Funds. If at the end of any calendar year, a loss has been incurred on the returns for the Certain Investment Funds, then the loss carry forward will reset to zero for the next calendar year with regards to the calculation of the Managing Members portion of the Certain Investment Funds income.
Liquidity and Capital Resources
The Registrant commenced operations on January 1, 2007. Contributions were raised and redemptions paid through new Members investments in and redemptions out of the aggregate trading vehicle through December 31, 2009. Beginning January 1, 2010, Individual Members may redeem directly from the Registrant on a monthly basis.
Subscriptions and Redemptions
Second Quarter 2016
Subscriptions of interests for the Second Quarter 2016 were $0. Redemptions of interests for the Second Quarter 2016 were $225,495.
Second Quarter 2015
Subscriptions of interests for the Second Quarter 2015 were $0. Redemptions of interests for the Second Quarter 2015 were $670,600.
Liquidity
A portion of the Registrants net assets is held in cash, which is used as margin for its indirect trading in commodities through its investment in Affiliated Investment Funds.
Commodity contracts exposed to indirectly through the Registrants investment in Affiliated Investment Funds may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as daily limits. During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Registrant from promptly liquidating its indirect exposure through its investment in Affiliated Investment Funds, to commodity futures positions.
26
Since the Registrants business is to trade futures, forward and option contracts through its investment in Affiliated Investment Funds, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). The Registrants exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Registrants speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond the Registrants experience to date and could ultimately lead to a loss of all or substantially all of Members capital. The Managing Member attempts to minimize these risks by requiring the Registrant and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 10 of the Registrants 2015 Annual Report for a further discussion on the credit and market risks associated with the Registrants futures, forwards and option contracts held indirectly through its investment in Affiliated Investment Funds.
There are no known material trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Registrants liquidity increasing or decreasing in a material way.
Capital Resources
The Registrant does not intend to raise additional capital through the sale of interests offered or through any borrowing. Due to the nature of the Registrants business, the Registrant does not contemplate making capital expenditures. The Registrant does not have, nor does it expect to have, any capital assets. Redemptions, exchanges, and sales of interests in the future will affect the amount of funds available for investments in futures interests in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future inflows and outflows of interests. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Registrants capital resource arrangements at the present time.
Market Overview
Following is a market overview for the Second Quarter 2016 and the Second Quarter 2015:
Second Quarter 2016
Performance of global stock indices diverged sharply in the second quarter as the UK vote to leave the European Union shocked markets. In the U.S., investors ultimately shrugged off any concerns as the indices made back their mid-June losses to end the period generally unchanged. Overseas, the story was quite different as European and Japanese indices ended the quarter sharply lower. In European markets, political and economic uncertainty post the Brexit vote weighed heavily; in Japan, the surge in the Japanese yen, sparked by safe haven buying, sent Japanese stock prices plummeting. Not surprisingly, the beneficiary of the turmoil was global interest rate markets.
Across the globe, prices soared as yields fell to multi-year, if not all-time lows, as investors sought out safe-haven assets. Additionally, while before the vote the odds of a U.S. interest rate increase were rising, the vote to leave tabled any expectations that the U.S. Federal Reserve would increase rates in the near-term. As traditional safe haven currencies, investors similarly flocked to the US Dollar and Japanese Yen in the aftermath of the historic vote. In particular, the yen soared, rising to levels not seen since 2014 and in June the Asian currency had is largest single-month increase since 1998. Conversely, the British pound fell to a three-decade low. The euro also ended the period lower, notably hitting a three-year low against the Japanese yen.
As per the Bloomberg Commodity Index, commodity prices overall ended the second quarter higher albeit there was a good deal of disparity among individual markets. In energies, the price of crude oil ended the period higher despite U.S. storage at a post-Great Depression high in April. Overall the markets focus was on expectations for a drawdown in these inventories with the beginning of the summer driving season in the U.S. In metals, gold prices surged to the highest in almost two years on the outlook for continued low global rates and the post-Brexit fallout; silver similarly ended at sharply higher levels at quarter-end. In base metals, copper was range-bound while zinc experienced is longest advance since 2013, pinned to decreasing supply which traders felt could be exacerbated by planned mine closures in Australia and Ireland. In the agricultural markets, wheat prices slumped on expectations for significant global supply while soybean prices touched levels not seen since 2014 on signs of strong U.S. export demand amid tighter supply. In tropical markets, coffee and sugar took the spotlight as prices rallied on supply worries; sugar prices ended the quarter at their highest level since 2013.
27
Second Quarter 2015
The second quarter of 2015 was a difficult one as many established trends reversed direction or stalled. In currencies, the U.S. dollars dominance waned early-on as weaker-than-anticipated economic reports sent the greenback to its first monthly loss since June 2014. Thereafter, the greenback traded in a wide band as investors fine-tuned their expectations for the timing of the first U.S. rate hike since June 2006. Conversely, the euro which had been trending lower gained ground against the US dollar in the second quarter as early investor enthusiasm over signs of recovery in the regions economy were sufficient to overcome worries over a potential Greek exit from the European Union. The British pound similarly rallied during the second quarter on solid economic reports and expectations that the Bank of England would be the next central bank after the US Federal Reserve (the Fed) to begin tightening. Finally, the Japanese yen settled off 12-year lows against the U.S. dollar, underscoring the divergence between the Fed and the Bank of Japans BOJ monetary policies where the Fed is looking for an opportunity to tighten while the BOJ remains in an easing mode.
Overall, global bond market prices moved lower during the second quarter. In the U.S., prices fell as investors looked past weak economic reports and worrying Greek debt negotiations, and focused instead on the Fed Chair Yellens contention that a first quarter economic slowdown would be transitory, which re-ignited expectations for a late-2015 interest rate hike. European bond market prices similarly lost ground as investors unwound positions as yields fell to historic lows. Prices worked a bit higher near quarter end as Greece worries intensified. In global equities, U.S. markets were generally range bound with the exception of the NASDAQ which ended the quarter higher. In European markets, the indices closed lower as worries over a potential Grexit intensified; UK equities were also pressured as expectations for a 2016 interest rate hike firmed. Conversely, Japanese equity markets posted strong gains in the second quarter, with the Nikkei and Topix rallying to multi-year highs. Chinese equities similarly ranked higher for most of the second quarter until mid-June when the market experienced a breathtaking collapse from highs and entered bear market territory as leveraged investors fled on worries that the bull market had moved too far, too fast.
The trend was generally down for commodity markets in the second quarter. In energies, crude prices rallied early in the quarter on signs of shrinking U.S. inventories, lower production and geopolitical conflicts in the Middle East, but thereafter settled into a trading range. In base metals, expectations for further Peoples Bank of China (PBOC) stimulus, strikes and slowing output buoyed prices early on, then worries of a China slowdown and dwindling demand erased those gains with metals throughout the group ending the quarter lower. Precious metals similarly ended the month lower. Grain and oilseed prices which drifted lower for much of the quarter rallied in June as too much rain in the U.S. Midwest, and not enough in Europe and Canada, combined with bullish U.S. Department of Agriculture reports, propelled prices higher. Wheat and soybeans were the main beneficiaries, ending higher for the quarter overall. In tropical markets, cocoa prices swept higher during the three-month period on signs of stronger demand amid reduced supply. Conversely, sugar prices extended lower.
Sector Performance
Due to the nature of the Registrants indirect trading activities, a period-to-period comparison of its indirect trading results is not meaningful. However, set forth below are the following:
(a) the major sectors to which the Registrants assets were allocated indirectly as of the Second Quarter 2016 and the Second Quarter 2015, measured as a percentage of the gross speculator margin (i.e., the minimum amount of cash or marginable securities a speculator must post when buying or selling futures assets); and
(b) a discussion of the Registrants trading results for the major sectors in which the Registrant traded indirectly for the Second Quarter 2016 and the Second Quarter 2015.
28
Second Quarter 2016
As of June 30, 2016, the allocation of the Registrants assets, through its investment in Affiliated Investment Funds, to major sectors was as follows:
Sector | Allocation | |||
Currencies | 2.55 | % | ||
Energies | 1.83 | % | ||
Grains | 9.01 | % | ||
Indices | 18.68 | % | ||
Interest Rates | 57.03 | % | ||
Meats | 0.31 | % | ||
Metals | 10.30 | % | ||
Tropicals | 0.29 | % | ||
TOTAL | 100.00 | % |
Trading results for the major sectors in which the Registrant traded indirectly for the Second Quarter 2016 were as follows:
Currencies: (-) The Registrant experienced losses in currencies as small gains in April were erased in May and June. In the wake of Brexit, positions in the euro and the British pound resulted in losses. Gains in the Japanese yen, which rallied on safe haven buying, served to dampen a portion of these losses.
Interest Rates: (+) The Registrant realized gains in global interest rates largely due to sizable profits in June as global bond prices rose on safe haven buying on the U.K.s vote to leave the European Union. Largest single-market profits were realized in the U.S. 10-year market; trading in the U.S. 30-year and German rates added to the sectors profitability.
Indices: (-) The Registrant experienced large losses in global stock indices as trading was unprofitable in all three months of the quarter. Overall, trading in the U.S. markets and the German DAX resulted in the quarters largest losses.
Energies: (-) The Registrant experienced losses in the energy complex largely due to positions in natural gas in April and May as prices vacillated within a trading band before breaking-out to the upside in June on warmer temperatures in the U.S.
Metals: (-) The Registrant realized losses in metals as losses in copper offset profits realized in gold as prices rallied on safe haven buying in the aftermath of the Brexit vote.
Grains: (-) The Registrant realized small losses in grains as profits in soybeans were insufficient to erase losses in corn. The bulk of the corn loss was posted in April as prices unexpectedly rallied as poor weather conditions slowed planting of the U.S. crop.
Tropicals: (-) The Registrant realized losses as gains in sugar were insufficient to cover losses realized in cocoa and coffee.
Meats: (-) The Registrant realized gains on positions in cattle as prices ended the quarter lower.
29
Second Quarter 2015
As of June 30, 2015, the allocation of the Registrants assets, through its investment in Affiliated Investment Funds, to major sectors was as follows:
Sector | Allocation | |||
Currencies | 24.09 | % | ||
Energies | 6.57 | % | ||
Grains | 3.80 | % | ||
Indices | 33.98 | % | ||
Interest Rates | 21.76 | % | ||
Meats | 0.61 | % | ||
Metals | 6.93 | % | ||
Tropicals | 2.26 | % | ||
TOTAL | 100.00 | % |
Trading results for the major sectors in which the Registrant traded indirectly for the Second Quarter 2015 were as follows:
Currencies: (-) The Registrant experienced the majority of its losses in April as the dollar ended the period lower on weaker than-forecast economic reports which clouded the outlook for the timing of Federal Reserve tightening.
Energies: (-) The Registrant was unprofitable in energies as crude oil prices rallied off lows in anticipation of increasing global demand. The quarters largest losses were realized in April.
Grains: (-) The Registrant was unprofitable in grains due to short positions as prices rallied sharply in June on deteriorating weather conditions in the U.S., Europe and Canada.
Indices: (+) The Registrant was profitable as exposures in Pacific Rim and U.S. markets were sufficient to cover losses on European stock index positions.
Interest Rates: (-) The Registrant was unprofitable in global interest rates markets as unprofitable long European bond exposures just offset gains in Pacific Rim and U.S. bond markets.
Meats: (-) The Registrant posted small losses in the meat markets due in part to short positions in live cattle.
Metals: (+) The Registrant posted slight profits in metals as gains in the precious complex was sufficient to cover losses realized on positions in base metals.
Tropicals: (-) The Registrant was unprofitable in tropical markets overall with largest losses seen in April, due in part to short positions in sugar which suffered as prices rallied.
30
Results of Operations
Year-To-Date 2016
The Net Asset Value of the Registrant as of June 30, 2016 was $6,261,770, a decrease of $1,074,486 from the December 31, 2015 Net Asset Value of $7,336,256, primarily due to the effect of investor redemptions and negative trading performance.
The Registrants performance for the Second Quarter 2016 and Year-To-Date 2016 was (6.87)% and (9.85)% respectively. Performance includes the percentage change in the Registrants Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of investment gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.
The Registrants total gain from its investment in securities for the Year-To-Date 2016 was approximately $7,620.
The Registrants total loss from its investment in Affiliated Investment Funds for the Year-To-Date 2016 was approximately $444,048.
Dividend income for the Year-To-Date 2016 was approximately $12,000, a decrease of approximately $6,000, as compared to the Year-To-Date 2015.
Brokerage commissions and other transaction fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2016, were approximately $189,000, an increase of approximately $167,000 as compared to the Year-To-Date 2015.
Management fees to the Trading Advisors, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2016 were approximately $26,000, a decrease of approximately $62,000 as compared to the Year-To-Date 2015, primarily due to the decrease in the Net Asset Value discussed above.
Management fees to the Managing Member for the Year-To-Date 2016 were approximately $102,000, a decrease of approximately $40,000 as compared to the Year-To-Date 2015, primarily due to the decrease in the Net Asset Value discussed above.
Trading Advisor incentive fees are based on the New High Net Trading Profits generated by the Trading Advisors, as defined in the Trading Advisory Agreements between the Registrant and the Trading Advisors. Trading Advisor incentive fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2016, were approximately $32,000.
An administrative services fee, which is indirectly paid to Clarity for risk management and related services with respect to monitoring the Trading Advisors through the Affiliated Investment Funds and reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2016 was approximately $10,000, a decrease of approximately $4,000 as compared to the Year-To-Date 2015.
Service fees for the Year-To-Date 2016 were approximately $108,000, a decrease of approximately $54,000 as compared to the Year-To-Date 2015, primarily due to the decrease in the Net Asset Value discussed above.
Managing Member interest earned on Certain Investment Funds for the Year-To-Date 2016 was approximately $18,000, an increase of approximately $8,000 as compared to the Year-To-Date 2015.
Operating expenses include accounting, audit, tax, and legal fees. Operating expenses for the Year-To-Date 2016 were approximately $85,000.
Year-To-Date 2015
The Net Asset Value of the Registrant as of June 30, 2015 was $8,913,008, a decrease of $1,279,353 from the December 31, 2014 Net Asset Value of $10,192,361, primarily due to the effect of investor redemptions and negative trading performance.
31
The Registrants performance for the Year-To-Date 2015 was (2.76)%. Performance includes the percentage change in the Registrants Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of investment gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.
The Registrants total gain from its investment in securities for the Year-To-Date 2015 was approximately $36,000.
The Registrants total gain from its investment in Affiliated Investment Funds for the Year-To-Date 2015 was approximately $94,000.
Dividend income for the Year-To-Date 2015 was approximately $18,000, a decrease of approximately $20,000, as compared to the Year-To-Date 2014.
Brokerage commissions and other transaction fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2015, were approximately $22,000, an increase of approximately $10,000 as compared to the Year-To-Date 2014.
Management fees to the Trading Advisors, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2015 were approximately $88,000, a decrease of approximately $8,000 as compared to the Year-To-Date 2014, primarily due to the decrease in the Net Asset Value discussed above.
Management fees to the Managing Member for the Year-To-Date 2015 were approximately $142,000, a decrease of approximately $12,000 as compared to the Year-To-Date 2014, primarily due to the decrease in the Net Asset Value discussed above.
Trading Advisor incentive fees are based on the New High Net Trading Profits generated by the Trading Advisors, as defined in the Trading Advisory Agreements between the Registrant and the Trading Advisors. Trading Advisor incentive fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2015, were approximately $68,000.
An administrative services fee, which is indirectly paid to Clarity for risk management and related services with respect to monitoring the Trading Advisors through the Affiliated Investment Funds and reflected within the respective net asset values of each of the Affiliated Investment Funds, for the Year-To-Date 2015 was approximately $14,000, approximately the same as compared to the Year-To-Date 2014.
Service fees for the Year-To-Date 2015 were approximately $162,000, a decrease of approximately $20,000 as compared to the Year-To-Date 2014, primarily due to the decrease in the Net Asset Value discussed above.
Managing Member interest earned on Certain Investment Funds for the Year-To-Date 2015 was approximately $10,000, a decrease of approximately $15,000 as compared to the Year-To-Date 2014.
Operating expenses include accounting, audit, tax, and legal fees. Operating expenses for the Year-To-Date 2015 were approximately $148,000.
Inflation
Inflation has had no material impact on the operations or on the financial condition of the Registrant from inception through June 30, 2016.
Off-Balance Sheet Arrangements and Contractual Obligations
The Registrant does not have any off-balance-sheet arrangements (as defined in Regulation S-K 303(a)(4)(ii)) that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to Members.
The Registrants contractual obligations are with the Managing Member, the Trading Advisors it accesses through its investment in Affiliated Investment Funds and its commodity broker. Trading Advisor management fees payable by the Registrant to the Trading Advisors through CTA Choice, and management fees payable to the Managing Member, are calculated as a fixed percentage of the Registrants Net Asset Value or Allocated Assets. Incentive fees payable by the Registrant to the Trading Advisors through CTA Choice are at a fixed rate, calculated as a percentage of the Registrants New High Net Trading Profits (as defined in the Trading Advisory Agreements). As such, the Managing Member cannot anticipate the amounts to be paid for future periods as Net Asset Values and New High Net Trading Profits are not known until a future date.
32
Commissions payable to the Registrants commodity broker are based on a cost per executed trade and, as such, the Managing Member cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. Additionally, since the Registrant does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations or other long-term liabilities that would otherwise be reflected on the Registrants condensed statements of financial condition, a table of contractual obligations has not been presented. For a further discussion of the Registrants contractual obligations, see Notes 1, 3, 4 and 5 of the Registrants 2015 Annual Report, which is filed as an exhibit to the Registrants Form 10-K for the year ended December 31, 2015.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Introduction
Past Results Not Necessarily Indicative of Future Performance
The Registrant is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and substantially all of the Registrants 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 Registrants main line of business.
Market movements result in frequent changes in the fair market value of the Registrants open positions and, consequently, in its earnings and cash flow. The Registrants 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 Registrants open positions and the liquidity of the markets in which it trades.
The Registrant rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular futures market scenario will affect performance, and the Registrants past performance is not necessarily indicative of its future results.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Registrants market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Registrant 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 Exchange Act.
The Registrants primary market risk exposures as well as the strategies used and to be used by the Managing Member and the Trading Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of the Registrants risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Registrant. There can be no assurance that the Registrants current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Members must be prepared to lose all or substantially all of their investment in the Registrant.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Managing Member and the Trading Advisors through CTA Choice attempt to manage the risk of the Registrants open positions is essentially the same in all market categories traded.
The Trading Advisors attempt to minimize market risk exposure by applying their own risk management trading policies that include the diversification of trading assets into various market sectors. Additionally, the Managing Members oversight committee is responsible for evaluating and overseeing the Trading Advisors trading policies. The oversight committee meets periodically to discuss and analyze issues such as liquidity, position size, capacity, performance cycles, and new product and market strategies.
The Managing Member attempts to minimize market risk exposure by requiring the Trading Advisors to abide by various trading limitations and policies. The Managing Member monitors compliance with these trading limitations and policies which include, but are not limited to, limiting the amount of margin or premium required for any one commodity or all commodities combined and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, the Managing Member shall automatically terminate the Trading Advisors through termination of the CTA Fund if the Net Asset Value of the Registrant declines by 40% during any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that the Registrant will liquidate its positions, and eventually dissolve, if the Registrant experiences a decline in the Net Asset Value of 50% in any year or since the commencement of trading activities. In each case, the decline in Net Asset Value is after giving effect for contributions, distributions and redemptions. The Managing Member may impose additional restrictions (through modifications of such trading limitations and policies) upon the trading activities of the Trading Advisors as it, in good faith, deems to be in the best interest of the Registrant.
33
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Registrants disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by the Registrant in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Registrants management, including the Managing Members President and Director of Fund Administration (who, in these capacities, function as the Principal Executive Officers and Principal Financial/Accounting Officer, respectively, of the Registrant), as appropriate to allow for timely decisions regarding required disclosure.
In designing and evaluating the Registrants disclosure controls and procedures, the Managing Member recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can prove absolute assurance that all control issues and instances of fraud, if any, within the Registrant have been detected.
The Managing Members management, under the supervision and with the participation of certain officers of the Managing Member (including the Managing Members President and Director of Fund Administration), has evaluated the effectiveness of the Registrants disclosure controls and procedures during the Year-To-Date 2016. Based upon such evaluation, the Managing Members President and Director of Fund Administration have concluded that, as of June 30, 2016, the Registrants disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Registrants internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during the Second Quarter 2016 that have materially affected, or are reasonably likely to materially affect, the Registrants internal control over financial reporting.
Item 1. | Legal Proceedings |
There are no material legal proceedings pending, on appeal, or concluded to which the Registrant is a party or to which any of its assets are subject.
Item 1.A. | Risk Factors |
There have been no changes from risk factors as previously disclosed in the Registrants Form 10-K for the fiscal year ended December 31, 2015.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
From January 1, 2016 to June 30, 2016, the Registrant sold interests which resulted in aggregate proceeds to the Registrant of $0.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosure |
Not Applicable
Item 5. | Other Information |
None
34
35
10.9 | Master Confirmation for Exotic Options between UBS AG and KMP Futures Fund I LLC (f/k/a WCM Pool LLC) (incorporated by reference from Exhibit 10.9 of the Registrants Registration Statement on Form 10, File No. 000-53816, filed with the Commission on November 2, 2009) | |
31.1 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
31.2 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith) | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
99.1 | Notice to Members regarding certain changes to the ownership and structure of the Registrants underlying managers (incorporated by reference to Exhibit 99.1 to the Registrants Form 8-K, File No. 000-53816, filed with the Commission on August 17, 2012) | |
99.2 | Notice to Members regarding certain changes to the ownership and structure of the Registrants underlying managers (incorporated by reference to Exhibit 99.1 to the Registrants Form 8-K, File No. 000-53816, filed with the Commission on November 5, 2012) | |
99.3 | Notice to Members of Administration Agreement and Middle/Back Office Agreement between GlobeOp Financial Services LLC and KMP Futures Fund I LLC (f/k/a WCM Pool LLC) (incorporated by reference to Exhibit 99.3 to the Registrants Form 8-K, File No. 000-53816, filed with the Commission on February 28, 2011) | |
101. INS | XBRL Instance Document | |
101. SCH | XBRL Taxonomy Extension Schema Document | |
101. CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101. LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101. PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101. DEF | XBRL Taxonomy Extension Definition Linkbase Document |
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
[Remainder of page left blank intentionally.]
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
KMP FUTURES FUND I LLC
By: | Kenmar Preferred Investments, LLC, |
its Managing Member | |
By: | /s/ Jim Parrish | Date: August 12, 2016 | ||||
Name: | Jim Parrish | |||||
Title: | President | |||||
(Principal Executive Officer) | ||||||
By: | /s/ Atinder S. Jaggi | Date: August 12, 2016 | ||||
Name: | Atinder S. Jaggi | |||||
Title: | Director of Fund Administration | |||||
(Principal Financial/Accounting Officer) |
37