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EX-31.01 - EX-31.01 - BlackRock Global Horizons I L.P.a10-12991_1ex31d01.htm
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EX-31.02 - EX-31.02 - BlackRock Global Horizons I L.P.a10-12991_1ex31d02.htm
EX-32.01 - EX-32.01 - BlackRock Global Horizons I L.P.a10-12991_1ex32d01.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x

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

 

For the quarterly period ended June 30, 2010

 

OR

 

o

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

 

For the transition period from                  to                

 

Commission File Number 0-23240

 

BLACKROCK GLOBAL HORIZONS I L.P.

(Exact Name of Registrant as

specified in its charter)

 

Delaware

 

13-3716393

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

c/o BlackRock Investment Management LLC

40 East 52nd Street

New York, New York 10022

(Address of principal executive offices)

(Zip Code)

 

609-282-6996

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  See definition of “accelerated and large accelerated filer” 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

 

 

 



 

BLACKROCK GLOBAL HORIZONS I L.P.

 

QUARTERLY REPORT FOR June 30, 2010 ON FORM 10-Q

 

Table of Contents

 

 

 

 

 

PAGE

 

 

 

 

 

PART I

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

2

 

 

 

 

 

Item 2.

 

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

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

PART II

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

33

 

 

 

 

 

Item 4.

 

Reserved

 

33

 

 

 

 

 

Item 5.

 

Other Information

 

33

 

 

 

 

 

Item 6.

 

Exhibits

 

33

 

1



 

PART I - FINANCIAL INFORMATION

 

Item 1.    Consolidated Financial Statements

 

BLACKROCK GLOBAL HORIZONS I L.P.

(A DELAWARE LIMITED PARTNERSHIP)

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

273,188,717

 

$

218,690,094

 

Equity in commodity futures trading accounts:

 

 

 

 

 

Cash (restricted cash $19,156,622 and $21,761,607)

 

54,665,809

 

64,904,058

 

Net unrealized profit on open contracts

 

4,911,820

 

886,156

 

Accrued interest and other assets

 

40,757

 

25,948

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

332,807,103

 

$

284,506,256

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Redemptions payable

 

$

593,806

 

$

5,342,237

 

Profit Shares payable

 

798,108

 

498,174

 

Distribution fees payable

 

772,652

 

703,082

 

Trading Advisors’ management fees payable

 

364,696

 

343,841

 

Sponsor fees payable

 

325,572

 

295,234

 

Administrator fees payable

 

216,704

 

166,599

 

Professional fees payable

 

412,063

 

425,908

 

Net unrealized loss on open contracts

 

 

906,015

 

Other fees payable

 

118,399

 

62,248

 

 

 

 

 

 

 

Total liabilities

 

3,602,000

 

8,743,338

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

General Partner (2,488,101 and 2,203,255 Units)

 

3,078,957

 

2,846,697

 

Limited Partners (285,012,354 and 226,947,615 Units)

 

326,126,146

 

272,916,221

 

 

 

 

 

 

 

Total partners’ capital

 

329,205,103

 

275,762,918

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

332,807,103

 

$

284,506,256

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT (Note 2)

 

 

 

 

 

 

See notes to consolidated financial statements.

 

2



 

BLACKROCK GLOBAL HORIZONS I L.P.

(A DELAWARE LIMITED PARTNERSHIP)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the three

 

For the three

 

For the six

 

For the six

 

 

 

months ended

 

months ended

 

months ended

 

months ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

TRADING PROFITS (LOSSES):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

1,166,294

 

$

(6,487,154

)

$

(730,333

)

$

(7,007,613

)

Change in unrealized

 

(306,156

)

1,371,559

 

4,931,679

 

(2,421,775

)

Brokerage commissions and clearing costs

 

(682,955

)

(418,636

)

(1,211,582

)

(774,086

)

 

 

 

 

 

 

 

 

 

 

Total trading profits (losses)

 

177,183

 

(5,534,231

)

2,989,764

 

(10,203,474

)

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME:

 

 

 

 

 

 

 

 

 

Interest

 

102,905

 

259,974

 

169,248

 

680,087

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Distribution fees

 

2,296,120

 

1,616,933

 

4,413,617

 

3,300,034

 

Trading Advisors’ management fees

 

1,107,226

 

769,822

 

2,145,454

 

1,560,642

 

Sponsor fees

 

965,429

 

676,844

 

1,853,457

 

1,381,228

 

Profit Shares

 

725,296

 

(204,485

)

980,223

 

267,020

 

Administrator fees

 

240,000

 

177,000

 

466,000

 

356,000

 

Professional fees

 

186,258

 

161,925

 

382,517

 

272,517

 

Other

 

99,000

 

110,600

 

253,000

 

180,400

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

5,619,329

 

3,308,639

 

10,494,268

 

7,317,841

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT LOSS

 

(5,516,424

)

(3,048,665

)

(10,325,020

)

(6,637,754

)

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(5,339,241

)

$

(8,582,896

)

$

(7,335,256

)

$

(16,841,228

)

 

 

 

 

 

 

 

 

 

 

NET LOSS PER UNIT: (1)

 

 

 

 

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

 

 

 

 

 

 

 

 

Series A

 

248,806,927

 

144,293,100

 

234,054,656

 

139,305,809

 

Series F

 

101,826

 

112,325

 

103,454

 

114,682

 

Series G

 

28,907,866

 

32,517,854

 

29,551,316

 

33,627,467

 

Series I

 

2,263,044

 

551,075

 

1,770,609

 

520,682

 

 

 

 

 

 

 

 

 

 

 

Net loss per weighted average General Partner and Limited Partner Unit

 

 

 

 

 

 

 

 

 

Series A

 

$

(0.0174

)

$

(0.0418

)

$

(0.0250

)

$

(0.0836

)

Series F

 

$

(4.31

)

$

(10.00

)

$

(6.3778

)

$

(19.83

)

Series G

 

$

(0.0187

)

$

(0.0434

)

$

(0.0274

)

$

(0.0859

)

Series I

 

$

(0.0114

)

$

(0.0378

)

$

(0.0072

)

$

(0.0674

)

 

See notes to consolidated financial statements.

 


(1) The weighted average number of Units outstanding is computed for purposes of disclosing net loss per weighted average Unit.  The weighted average number of Units outstanding for the three-month and six-month periods ended June 30, 2010 and 2009 equals the Units outstanding as of such date, adjusted proportionately for Units sold and redeemed based on the respective length of time each was outstanding during the period.

 

3



 

BLACKROCK GLOBAL HORIZONS I L.P.

(A DELAWARE LIMITED PARTNERSHIP)

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

 

 

 

 

 

General

 

Limited

 

 

 

 

 

Units

 

Partner

 

Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, January 1, 2009

 

164,471,111

 

$

3,098,146

 

$

224,987,780

 

$

228,085,926

 

 

 

 

 

 

 

 

 

 

 

Additions

 

30,458,634

 

 

34,626,843

 

34,626,843

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(217,076

)

(16,624,152

)

(16,841,228

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(15,360,919

)

 

(19,516,915

)

(19,516,915

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, June 30, 2009

 

179,568,826

 

$

2,881,070

 

$

223,473,556

 

$

226,354,626

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, January 1, 2010

 

229,150,870

 

$

2,846,697

 

$

272,916,221

 

275,762,918

 

 

 

 

 

 

 

 

 

 

 

Additions

 

78,709,661

 

300,000

 

83,396,057

 

83,696,057

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(67,740

)

(7,267,516

)

(7,335,256

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(20,360,076

)

 

(22,918,616

)

(22,918,616

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, June 30, 2010

 

287,500,455

 

$

3,078,957

 

$

326,126,146

 

$

329,205,103

 

 

See notes to consolidated financial statements.

 

4



 

BLACKROCK GLOBAL HORIZONS I L.P.

(A DELAWARE LIMITED PARTNERSHIP)

 

CONSOLIDATED FINANCIAL DATA HIGHLIGHTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(unaudited)

 

The following per Unit data and ratios have been derived from information provided in the consolidated financial statements.  An individual Partner’s results may vary from these ratios due to timing of income and expenses and capital transactions.

 

 

 

Series A

 

Series F

 

Series G

 

Series I

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

1.0775

 

$

259.29

 

$

1.1230

 

$

1.2255

 

 

 

 

 

 

 

 

 

 

 

Realized trading loss

 

(0.0032

)

(0.76

)

(0.0033

)

(0.0036

)

Change in unrealized trading profits

 

0.0167

 

4.00

 

0.0173

 

0.0191

 

Interest

 

0.0005

 

0.14

 

0.0006

 

0.0007

 

Expenses

 

(0.0401

)

(9.66

)

(0.0418

)

(0.0293

)

 

 

 

 

 

 

 

 

 

 

Net asset value, end of period

 

$

1.0514

 

$

253.01

 

$

1.0958

 

$

1.2124

 

 

 

 

 

 

 

 

 

 

 

Total Return:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return (before Profit Shares)

 

-2.12

%

-2.12

%

-2.12

%

-0.58

%

Profit Shares

 

-0.31

%

-0.31

%

-0.31

%

-0.50

%

Total return

 

-2.42

%

-2.42

%

-2.42

%

-1.07

%

 

 

 

 

 

 

 

 

 

 

Ratios to Average Net Assets:(1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses (before Profit Shares)

 

6.96

%

6.96

%

6.96

%

3.85

%

Profit Shares

 

0.32

%

0.30

%

0.30

%

0.56

%

Expenses

 

7.28

%

7.26

%

7.26

%

4.41

%

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

-7.17

%

-7.16

%

-7.16

%

-4.29

%

 


(1) Included in the ratios of expenses to average net assets are brokerage commissions and clearing costs which are presented in Trading Profits (Losses) on the Consolidated Statement of Operations.

(2) The expenses (before Profit Shares) and the interest portion of net investment loss for the net investment loss ratios have been annualized.

 

See notes to consolidated financial statements.

 

5



 

BLACKROCK GLOBAL HORIZONS I L.P.

(A DELAWARE LIMITED PARTNERSHIP)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Effective April 1, 2010, the General Partner has formed a number of wholly owned subsidiaries to hold Partnership assets allocated to each particular Trading Advisor. Each of these subsidiaries has, in turn, entered into an advisory agreement with each respective Trading Advisor. The purpose of these subsidiaries is to segregate the assets of the Partnership allocated to any one Trading Advisor from the other assets of the Partnership in order to seek to limit liability for trading losses by any one Trading Advisor to the assets allocated to such subsidiary.

 

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and include the accounts of the Partnership and its wholly owned subsidiaries.

 

The interim financial information at June 30, 2010 and for the periods ended June 30, 2010 and 2009 is unaudited.  However, in the opinion of management, the interim financial information includes all normal recurring adjustments necessary for the fair presentation of the operating results of BlackRock Global Horizons I L.P. (the “Partnership”) for the interim periods presented. The operating results for the interim periods may not be indicative of the results for the full year.

 

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, (the “SEC”) for the year ended December 31, 2009.

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

BlackRock Investment Management, LLC (the “General Partner” or “BRIM”), a wholly owned subsidiary of BlackRock, Inc. (“BlackRock”) is the general partner of the Partnership.

 

The Partnership’s assets will be held at PFPC Trust Company (“PFPC Trust”), an affiliate of the General Partner, and at Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), an affiliate of the General Partner, Newedge USA, LLC (“NUSA”), UBS AG (“UBS”) and any other clearing brokers or derivatives counterparty that may be utilized by the Partnership in the future (the “Clearing Brokers”) or allocated to one or more Portfolio Funds for which custodians and clearing brokers are selected by the independent professional advisors of such Portfolio Funds or managed accounts (the “Trading Advisors”).

 

Valuation

 

The Partnership’s policy is to fair value its financial instruments at market value. The Partnership’s commodities futures contracts traded on exchanges are valued at their close price. Foreign currency exchange contracts are valued at the mid between the bid and ask prices and are determined as of the close of business of the New York Stock Exchange. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. Exchange-traded options are valued at the mean between the last bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the prior day’s close price, unless it is determined that the prior day’s price no longer reflects the fair value of the option. Over-the-counter (“OTC”) options and swaptions are valued by single broker quotes which use mathematical model which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.

 

6



 

Net Unrealized Profit (Loss) on Open Contracts

 

The Partnership, in its normal course of business, enters into various derivatives contracts with MLPF&S, NUSA, and UBS each acting as the Partnership’s clearing brokers or derivatives counterparty. Pursuant to the brokerage agreements with MLPF&S and NUSA (which include netting arrangements with each broker), to the extent that such trading results in receivables from and payables to MLPF&S, and NUSA these receivables and payables are offset and reported as a net receivable or payable with each broker.  Net receivables are included in the Consolidated Statements of Financial Condition under Equity in commodity futures trading accounts in net unrealized profit on open contracts; net payables are included in the Consolidated Statements of Financial Condition under Liabilities in net unrealized loss on open contracts.

 

Pursuant to the UBS brokerage agreement (which includes netting arrangements for the same transactions and which may be elected for multiple transactions), to the extent that such trading results in receivables from and payables to UBS, these receivables and payables are offset and reported as a net receivable or payable. Net receivables are included in the Consolidated Statements of Financial Condition under Equity in commodity futures trading accounts in net unrealized profit on open contracts; net payables are included in the Consolidated Statements of Financial Condition under Liabilities in net unrealized loss on open contracts.

 

Commodity futures, forwards and options contracts transactions are recorded on the trade date and the receivables and payables represent the difference between the original contract value and the market value.  The change in unrealized profit (loss) on open contracts from one period to the next is reflected in Change in unrealized in the Consolidated Statements of Operations.

 

Income Taxes

 

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

 

Distributions

 

The Limited Partners are entitled to receive, equally per Unit, any distributions which may be made by the Partnership.  No such distributions have been declared for the six-month periods ended June 30, 2010 and 2009.

 

7



 

2.               PARTNERS’ CAPITAL

 

At June 30, 2010 and December 31, 2009, the Net Asset Values of the different series of Units were:

 

June 30, 2010

 

Net Asset Value

 

Number of
Units

 

Net Asset
Value per
Unit

 

 

 

 

 

 

 

 

 

Series A

 

$

269,794,126

 

256,607,245

 

$

1.0514

 

Series F

 

25,398,121

 

100,384

 

$

253.01

 

Series G

 

31,192,677

 

28,466,657

 

$

1.0958

 

Series I

 

2,820,179

 

2,326,169

 

$

1.2124

 

Total partners’ capital

 

$

329,205,103

 

287,500,455

 

 

 

 

December 31, 2009

 

Net Asset Value

 

Number of
Units

 

Net Asset
Value per
Unit

 

 

 

 

 

 

 

 

 

Series A

 

$

213,153,124

 

197,831,350

 

$

1.0775

 

Series F

 

27,465,985

 

105,927

 

$

259.29

 

Series G

 

34,044,148

 

30,316,276

 

$

1.1230

 

Series I

 

1,099,661

 

897,317

 

$

1.2255

 

Total partners’ capital

 

$

275,762,918

 

229,150,870

 

 

 

 

3.               FAIR VALUE DISCLOSURES

 

The Partnership records derivatives contracts held in commodities futures trading accounts and cash equivalents at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that the Partnership would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk to the extent the asset or liability is not traded on an exchange or an active market.  Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Partnership. Unobservable inputs are inputs that reflect the General Partner assumptions about what information market participants would use to price an asset or liability developed based on the best information available under the circumstances.

 

ASC 820 establishes a hierarchy that classifies these inputs into the three broad levels listed below:

 

·                                          Level 1 — Price quotations (unadjusted) in active markets/exchanges for identical instruments.

·                                          Level 2 — Other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability, either directly or indirectly.  Level 2 includes quoted prices (unadjusted) for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as those used in models or other valuation methodologies.

 

8



 

·                                          Level 3 — Primarily inputs and significant assumptions that are unobservable in the market place.  Level 3 assets include investments for which there is little, if any, market activity.  These inputs require significant judgment or estimation by the General Partner of the Partnership.

 

The following table summarizes the valuation of the Partnership’s investments by the above ASC 820 fair value hierarchy levels as of June 30, 2010 and December 31, 2009.

 

 

 

 

 

Fair Value at Reporting Date Using

 

Description

 

6/30/2010

 

Quoted Prices in Active
Markets for Identical
Assets (Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Cash Equivalents

 

$

273,188,717

 

$

273,188,717

 

$

 

Futures (1)

 

2,316,424

 

2,316,424

 

 

Forwards (1)

 

2,585,688

 

 

2,585,688

 

Options (1)

 

9,708

 

 

9,708

 

 

 

$

278,100,537

 

$

275,505,141

 

$

2,595,396

 

 

Description

 

12/31/2009

 

 

 

 

 

Cash Equivalents

 

$

218,690,094

 

$

218,690,094

 

$

 

Futures (1)

 

1,800,573

 

1,800,573

 

 

Forwards (1)

 

(1,785,140

)

 

(1,785,140

)

Options (1)

 

(35,292

)

 

(35,292

)

 

 

$

218,670,235

 

$

220,490,667

 

$

(1,820,432

)

 


(1)   See the consolidated condensed schedule of investments in Note 4 for the values in each commodity industry sector within this table.

 

4.   DERIVATIVE CONTRACTS AND OFF-BALANCE SHEET RISK

 

The Partnership trades in the international futures and forward markets with the objective of achieving, through speculative trading, substantial capital appreciation over time. The Partnership’s assets are allocated and reallocated by the General Partner to accounts managed by the Trading Advisors applying proprietary strategies in numerous markets.

 

The Partnership engages in the speculative trading of derivative contracts on interest rates, commodities, currencies, metals, energy, livestock and stock indices. The following were the primary trading risk exposures of such derivative contracts as of at June 30, 2010, organized by market sector:

 

Agricultural.  The Partnership’s primary exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions.

 

Currencies.  Exchange rate risk is a principal market exposure of the Partnership.  The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs.  The fluctuations are influenced by interest rate changes as well as political and general economic conditions.  The Partnership trades in a large number of currencies, including cross-rates—e.g., positions between two currencies other than the U.S. dollar.

 

9



 

Energy.  The Partnership’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East and economic conditions worldwide.  Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.

 

Interest rates.  Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly the value of its stock index and currency positions.  Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Partnership’s profitability.  The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and other major industrialized, or Group of Seven countries (Canada, France, Germany, Italy, Japan, United Kingdom and United States, collectively, “G-7”).  However, the Partnership also may take positions in futures contracts on the government debt of other nations.  The General Partner anticipates that G-7 interest rates, both long-term and short-term, will remain the primary market exposure of the Partnership for the foreseeable future.

 

Metals. The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, silver, tin and zinc.

 

Stock Indices.  The Partnership’s equity exposure, through stock index futures, is to equity price risk in the G-7 countries, as well as other countries.

 

The Partnership, through the trading activities of the Trading Advisors, also engages in the speculative trading of forward currency contracts. Substantially all of the Partnership’s off-exchange trading takes place in the highly liquid, institutional spot and forward foreign exchange markets (the “FX Markets”) where there are no direct execution costs. Instead, the participant banks and dealers in the FX Markets take a “spread” between the prices at which they are prepared to buy and sell a particular currency, and such spreads are built into the pricing of the spot or forward contracts traded with the Partnership. In its exchange of futures for physical (“EFP”) trading, the Partnership acquires cash currency positions through banks and dealers. The Partnership pays a spread when it exchanges these positions for futures. This spread reflects, in part, the different settlement dates of the cash and the futures contracts, as well as prevailing interest rates, but also includes a pricing spread in favor of the banks and dealers, which may include a Merrill Lynch entity.

 

As both a buyer and seller (writer) of options, the Partnership pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership does not consider these contracts to be guarantees as described in ASC 460 Guarantees No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.”

 

The Partnership may purchase and write (sell) both exchange listed and over-the-counter, options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Partnership writes an option, the premium received is recorded as a liability in the Consolidated Statements of Financial Condition and marked to market daily. When the Partnership purchases an option, the premium paid is recorded as an asset in the Consolidated Statements of Financial Condition and marked to

 

10



 

market daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the Consolidated Statements of Operations.

 

The Partnership is exposed to both market risk, the risks arising from changes in the market value of the contracts, and credit risk, the risk of failure by another party to perform according to the terms of a contract.

 

Market Risk

 

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

 

BRIM has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so.  These procedures focus primarily on monitoring the trading of the Trading Advisors, calculating the Net Asset Value of the Partnership as of the close of business on each day and reviewing outstanding positions, or reallocating Partnership assets among Trading Advisors (although typically only as of the end of a month) for over-concentrations.  While BRIM does not itself intervene in the markets to hedge or diversify the Partnership’s market exposure, BRIM may urge the Trading Advisors to reallocate positions in an attempt to avoid over-concentrations.  Except in cases in which it appears that the Trading Advisors have begun to deviate from past practice or trading policies or to be trading erratically, BRIM’s basic risk control procedures consist simply of the ongoing process of Trading Advisor monitoring, with the market risk controls being applied by the Trading Advisors themselves.

 

Credit Risk

 

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

 

The amount of required margin and good faith deposits with the brokers usually ranges from 5% to 30% of Net Asset Value.  The market value of cash and securities held to satisfy such requirements at June 30, 2010 and December 31, 2009 was $19,156,622 and $21,761,607 respectively, which equals 5.82% and 7.89% of Net Asset Value, respectively.

 

The Partnership has a substantial portion of its assets on deposit with financial institutions.  In the event of a financial institution’s insolvency, recovery of Partnership assets on deposit may be limited to account insurance or other protection afforded such deposits.

 

11



 

For derivatives, risks arise from changes in the market value of the contracts.  Theoretically, the Partnership is exposed to a market risk equal to the notional contract value of futures and forward currency contracts purchased and unlimited liability on such contracts sold short.

 

The Partnership qualifies as an investment company under the provisions of the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies and therefore, all investments including derivatives are stated at fair value in the Consolidated Statements of Financial Condition, and changes in fair value are included in realized and unrealized trading profits and losses in the Consolidated Statements of Operations.

 

12



 

Condensed Consolidated Schedule of Investments

 

The Partnership trades futures and forward contracts.  The level of trading is affected by conditions in those markets.  During the quarter and six-months ended June 30, 2010, 122,045 and 229,713 contracts were closed, respectively.  The fair value of the Partnership’s futures and forward contracts by type, defined as Net unrealized profit on open contracts in the Consolidated Statements of Financial Condition as of June 30, 2010 are as follows:

 

 

 

Long Positions

 

Long Positions

 

 

 

 

 

Short Positions

 

Short Positions

 

 

 

Net unrealized

 

 

 

 

 

Commodity

 

Number

 

Gross Unrealized

 

Unrealized

 

Percent of

 

Commodity

 

Number

 

Gross Unrealized

 

Unrealized

 

Percent of

 

profit (loss) on

 

Percent of

 

 

 

Industry Sector

 

of Contracts

 

Gains

 

Losses

 

Profit (Loss)

 

Net Assets

 

Industry Sector

 

of Contracts

 

Gains

 

Losses

 

Profit (Loss)

 

Net Assets

 

open contracts

 

Net Assets

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

647

 

$

271,450

 

$

(155,534

)

$

115,916

 

0.04

%

Agriculture

 

(1,393

)

$

346,529

 

$

(596,293

)

$

(249,764

)

-0.08

%

$

(133,848

)

-0.04

%

July 2010 - March 2011

 

Currencies

 

429

 

334,962

 

(112,047

)

222,915

 

0.07

%

Currencies

 

(397

)

72,314

 

(653,729

)

(581,415

)

-0.18

%

(358,500

)

-0.11

%

September 2010

 

Energy

 

322

 

69,440

 

(281,457

)

(212,017

)

-0.07

%

Energy

 

(582

)

361,802

 

(299,468

)

62,334

 

0.02

%

(149,683

)

-0.05

%

July 2010 - December 2010

 

Interest rates

 

3,903

 

3,392,294

 

(27,459

)

3,364,835

 

1.02

%

Interest rates

 

(416

)

29,737

 

(92,504

)

(62,767

)

-0.02

%

3,302,068

 

1.00

%

July 2010 - September 2012

 

Metals

 

822

 

497,178

 

(4,067,295

)

(3,570,117

)

-1.08

%

Metals

 

(819

)

3,517,428

 

(226,227

)

3,291,201

 

1.00

%

(278,916

)

-0.08

%

July 2010 - April 2011

 

Stock indices

 

572

 

9,588

 

(850,889

)

(841,301

)

-0.26

%

Stock indices

 

(727

)

778,121

 

(1,517

)

776,604

 

0.24

%

(64,697

)

-0.02

%

July 2010 - September 2010

 

Subtotal

 

6,695

 

4,574,912

 

(5,494,681

)

(919,769

)

-0.28

%

Subtotal

 

(4,334

)

5,105,931

 

(1,869,738

)

3,236,193

 

0.98

%

2,316,424

 

0.70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

86

 

1,088,716

 

(2,721,079

)

(1,632,363

)

-0.49

%

Currencies

 

(94

)

5,090,064

 

(872,013

)

4,218,051

 

1.28

%

2,585,688

 

0.79

%

July 2010 - September 2010

 

Subtotal

 

86

 

1,088,716

 

(2,721,079

)

(1,632,363

)

-0.49

%

Subtotal

 

(94

)

5,090,064

 

(872,013

)

4,218,051

 

1.28

%

2,585,688

 

0.79

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

13

 

9,708

 

 

9,708

 

0.00

%

Currencies

 

 

 

 

 

0.00

%

9,708

 

0.00

%

July 2010

 

Subtotal

 

13

 

9,708

 

 

9,708

 

0.00

%

Subtotal

 

 

 

 

 

0.00

%

9,708

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

6,794

 

$

5,673,336

 

$

(8,215,760

)

$

(2,542,424

)

-0.77

%

Total

 

(4,428

)

$

10,195,995

 

$

(2,741,751

)

$

7,454,244

 

2.26

%

$

4,911,820

 

1.49

%

 

 

 

No individual contract’s unrealized profit or loss comprised greater than 5% of the Partnership’s capital as of June 30, 2010.

 

13



 

The Partnership trades futures and forward contracts. The level of trading is affected by conditions in those markets. During the year ended December 31, 2009, 391,944(1) contracts were closed. The fair value of the Partnership’s futures and forward contracts by type, defined as Net unrealized profit (loss) on open contracts in the Consolidated Statements of Financial Condition as of December 31, 2009 are as follows:

 

 

 

Long Positions

 

Long Positions

 

 

 

 

 

Short Positions

 

Short Positions

 

 

 

Net unrealized

 

 

 

 

 

Commodity

 

Number

 

Gross Unrealized

 

Unrealized

 

Percent of

 

Commodity

 

Number

 

Gross Unrealized

 

Unrealized

 

Percent of

 

profit (loss) on

 

Percent of

 

 

 

Industry Sector

 

of Contracts

 

Gains

 

Losses

 

Profit (Loss)

 

Net Assets

 

Industry Sector

 

of Contracts

 

Gains

 

Losses

 

Profit (Loss)

 

Net Assets

 

open contracts

 

Net Assets

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

1,023

 

$

982,535

 

$

(158,124

)

$

824,411

 

0.30

%

Agriculture

 

(568

)

$

159,142

 

$

(223,420

)

$

(64,278

)

-0.02

%

$

760,133

 

0.28

%

January 10 - May 10

 

Currencies

 

569

 

240,052

 

(449,588

)

(209,536

)

-0.08

%

Currencies

 

(463

)

313,343

 

(90,432

)

222,911

 

0.08

%

13,375

 

0.00

%

January 10 - December 10

 

Energy

 

225

 

480,824

 

(109,534

)

371,290

 

0.13

%

Energy

 

(158

)

33,782

 

(474,913

)

(441,131

)

-0.16

%

(69,841

)

-0.03

%

January 10 - July 10

 

Interest rates

 

2,265

 

250,907

 

(1,254,976

)

(1,004,069

)

-0.36

%

Interest rates

 

(1,094

)

595,914

 

(77,877

)

518,037

 

0.19

%

(486,032

)

-0.17

%

March 10 - December 10

 

Metals (1)

 

1,262

 

5,843,920

 

(387,661

)

5,456,259

 

1.98

%

Metals (1)

 

(903

)

159,323

 

(4,729,827

)

(4,570,504

)

-1.66

%

885,755

 

0.32

%

January 10 - December 10

 

Stock indices

 

1,636

 

1,005,269

 

(215,061

)

790,208

 

0.29

%

Stock indices

 

(114

)

28,861

 

(121,886

)

(93,025

)

-0.03

%

697,183

 

0.26

%

January 10 - March 10

 

Subtotal (1)

 

6,980

 

8,803,507

 

(2,574,944

)

6,228,563

 

2.26

%

Subtotal (1)

 

(3,300

)

1,290,365

 

(5,718,355

)

(4,427,990

)

-1.60

%

1,800,573

 

0.66

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

442

 

759,515

 

(1,991,882

)

(1,232,367

)

-0.45

%

Currencies

 

(481

)

1,527,996

 

(2,080,769

)

(552,773

)

-0.20

%

(1,785,140

)

-0.65

%

January 10 - July 10

 

Subtotal

 

442

 

759,515

 

(1,991,882

)

(1,232,367

)

-0.45

%

Subtotal

 

(481

)

1,527,996

 

(2,080,769

)

(552,773

)

-0.20

%

(1,785,140

)

-0.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

 

 

 

0.00

%

Agriculture

 

(44

)

 

(18,925

)

(18,925

)

-0.01

%

(18,925

)

-0.01

%

January 10 - May 10

 

Currencies

 

1

 

 

(7,377

)

(7,377

)

0.00

%

Currencies

 

 

 

 

 

0.00

%

(7,377

)

0.00

%

January 10 - July 10

 

Energy

 

31

 

 

(8,990

)

(8,990

)

0.00

%

Energy

 

 

 

 

 

0.00

%

(8,990

)

0.00

%

January 10 - December 10

 

Subtotal

 

32

 

 

(16,367

)

(16,367

)

0.00

%

Subtotal

 

(44

)

 

(18,925

)

(18,925

)

-0.01

%

(35,292

)

-0.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (1)

 

7,454

 

$

9,563,022

 

$

(4,583,193

)

$

4,979,829

 

1.81

%

Total (1)

 

(3,825

)

$

2,818,361

 

$

(7,818,049

)

$

(4,999,688

)

-1.81

%

$

(19,859

)

0.00

%

 

 

 

No individual contract’s unrealized profit or loss comprised greater than 5% of the Partnership’s capital as of December 31, 2009.

 


(1)   The numbers of long and short contracts and contracts closed have been revised from amounts previously reported to correct for an error in the aggregation of certain metals contracts. The correction of the error had no impact on any other amounts previously reported in the consolidated financial statements or consolidated financial data highlights.

 

14



 

The trading profits (losses) of the Partnership’s derivatives by instrument type, as well as the location of those gains and losses on the Consolidated Statement of Operations for the three month period ended June 30, 2010 and 2009 are as follows:

 

2010

 

Commodity
Industry Sector

 

Realized Profits
(Losses)

 

Change in Net
Unrealized Profits
(Losses)

 

Net Trading
Profits (Losses)

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

Agriculture

 

$

(2,118,906

)

$

(978,682

)

$

(3,097,588

)

Currencies

 

312,304

 

(829,447

)

(517,143

)

Energy

 

(1,143,538

)

(1,022,293

)

(2,165,831

)

Interest rates

 

8,610,735

 

2,869,208

 

11,479,943

 

Metals

 

(83,951

)

(250,959

)

(334,910

)

Stock indices

 

(5,056,498

)

(1,059,487

)

(6,115,985

)

Subtotal

 

520,146

 

(1,271,660

)

(751,514

)

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

Currencies

 

649,940

 

1,004,846

 

1,654,786

 

Subtotal

 

649,940

 

1,004,846

 

1,654,786

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

Agriculture

 

49,489

 

(49,489

)

 

Currencies

 

(96,539

)

4,754

 

(91,785

)

Energy

 

(1,000

)

1,000

 

 

Metals

 

44,258

 

4,393

 

48,651

 

Subtotal

 

(3,792

)

(39,342

)

(43,134

)

 

 

 

 

 

 

 

 

Total

 

$

1,166,294

 

$

(306,156

)

$

860,138

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity
Industry Sector

 

Realized Profits
(Losses)

 

Change in Net
Unrealized Profits
(Losses)

 

Net Trading
Profits (Losses)

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

Agriculture

 

$

(889,919

)

$

970,781

 

$

80,862

 

Currencies

 

166,462

 

689,130

 

855,592

 

Energy

 

(1,948,701

)

(283,547

)

(2,232,248

)

Interest rates

 

(1,232,023

)

(1,297,986

)

(2,530,009

)

Metals

 

(626,278

)

(89,205

)

(715,483

)

Stock indices

 

(843,636

)

328,198

 

(515,438

)

Subtotal

 

(5,374,095

)

317,371

 

(5,056,724

)

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

Currencies

 

(1,113,059

)

1,054,188

 

(58,871

)

Subtotal

 

(1,113,059

)

1,054,188

 

(58,871

)

 

 

 

 

 

 

 

 

Total

 

$

(6,487,154

)

$

1,371,559

 

$

(5,115,595

)

 

15



 

The trading profits (losses) of the Partnership’s derivatives by instrument type, as well as the location of those gains and losses on the Consolidated Statement of Operations for the six month period ended June 30, 2010 and 2009 are as follows:

 

2010

 

Commodity
Industry Sector

 

Realized Profits
(Losses)

 

Change in Net
Unrealized Profits
(Losses)

 

Net Trading
Profits (Losses)

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

Agriculture

 

$

(3,339,828

)

$

(893,981

)

$

(4,233,809

)

Currencies

 

311,780

 

(371,875

)

(60,095

)

Energy

 

(3,374,857

)

(79,842

)

(3,454,699

)

Interest rates

 

9,394,750

 

3,788,100

 

13,182,850

 

Metals

 

792,392

 

(1,164,671

)

(372,279

)

Stock indices

 

(3,722,100

)

(761,880

)

(4,483,980

)

Subtotal

 

62,137

 

515,851

 

577,988

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

Currencies

 

(683,380

)

4,370,828

 

3,687,448

 

Subtotal

 

(683,380

)

4,370,828

 

3,687,448

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

Agriculture

 

(18,925

)

18,925

 

 

Currencies

 

(131,018

)

17,085

 

(113,933

)

Energy

 

(8,990

)

8,990

 

 

Metals

 

49,843

 

 

49,843

 

Subtotal

 

(109,090

)

45,000

 

(64,090

)

 

 

 

 

 

 

 

 

Total

 

$

(730,333

)

$

4,931,679

 

$

4,201,346

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity
Industry Sector

 

Realized Profits
(Losses)

 

Change in Net
Unrealized Profits
(Losses)

 

Net Trading
Profits (Losses)

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

Agriculture

 

$

(2,011,418

)

$

926,056

 

$

(1,085,362

)

Currencies

 

(768,925

)

592,125

 

(176,800

)

Energy

 

(2,733,499

)

20,066

 

(2,713,433

)

Interest rates

 

(2,597,191

)

(2,832,016

)

(5,429,207

)

Metals

 

(672,384

)

(933,461

)

(1,605,845

)

Stock indices

 

2,807,999

 

67,579

 

2,875,578

 

Subtotal

 

(5,975,418

)

(2,159,651

)

(8,135,069

)

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

Currencies

 

(1,032,195

)

(262,124

)

(1,294,319

)

Subtotal

 

(1,032,195

)

(262,124

)

(1,294,319

)

 

 

 

 

 

 

 

 

Total

 

$

(7,007,613

)

$

(2,421,775

)

$

(9,429,388

)

 

16



 

5.   RELATED PARTY TRANSACTIONS

 

Some of the Partnership’s U.S. dollar assets are maintained at MLPF&S.  MLPF&S is a wholly owned subsidiary of Merrill Lynch, which in turn maintains a significant ownership interest in BlackRock, Inc., the parent company of the General Partner. On assets held in U.S. dollars, Merrill Lynch credits the Partnership with interest at the prevailing 91-day U.S. Treasury bill rate. The Partnership is credited with interest on any of its net gains actually held by MLPF&S in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch.  Merrill Lynch may derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Partnership, from possession of such assets. Additionally some of the Partnership’s U.S. dollar assets are maintained at PFPC Trust Company (“PFPC Trust”), an affiliate of the General Partner.  PNC Global Investment Servicing (U.S.), Inc. (“PNCGIS”), an affiliate of the General Partner, serves as the Partnership’s transfer agent. The transfer agency fees paid to PNCGIS are included in Administrator fees on the Consolidated Statements of Operations. Effective July 1, 2010, PNCGIS was sold to The Bank of New York Mellon Corporation (“BNY Mellon”) and is no longer considered an affiliate of the General Partner. At the close of the sale, PNCGIS changed its name to BNY Mellon Investment Servicing (US), Inc.

 

As of June 30, 2010 and December 31, 2009, $10,522,248 and $10,617,906, respectively, was held in trading accounts at MLPF&S.  For the three-month periods ended June 30, 2010 and 2009, the Partnership incurred $96,545 and $90,650, respectively, for brokerage commissions payable to MLPF&S. For the six-month periods ended June 30, 2010 and 2009, the Partnership incurred $173,887 and $137,343, respectively, for brokerage commissions payable to MLPF&S.

 

PFPC Trust provides custody services for the Partnership. As of June 30, 2010 and December 31, 2009, $273,188,717 and $218,690,094, respectively, was held in custody at PFPC Trust and invested in an affiliated BlackRock money market fund.

 

For the three-month periods ended June 30, 2010 and 2009, the Partnership incurred $178,000 and $132,600, respectively, for administrative, custodian, transfer agency and other services fees payable to PNCGIS and its affiliates. For the six-month periods ended June 30, 2010 and 2009, the Partnership incurred $342,000 and $263,400, respectively, for administrative, custodian, transfer agency and other services fees payable to PNCGIS and its affiliates.

 

Merrill Lynch charges the Partnership Merrill Lynch’s cost of financing realized and unrealized losses on the Partnership’s non-U.S. dollar denominated positions.  Such amounts are netted against interest income due to the insignificance of such amounts.

 

6.   RECENT ACCOUNTING PRONOUNCEMENT

 

In January 2010, the Financial Accounting Standards Board issued amended guidance to improve disclosures about fair value measurements which will require additional disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). It also clarifies existing disclosure requirements relating to the levels of disaggregation for fair value measurement and inputs and valuation techniques used to measure fair value. The amended guidance is effective for financial statements for

 

17



 

fiscal years and interim periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the applicable additional disclosure requirements did not materially impact the Partnership’s consolidated financial statements.

 

7.   SUBSEQUENT EVENTS

 

Management has evaluated the impact of all subsequent events on the Partnership through the date the consolidated financial statements were issued, and has determined that there were no subsequent events requiring adjustment or additional disclosure in the consolidated financial statements, other than as described below.

 

Effective July 1, 2010, PNCGIS and PFPC Trust were acquired by subsidiaries of BNY Mellon and will no longer be considered related parties of the Partnership as of and after that date.

 

18



 

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

 

Operational Review

 

Set forth below is a chart which provides the Partnership’s current Trading Advisors, the portion of the Partnership’s assets that each controlled as of June 1, 2010, the general trading focus of each such Trading Advisor, an indication as to whether each Trading Advisor’s program is discretionary or systematic, as well as the commodity pool operator and investment adviser registration status of each Trading Advisor (with the Commodity Futures Trading Commission (the “CFTC”) and Securities and Exchange Commission (the “SEC”), respectively).

 

Trading Advisors

 

Systematic /
Discretionary

 

General Trading Focus

 

Allocation

 

CPO Registration
Status

 

Investment Adviser
Registration Status

Abraham Capital Management

 

Systematic

 

 Long-term trend-following

 

8.75

%

Not Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Boronia Capital PTY Ltd

 

Systematic

 

 Short-term trend-following

 

9.90

%

Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Blackwater Capital Management LLC

 

Systematic

 

 Medium-term trend-following

 

8.40

%

Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Cantab Capital Partners LLP

 

Systematic

 

 Medium-term trend-following and mean reversion

 

8.90

%

Exempt CPO

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Crabel Capital Management LLC

 

Systematic

 

 Short-term trend-following

 

8.90

%

Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Mapleridge Capital Corporation

 

Systematic

 

 Short-term trend-following and mean reversion

 

9.85

%

Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Nuwave Investment Management LLC

 

Systematic

 

 Medium-term pattern recognition

 

7.00

%

Registered

 

Registered

 

 

 

 

 

 

 

 

 

 

 

Ortus Capital Management Ltd

 

Systematic

 

 Medium-term econometric

 

9.90

%

Not Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Quantitative Investment Management - Global Program

 

Systematic

 

 Short-term pattern recognition

 

7.90

%

Registered

 

Not Registered

 

 

 

 

 

 

 

 

 

 

 

Winton Capital Management Limited

 

Systematic

 

 Medium-term trend-following

 

14.50

%

Registered

 

Not Registered

 

BRIM may, from time to time, direct certain individual Trading Advisors to manage their respective Partnership accounts as if they were managing more equity than the actual capital allocated to them.

 

19



 

One of the objectives of the Partnership is to provide diversification for a limited portion of the risk segment of the Limited Partners’ portfolios. Commodity pool performance has historically demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Partnership’s returns have been significantly non-correlated with the United States stock and bond markets.

 

The advisory agreements between the Partnership, the General Partner and each Trading Advisor govern the relationships with the Trading Advisors. The principal terms of the form of advisory agreement include the management fees (the “Management Fees”), profit shares (the “Profit Shares”), indemnification provisions and the term of the advisory agreement. Set forth below are descriptions of each of these terms. Other than the differences in fees, as described in the ranges provided below, the only other key term that differs among the agreements with the Trading Advisors is the minimum account maintenance level. The minimum account maintenance level for each Trading Advisor is described below.

 

Management Fees. Generally, Management Fees approximate between 0% and 2.5% (annualized) of the net asset value of the Partnership’s account managed by a Trading Advisor.

 

Profit Shares. Profit Shares generally are between 15% and 30% of the net capital appreciation in the Partnership’s account managed by a Trading Advisor for the applicable period, generally quarterly or annually, and are calculated on a cumulative high water mark basis, including realized and unrealized gains and losses from futures trading. Each Trading Advisor must earn back any losses causing cumulative quarter-end or year-end trading profits experienced by the Partnership’s account managed by the Trading Advisor to fall below the previous cumulative high water mark for such account before generating additional new trading profits on which Profit Shares are paid. However, Profit Shares once paid are not subject to being repaid to the Partnership as a result of subsequent realized or unrealized losses.

 

Indemnification. The advisory agreements generally provide that the Partnership will indemnify each Trading Advisor and its officers, employees and controlling persons for conduct undertaken as a trading advisor or otherwise relating to any action or omission of such persons (or alleged action or omission) in connection with the advisory agreements; provided that such action or omission (or alleged action or omission) does not constitute negligence (or gross negligence in some cases), misconduct or breach of the advisory agreements and was done in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Partnership. The advisory agreements further provide that this indemnity provision will not increase the liability of any Limited Partner to the Partnership beyond the amount of his or her capital and profits (exclusive of distributions or other returns of capital, including redemptions), if any, in the Partnership. The advisory agreements generally provide that the foregoing indemnified parties shall not be liable to the Partnership for actions or omissions within the scope of the standards set forth in the foregoing indemnities.

 

Term. The advisory agreements may be renewed at the option of the General Partner and the Partnership for successive one year terms. Each Trading Advisor may terminate the advisory agreement if the equity in the Partnership’s account drops below a specified minimum amount as of the close of business on any day, among other reasons. The Partnership may terminate the advisory agreements as of any month-end.

 

Minimum Investment Maintenance Levels. The minimum maintenance levels with each Trading Advisor are as follows: Abraham Capital Management: $1,000,000; Boronia Capital Pty Ltd.: $1,000,000; Blackwater Capital Management LLC: $1,000,000; Cantab Capital Partners LLP:

 

20



 

$15,000,000; Crabel Capital Management LLC: $1,000,000; Mapleridge Capital Corporation: $1,000,000; NuWave Investment Management, LLC: $1,000,000; Ortus Capital Management Ltd.: $20,000,000; Quantitative Investment Management: none; Winton Capital Management Limited: $1,000,000. A failure to maintain the minimum investment level does not result in an automatic termination of the agreement with the Trading Advisor, rather it permits the Trading Advisor to terminate the advisory agreement.

 

The relationship with PIA Capital Management L.P. was terminated on May 28, 2010.

 

Performance Summary and Net Asset Value Per Unit

 

MONTH-END NET ASSET VALUE PER SERIES F UNIT

 

 

 

Jan.

 

Feb.

 

Mar.

 

Apr.

 

May

 

Jun.

 

2009

 

$

284.04

 

$

283.02

 

$

272.56

 

$

264.70

 

$

268.52

 

$

262.57

 

2010

 

$

252.82

 

$

253.45

 

$

257.28

 

$

255.55

 

$

251.68

 

$

253.01

 

 

Set forth below is a list of the year-to-date net trading profit (loss) from each of the different Trading Advisors as measured at June 30, 2010.

 

Trading Advisors

 

Realized

 

Change in
Unrealized

 

Brokerage
Commissions and
Clearing Costs

 

Total Trading Profit
(Losses)

 

Abraham Capital Management

 

$

(1,554,938

)

$

(138,798

)

$

(163,041

)

$

(1,856,777

)

Boronia Capital PTY Ltd

 

1,044,965

 

(71,544

)

(191,510

)

781,911

 

Blackwater Capital Management LLC

 

(486,967

)

25,141

 

(33,233

)

(495,059

)

Cantab Capital Partners LLP

 

(3,176,143

)

1,173,506

 

(78,186

)

(2,080,823

)

Crabel Capital Management LLC

 

1,727,734

 

813,445

 

(159,018

)

2,382,161

 

Mapleridge Capital Corporation

 

(620,847

)

(412,359

)

(484,778

)

(1,517,984

)

Nuwave Investment Corp

 

1,037,260

 

302,308

 

(10,846

)

1,328,722

 

Ortus Capital Management Ltd

 

64,064

 

3,555,971

 

 

3,620,035

 

PIA Capital Management LP

 

(57,487

)

(139,936

)

(18,737

)

(216,160

)

Quantitative Investment Management - Global Program

 

(1,398,473

)

(610,630

)

(44,205

)

(2,053,308

)

Winton Capital Management Limited

 

2,690,499

 

434,575

 

(28,028

)

3,097,046

 

Total

 

$

(730,333

)

$

4,931,679

 

$

(1,211,582

)

$

2,989,764

 

 

The weighted average Management Fee rate of the Trading Advisors based on allocations as of June 30, 2010 was 1.39% and the weighted average incentive fee rate was 21%. The range of Management Fees as of June 30, 2010 was 0% to 2.5% (annualized) and the range of Profit Shares was 15% to 30%.

 

Performance Summary - Results of Trading

 

January 1, 2010 to June 30, 2010

 

January 1, 2010 to March 31, 2010

 

The Partnership posted a net loss for the quarter as broadly mixed performance across underlying managers reflected a period with numerous news shocks that proved to be difficult for many systematic models to capture. Overall, foreign exchange led the quarter’s contributing sectors, with equities, fixed income and energy also producing positive results. Meanwhile, commodities trading generally struggled during the quarter, as agriculture and metals detracted.

 

21



 

Leading foreign exchange activity, underlying long US dollar exposures versus a troubled euro and a sympathetic British pound were largely additive during the quarter. In particular, continued concerns around Greece’s sovereign debt crisis, and the Eurozone in general, influenced a general sell-off of the euro resulting in seven-month lows against the US dollar. The British pound also experienced weakness over local debt concerns and political uncertainty. Additional performance gains were generally the result of underlying long exposures to the currencies of commodity-dominant Australia and Canada. Meanwhile, underlying long Japanese yen holdings largely suffered during the quarter as the yen experienced its largest monthly decline versus the euro since early 2009 despite the euro’s troubles, and fell to three-month lows versus the US dollar.

 

Equities struggled early in the quarter as European fiscal concerns drove investors to sell risky assets. Following these long-side losses, including notable declines in the Dow Jones Eurostoxx and Hang Seng indices, many underlying managers ultimately reduced net long exposure through stop-loss levels and a reduction in signal strength. This led to further negative underlying manager results when markets strongly rebounded mid-quarter as investors looked favorably on indications that the EU would support Greece. Additionally, economic data releases late in the quarter also appeared to support investor optimism that the economy was on a recovery path, benefiting underlying long US and Japanese exposures particularly. Underlying managers were generally able to successfully navigate the continued upswing in March, accruing enough gains to overcome a large part of earlier losses.

 

The shift away from risky assets was a predominant theme for bond markets in January and early February. In particular, underlying long exposures to Euribor and German bunds profited, perceived as a safer alternative to the more heavily-indebted economies in the Eurozone, chiefly Greece. Gilts also appreciated mid-quarter after the Bank of England signaled concerns late in the month of a shrinking economy. However, range-bound global rates and a lack of clear market direction created a difficult trading environment later in the period. German bunds reversed from their previous upswing and Japanese government bond prices declined in anticipation of improved economic reports. Meanwhile, US Treasury trading was mixed throughout the quarter as rising longer-term yields reflected increased issuance and perceived improvements in the economy, while record-low short-term rates reflected the apparent intention of policy makers to remain accommodative.

 

Energy trading struggled early, but generally was able to recover lost ground in March. A commodity sell-off in crude oil and low volatility in natural gas prices created a difficult start to the year, leading many to short the sector. However, sharp reversals in crude oil prices frustrated a number of underlying managers. Following these losses, several underlying managers built up long exposures, setting up notable gains throughout the second half of the period as oil prices reached 18-month highs, bolstered by a growing appeal of commodities relative to corporate securities, as well as the US dollar’s decline. Furthermore, natural gas stockpiles reached above-average levels, profitably affecting underlying short natural gas exposures and pushing the overall sector into positive territory for the month.

 

First quarter metals sector declines were driven by gold and copper exposures. Most notably, underlying short gold positions generally lost ground as historically low central bank sales and a rebounding market in India and China supported prices. Meanwhile, underlying long nickel exposures helped to partially mitigate losses as the industrial metal’s prices reached 22-month highs in March, bolstered by the improving economic outlook. Platinum also contributed as anticipated demand from a global auto recovery augmented the metal’s performance over the quarter.

 

Agriculture-based commodity trading has experienced a very challenging environment year-to-date. Soybeans led losses within a rangebound trading environment for the crop, and wheat hit a five-month low in March due to light demand and higher-than-expected global supply. Furthermore, underlying long

 

22



 

exposures to sugar experienced initial gains due to poor recent crops in India and Brazil, but the commodity aggressively reversed after hitting a 25-year high, ultimately suffering a 15% price collapse on news of increasing output in the two regions.

 

April 1, 2010 to June 30, 2010

 

The Partnership posted a net loss for the quarter on broadly mixed performance across underlying managers. The period reflected increasing uncertainty over the health of the global recovery, affected in part by weak economic data from the developed world and the unknown impact of various financial and fiscal reforms. Overall, select long sovereign fixed income exposures led the quarter’s contributors as investors favored safe havens, and metals and foreign exchange activity experienced flat returns. Meanwhile, energy, agricultures and equities all detracted during the quarter.

 

Increasingly risk-averse investor attitudes during the second quarter contributed to significant gains for underlying managers in the fixed income sector, as investors continued to seek low-risk assets. Underlying long exposures to German bunds, US Treasurys and Japanese government bonds were generally profitable throughout the period as bond yields in many developed countries declined, particularly on poor economic news in China and the US. Specifically, US 10-year yields reached a 13-month low during the period. However, bond prices in peripheral Europe fell as disappointing macroeconomic data reignited worries about sovereign debt in the region, despite the European Union’s and IMF’s announced €75 billion bail-out of Greece.

 

The metals sector was largely flat during the quarter as trades hedging a flight-to-quality mitigated losses from weaker industrial metal pricing. Gold was a notable winner for the sector as investors increasingly favored it as a safe haven, with prices rising throughout the quarter. Copper shorts also contributed as the metal sold off, falling as much as 12% in June before partially recovering in the last two weeks of the quarter. Meanwhile, nickel prices peaked in late April, declining in May on factors including rising global inventories and increased production of low-cost alternatives in China.

 

Foreign exchange activity was mixed during the quarter. Gains from select major currencies trades offset losses in emerging market and minor currency trading. In particular, concerns in Europe continued to drive the decreasing value of the euro to a four-year low against the US dollar, ultimately aiding managers short the euro versus the rallying US dollar. Meanwhile, the Swiss franc experienced a volatile quarter, as the Swiss National Bank sought to prevent significant currency appreciation against the euro, causing a decline in the currency in May, but later improving in June after further intervention was abandoned on improving economic data. The Australian and Canadian dollars also struggled in May as commodity-related currencies generally sold-off, only to reverse in June. In addition, the British pound and Japanese yen experienced mixed results during the quarter.

 

Despite gains in April, energy trading experienced significant losses in May, ultimately driving negative quarterly performance for the sector. Oil prices and investor sentiment were on the rise in April, but a sharp reversal occurred in May upon concerns of curbed demand and growing stockpiles in the eurozone and China, the world’s second largest consumer of oil. Crude oil rallied in June as the US dollar weakened, and natural gas prices gained ground on positive inventory data, however managers added to energy shorts following May’s declines, hurting overall performance.

 

The agriculture sector continued to experience a challenging environment, garnering losses in cotton, soybeans, corn, coffee and lumber trading. Corn and wheat exposures proved difficult for short-biased managers when prices rose early in the quarter on speculation of adverse weather during the growing season. After reports of expanded planting and inventory relaxed prices somewhat, the grains finished

 

23



 

the quarter on an uptick, again generating losses. In the meantime, cotton performance was negatively affected by a strengthening US dollar and weakening equity prices, while coffee improved when NYMEX futures notably increased due to global supply uncertainties, creating short-side losses.

 

Equities suffered throughout the quarter, experiencing wide and volatile trading ranges. In general, continued concerns over the European sovereign debt crisis and Chinese policy tightening overshadowed positive developments in corporate profitability and rising economic growth forecasts. Furthermore, the May 6th “flash crash” sell-off, and the May 10th recovery spike resulting from the announcement of the European Union’s and IMF’s planned €75 billion bail-out of Greece contributed to a more than 20-point surge in the VIX during the month. While the S&P 500 was able to maintain positive performance in April, both domestic and international indices, including the CAC 40, DAX, FTSE, S&P 500, NASDAQ and Nikkei 225 indices, contributed to the sector’s overall losses during the quarter.

 

January 1, 2009 to June 30, 2009

 

January 1, 2009 to March 31, 2009

 

The Partnership posted a net loss for the quarter, with early gains offset by losses late in the quarter.  The stock indices sector was the only profitable sector for the quarter, with the largest losses occurring in the interest rate sector.

 

Stock indices trading contributed to gains early in the quarter through short exposures to global markets. Broad-based equity declines impacted global markets in January and February on negative economic news and poor earnings.  However, investors experienced a sharp reversal and rally in March as they began to perceive stabilization in the global financial system after several months of uncertainty. Within this environment, short global equity exposures to the US, Germany, Hong Kong and Japan, proved to be beneficial as markets substantially declined early in the period. However, many of these short equity exposures detracted late in the quarter as the markets rallied on positive corporate earnings and government stimulus efforts.

 

Trading in energies was relatively flat over the first three months of the year, with slight profits early in the quarter roughly balanced by later losses. Oil prices hit cyclical lows in February, falling below $40/barrel for the first time since 2004 before rebounding to nearly $50/barrel by the end of March on signs that economic deterioration appears to be slowing. Demand for energy continued to slump, weighed by a decrease in economic activity driven by the global recession.  Natural gas prices were negatively impacted by falling demand from power producers and their industrial clientele.

 

Short exposures in the metals sector detracted slightly from performance for the quarter, with gains early in the quarter outweighed by March losses. Prices for industrial metals such as copper, lead and zinc, rallied in March from their earlier lows on hopes that government stimulus efforts would spark industrial production and reduce existing basic materials inventory levels. Precious metals prices also rose during the quarter, continuing to benefit from higher levels of market volatility and economic uncertainty, as well as latent fears over growing inflation after the economy recovers.

 

Trading in agricultural commodities detracted from performance despite a profitable month of February. In particular, short positions in corn and soybeans profited in February on speculation that demand for biofuels and animal feed would decline in the midst of the recession, and demand for cotton process fell based on a reduced demand for raw materials. However, prices broadly recovered in March as investors perceived better economic times ahead.  Coffee prices improved substantially over the course of the quarter, as investors anticipated a reduced supply from Central and South America.

 

24



 

Currency trading also detracted from performance for the quarter. Long exposures to Japanese yen and short exposures to the Euro contributed early in the quarter; however it was not enough to offset losses in the latter half of the quarter.  The foreign exchange markets were range-bound during February with declining volatility, resulting in a challenging environment for underlying managers with shorter holding periods. While demand for the U.S. dollar was strong early in the period due to high market uncertainty, late in the quarter, long U.S. dollar trades struggled following quantitative easing initiatives launched by the U.S. Federal Reserve.

 

The interest rate sector was the worst performing strategy for the quarter. Long U.S. treasury, Gilt, and German Bund exposures led losses, selling off despite a backdrop of stock market volatility, worsening economic conditions and regulatory uncertainty. March proved to be particularly challenging, with several government and central bank stimulus initiatives, including those by the U.S. Federal Reserve, the Bank of England, the Swiss National Bank and the Bank of Japan, creating a challenging environment for systematic managers.

 

April 1, 2009 to June 30, 2009

 

The Partnership posted a net loss for the quarter as mid-quarter gains were offset by losses early and late in the quarter. In general, Trading Advisors faced challenges as reduced volatility and shifting trends resulted in an environment with limited momentum to exploit. Overall, foreign exchange activity was the only positive contributor to gains in the currencies sector, with agriculture-based trades posting essentially flat returns. Amongst sectors producing losses for the quarter, the worst performer was interest rates, followed by energy, metals and stock indices.

 

While the currency sector was profitable overall, it was a complex trading environment. Many Trading Advisors started the period short select currencies, such as the Canadian dollar and the British pound. However, hopes for economic recovery and an accelerating slide in the U.S. dollar in April generated losses in these short positions early. Trade positioning quickly adjusted, and many Trading Advisors enjoyed substantial long-side gains in the Australian dollar and the Euro as the U.S. dollar experienced its sharpest monthly decline in years. However, the quarter ended with the U.S. dollar trading somewhat range-bound, creating a difficult backdrop for momentum-based strategies to profit, and leading Trading Advisors to sustain modest losses in June.

 

Trading in agricultural commodities also proved to be demanding, as Trading Advisors fought back from early losses to end the quarter nearly flat. April losses in long exposure to sugar were offset by later gains from a broad commodity price rally brought on by signs of improving global demand and a weakening U.S. dollar. On the short side, exposures to corn and wheat made back earlier losses as prices substantially declined on reports of increasing supplies and speculation that warm, wet weather would accelerate plant development. Meanwhile, short exposures to hogs contributed throughout the period as hog positions sold off over concerns about the H1N1 virus.

 

Trading in the interest rate sector struggled during the quarter, in large part due to improved market sentiment and the resulting flow of investor capital away from sovereign bonds and toward riskier assets. In particular, long exposures to Japanese government bonds, German Bunds and Gilts all declined during the period. Meanwhile, long exposure to short-term interest rates, especially in the Eurodollar, Euribor and Sterling, also detracted, adversely responding to the European Central Bank holding rates at a record low and higher-than-expected U.S. unemployment numbers. However, several underlying funds mitigated a portion of losses through trading long-term U.S. interest rates, which provided opportunities through both long and short exposures during the period.

 

25



 

Trading in energies also contributed to losses.  Short exposures to crude oil and heating oil in April and May drove energy trading losses, as upbeat economic news and declining inventory levels positively influenced underlying energy prices. Nonetheless, select funds profited from shorter-term tactical trades in natural gas, benefiting from short exposures in April as natural gas sold off to a 6-year low, followed by successfully trading the market through both short and long exposures as volatility increased later in the quarter.

 

Trading in metals also contributed to losses.  Metals saw mixed results during the quarter as long exposures to gold detracted in April and June but profited in May as investors sought inflation hedges given the sharply declining U.S. dollar. Conversely, industrial metals such as aluminum and nickel trades were profitable in April, rallying on improved economic recovery prospects. As market rallies extended throughout the quarter, Trading Advisors increased select short positions. Aluminum short exposures were among those that took a substantial hit as the commodity experienced its largest weekly gain in 21 years during June, contributing to an overall loss for the sector.

 

Trading in stock indices contributed the most to losses in the quarter.  Initial short exposures lost ground early, given broad market rallies across the globe. However, Trading Advisors reduced these positions quickly; increasing long exposures to the U.S. and holding more neutral exposures in select other markets.  While long holdings in the NASDAQ and Russell indices added overall gains as global indices continued to improve throughout the quarter on strengthening sentiment, short hedges to the Dow Jones Eurostoxx, Hang Seng and FTSE indices outweighed gains, driving an overall decline for the strategy during the quarter.

 

Performance Summary — Factors Affecting Interest Income and Expenses

 

Cash held in accounts at the Clearing Brokers and PFPC Trust earns interest on all such assets which are not used for trading.  The low level of interest rates in 2010 in the United States negatively impacted interest income revenues when compared to 2009.   The Partnership estimates that approximately 95% of its assets are earning interest.   For the six and three months ended June 30, 2010 the Partnership earned $169,248 and $102,905, respectively, in interest income, or approximately 0.05% and 0.03%, respectively, of the Partnership’s average month-end net assets.  For the six and three months ended June 30, 2009, the Partnership earned $680,087 and $259,974, respectively, in interest income, or approximately 0.29% and 0.11%, respectively, of the Partnership’s average month-end net assets.  The average interest rates for the three and six month periods ended June 30, 2010 were 0.15% and 0.13%, respectively.  The average interest rates for the three and six month periods ended June 30, 2009 were 0.54% and 0.99%, respectively.

 

The overall expenses of the Partnership (excluding Profit Shares) generally vary with changes in net assets. As such, expenses that vary with net assets are higher as of June 30, 2010 when compared to the same period ending June, 30 2009 due to the overall increase in the Partnership’s net assets.  For the six and three month periods ended June 30, 2010, Distribution, Trading Advisors’ management fees and Sponsor fees increased approximately 35% and 43%, respectively when compared to the six and three month periods ended June 30, 2009.  This is due mostly to a 41% and 33% increase in average net assets in the six and three month periods ended June 30, 2010 when compared to six and three months ended June 30, 2009, partially offset by the variation of the level of traded assets during the respective periods.  Profit Shares increased for the period ending June 30, 2010, when compared to the period ending June 30, 2009 primarily due to a few profitable Trading Advisors.

 

26



 

The distribution fee is paid to the General Partner, who will then pay the distribution fee to the third-party selling agents, if any. Such selling agents in turn may use cash funds to compensate financial advisors and/or to cover the costs of supporting client accounts within the third party organization. If there are no payments to third-party selling agents with respect to a particular investor, the distribution fee will be returned by the General Partner or paid to an affiliate. Management Fees are paid to the Trading Advisors. Sponsor fees are paid to the General Partner.

 

Liquidity; Capital Resources

 

The Partnership borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Partnership’s U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency. They have been immaterial to the Partnership’s operation to date and are expected to continue to be so.

 

Substantially all of the Partnership’s assets are currently held in cash except for the net unrealized profit on open positions. The Net Asset Value of the Partnership’s cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Partnership’s profit potential generally increases. Inflation in commodity prices could also generate price movements, which the Trading Advisors’ strategies might successfully follow.

 

With respect to assets allocated to accounts managed by the Trading Advisors rather than Portfolio Funds, except in very unusual circumstances, the Partnership should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices. This should permit a Trading Advisor to seek to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there generally is a readily available market value for the Partnership’s positions and assets not allocated to Portfolio Funds, the Partnership’s monthly Net Asset Value calculations typically are precise, and investors generally need only wait ten business days to receive the full redemption proceeds of their Units, although there can be no assurance as to the timing of such payments.

 

Although the Partnership has not done so to date, the Partnership may allocate assets to Portfolio Funds which typically are subject to redemption restrictions which may include advance written notice for redemptions, monthly or quarterly redemptions and such Portfolio Fund’s ability to limit or suspend redemptions.

 

Most United States exchanges (but generally not foreign exchanges, or banks or broker-dealer firms in the case of foreign currency forward contracts) limit by regulation the amount of fluctuation limits. The daily limits establish the maximum amount the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of the trading session. Once the “daily limit” has been reached in a particular commodity, no trades may be made at a price beyond the limit. Positions in the commodity can then be taken or liquidated only if traders are willing to effect trades at or within the limit during the period for trading on such day. Because the “daily limit” rule only governs price movement for a particular trading day, it does not limit losses. The rule may, in fact, substantially increase losses because it may prevent the liquidation of unfavorable positions. Futures prices have occasionally moved the daily limit for several consecutive trading days, and thereby prevented prompt liquidation of futures positions on one side of the market, subjecting those futures traders involved to substantial losses.

 

Liquidity will be of concern to the Partnership primarily in that the futures markets in which the Trading Advisors take positions may have periods in which illiquidity makes it impossible or economically

 

27



 

undesirable to execute trades which its respective trading strategy would otherwise suggest. Other than in respect of the functioning of the markets in which it trades, we believe liquidity should be of little relevance.

 

The Partnership has not made any investments in Portfolio Funds to date so it has not had to raise funds from Portfolio Funds. Instead, the Partnership pays its redemptions with the cash held in its various operating accounts. Due to the nature of its futures trading, the Partnership has significant amounts of cash available to it. When it needs to fund redemptions, the General Partner will adjust the net assets allocated to the Partnership’s various Trading Advisors as appropriate based upon its asset allocation process. The individual Trading Advisors decide which trading positions to liquidate in the accounts they manage, when necessary. The Partnership has been able to satisfy all of its redemption requests in a timely manner.

 

There were no material commitments for capital expenditures as of June 30, 2010, the end of the most recent reporting period.

 

28



 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Quantifying the Partnership’s Trading Value at Risk

 

Quantitative Forward-Looking Statements

 

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act  and Section 21E of the Exchange Act).  All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

 

The Partnership’s risk exposure in the various market sectors traded by the Trading Advisors is quantified below in terms of Value at Risk.  Due to the Partnership’s mark-to-market accounting, any loss in the fair value of the Partnership’s open positions is directly reflected in the Partnership’s earnings (realized or unrealized) and cash flows (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).

 

Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk.  Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95% - 99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels.  Maintenance margin levels are established by dealers and exchanges using historical price studies, as well as an assessment of current market volatility and economic fundamentals, to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

 

In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.

 

The fair value of the Partnership’s futures and forward positions does not have any optionality component. However, certain of the Trading Advisors trade commodity options.  The Value at Risk associated with options is reflected in the following table as the margin requirement attributable to the instrument underlying each option.

 

In quantifying the Partnership’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category’s aggregate Value at Risk.  The diversification effects resulting from the fact that the Partnership’s positions are rarely, if ever, 100% positively correlated, have not been reflected.

 

29



 

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

 

The measurement of the Partnership’s Trading Value at Risk is based upon the margin requirements imposed upon the Partnership for the positions it maintains across the various market sectors it invests in, which are calculated for each of its clearing accounts. The Partnership’s margin requirements are then allocated across the various market sectors disclosed in the table based upon the relative size of the positions held in each sector. The Partnership’s disclosure does not attempt to reduce this exposure based upon any assumptions on the correlation of positions held across the different clearing accounts to each other. The following table indicates the average, highest and lowest trading Value at Risk associated with the Partnership’s open positions by market category for the quarterly period ended June 30, 2010. During this period, the Partnership’s average capitalization was $324,036,976.

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

295,202

 

0.09

%

$

315,729

 

$

265,852

 

Currencies

 

5,847,270

 

1.80

%

7,942,593

 

4,453,878

 

Energy

 

530,647

 

0.16

%

751,168

 

318,196

 

Interest Rates

 

11,798,530

 

3.64

%

13,792,217

 

8,482,334

 

Metals

 

395,882

 

0.12

%

761,760

 

113,891

 

Stock Indices

 

420,091

 

0.13

%

1,030,291

 

17,393

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

19,287,622

 

5.94

%

$

24,593,758

 

$

13,651,544

 

 

Average, Highest and Lowest Value at Risk amounts relate to the average, highest and lowest month-end amounts for each month-end during the period. The Percentage of Average Capitalization is the average of the Partnership’s capitalization at the end of each calendar month during the period.

 

Item 4. Controls and Procedures

 

BRIM, the General Partner of the Partnership, with the participation of the Partnership’s president as Principal Executive Officer of the Partnership (“President”) and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period of this quarterly report and, based on this evaluation, has concluded that these disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting

 

There were no significant changes in the Partnership’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

30



 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

 

 

None.

 

 

Item 1A.

Risk Factors

 

 

 

None.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

 

 

(a)

The table below represents the units issued to accredited investors pursuant to Regulation D and Section 4(2) under the Securities Act.

 

SERIES A

 

 

 

Subscription

 

 

 

 

 

 

 

Amount

 

Units

 

NAV

 

Apr-10

 

$

17,048,836

 

15,945,413

 

$

1.0692

 

May-10

 

11,640,883

 

10,961,283

 

1.0620

 

Jun-10

 

13,590,921

 

12,994,475

 

1.0459

 

 

SERIES I

 

 

 

Subscription

 

 

 

 

 

 

 

Amount

 

Units

 

NAV

 

Apr-10

 

$

536,792

 

438,484

 

$

1.2242

 

May-10

 

69,998

 

57,432

 

1.2188

 

Jun-10

 

99,000

 

82,260

 

1.2035

 

 

(b) None.

 

31



 

(c) Limited Partners may redeem their Units at the end of each calendar month at the then current month-end Net Asset Value per Unit.  The redemption of Units has no impact on the value of Units that remain outstanding, and Units are not reissued once redeemed.

 

The following table summarizes the redemptions by Limited Partners during the second calendar quarter of 2010:

 

Series F

 

 

 

 

 

Redemption Date

 

Redemption

 

Month

 

Units Redeemed

 

NAV Per Unit

 

Amount

 

April 30, 2010

 

424

 

$

255.55

 

$

108,353

 

May 31, 2010

 

1,323

 

251.68

 

332,973

 

June 30, 2010

 

419

 

253.01

 

106,011

 

 

 

 

 

 

 

 

 

Total

 

2,166

 

 

 

$

547,337

 

 

Series A

 

 

 

 

 

Redemption Date

 

Redemption

 

Month

 

Units Redeemed

 

NAV Per Unit

 

Amount

 

April 30, 2010

 

1,135,253

 

$

1.0620

 

$

1,205,639

 

May 31, 2010

 

5,632,639

 

1.0459

 

5,891,177

 

June 30, 2010

 

382,916

 

1.0514

 

402,598

 

 

 

 

 

 

 

 

 

Total

 

7,150,808

 

 

 

$

7,499,414

 

 

Series G

 

 

 

 

 

Redemption Date

 

Redemption

 

Month

 

Units Redeemed

 

NAV Per Unit

 

Amount

 

April 30, 2010

 

147,530

 

$

1.1068

 

$

163,286

 

May 31, 2010

 

461,783

 

1.0900

 

503,344

 

June 30, 2010

 

84,177

 

1.0958

 

92,241

 

 

 

 

 

 

 

 

 

Total

 

693,490

 

 

 

$

758,871

 

 

Series I

 

 

 

 

 

Redemption Date

 

Redemption

 

Month

 

Units Redeemed

 

NAV Per Unit

 

Amount

 

April 30, 2010

 

 

$

1.2188

 

$

 

May 31, 2010

 

16,288

 

1.2035

 

19,603

 

June 30, 2010

 

 

1.2124

 

 

 

 

 

 

 

 

 

 

Total

 

16,288

 

 

 

$

19,603

 

 

32



 

Item 3.

Defaults Upon Senior Securities

 

 

 

None.

 

 

Item 4.

Reserved

 

 

Item 5.

Other Information

 

 

 

None.

 

 

Item 6.

Exhibits

 

(a) Exhibits

 

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

31.01 and

 

31.02

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

 

 

Exhibit 31.01

 

and 31.02:

Are filed herewith.

 

 

32.01 and

 

32.02

Section 1350 Certifications

 

 

Exhibit 32.01

 

and 32.02

Are filed herewith.

 

33



 

SIGNATURES

 

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

 

 

 

BLACKROCK GLOBAL HORIZONS I L.P.

 

 

 

 

 

By: BLACKROCK INVESTMENT MANAGEMENT, LLC

 

(General Partner)

 

 

 

 

Date: August 13, 2010

By

/s/ EDWARD RZESZOWSKI

 

 

Edward Rzeszowski

 

 

President

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Date: August 13, 2010

By

/s/ MICHAEL L. PUNGELLO

 

 

Michael L. Pungello

 

 

Chief Financial Officer

 

 

(Chief Financial Officer)

 

34