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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 March 31, 2012

 

 

OR

 

 

o

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

 

For the transition period from                 to                

 

Commission File Number 0-50269

 

ML SELECT FUTURES I L.P.

(Exact Name of Registrant as

specified in its charter)

 

Delaware

 

13-3879393

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

c/o Merrill Lynch Alternative Investments LLC

Four World Financial Center, 10th Floor

250 Vesey Street

New York, New York 10080

(Address of principal executive offices)

(Zip Code)

 

212-449-3517

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of March 31, 2012, 404,078 units of limited partnership interest were outstanding.

 

 

 



 

ML SELECT FUTURES I L.P.

 

QUARTERLY REPORT FOR MARCH 31, 2012 ON FORM 10-Q

 

Table of Contents

 

 

 

 

PAGE

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

1

 

 

 

 

Item 2.

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

 

12

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

17

 

 

 

 

Item 4.

Controls and Procedures

 

21

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

22

 

 

 

 

Item 1A.

Risk Factors

 

22

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

22

 

 

 

 

Item 4.

Mine Safety Disclosures

 

22

 

 

 

 

Item 5.

Other Information

 

22

 

 

 

 

Item 6.

Exhibits

 

22

 



 

PART I - FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

ML SELECT FUTURES I L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Equity in commodity futures trading accounts:

 

 

 

 

 

Cash (includes restricted cash of $10,438,452 for 2012 and $7,624,023 for 2011)

 

$

114,115,309

 

$

122,672,228

 

Net unrealized profit on open futures contracts

 

2,288,583

 

353,629

 

Cash and cash equivalents

 

411,337

 

468,957

 

Other assets

 

9,388

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

116,824,617

 

$

123,494,814

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on open futures contracts

 

$

1,101,725

 

$

175,598

 

Net unrealized loss on open forward contracts

 

30,088

 

325,173

 

Redemptions payable

 

3,081,253

 

3,100,626

 

Wrap fee payable

 

554,361

 

589,346

 

Other liabilities

 

81

 

 

Total liabilities

 

4,767,508

 

4,190,743

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

 

 

 

 

 

 

General Partner (6,000 Units and 6,000 Units)

 

1,663,893

 

1,705,074

 

Limited Partners (398,078 Units and 413,820 Units)

 

110,393,216

 

117,598,997

 

 

 

 

 

 

 

Total partners’ capital

 

112,057,109

 

119,304,071

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

116,824,617

 

$

123,494,814

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT

 

 

 

 

 

(Based on 404,078 and 419,820 Units outstanding; unlimited Units authorized)

 

$

277.3155

 

$

284.1791

 

 

See notes to financial statements.

 

1



 

ML SELECT FUTURES I L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the three

 

For the three

 

 

 

months ended

 

months ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

TRADING PROFIT (LOSS):

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

(2,567,221

)

$

7,790,007

 

Change in unrealized, net

 

1,303,912

 

(2,593,196

)

 

 

 

 

 

 

Total trading profit (loss), net

 

(1,263,309

)

5,196,811

 

 

 

 

 

 

 

INVESTMENT INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

19,608

 

50,066

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Wrap fee

 

1,657,465

 

2,188,972

 

 

 

 

 

 

 

Total expenses

 

1,657,465

 

2,188,972

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(1,637,857

)

(2,138,906

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(2,901,166

)

$

3,057,905

 

 

 

 

 

 

 

NET INCOME (LOSS) PER UNIT:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

417,840

 

516,564

 

 

 

 

 

 

 

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

 

$

(6.94

)

$

5.92

 

 

See notes to financial statements.

 

2



 

ML SELECT FUTURES I L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(unaudited)

 

 

 

 

 

General

 

Limited

 

 

 

 

 

Units

 

Partner

 

Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2010

 

522,570

 

$

4,006,555

 

$

146,448,795

 

$

150,455,350

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

81,290

 

2,976,615

 

3,057,905

 

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(25,455

)

 

(7,482,824

)

(7,482,824

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, March 31, 2011

 

497,115

 

$

4,087,845

 

$

141,942,586

 

$

146,030,431

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2011

 

419,820

 

$

1,705,074

 

$

117,598,997

 

$

119,304,071

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

456

 

 

124,865

 

124,865

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(41,181

)

(2,859,985

)

(2,901,166

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(16,198

)

 

(4,470,661

)

(4,470,661

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, March 31, 2012

 

404,078

 

$

1,663,893

 

$

110,393,216

 

$

112,057,109

 

 

See notes to financial statements.

 

3



 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

FINANCIAL DATA HIGHLIGHTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (unaudited)

 

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

 

 

 

Three months ended

 

Three months ended

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

 

 

 

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

284.1791

 

$

287.9143

 

 

 

 

 

 

 

Realized trading profit (loss)

 

(6.1111

)

15.0962

 

Change in unrealized, net

 

3.1673

 

(5.1223

)

Interest income

 

0.0470

 

0.0978

 

Expenses (1)

 

(3.9668

)

(4.2302

)

 

 

 

 

 

 

Net asset value, end of period

 

$

277.3155

 

$

293.7558

 

 

 

 

 

 

 

Total Return:

 

 

 

 

 

 

 

 

 

 

 

Total return (2) 

 

-2.42

%

2.03

%

 

 

 

 

 

 

Ratios to Average Partners’ Capital (1):

 

 

 

 

 

 

 

 

 

 

 

Expenses (2)

 

1.44

%

1.45

%

Net investment loss

 

-1.42

%

-1.42

%

 


(1) Includes the impact of brokerage commission expenses.

(2) Includes the impact of Performance fees of 0.0%, and 0.0%, respectively.

 

See notes to financial statements.

 

4



 

ML SELECT FUTURES I L.P.

(a Delaware Limited Partnership)

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

ML Select Futures I L.P. (the “Partnership”) was organized under the Delaware Revised Uniform Partnership Act in August 1995 and commenced trading activities on April 16, 1996. The Partnership issues new units of limited partner interest (“Units”) at Net Asset Value as of the beginning of each calendar month (see Item 2 for discussion of Net Asset Value). The Partnership engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Sunrise Capital Partners, LLC (“Sunrise” or “trading advisor”) is the trading advisor of the Partnership. Merrill Lynch Alternative Investments LLC (“MLAI” or “General Partner”) is the general partner of the Partnership.

 

MLAI is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”). Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the Partnership’s commodity broker. Merrill Lynch International Bank (“MLIB”) is the Partnership’s forward contracts broker. Merrill Lynch is a wholly-owned subsidiary of Bank of America Corporation.  Bank of America Corporation and its affiliates are sometimes referred to herein as “BAC”. MLAI has agreed to maintain a general partner’s interest of at least 1% of the total capital in the Partnership.  MLAI and each Limited Partner share in the profits and losses of the Partnership in proportion to their respective interests in it.

 

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

 

In the opinion of management, these interim financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of the Partnership as of March 31, 2012 and the results of its operations for the three months ended March 31, 2012 and 2011.  However, the operating results for the interim periods may not be indicative of the results for the full year.

 

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

 

Estimates

 

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

 

5



 

2.               CONDENSED SCHEDULE OF INVESTMENTS

 

The Partnership’s investments, defined as net unrealized profit (loss) on open contracts on the Statements of Financial Condition, as of March 31, 2012 and December 31, 2011, are as follows:

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Positions

 

Short Positions

 

Net Unrealized

 

 

 

 

 

Commodity Industry

 

Number of

 

Unrealized

 

Percent of

 

Number of

 

Unrealized

 

Percent of

 

Profit (Loss)

 

Percent of

 

 

 

Sector

 

Contracts / Notional

 

Profit (Loss)

 

Partners’ Capital

 

Contracts / Notional

 

Profit (Loss)

 

Partners’ Capital

 

on Open Positions

 

Partners’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

238

 

$

 197,377

 

0.18

%

(268

)

$

 423,878

 

0.38

%

$

 621,255

 

0.56

%

May 12 - August 12

 

Currencies

 

1,516,569

 

252,200

 

0.23

%

(8,625,171

)

(357,563

)

-0.32

%

(105,363

)

-0.09

%

June 12

 

Energy

 

501

 

(894,645

)

-0.80

%

(24

)

68,640

 

0.06

%

(826,005

)

-0.74

%

April 12 - May 12

 

Interest rates

 

35

 

6,826

 

0.01

%

(272

)

(15,040

)

-0.01

%

(8,214

)

0.00

%

June 12 - Sept 12

 

Metals

 

 

 

0.00

%

(54

)

116,405

 

0.10

%

116,405

 

0.10

%

May 12 - June 12

 

Stock indices

 

1,466

 

1,358,692

 

1.21

%

 

 

0.00

%

1,358,692

 

1.21

%

April 12 - June 12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, net

 

 

 

$

920,450

 

0.83

%

 

 

$

236,320

 

0.21

%

$

1,156,770

 

1.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Positions

 

Short Positions

 

Net Unrealized

 

 

 

 

 

Commodity Industry

 

Number of

 

Unrealized

 

Percent of

 

Number of

 

Unrealized

 

Percent of

 

Profit (Loss)

 

Percent of

 

 

 

Sector

 

Contracts / Notional

 

Profit (Loss)

 

Partners’ Capital

 

Contracts / Notional

 

Profit (Loss)

 

Partners’ Capital

 

on Open Positions

 

Partners’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

$

 —

 

0.00

%

(641

)

$

 (962,910

)

-0.81

%

$

 (962,910

)

-0.81

%

March 12 - June 12

 

Currencies

 

36,805,645

 

467,077

 

0.39

%

(163,173,387

)

(178,630

)

-0.15

%

288,447

 

0.24

%

March 12

 

Interest rates

 

378

 

223,111

 

0.19

%

(285

)

3,149

 

0.00

%

226,260

 

0.19

%

March 12 - June 12

 

Energy

 

 

 

0.00

%

(34

)

54,740

 

0.05

%

54,740

 

0.05

%

January 12

 

Metals

 

7

 

(3,993

)

0.00

%

(269

)

113,371

 

0.10

%

109,378

 

0.10

%

February 12 - March 12

 

Stock indices

 

 

 

0.00

%

(340

)

136,943

 

0.11

%

136,943

 

0.11

%

January 12 - March 12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, net

 

 

 

$

686,195

 

0.58

%

 

 

$

(833,337

)

-0.70

%

$

(147,142

)

-0.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No individual contract’s unrealized profit or loss comprised greater than 5% of Partners’ Capital as of March 31, 2012 and December 31, 2011.

 

6



 

3.               FAIR VALUE OF INVESTMENTS

 

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

 

Fair value of an investment is the amount that would be received to sell the investment in an orderly transaction between market participants at the measurement date (i.e. the exit price). All investments (including derivative financial instruments and derivative commodity instruments) are held for trading purposes.  The investments are recorded on trade date and open contracts are recorded at fair value (described below) at the measurement date. Investments denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date.  Profits or losses are realized when contracts are liquidated.  Unrealized profits or losses on open contracts are included in equity in commodity trading account on the Statements of Financial Condition.  Any change in net unrealized profit or loss from the preceding year is reported on the Statements of Operations.

 

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

 

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

 

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

 

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

 

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

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. MLAI’s assessment of the significance of a

 

7



 

particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

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

 

Exchange traded investments are fair valued by the Partnership by using the reported closing price on the primary exchange where it trades such investments. These closing prices are observed through the clearing broker and third party pricing services. For non-exchange traded investments, quoted values and other data provided by nationally recognized independent pricing sources are used as inputs into its process for determining fair values.

 

The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair market value.

 

The Partnership has determined that Level I securities would include its futures and options contracts where it believes that quoted prices are available in an active market.

 

Where the Partnership believes that quoted market prices are not available or that the market is not active, fair values are estimated by using quoted prices of securities with similar characteristics, pricing models or matrix pricing and these are generally classified as Level II securities. The Partnership determined that Level II securities would include its forward and certain futures contracts.

 

The Partnership’s net unrealized profit (loss) on open forward and futures contracts, by the above fair value hierarchy levels, as of March 31, 2012 and December 31, 2011 are as follows:

 

Net unrealized profit (loss) 

 

 

 

 

 

 

 

 

 

on open contracts

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

Long

 

$

920,450

 

$

920,450

 

$

 

$

 

Short

 

266,408

 

137,553

 

128,855

 

 

 

 

1,186,858

 

1,058,003

 

128,855

 

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

Long

 

 

 

 

 

Short

 

(30,088

)

 

(30,088

)

 

 

 

(30,088

)

 

(30,088

)

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

$

1,156,770

 

$

1,058,003

 

$

98,767

 

$

 

 

8



 

Net unrealized profit (loss)

 

 

 

 

 

 

 

 

 

on open contracts

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

Futures

 

 

 

 

 

 

 

 

 

Long

 

$

691,525

 

$

695,518

 

$

(3,993

)

$

 

Short

 

(513,494

)

(497,885

)

(15,609

)

 

 

 

178,031

 

197,633

 

(19,602

)

 

 

 

 

 

 

 

 

 

 

 

Forwards

 

 

 

 

 

 

 

 

 

Long

 

(5,330

)

 

(5,330

)

 

Short

 

(319,843

)

 

(319,843

)

 

 

 

(325,173

)

 

(325,173

)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

$

(147,142

)

$

197,633

 

$

(344,775

)

$

 

 

The Partnership’s volume of trading forwards and futures as of the period and year ended March 31, 2012 and December 31, 2011, respectively, are representative of the activity throughout these periods. There were no transfers to or from any level during the quarter ended March 31, 2012.

 

The Partnership engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Such contracts meet the definition of a derivative as noted in the ASC guidance for accounting for derivative and hedging activities. The fair value amounts of and the net profits and losses on derivative instruments is disclosed in the Statements of Financial Condition and Statements of Operations, respectively. There are no credit related contingent features embedded in these derivative contracts. The total notional, contract amount, or number of contracts and fair values of derivative instruments by contract type/commodity sector are disclosed in Note 2, above.

 

The following table indicates the trading profits and losses, before brokerage commissions, by commodity industry sector, on derivative instruments for each of the three month periods ended March 31, 2012 and 2011:

 

 

 

For the three months ended

 

For the three months ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Commodity Industry Sector

 

profit (loss) from trading, net

 

profit (loss) from trading, net

 

 

 

 

 

 

 

Agriculture

 

$

1,029,689

 

$

(120,999

)

Currencies

 

(3,729,859

)

(1,710,208

)

Energy

 

948,355

 

8,508,432

 

Interest rates

 

(636,484

)

(283,495

)

Metals

 

(2,414,728

)

(1,190,837

)

Stock indices

 

3,539,718

 

(6,082

)

 

 

 

 

 

 

Total, net

 

$

(1,263,309

)

$

5,196,811

 

 

9



 

The Partnership is subject to the risk of insolvency of a counterparty, an exchange, a clearinghouse MLPF&S or other BAC entities.  Partnership assets could be lost or impounded during lengthy bankruptcy proceedings.  Were a substantial portion of the Partnership’s capital tied up in a bankruptcy or other similar types of proceedings, MLAI might suspend or limit trading, perhaps causing the Partnership to miss significant profit opportunities.  There are increased risks in dealing with unregulated trading counterparties including the risk that assets may not benefit from the protection afforded to “customer funds” deposited with regulated dealers and brokers.

 

4.               MARKET AND CREDIT RISKS

 

The nature of this Partnership has certain risks, which cannot all be presented on the financial statements.  The following summarizes some of those risks.

 

Market Risk

 

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

 

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

 

Credit Risk

 

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

 

The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit (loss) on open contracts, if any, included in the Statements of Financial Condition.  The Partnership attempts to mitigate this risk by dealing exclusively with BAC entities as clearing brokers.

 

10



 

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

 

Indemnifications

 

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

 

5.               RELATED PARTY TRANSACTIONS

 

Financial Data Services, Inc. (the “Transfer Agent”), a related party of Merrill Lynch through MLAI performs the transfer agent and investor services functions for the Partnership.  The agreement with the transfer agent calls for a fee to be paid based on the collective net asset of funds managed or sponsored by MLAI with the minimum annual fee of $2,700,000.  The fee rate ranges from 0.016% to 0.02% based on aggregate net assets.  MLAI allocates the Transfer Agent fees to each of the managed/sponsored funds on a monthly basis based on the Partnership’s net assets and the fee is payable monthly in arrears. The Transfer Agent fee, which ranged between 0.018% and 0.02% of aggregate asset level, allocated to the Partnership for the quarter ended March 31, 2012 are paid on behalf of the Partnership by the Sponsor.

 

6.               SUBSEQUENT EVENTS

 

The General Partner has evaluated the impact of subsequent events on the Partnership through the date the financials were able to be issued and has determined that there were no subsequent events that require adjustments to, or disclosure in, the financial statements.

 

11



 

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

 

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

 

The Partnership calculates the Net Asset Value per unit as of the close of business on the last business day of each calendar month and such other dates as MLAI may determine in its discretion. The Partnership’s “Net Asset Value” as of any calculation date will generally equal the value of the Partnership’s account under the management of its trading advisor as of such date, plus any other assets held by the Partnership, minus accrued brokerage commissions, administrative fees, profit shares, and other liabilities of the Partnership. MLAI is authorized to make all Net Asset Value determinations.

 

MONTH-END NET ASSET VALUE PER UNIT

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

288.6250

 

$

297.7954

 

$

293.7558

 

2012

 

$

273.8266

 

$

272.7583

 

$

277.3155

 

 

Liquidity and Capital Resources

 

The Partnership does not engage in the sale of goods or services.  The Partnership’s assets generally are its (i) equity in its trading account, consisting of cash (including restricted cash), and unrealized profit net of unrealized losses and (ii) interest receivable.  Because of the low margin deposits normally required in commodity futures trading relatively small price movements may result in substantial losses to the Partnership.  While substantial losses could lead to a material decrease in liquidity, no such material losses occurred during the first quarter of 2012 and there was no impact on the Partnership’s liquidity.

 

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

 

For the three months ended March 31, 2012, Partnership capital decreased 6.07% from $119,304,071 to $112,057,109.  This decrease was attributable to the net loss from operations of $2,901,166 coupled with the redemption of 16,198 Redeemable Units of Interest resulting in an outflow of $4,470,661.  The cash outflow was offset with cash inflow of $124,865 due to subscriptions of 456 Units. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent months.

 

Critical Accounting Policies

 

Statement of Cash Flows

 

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

 

Investments

 

All investments (including derivatives) are held for trading purposes.  Investments are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date.  Investments denominated

 

12



 

in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Profits or losses are realized when contracts are liquidated.  Unrealized profits or losses on open contracts are included as a component of equity in a commodity trading account on the Statements of Financial Condition. Realized profits or losses and any change in net unrealized profits or losses from the preceding period are reported in the Statements of Operations.

 

Cash and Cash Equivalents

 

The Partnership considers all highly liquid investments, with a maturity of three months or less when acquired, to be cash equivalents. As of March 31, 2012 the Partnership holds no cash equivalents. Cash was held at a nationally recognized financial institution.

 

Fair Value Measurements

 

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

 

Futures Contracts

 

The Partnership trades listed futures contracts.  A listed futures contract is a firm commitment to buy or sell a standardized quantity of an underlying asset over a specified duration.  The Partnership buys and sells contracts based on indices of financial assets such as stocks, domestic and global stock indices, as well as contracts on various physical commodities. Prices paid or received on these contracts are determined by the ask or bid provided by the exchanges on which they are traded.   Contracts may be settled in physical form or cash settled depending upon the contract.  Upon the execution of a trade, margin requirements determine the amount of cash that must be on deposit to secure the transaction.  These amounts are considered restricted cash on the Partnership’s Statement of Financial Condition.  Contracts are priced daily by the Partnership and the profit or loss based on the daily mark to market are recorded as unrealized profits.  When the contract is closed, the Partnership records a realized profit or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.  Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited.  Realized profits (losses), net and changes in unrealized profits (losses), net on futures contracts are included in the Statements of Operations.  The Partnership also trades futures contracts on the London Metals Exchange (LME).  The valuation pricing for LME contracts is based on action of a committee that incorporates prices from the most liquid trading sessions of the day and can also rely on other inputs such as supply and demand factors and bid and asks from open outcry sessions.

 

Forward Foreign Currency Contracts

 

Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date.  Foreign currency contracts are valued daily, and the Partnership’s net equity therein, representing unrealized profit or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition.  Realized profits (losses) and changes in unrealized profits (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Operations.

 

13



 

Interest Rates and Income

 

The Partnership receives an interest rate based on the 90 day T-bill rate on U.S. dollar deposits.  Other rates exist for non-U.S. dollar deposits, however most of the Partnership’s cash is held in U.S. dollars.  The current short term interest rates have remained extremely low when compared with historical rates and thus has contributed negligible amounts to overall Partnership performance.

 

Income Taxes

 

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

 

The Partnership follows the ASC guidance on accounting for uncertainty in income taxes.  This guidance provides how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements.  This guidance also requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority.  Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year.  MLAI has analyzed the Partnership’s tax positions and has concluded that no provision for income tax is required in the Partnership’s financial statements. The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States — 2008.

 

Reform Act

 

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

 

Results of Operations

 

January 1, 2012 to March 31, 2012

 

January 1. 2012 to March 31, 2012

 

The Partnership experienced a net loss of $1,263,309 before brokerage commissions and related fees in the first quarter of 2011. The Partnership’s profits were primarily attributable to the stock indices, agriculture and the energy sectors posting profits. The interest rates, metals and the currencies sectors posted losses.

 

The stock indices sector posted profits to the Partnership. Losses were posted to the Partnership at the beginning of the quarter. After last year’s wild swings, equity markets had a strong start to the year and moved steadily higher. Positive data from the U.S., China and even Europe helped drove stock prices higher. The trading program exited all of its remaining short trades and initiated new long positions in both domestic and foreign equity markets. Profits were posted to the Partnership in the middle of the quarter. A two month rally, driven in large part by an improving U.S. economic outlook and a stabilizing European

 

14



 

debt situation, ultimately challenged the technically (and psychologically) important 13,000 level. Among the equity positions, the NASDAQ was the best performing market for the Trading program’s strategy. Profits were posted to the Partnership at the end of the quarter. The U.S. equity markets continued to trend in March, moving up without a meaningful retracement. An improving U.S. economy combined with an increase in investor confidence and signs of stabilization in Europe appear to be influencing this rally.

 

The agriculture sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the quarter as the winter’s unusually warm climate across much of the country has disrupted the seasonal trading patterns, ultimately causing prices to drop further. Trading in coffee was profitable as the coffee prices continued to decline on expectations of a record crop in Brazil, the world’s largest producer. Profits were posted to the Partnership in the middle of the quarter as coffee prices ended the month of February lower, in favor of short positions which were driven by its own, weather related fundamentals. Profits were posted to the Partnership at the end of the quarter. The coffee market remained in a downward trend, which contributed to profits. Since hitting a near record high price in 2011, coffee prices have fallen on expectations of an extra-large Brazilian crop, the world’s largest coffee producer.

 

The energy sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. Short natural gas positions posted profits in January. Prices dropped to their lowest level in 10 years. Overall, the boom in low-cost natural gas from shale has suppressed prices in recent months. In addition, the market appeared to be anticipating storage cost increases on the horizon as stored inventories continue to build. Losses were posted to the Partnership in the middle of the quarter. Energy prices rallied as tensions with Iran raised fears about a possible supply disruption and/or military conflict. The Iran situation had a more pronounced impact on Brent Crude as compared to West Texas Intermediate, because the Eurozone is one of Iran’s biggest markets for its oil. The price of U.S. oil lagged behind that of Brent Crude, which rose above $125 per barrel in February while West Texas Intermediate stayed below the $110 level. During the last three days of February energy prices retreated by more than which caused the sector to finish the month with a minor loss. Nevertheless, rising oil prices seem to be a key fundamental risk factor for the global economy. Unfortunately, geopolitical risks coming from the Middle East still have an oversized impact on oil prices. Profits were posted to the Partnership at the end of the quarter. Gasoil and Unleaded Gas (RBOB) finished the month of March higher and generated profits, while Brent Crude traded sideways and posted only marginal gains. Trading in natural gas was also profitable. The market has been chronically oversupplied and prices continued to weaken.

 

The interest rate sector posted losses to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. Following the U.S. Federal Reserve’s announcement, interest rate futures rallied, pushing yields lower. Yields for 5-year Notes fell to an all-time low of 0.752%. Losses were posted to the Partnership in the middle through the end of the quarter. During the first half of the month of March, U.S. interest rates moved higher. This rate rise triggered a liquidation of the Trading program’s remaining exposure in domestic interest rate futures, which caused negative performance.

 

The metals sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the quarter. The Partnership liquidated a substantial portion of their short positions in metals as prices bounced back from their December lows. Losses were posted to the Partnership in the middle through the end of the quarter due to volatility in the market.

 

The currency sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the quarter as the U.S. dollar reversed course over the second half of January and weakened across the board. The Euro initially touched a 16-month low against the U.S. dollar and then climbed back above $1.30. Losses were posted to the Partnership in the middle of the quarter. The currency sector suffered from price reversals against established market trends, particularly in the Euro and the Japanese yen. The Euro staged a rally as optimism about Greece sent the currency to a three month high against the U.S.

 

15



 

dollar and the Euro trades were partially liquidated as a result. The Japanese yen fell against the U.S. dollar after the Bank of Japan injected more money into the economy, applying downward pressure on the Japanese yen. This is merely the Bank of Japan’s most recent effort to weaken the Japanese yen: Japan intervened three times last year to weaken the Japanese yen in the face of a post-World War II record high against the U.S. dollar (in October last year). Consequently, the Partnership was stopped out of all of its long Japanese yen positions. The Partnership also liquidated most of the short positions in minor currencies as they moved higher against the U.S. dollar. Losses were posted to the Partnership at the end of the quarter.  The U.S. dollar initially benefited from higher yields and gained against other currencies; however, the U.S. dollar came under pressure during the second half of March. The Partnership maintained a very low exposure in the currency sector during this month due to a lack of any sustained trends.

 

January 1, 2011 to March 31, 2011

 

January 1, 2011 to March 31, 2011

 

The Partnership experienced a net profit of $5,196,811 before brokerage commissions and related fees in the first quarter of 2011. The Partnership’s profits were primarily attributable to energy sector posting profits. The stock indices, agriculture, interest rates, currencies and metals sectors posted losses.

 

The energy sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. Worries about possible supply disruptions triggered considerable price movements in the energy market and helped Brent Crude oil prices break through the $100/barrel resistance level. Profits were posted to the Partnership in the middle of the quarter. Political chaos in oil producing countries of the Middle East and North Africa injected new volatility into the market and raised new risks for the global economy. The impact of these events was felt across different market sectors. Oil prices shot higher as disruptions in crude oil production took a large amount of oil off the world market. The Brent crude contract for nearby delivery surpassed $110 per barrel. The quarter ended with profits posted to the Partnership. Developments in Libya followed by a devastating earthquake and nuclear crisis in Japan provided unexpected shocks to the markets in March and triggered high levels of price volatility and economic uncertainty.  Markets somewhat stabilized during the second half of the month and energies resumed their upward trend.

 

The stock indices sector posted losses to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. Profits in equity markets appeared to be driven by a more optimistic view on economic growth. Profits were posted to the Partnership in the middle of the quarter. The situation in the Middle East and North Africa prompted a large correction in the global equity market after the rally of the past few months. Despite the price correction, profits were posted to the Partnership due to the trading program’s long U.S. and European stock index futures. Losses were posted to the Partnership at the end of the quarter. Developments in Libya followed by a devastating earthquake and nuclear crisis in Japan provided unexpected shocks to the markets in March and triggered high levels of price volatility and economic uncertainty. Most equity markets initially moved lower, reversing the trends of previous months.

 

The agriculture sector posted losses to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. Price action in the agricultural sector was relatively subdued and produced marginal profits. Profits were posted to the Partnership in the middle of the quarter only to be reversed at the end of the quarter. Developments in Libya followed by a devastating earthquake and nuclear crisis in Japan provided unexpected shocks to the markets in March and triggered high levels of price volatility and economic uncertainty. Most equity markets initially moved lower, reversing the trends of previous months. Agricultural commodities suffered pullbacks as they focused on potentially major economic consequences of these events.

 

16



 

The interest rate sector posted losses to the Partnership. Profits were posted to the Partnership at the beginning of the quarter. The interest rate sector was trading in a relatively tight range. Small profits were recorded in European short-term instruments on rising expectations for an interest rate increase in the Eurozone. Profits were posted to the Partnership in the middle of the quarter only to be reversed at the end of the quarter. Developments in Libya followed by a devastating earthquake and nuclear crisis in Japan provided unexpected shocks to the markets in March and triggered high levels of price volatility and economic uncertainty.

 

The currency sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the quarter. The year started with a substantial price correction in high yielding currencies, in particular, the South African rand. The South African rand currency fell against the U.S. Dollar which caused losses for the trading program. The British pound moved higher against the trading program’s positions and also contributed to the losses. Losses were posted to the Partnership in the middle of the quarter. The U.S. dollar initially strengthened, but came under pressure against most major and minor currencies during the second half of February. Small profits from the trading program’s short positions in the U.S. dollar trades against minor currencies were offset by losses from major currency cross rates. Losses were posted to the Partnership at the end of the quarter. The Japanese yen experienced some wild swings in value, but eventually moved lower against the U.S. dollar and other currencies, possibly a result of coordinated intervention by the central banks.

 

The metals sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the quarter. Precious metals experienced significant price retracements in January. Gold fell $100 off the high it posted at the beginning of the month which led to the liquidation of most of our Gold positions. The trading program’s Silver trade was also closed out in January, posting realized profits overall which was not enough to offset losses. Profits were posted to the Partnership in the middle of the quarter. Precious metals seemed to be benefiting from higher levels of geopolitical risk. Gold resumed its upward momentum and pushed through $1400 an ounce. The silver price touched an all time high in February above $33/oz. Losses were posted to the Partnership at the end of the quarter. Developments in Libya followed by a devastating earthquake and nuclear crisis in Japan provided unexpected shocks to the markets in March and triggered high levels of price volatility and economic uncertainty. Most equity markets initially moved lower, reversing the trends of previous months. Metals suffered pullbacks as they focused on potentially major economic consequences of these events.

 

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

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes and all or substantially all of the Partnership’s assets are subject to the risk of trading loss.  Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

 

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

 

17



 

The Partnership, under the direction of Sunrise, rapidly acquires and liquidates both long and short positions in a wide range of different markets.  Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s past performance is not necessarily indicative of its future results.

 

Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s attempts to manage its 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 statement” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

 

The Partnership’s risk exposure in the various market sectors traded by the Advisor is quantified below in terms of Value at Risk.  Due to the Partnership’s fair value 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 flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).

 

Exchange maintenance margin requirements 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.  The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

 

In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the 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.

 

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.

 

18



 

Partnership’s Trading Value at Risk in Different Market Sectors

 

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 fiscal period.  For the three months ended March 31, 2012 and 2011, the Partnership’s average capitalization was approximately $114,770,435 and $149,403,141, respectively.

 

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

$

299,401

 

0.26

%

$

363,826

 

$

220,948

 

Metals

 

330,778

 

0.29

%

401,955

 

244,104

 

Stock Indices

 

3,860,872

 

3.36

%

4,691,664

 

2,849,206

 

Interest Rates

 

23,341

 

0.02

%

28,364

 

17,225

 

Energy

 

2,347,184

 

2.05

%

2,852,257

 

1,732,150

 

Agricultural Commodities

 

1,765,361

 

1.54

%

2,145,236

 

1,302,783

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

8,626,937

 

7.52

%

$

10,483,302

 

$

6,366,416

 

 

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

$

136,054

 

0.09

%

$

157,736

 

$

101,010

 

Metals

 

559,811

 

0.37

%

649,022

 

415,617

 

Stock Indices

 

373,523

 

0.25

%

433,048

 

277,313

 

Interest Rates

 

4,620

 

0.00

%

5,356

 

3,430

 

Energy

 

4,579,631

 

3.07

%

5,309,437

 

3,400,031

 

Agricultural Commodities

 

604,114

 

0.40

%

700,386

 

448,509

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

6,257,753

 

4.18

%

$

7,254,985

 

$

4,645,910

 

 

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

 

The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership.  The magnitude of the Partnership’s open positions creates a “risk of ruin” not typically found in most other investment vehicles.  Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Partnership to incur severe losses over a short period of time.   The foregoing Value at Risk table — as well as the past performance of the Partnership — gives no indication of this “risk of ruin”.

 

Non-Trading Risk

 

Foreign Currency Balances; Cash on Deposit with MLPF&S and MLIB

 

The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial.

 

19



 

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

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

The following qualitative disclosures regarding the Partnership’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership manages its primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures as well as the strategies used and to be used by MLAI and Sunrise for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, and an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. There can be no assurance that the Partnership’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Partnership.

 

The following were the primary trading risk exposures of the Partnership as of March 31, 2012 by market sector.

 

Interest Rates

 

Interest rate movements directly affect the price of derivative sovereign bond 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 materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries.  However, the Partnership also takes positions in the government debt of smaller nations (e.g., Australia).  MLAI anticipates that G-7 interest rates will remain the primary market exposure of the Partnership for the foreseeable future.

 

Currencies

 

The Partnership trades in a number of currencies. The Partnership does not anticipate that the risk profile of the Partnership’s currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk of maintaining Value at Risk in a functional currency other than U.S. dollars.

 

Stock Indices

 

The Partnership’s primary equity exposure is to S&P 500, NASDAQ, DJIA and OMX S30 equity index price movements. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices.

 

20



 

Metals

 

The Partnership’s metals market exposure is to fluctuations in both the price of precious and non-precious metals.

 

Agricultural Commodities

 

The Partnership’s primary agricultural commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Soybeans, grains, rubber and cotton accounted for the substantial bulk of the Partnership’s agricultural commodities exposure as of March 31, 2012. However, it is anticipated that Sunrise will maintain an emphasis on cotton, grains and sugar, in which the Partnership has historically taken its largest positions.

 

Energy

 

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

 

Qualitative Disclosures Regarding Non-Trading Risk Exposure

 

The following were the only non-trading risk exposures of the Partnership as of March 31, 2012.

 

Foreign Currency Balances

 

The Partnership’s primary foreign currency balances are in Hong Kong dollar and South African rand.

 

U.S. Dollar Cash Balance

 

The Partnership holds U.S. dollars in cash at MLPF&S and MLIB. The Partnership has immaterial cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline.

 

Item 4.    Controls and Procedures

 

MLAI, the General Partner of the Partnership with the participation of MLAI’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934) with respect to the Partnership as of the end of the period covered by this quarterly report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective.  No change in internal control over financial reporting (in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

21



 

PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

None.

 

Item 1A.   Risk Factors

 

There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 23, 2012.

 

Item 2.                                     Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)  Units are privately offered and sold to “accredited investors” (as defined in Rule 501(a) under the Securities Act) in reliance on the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 thereunder.  The selling agent of the Units was MLPF&S.

 

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV

 

Jan-12

 

$

 

 

$

284.1791

 

Feb-12

 

124,865

 

456

 

273.8266

 

Mar-12

 

 

 

272.7583

 

Apr-12

 

50,000

 

180

 

277.3155

 

 

(b)      Not applicable.

(c) Not applicable.

 

Item 3.                                     Defaults Upon Senior Securities

 

None.

 

Item 4.                                     Mine Safety Disclosures

 

Not applicable.

 

Item 5.                                     Other Information

 

None.

 

Item 6.                                     Exhibits

 

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

 

31.01 and 31.02 Rule 13a-14(a)/15d-14(a) Certifications

 

Exhibit 31.01 and 31.02: Are filed herewith.

 

22



 

32.01 and

32.02         Section 1350 Certifications

 

Exhibit 32.01

and 32.02     Are filed herewith.

 

Exhibit 101  Are filed herewith.

The following materials from the Partnership’s quarterly Report on Form 10-Q for the three month period ended March 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition (ii) Statements of Operations (iii) Statements of Changes in Partners’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text. (1)

 


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

 

23



 

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.

 

 

 

 

ML SELECT FUTURES I L.P.

.

 

 

 

 

 

 

By

MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC

 

 

(General Partner)

 

 

 

 

 

 

Date: May 11, 2012

By:

/s/ DEANN MORGAN

 

 

Deann Morgan

 

 

Chief Executive Officer and President

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Date: May 11, 2012

By:

/s/ BARBRA E. KOCSIS

 

 

Barbra E. Kocsis

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

24