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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 0-28928

 

ML TREND-FOLLOWING FUTURES FUND L.P.

(Exact Name of Registrant as
specified in its charter)

 

Delaware

 

13-3887922

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

c/o Merrill Lynch Alternative Investments LLC

Four World Financial Center, 10th Floor

250 Vesey Street

New York, New York 10080

(Address of principal executive offices)

(Zip Code)

 

212-449-3517

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

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, 877,789 units of limited partnership interest were outstanding.

 

 

 



 

ML TREND-FOLLOWING FUTURES FUND L.P.

 

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

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

Item 4.

Mine Safety Disclosures

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

2


 


 

PART I - FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

310,221

 

$

307,906

 

Investments in Portfolio Funds (cost $127,465,471 for 2012 and cost $136,008,811 for 2011)

 

158,865,367

 

170,657,787

 

Due from Portfolio Funds

 

4,719,328

 

13,937,314

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

163,894,916

 

$

184,903,007

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Wrap fee payable

 

$

546,313

 

$

616,342

 

Redemptions payable

 

4,372,844

 

13,457,625

 

 

 

 

 

 

 

Total liabilities

 

4,919,157

 

14,073,967

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

General Partner (9 Units and 9 Units)

 

1,630

 

1,650

 

Limited Partners (877,780 Units and 931,833 Units)

 

158,974,129

 

170,827,390

 

 

 

 

 

 

 

Total partners’ capital

 

158,975,759

 

170,829,040

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL:

 

$

163,894,916

 

$

184,903,007

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT
(Based on 877,789 and 931,842 Units outstanding; unlimited Units authorized)

 

$

181.1093

 

$

183.3240

 

 

See notes to financial statements.

 

1



 

ML TREND-FOLLOWING FUTURES FUND 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

 

$

2,997,022

 

$

3,046,592

 

Change in unrealized, net

 

(3,249,080

)

(3,704,323

)

Total trading profit (loss), net

 

(252,058

)

(657,731

)

 

 

 

 

 

 

INVESTMENT INCOME (LOSS)

 

 

 

 

 

Interest, net

 

 

183

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Wrap fee

 

1,692,027

 

2,240,415

 

Total expenses

 

1,692,027

 

2,240,415

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(1,692,027

)

(2,240,232

)

 

 

 

 

 

 

NET PROFIT (LOSS)

 

$

(1,944,085

)

$

(2,897,963

)

 

 

 

 

 

 

NET PROFIT (LOSS) PER UNIT:

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

$

918,561

 

1,163,278

 

 

 

 

 

 

 

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

 

$

(2.12

)

$

(2.49

)

 

See notes to  financial statements.

 

2



 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

FOR THE THREE  MONTHS ENDED MARCH 31, 2012 AND 2011

(unaudited)

 

 

 

Units

 

General
Partner

 

Limited
Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2010

 

1,177,705

 

$

8,063,381

 

$

219,486,396

 

$

227,549,777

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

7,568

 

 

1,459,151

 

1,459,151

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

(105,100

)

(2,792,863

)

(2,897,963

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(67,961

)

 

(13,050,102

)

(13,050,102

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, March 31, 2011

 

1,117,312

 

$

7,958,281

 

$

205,102,582

 

$

213,060,863

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, December 31, 2011

 

931,842

 

$

1,650

 

$

170,827,390

 

$

170,829,040

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

2,017

 

 

370,304

 

370,304

 

 

 

 

 

 

 

 

 

 

 

Net Profit (Loss)

 

 

(20

)

(1,944,065

)

(1,944,085

)

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(56,070

)

 

(10,279,500

)

(10,279,500

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL, March 31, 2012

 

877,789

 

$

1,630

 

$

158,974,129

 

$

158,975,759

 

 

See notes to  financial statements.

 

3



 

ML TREND-FOLLOWING FUTURES FUND 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

 

Per Unit Operating Performance:

 

March 31, 2012

 

March 31, 2011

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

183.3240

 

$

193.2146

 

 

 

 

 

 

 

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

 

(0.3730

)

(0.6019

)

Expenses (1)

 

(1.8417

)

(1.9221

)

 

 

 

 

 

 

Net asset value, end of period

 

$

181.1093

 

$

190.6906

 

 

 

 

 

 

 

Total Return: (3)

 

 

 

 

 

 

 

 

 

 

 

Total return

 

-1.21

%

-1.31

%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

1.00

%

1.00

%

 

 

 

 

 

 

Net investment profit (loss)

 

-1.18

%

-1.27

%

 


(1) Includes the impact of brokerage commission expense.

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

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

 

See notes to financial statements.

 

4


 


 

ML TREND-FOLLOWING FUTURES FUND L.P.

(a Delaware Limited Partnership)

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

MLAI, the sponsor (“Sponsor”) and general partner of the Partnership, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”).  Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the Portfolio Fund’s commodity broker.  Merrill Lynch International Bank (“MLIB”) is the Portfolio Fund’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”.

 

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 Fund’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.               INVESTMENTS IN PORTFOLIO FUNDS

 

The five funds (each a “Portfolio Fund” and collectively “Portfolio Funds”) in which the Partnership is invested in as of March 31, 2012 are; Aspect FuturesAccess LLC (“Aspect”) (formerly ML Aspect FuturesAccess LLC), ML BlueTrend FuturesAccess LLC (“BlueTrend”), MAN AHL FuturesAccess LLC (“MAN”), ML Transtrend DTP Enhanced FuturesAccess LLC (“Transtrend”) and ML Winton FuturesAccess LLC (“Winton”).  MLAI may, in its discretion, change Portfolio Funds at any time. MLAI may vary the percentage of the Partnership’s total portfolio allocated to the different Portfolio Funds at MLAI’s discretion. There is no pre-established range for the minimum and maximum allocations that may be made to any individual Portfolio Funds.

 

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

 

The details of investments in Portfolio Funds at and for the period ended March 31, 2012 are as follows:

 

March 31, 2012

 

 

 

 

 

Percentage of 

 

 

 

 

 

Management

 

Performance

 

Redemptions

 

 

 

Fair Value

 

Partners’ Capital

 

Profit (Loss)

 

Cost @ 3/31/12

 

Fee

 

Fee

 

Permitted

 

Winton

 

$

31,773,073

 

19.99

%

$

(367,133

)

$

20,673,125

 

$

(126,474

)

$

 

Monthly

 

Aspect

 

31,773,073

 

19.99

%

477,328

 

21,740,480

 

(127,916

)

 

Monthly

 

Transtrend

 

31,773,074

 

19.99

%

1,061,691

 

23,024,353

 

(85,444

)

 

Monthly

 

Bluetrend

 

31,773,074

 

19.99

%

(403,936

)

27,826,052

 

(84,356

)

 

Monthly

 

Man

 

31,773,073

 

19.99

%

(1,020,008

)

34,201,461

 

(83,708

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

158,865,367

 

99.95

%

$

(252,058

)

$

127,465,471

 

$

(507,898

)

$

 

 

 

 

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

 

December 31, 2011

 

 

 

Fair Value

 

Percentage of
Partners’ Capital

 

Profit (Loss)

 

Cost @ 12/31/11

 

Management
Fee

 

Performance
Fee

 

Redemptions
Permitted

 

Winton

 

$

34,131,627

 

19.98

%

$

2,578,630

 

$

21,952,689

 

$

(623,365

)

$

 

Monthly

 

Aspect

 

34,131,941

 

19.98

 

2,458,921

 

23,597,609

 

(622,769

)

 

Monthly

 

Transtrend

 

34,131,695

 

19.98

 

(3,905,862

)

25,364,344

 

(407,955

)

 

Monthly

 

Bluetrend

 

34,131,105

 

19.98

 

192,520

 

29,491,911

 

(414,658

)

 

Monthly

 

Man

 

34,131,419

 

19.98

 

(3,718,173

)

35,602,258

 

(407,717

)

 

Monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment in Portfolio Funds at fair value

 

$

170,657,787

 

99.90

%

$

(2,393,964

)

$

136,008,811

 

$

(2,476,464

)

$

 

 

 

 

6



 

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

 

 

 

As of March 31, 2012

 

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

 

 

 

Winton

 

$

1,164,966,581

 

$

35,078,123

 

$

1,129,888,458

 

 

 

 

Aspect

 

321,113,409

 

15,626,606

 

305,486,803

 

 

 

 

Transtrend

 

212,576,865

 

12,160,964

 

200,415,901

 

 

 

 

Bluetrend

 

260,659,017

 

6,673,457

 

253,985,560

 

 

 

 

Man

 

52,646,464

 

2,168,652

 

50,477,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,011,962,336

 

$

71,707,802

 

$

1,940,254,534

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

 

 

 

Winton

 

$

1,165,044,597

 

$

45,943,206

 

$

1,119,101,391

 

 

 

 

Aspect

 

330,934,407

 

25,416,723

 

305,517,684

 

 

 

 

Transtrend

 

234,879,250

 

13,832,941

 

221,046,309

 

 

 

 

Bluetrend

 

261,062,613

 

5,355,684

 

255,706,929

 

 

 

 

Man

 

57,971,592

 

3,904,627

 

54,066,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,049,892,459

 

$

94,453,181

 

$

1,955,439,278

 

 

 

 

 

 

 

For the three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

Net

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Income (Loss)

 

Winton

 

$

(217,646

)

$

(10,151

)

$

(139,336

)

$

(367,133

)

Aspect

 

732,001

 

(21,417

)

(233,256

)

477,328

 

Transtrend

 

1,215,324

 

(44,300

)

(109,333

)

1,061,691

 

Bluetrend

 

(255,229

)

(32,793

)

(115,914

)

(403,936

)

Man

 

(830,622

)

(21,836

)

(167,549

)

(1,020,007

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

643,828

 

$

(130,497

)

$

(765,388

)

$

(252,057

)

 

 

 

For the three months ended March 30, 2011

 

 

 

 

 

 

 

 

 

Net

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Income (Loss)

 

Winton

 

$

1,076,819

 

$

(11,466

)

$

(318,431

)

$

746,922

 

Aspect

 

480,595

 

(24,692

)

(232,413

)

223,490

 

Transtrend

 

(99,635

)

(51,304

)

(157,292

)

(308,231

)

Bluetrend

 

2,134,869

 

(40,490

)

(632,215

)

1,462,164

 

Man

 

(2,466,625

)

(126,472

)

(188,979

)

(2,782,076

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,126,023

 

$

(254,424

)

$

(1,529,330

)

$

(657,731

)

 

7



 

3.    FAIR VALUE OF INVESTMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8



 

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

 

 

Investment in 

 

 

 

 

 

 

 

 

 

Portfolio Funds

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

$

158,865,367

 

$

 

$

158,865,367

 

$

 

December 31, 2011

 

$

170,657,787

 

$

 

$

170,657,787

 

$

 

 

There were no transfers to or from any level during the quarter ended March 31, 2012.

 

4.    MARKET, CREDIT AND CONCENTRATION RISKS

 

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

 

Market Risk

 

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

 

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

 

Credit Risk

 

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

 

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

 

9



 

The Portfolio Funds, 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.

 

Concentration Risk

 

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

 

Indemnifications

 

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

 

5.   RELATED PARTY TRANSACTIONS

 

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

 

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

 

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

 

MONTH-END NET ASSET VALUE PER UNIT

 

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

 

The Partnership calculates the Net Asset Value per unit of each class of units as of the close of business on the last business day of each calendar month and such other dates as MLAI may determine in its discretion.  The Partnership’s “Net Asset Value” as of any calculation date will generally equal the value of the Partnership’s investments in the underlying funds as of such date, plus any other assets held by the Partnership, minus accrued brokerage commissions,

 

10



 

sponsor’s, management and performance fees and any operating costs and other liabilities of the Partnership. MLAI is authorized to make all Net Asset Value determinations.

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT

 

 

 

Jan. 

 

Feb.

 

Mar.

 

2011

 

$

190.8217

 

$

194.3375

 

$

190.6906

 

2012

 

$

183.7531

 

$

185.8545

 

$

181.1093

 

 

Liquidity and Capital Resources

 

The Partnership does not engage in the sale of goods or services.  The Partnership’s assets generally are its (i) investment in Funds and (ii) cash.  Because of the low margin deposits normally required in commodity futures trading relatively small price movements may result in substantial losses to the Partnership.  While substantial losses could  lead to a material decrease in liquidity, no such material losses occurred during the 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 6.94% from $170,829,040 to $158,975,759.  This decrease was attributable to the net loss from operations of $1,944,085, coupled with the redemption of 56,070 Redeemable Units resulting in an outflow of $10,279,500. The cash outflow was offset with cash inflow of $370,304 due to subscriptions of 2,017 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

 

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

 

Cash and Cash Equivalents

 

The Partnership considers all highly liquid investments, with a maturity of three months or less when acquired, to be cash equivalents. As of 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 the Partnership’s treatment of fair value see Note 3, Fair Value of Investments.

 

11



 

Income Taxes

 

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

 

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

 

12


 


 

Results of Operations

 

January 1, 2012 to March 31, 2012

 

January 1, 2012 to March 31, 2012

 

The following table is an allocation by sector as a percentage of net unrealized profits and losses on open positions for the Fund as a whole taking into account the positions at the underlying Portfolio Fund Level and the allocation to each underlying Portfolio Fund as of March 31, 2012:

 

March 31, 2012

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss) 

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

521,147

 

-810.03

%

Currencies

 

(728,043

)

1131.62

%

Energy

 

(48,746

)

75.77

%

Interest rates

 

(114,326

)

177.70

%

Metals

 

(229,882

)

357.31

%

Stock indices

 

535,514

 

-832.37

%

 

 

 

 

 

 

Total

 

$

(64,336

)

100.00

%

 

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

 

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

 

Coming into March, the Partnership continued to be long most markets and asset classes. In equity indices, the year started with a strong rally that spanned several global equity markets. Following strong up moves in both January and February, the Portfolio Funds built up large long equity index positions across several geographies. These positions tended to be the biggest in the U.S. and Europe, with somewhat smaller long positions in Japan and Asia. Commodities represented another significant risk allocation. The Portfolio Funds tended to have large long positions in oil and oil products as well as precious metals and short positions in natural gas. In crops, grains and industrial metals, positions were close to neutral, with longs and short balancing each other. Within currencies, a few large positions dominated, including shorts in the euro and longs in the Australian dollar. In other currencies, the Portfolio Funds generally had small long exposure. Finally, fixed income exposure was on the long side, in both rates and bonds.

 

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

 

13



 

January 1, 2011 to March 31, 2011

 

January 1, 2011 to March 31, 2011

 

The following table is an allocation by sector as a percentage of net unrealized profits and losses on open positions for the Fund as a whole taking into account the positions at the underlying Portfolio Fund Level and the allocation to each underlying Portfolio Fund as of March 31, 2011:

 

March 31, 2011

 

 

 

 

 

Percent of

 

 

 

Net Unrealized

 

Net Unrealized

 

Commodity Industry

 

Profit (Loss) 

 

Profit (Loss)

 

Sector

 

on Open Positions

 

on Open Positions

 

 

 

 

 

 

 

Agriculture

 

$

168,480

 

3.62

%

Currencies

 

1,584,188

 

34.04

%

Energy

 

1,260,216

 

27.08

%

Interest rates

 

(178,106

)

-3.83

%

Metals

 

202,186

 

4.34

%

Stock indices

 

1,616,373

 

34.75

%

 

 

 

 

 

 

Total

 

$

4,653,337

 

100.00

%

 

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

 

The Partnership (Trend-Following Futures) declined by more than 1% in the first quarter of 2011 while the Dow Jones-Credit Suisse AllHedge Managed Futures Index lost 2.1%. Market conditions were generally not conducive to trend-following strategies as many markets experienced severe reversals. Overall, the quarter started poorly in January, and the Portfolio Funds were profitable in February only to give it all back and then some in March.

 

Coming into the first quarter, the Portfolio Funds were generally positioned for a rally in equities and commodities. Additionally, a short U.S. dollar bias was highly prevalent in the portfolio. The majority of the Portfolio Funds had reduced their exposure to fixed income positions going into the year, with smaller allocations remaining on the long side. In January, managed futures strategies generally suffered from a rally in the U.S. dollar and a substantial retracement in gold. In February, this positioning was able to generate positive performance when long positions in equities and energy rallied. However, while February’s profits offset January’s losses to a large extent, it was not enough to carry the strategy for the quarter. March was characterized by volatile trading conditions across several markets, creating losses for the month and putting Trend-Following Futures in negative territory for the year. During March, most trend-following strategies were whipsawed by the sharp selloffs following the earthquake and tsunami in Japan and the sharp rebounds in the weeks afterwards. As a result, losses in agricultural commodities as well as global equity indices offset any profits from energy and currency positions.

 

While it was generally a challenging quarter for Trend-Following Futures as a whole, individual Portfolio Funds returns varied considerably, ranging from -6.9% to +2.4%. Three Portfolio Funds had negative returns while two ended the quarter with positive performance.

 

The best performing Portfolio Fund over the first three months was BlueTrend. While the Portfolio Fund encountered many of same difficulties as others in the quarter, BlueTrend did a better job of capturing the upside in energy. The lagging performer in the portfolio, Man-AHL, incurred losses primarily due to poor positioning in the equity and commodity markets, in particular energy and metals market

 

14



 

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

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

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

 

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

 

The Portfolio Funds’ under the direction of their respective trading advisors rapidly acquire and liquidate both long and short positions in a wide range of different markets.  Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the past performance is not necessarily indicative of its future results.

 

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

 

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

 

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

 

Exchange maintenance margin requirements of the Portfolio Funds have been used as the measure of their Value at Risk.  Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95% to 99% of the one-day time periods included in the historical sample

 

15



 

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

 

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

 

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

 

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

 

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

 

The following tables indicate the average, highest, and lowest trading Value at Risk associated with the Portfolio Funds’ open positions by market category for the three months ended March 31, 2012 and 2011.

 

16



 

Aspect Class DT (3)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

861,919

 

2.59

%

$

912,516

 

$

790,875

 

Energy

 

581,413

 

1.75

%

615,543

 

533,489

 

Interest Rates

 

452,499

 

1.36

%

479,062

 

415,202

 

Metals

 

83,290

 

0.25

%

88,180

 

76,425

 

Stock Indices

 

1,044,536

 

3.14

%

1,105,852

 

958,439

 

Currencies

 

48,523

 

0.15

%

51,371

 

44,523

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,072,180

 

9.24

%

$

3,252,524

 

$

2,818,953

 

 


(3) Average Capitalization of Aspect Class DT is $33,289,873.

 

Aspect Class DT (3)

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

3,951

 

0.01

%

$

4,144

 

$

3,815

 

Energy

 

1,271,539

 

2.87

%

1,333,787

 

1,227,748

 

Interest Rates

 

11,452

 

0.03

%

12,012

 

11,057

 

Metals

 

120,997

 

0.27

%

126,921

 

116,830

 

Stock Indices

 

555,147

 

1.25

%

582,325

 

536,028

 

Currencies

 

704,880

 

1.59

%

739,388

 

680,605

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,667,966

 

6.02

%

$

2,798,577

 

$

2,576,083

 

 


(3) Average Capitalization of Aspect Class DT is $44,253,262.

 

17



 

Transtrend Class DT (2)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

728,508

 

2.19

%

$

789,322

 

$

660,669

 

Energy

 

1,544,631

 

4.64

%

1,673,573

 

1,400,794

 

Interest Rates

 

197,954

 

0.59

%

214,479

 

179,521

 

Metals

 

295,307

 

0.89

%

319,958

 

267,808

 

Stock Indices

 

477,406

 

1.43

%

517,259

 

432,950

 

Currencies

 

447,057

 

1.34

%

484,376

 

405,427

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,690,863

 

11.08

%

$

3,998,967

 

$

3,347,169

 

 


(2) Average capitalization of Transtrend Class DT is $33,289,811.

 

Transtrend Class DT (2)

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

402,389

 

0.91

%

$

474,955

 

$

329,555

 

Energy

 

212,249

 

0.48

%

250,525

 

173,831

 

Interest Rates

 

64,872

 

0.15

%

76,571

 

53,130

 

Metals

 

665,649

 

1.50

%

785,691

 

545,164

 

Stock Indices

 

1,194,215

 

2.70

%

1,409,576

 

978,058

 

Currencies

 

1,580,131

 

3.57

%

1,865,087

 

1,294,122

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

4,119,505

 

9.31

%

$

4,862,405

 

$

3,373,860

 

 


(2) Average capitalization of Transtrend Class DT is $44,253,262.

 

18


 


 

Winton Class DT (5)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

266,132

 

0.80

%

$

284,893

 

$

252,571

 

Energy

 

271,625

 

0.82

%

290,773

 

257,784

 

Interest Rates

 

99,981

 

0.30

%

107,029

 

94,886

 

Metals

 

329,981

 

0.99

%

353,243

 

313,167

 

Stock Indices

 

570,646

 

1.71

%

610,874

 

541,568

 

Currencies

 

570,035

 

1.71

%

610,220

 

540,989

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,108,400

 

6.33

%

$

2,257,032

 

$

2,000,965

 

 


(5) Average capitalization of Winton Class DT is $33,289,795.

 

Winton Class DT (5)

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

188,919

 

0.43

%

$

206,313

 

$

174,902

 

Energy

 

306,059

 

0.69

%

334,239

 

283,352

 

Interest Rates

 

187,077

 

0.42

%

204,303

 

173,198

 

Metals

 

102,530

 

0.23

%

111,970

 

94,923

 

Stock Indices

 

668,235

 

1.51

%

729,764

 

618,658

 

Currencies

 

645,147

 

1.46

%

704,550

 

597,283

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,097,967

 

4.74

%

$

2,291,139

 

$

1,942,316

 

 


(5) Average capitalization of Winton Class DT is $44,253,263.

 

19



 

Bluetrend Class DT (2)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

441,821

 

1.33

%

$

472,794

 

$

421,869

 

Energy

 

871,138

 

2.62

%

932,207

 

831,799

 

Interest Rates

 

66,618

 

0.20

%

71,288

 

63,610

 

Metals

 

438,812

 

1.32

%

469,574

 

418,996

 

Stock Indices

 

9,796

 

0.03

%

10,483

 

9,354

 

Currencies

 

1,451,395

 

4.36

%

1,553,143

 

1,385,853

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,279,580

 

9.86

%

$

3,509,489

 

$

3,131,481

 

 


(2) Average capitalization of Bluetrend Class DT is $33,289,664.

 

Bluetrend Class DT (2)

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

11,094

 

0.03

%

$

11,927

 

$

9,928

 

Energy

 

1,447,905

 

3.27

%

1,556,656

 

1,295,721

 

Interest Rates

 

111,318

 

0.25

%

119,679

 

99,618

 

Metals

 

6,572

 

0.01

%

7,065

 

5,881

 

Stock Futures

 

1,929,822

 

4.36

%

2,074,771

 

1,726,986

 

Currencies

 

453,360

 

1.02

%

487,412

 

405,709

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,960,071

 

8.94

%

$

4,257,510

 

$

3,543,843

 

 


(2) Average capitalization of Bluetrend Class DT is $44,253,263.

 

20



 

Man AHL LLC Class DT (5)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

200,083

 

0.60

%

$

250,154

 

$

172,315

 

Energy

 

299,546

 

0.90

%

374,506

 

257,974

 

Interest Rates

 

317,951

 

0.96

%

397,518

 

273,825

 

Metals

 

17,361

 

0.05

%

21,705

 

14,952

 

Stock Indices

 

365,806

 

1.10

%

457,347

 

315,038

 

Currencies

 

1,142,936

 

3.44

%

1,428,952

 

984,316

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,343,683

 

7.05

%

$

2,930,182

 

$

2,018,420

 

 


(5) Average capitalization of Man AHL LLC Class DT is $33,269,594.

 

Man AHL LLC Class DT (5)

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

80,459

 

0.18

%

$

96,281

 

$

70,239

 

Energy

 

441,895

 

1.00

%

528,793

 

385,764

 

Interest Rates

 

659,841

 

1.50

%

789,598

 

576,025

 

Metals

 

302,064

 

0.68

%

361,465

 

263,695

 

Stock Indices

 

89,469

 

0.20

%

107,063

 

78,104

 

Currencies

 

1,775,889

 

4.03

%

2,125,116

 

1,550,308

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,349,617

 

7.59

%

$

4,008,316

 

$

2,924,135

 

 


(5) Average capitalization of Man AHL LLC Class DT is $44,114,854.

 

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

 

The face value of the market sector instruments held by the Portfolio Funds are typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Portfolio Funds.  The magnitude of the Portfolio Funds’ open positions creates a “risk of ruin” not typically found in most other investment vehicles.  Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Portfolio Funds to incur severe losses over a short period of time.   Even comparatively minor losses could cause MLAI to further deleverage or terminate the

 

21



 

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

 

Non-Trading Risk

 

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

 

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

 

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

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

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

 

Qualitative Disclosures Regarding Means of Managing Risk Exposure

 

Trading Risk

 

MLAI has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so.  While MLAI does not intervene in the markets to hedge or diversify the Partnership’s market exposure; MLAI may urge the Portfolio Funds to reallocate positions in an attempt to avoid over-concentrations.  However, such interventions are unusual.  Except in cases in which it appears that the Portfolio Funds has begun to deviate from past practice and trading policies or to be trading erratically, MLAI basic risk control procedures consist simply of the ongoing process of monitoring the Portfolio Funds with the market risk controls being applied by the Portfolio Funds.

 

22



 

Risk Management

 

Portfolio Funds attempt to control risk in all aspects of the investment process — from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts.  Portfolio Funds double check the accuracy of market data, and will not trade a market without multiple price sources for analytical input.  In constructing a portfolio, Portfolio Funds seek to control overall risk as well as the risk of any one position, and Portfolio Funds trade only markets that have been identified as having positive performance characteristics.  Trading discipline requires plans for the exit of a market as well as for entry.  Portfolio Funds factor the point of exit into the decision to enter (stop loss).  The size of Portfolio Fund’s positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.

 

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

 

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

 

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

 

Non-Trading Risk

 

The Partnership and the Portfolio Funds control the non-trading exchange rate risk by regularly converting foreign currency balances back into U.S. dollars at least once per week and more frequently if a particular foreign currency balance becomes unusually high.

 

The Partnership and the Portfolio Funds have cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline.  However, a certain amount of cash or cash equivalents must be held by the Partnership in order to facilitate margin payments and pay expenses and redemptions.  MLAI does not take any steps to limit the cash flow risk on the cash held on deposit at MLPF&S.

 

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

 

23



 

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 first quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

None.

 

Item 1A:  Risk Factors

 

There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 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

 

$

138,591

 

756

 

183.3240

 

Feb-12

 

231,713

 

1,261

 

183.7531

 

Mar-12

 

 

 

185.8545

 

Apr-12

 

200,000

 

1,104

 

181.1093

 

 

(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.

 

24



 

Item 6.

Exhibits

 

 

 

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

 

 

 

 

31.01 and 31.02

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

 

 

 

 

Exhibit 31.01 and 31.02

Are filed herewith.

 

 

 

 

32.01 and 32.02

Section 1350 Certifications

 

 

 

 

Exhibit 32.01 and 32.02

Are filed herewith.

 

 

 

 

Exhibit 101

Are filed herewith.

 

 

 

The following materials from the Partnership’s quarterly Report on Form 10-Q for the three 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.

 

25



 

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 TREND-FOLLOWING FUTURES FUND 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)

 

26