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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 0-52505

 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(Exact Name of Registrant as
specified in its charter)

 

Delaware

 

30-0408280

(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, 710,190,232 units of limited liability company interest were outstanding.

 

 

 



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

 

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

 

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

30

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

133,679

 

$

45,570

 

Investment in Portfolio Funds (Cost $798,690,013 at 2012 and $880,414,859 at 2011)

 

819,439,657

 

909,794,576

 

Receivable from Portfolio Fund

 

35,212,611

 

35,418,578

 

Other assets

 

 

119,995

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

854,785,947

 

$

945,378,719

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ CAPITAL:

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Sponsor fee payable

 

$

1,438,782

 

$

1,596,782

 

Redemptions payable

 

36,093,240

 

34,062,410

 

Other liabilities

 

543,314

 

603,765

 

 

 

 

 

 

 

Total liabilities

 

38,075,336

 

36,262,957

 

 

 

 

 

 

 

MEMBERS’ CAPITAL:

 

 

 

 

 

Members’ Interest (710,190,232 Units and 782,897,013 Units outstanding; unlimited Units authorized)

 

816,710,611

 

909,115,762

 

Total members’ capital

 

816,710,611

 

909,115,762

 

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBERS’ CAPITAL

 

$

854,785,947

 

$

945,378,719

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT:

 

 

 

 

 

 

 

 

 

 

 

Class A

 

$

1.1364

 

$

1.1452

 

Class C

 

$

1.1304

 

$

1.1421

 

Class D

 

$

1.3674

 

$

1.3729

 

Class I

 

$

1.2097

 

$

1.2179

 

Class D1

 

$

1.2204

 

$

1.2253

 

Class M

 

$

1.0102

 

$

1.0143

 

 

See notes to financial statements.

 

1



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the three

 

For the three

 

 

 

months ended

 

months ended

 

 

 

March 31, 2012

 

March 31, 2011

 

TRADING PROFIT (LOSS):

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

6,315,046

 

$

1,426,894

 

Change in unrealized, net

 

(8,630,073

)

(30,248,961

)

 

 

 

 

 

 

Total trading profit (loss), net

 

(2,315,027

)

(28,822,067

)

 

 

 

 

 

 

INVESTMENT INCOME:

 

 

 

 

 

Interest, net

 

 

84

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Sponsor fee

 

4,527,844

 

5,216,635

 

Other

 

356,999

 

397,150

 

Total expenses

 

4,884,843

 

5,613,785

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(4,884,843

)

(5,613,701

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(7,199,870

)

$

(34,435,768

)

 

 

 

 

 

 

NET INCOME (LOSS) PER UNIT:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Units outstanding

 

 

 

 

 

Class A

 

117,664,413

 

115,047,368

 

Class C

 

529,285,356

 

566,323,165

 

Class D

 

32,978,505

 

36,784,464

 

Class I

 

67,656,553

 

78,591,516

 

Class D1

 

19,538,871

 

35,706,226

 

Class M*

 

554,219

 

 

 

 

 

 

 

 

Net income (loss) per weighted average Unit

 

 

 

 

 

Class A

 

$

(0.0084

)

$

(0.0388

)

Class C

 

$

(0.0105

)

$

(0.0423

)

Class D

 

$

(0.0040

)

$

(0.0438

)

Class I

 

$

(0.0070

)

$

(0.0398

)

Class D1

 

$

(0.0030

)

$

(0.0351

)

Class M*

 

$

(0.0041

)

$

 

 


* Units issued on December 1, 2011

 

See notes to financial statements.

 

2



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 (unaudited) (in Units)

 

 

 

Members’ Capital
December 31, 2010

 

Subscriptions

 

Redemptions

 

Members’ Capital
March 31, 2011

 

Members’ Capital
December 31, 2011

 

Subscriptions

 

Redemptions

 

Members’ Capital
March 31, 2012

 

Class A

 

109,942,197

 

9,657,373

 

(5,389,243

)

114,210,327

 

118,415,228

 

1,844,516

 

(7,878,720

)

112,381,024

 

Class C

 

545,907,287

 

39,438,758

 

(12,350,980

)

572,995,065

 

541,061,830

 

7,246,190

 

(58,962,027

)

489,345,993

 

Class D

 

34,000,711

 

5,839,850

 

(164,000

)

39,676,561

 

32,964,610

 

1,088,534

 

(5,251,303

)

28,801,841

 

Class I

 

78,308,142

 

2,318,371

 

(2,117,914

)

78,508,599

 

69,895,943

 

193,425

 

(8,897,804

)

61,191,564

 

Class D1

 

35,556,370

 

546,379

 

(842,608

)

35,260,141

 

20,409,402

 

 

(2,493,811

)

17,915,591

 

Class M*

 

 

 

 

 

150,000

 

404,219

 

 

554,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Members’ Units

 

803,714,707

 

57,800,731

 

(20,864,745

)

840,650,693

 

782,897,013

 

10,776,884

 

(83,483,665

)

710,190,232

 

 


* Units issued on December 1, 2011

 

See notes to financial statements.

 

3



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

(unaudited)

 

 

 

Members’ Capital
December 31, 2010

 

Subscriptions

 

Redemptions

 

Net Income
(Loss)

 

Members’ Capital
March 31, 2011

 

Members’ Capital
December 31, 2011

 

Subscriptions

 

Redemptions

 

Net Income
(Loss)

 

Members’ Capital
March 31, 2012

 

Class A

 

$

137,682,539

 

$

12,069,132

 

$

(6,652,245

)

$

(4,469,349

)

$

138,630,077

 

$

135,614,804

 

$

2,126,041

 

$

(9,042,122

)

$

(991,890

)

$

127,706,833

 

Class C

 

688,642,500

 

49,512,678

 

(15,344,730

)

(23,972,406

)

698,838,042

 

617,955,947

 

8,306,385

 

(67,547,339

)

(5,541,252

)

553,173,741

 

Class D

 

50,284,160

 

8,649,996

 

(235,963

)

(1,610,091

)

57,088,102

 

45,258,044

 

1,500,000

 

(7,243,626

)

(130,432

)

39,383,986

 

Class I

 

103,872,241

 

3,071,099

 

(2,776,603

)

(3,129,257

)

101,037,480

 

85,127,204

 

237,112

 

(10,866,465

)

(475,377

)

74,022,474

 

Class D1

 

46,930,446

 

711,112

 

(1,108,750

)

(1,254,665

)

45,278,143

 

25,007,612

 

 

(3,085,266

)

(58,660

)

21,863,686

 

Class M*

 

 

 

 

 

 

152,151

 

409,999

 

 

(2,259

)

559,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Members’ Interest

 

$

1,027,411,886

 

$

74,014,017

 

$

(26,118,291

)

$

(34,435,768

)

$

1,040,871,844

 

$

909,115,762

 

$

12,579,537

 

$

(97,784,818

)

$

(7,199,870

)

$

816,710,611

 

 


* Units issued on December 1, 2011

 

See notes to financial statements.

 

4



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

FINANCIAL DATA HIGHLIGHTS

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

 

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

 

 

 

Class A

 

Class C

 

Class D

 

Class I

 

Class D1

 

Class M

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

1.1452

 

$

1.1421

 

$

1.3729

 

$

1.2179

 

$

1.2253

 

$

1.0143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(0.0041

)

(0.0041

)

(0.0050

)

(0.0044

)

(0.0044

)

(0.0037

)

Expenses

 

(0.0047

)

(0.0076

)

(0.0005

)

(0.0038

)

(0.0005

)

(0.0004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, end of period

 

$

1.1364

 

$

1.1304

 

$

1.3674

 

$

1.2097

 

$

1.2204

 

$

1.0102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Return: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return

 

-0.77

%

-1.02

%

-0.40

%

-0.68

%

-0.40

%

-0.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios to Average Members’ Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

0.41

%

0.67

%

0.04

%

0.31

%

0.04

%

0.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

-0.41

%

-0.67

%

-0.04

%

-0.31

%

-0.04

%

-0.04

%

 


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

 

See notes to financial statements.

 

5



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

FINANCIAL DATA HIGHLIGHTS

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

 

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

 

 

 

Class A

 

Class C

 

Class D

 

Class I

 

Class D1

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

1.2523

 

$

1.2615

 

$

1.4789

 

$

1.3265

 

$

1.3199

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(0.0334

)

(0.0336

)

(0.0395

)

(0.0354

)

(0.0353

)

Interest income

 

0.0000

 

0.0000

 

0.0000

 

0.0000

 

0.0000

 

Expenses

 

(0.0051

)

(0.0083

)

(0.0006

)

(0.0041

)

(0.0005

)

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, end of period

 

$

1.2138

 

$

1.2196

 

$

1.4388

 

$

1.2870

 

$

1.2841

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Return: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return

 

-3.07

%

-3.32

%

-2.71

%

-2.98

%

-2.71

%

 

 

 

 

 

 

 

 

 

 

 

 

Ratios to Average Members’ Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

0.41

%

0.66

%

0.04

%

0.31

%

0.04

%

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

-0.41

%

-0.66

%

-0.04

%

-0.31

%

-0.04

%

 


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

 

See notes to financial statements.

 

6



 

SYSTEMATIC MOMENTUM FUTURESACCESS LLC

(a Delaware Limited Liability Company)

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Systematic Momentum FuturesAccess LLC (the “Fund”), formerly ML Systematic Momentum FuturesAccess LLC, a Merrill Lynch FuturesAccessSM Program (the “Program”) fund, was organized under the Delaware Limited Liability Company Act on March 8, 2007 and commenced operations on April 2, 2007.  The Fund operates as a “fund of funds”, allocating and reallocating its capital, under the direction of Merrill Lynch Alternative Investments LLC (“MLAI” or the “Sponsor”), the Sponsor of the Fund, among seven underlying FuturesAccess Funds (each a “Portfolio Fund”, and collectively the “Portfolio Funds”). The Fund issues new units of limited liability company interest (“Units”) at Net Asset Value per Unit (see Item 2 for discussion of net asset value and net asset value per unit for subscriptions and redemptions purposes hereinafter referred to as Net Asset Value and Net Asset Value per Unit) as of the beginning of each calendar month.

 

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 Portfolio Fund’s commodity broker of the Portfolio Funds. 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”.

 

The Program is a group of commodity pools sponsored by MLAI (each a “Program Fund” or collectively, “Program Funds”) each of which places substantially all of its assets in a managed futures and forward trading account managed by a single or multiple commodity trading advisors. Each Program Fund is generally similar to the Fund in terms of fees, Classes of Units and redemption rights. Each of the Program Funds implements a different trading strategy.

 

Interests in the Fund 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 Fund 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 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

 

7



 

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.

 

Initial Offering and Organizational Costs

 

Organization and Offering costs are amortized against the net asset value over 60 months, beginning with the first month-end after the initial issuance of Units for operational and investor trading purposes. However, for financial reporting purposes, organizational costs, to the extent material, will be shown as deducted from net asset value as of the date of such initial issuance and initial offering costs, to the extent material, will be amortized over a 12-month period after the initial issuance of Units.

 

2.               INVESTMENTS IN PORTFOLIO FUNDS

 

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

 

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:

 

 

 

Percentage of
Members’
Capital

 

Fair Value

 

Profit (Loss)

 

Cost

 

Management
Fees

 

Performance
Fees

 

Redemptions Permitted

 

Tudor Tensor

 

11.95

%

$

97,627,573

 

$

1,371,209

 

$

102,703,790

 

$

(546,710

)

$

 

monthly

 

Transtrend

 

16.55

%

135,176,640

 

4,457,027

 

135,456,560

 

(761,249

)

 

monthly

 

Altis

 

11.95

%

97,627,573

 

(1,572,269

)

117,605,096

 

(541,793

)

 

monthly

 

Winton

 

16.55

%

135,176,640

 

(1,793,690

)

117,088,369

 

(751,130

)

 

monthly

 

Aspect

 

9.20

%

75,098,134

 

1,099,147

 

62,630,427

 

(422,432

)

 

monthly

 

John Locke

 

12.87

%

105,137,387

 

(3,159,554

)

112,120,020

 

(581,021

)

 

monthly

 

BlueTrend

 

21.26

%

173,595,710

 

(2,716,897

)

151,085,751

 

(883,994

)

 

monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100.33

%

$

819,439,657

 

$

(2,315,027

)

$

798,690,013

 

$

(4,488,329

)

$

 

 

 

 

8



 

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

 

 

 

Percentage of
Members’
Capital

 

Fair Value

 

Profit (Loss)

 

Cost

 

Management
Fees

 

Performance
Fees

 

Redemptions Permitted

 

Transtrend

 

17.01

%

154,664,583

 

(19,424,860

)

158,073,068

 

(3,583,948

)

 

monthly

 

Altis

 

12.29

%

111,702,199

 

(44,402,871

)

129,319,659

 

(2,535,363

)

 

monthly

 

Winton

 

17.01

%

154,664,303

 

9,917,494

 

132,177,938

 

(3,655,604

)

 

monthly

 

Aspect

 

9.45

%

85,925,338

 

5,314,184

 

71,811,623

 

(2,029,046

)

 

monthly

 

John Locke

 

13.23

%

120,294,680

 

(11,808,229

)

124,464,075

 

(2,790,838

)

 

monthly

 

BlueTrend

 

18.79

%

170,839,098

 

(2,353,478

)

145,612,242

 

(3,468,874

)

 

monthly

 

Tudor Tensor

 

12.29

%

111,704,375

 

(13,295,954

)

118,956,254

 

(2,589,847

)

 

monthly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100.07

%

$

909,794,576

 

$

(76,053,714

)

$

880,414,859

 

$

(20,653,520

)

$

 

 

 

 

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

 

 

 

John Locke

 

$

109,215,755

 

$

4,078,367

 

$

105,137,388

 

 

 

Transtrend

 

212,576,865

 

12,160,964

 

200,415,901

 

 

 

BlueTrend

 

260,659,017

 

6,673,457

 

253,985,560

 

 

 

Winton

 

1,164,966,581

 

35,078,123

 

1,129,888,458

 

 

 

Altis

 

103,932,764

 

6,305,191

 

97,627,573

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,851,350,982

 

$

64,296,102

 

$

1,787,054,880

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Total Capital

 

 

 

Altis

 

$

118,202,967

 

$

6,500,768

 

$

111,702,199

 

 

 

Transtrend

 

234,879,250

 

13,832,941

 

221,046,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

353,082,217

 

$

20,333,709

 

$

332,748,508

 

 

 

 

 

 

For the three months ended March 31, 2012

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Net
Income (Loss)

 

John Locke

 

$

(2,311,735

)

$

(217,383

)

$

(630,437

)

$

(3,159,555

)

Transtrend

 

5,520,947

 

(196,285

)

(867,635

)

4,457,027

 

BlueTrend

 

(1,591,688

)

(172,938

)

(952,271

)

(2,716,897

)

Winton

 

(937,355

)

(44,992

)

(811,343

)

(1,793,690

)

Altis

 

(902,398

)

(81,434

)

(588,438

)

(1,572,270

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

(222,229

)

$

(713,032

)

$

(3,850,124

)

$

(4,785,385

)

 

 

 

For the three months ended March 31, 2011

 

 

 

Income (Loss)

 

Commissions

 

Other

 

Net
Income (Loss)

 

Altis

 

$

(19,472,228

)

$

(206,141

)

$

(686,173

)

$

(20,364,542

)

John Locke

 

(8,609,364

)

(306,042

)

(756,592

)

(9,671,998

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

(28,081,592

)

$

(512,183

)

$

(1,442,765

)

$

(30,036,540

)

 

9



 

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 are 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 Fund does not adjust the quoted price for these investments even in situations where the Fund 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.

 

10



 

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 Fund has transparency.  As such, the Fund determined that its investments in these Portfolio Fund’s in this case, would be classified as Level II.  There were no transfers to or from any level during the quarter and period ended March 31, 2012.

 

The following table summarizes the valuation of the Fund’s investment 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

 

$

819,439,657

 

$

 

$

819,439,657

 

$

 

December 31, 2011

 

$

909,794,576

 

$

 

$

909,794,576

 

$

 

 

4.                           MARKET, CREDIT AND CONCENTRATION RISKS

 

The nature of this Fund has certain risks, which cannot all be presented on the financial statements.  Additionally, the Fund invests in the Portfolio Funds which have similar market risks 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 Fund’s net unrealized profit (loss) on open contracts on such derivative instruments as reflected in the Portfolio Funds’ Statements of Financial Condition.  The Portfolio Fund’s 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 Fund 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 advisor monitoring, along with monitoring the market risk controls being applied by respective trading advisors is sufficient to detect if any such intervention is needed.

 

11



 

Credit Risk

 

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

 

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

 

The Portfolio Funds, in 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 Fund’s investments in the Portfolio Funds are subject to the market and credit risk of the Portfolio Funds. Because the majority of the Fund’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 Fund.

 

Indemnifications

 

In the normal course of business, the Fund has entered, or may in the future enter into agreements that obligate the Fund to indemnify third parties, including affiliates of the Fund, for breach of certain representations and warranties made by the Fund. 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 Fund’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 Fund.  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 Fund’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 Fund for the quarter ended March 31, 2012 amounted to $44,803, of which $44,346 was payable to the Transfer Agent as of March 31, 2012.

 

12



 

6.                           SUBSEQUENT EVENTS

 

Management has evaluated the impact of subsequent events on the Fund 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 Fund.  Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for financial reporting purposes.

 

The Fund 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 Fund’s “Net Asset Value” as of any calculation date will generally equal the value of the Fund’s investments in the underlying funds as of such date, plus any other assets held by the Fund, minus accrued brokerage commissions, sponsor’s management and performance fees, and any operating costs and other liabilities of the Fund. MLAI is authorized to make all Net Asset Value determinations.

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

1.2333

 

$

1.2546

 

$

1.2138

 

2012

 

$

1.1480

 

$

1.1623

 

$

1.1364

 

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

1.2413

 

$

1.2617

 

$

1.2196

 

2012

 

$

1.1439

 

$

1.1572

 

$

1.1304

 

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

1.4583

 

$

1.4854

 

$

1.4388

 

2012

 

$

1.3780

 

$

1.3969

 

$

1.3674

 

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

1.3068

 

$

1.3298

 

$

1.2870

 

2012

 

$

1.2213

 

$

1.2369

 

$

1.2097

 

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D1

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

$

1.3015

 

$

1.3257

 

$

1.2841

 

2012

 

$

1.2298

 

$

1.2467

 

$

1.2204

 

 

MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS M

 

 

 

Jan.

 

Feb.

 

Mar.

 

2011

 

n/a

 

n/a

 

n/a

 

2012

 

$

1.0180

 

$

1.0320

 

$

1.0102

 

 

13



 

Liquidity and Capital Resources

 

The Fund does not engage in the sale of goods or services.  The Fund’s assets generally are its (i) investment in Portfolio 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 Fund.  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 Fund’s liquidity.

 

The Fund’s capital consists of the capital contributions of the members 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. Fund capital decreased 10.16% from $909,115,762 to $816,710,611.  This decrease was attributable to the net loss from operations of $7,199,870, coupled with the redemption of 83,483,665 Redeemable Units resulting in an outflow of $97,784,818.  The cash outflow was offset with cash inflow of $12,579,537 due to subscriptions of 10,776,884 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 Fund 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 Fund 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 Fund 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.

 

Income Taxes

 

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

 

14



 

The Fund follows the ASC’s 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 Fund’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 Fund 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 Fund’s tax positions and has concluded that no provision for income tax is required in the Fund’s financial statements. The following is the major tax jurisdiction for the Fund 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 Fund 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 Fund.

 

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

 

$

3,339,558

 

127.92

%

Currencies

 

(2,644,596

)

-101.30

%

Energy

 

1,159,328

 

44.41

%

Interest rates

 

101,467

 

3.89

%

Metals

 

(1,424,076

)

-54.55

%

Stock indices

 

2,078,931

 

79.63

%

 

 

 

 

 

 

Total

 

$

2,610,612

 

100.00

%

 

The Fund experienced a net trading loss for the first quarter ended March 31, 2012 of $2,315,027.

 

In the first two months of 2012, the investment environment was one of risk seeking. Equities and commodities generally rallied and the U.S. dollar was down. Despite a bias towards risk, fixed income did not sell off in any significant way. The Portfolio Fund trading advisors generally spent part of

 

15



 

January adjusting to this environment. By February, their portfolios were well positioned to take advantage of these trends. The Fund was up 1.3% in these two months. At the start of March, the Fund continued to be long risk assets and long fixed income. The only exceptions to the rule were short positions in natural gas, the euro, and some industrial metal and agricultural markets. This positioning suffered losses in March due to reversals.

 

The most significant reversal in March was seen in fixed income, at the longer end of the curve. Yields on notes and bonds jumped higher in the middle of the month and given that most of the Portfolio Funds had sizeable positions resulted in losses. While yields backed down towards month end, the damage was done as many Portfolio Funds trading advisors had already reduced positions, failing to benefit from the latter moves. Currencies also saw some reversals as the U.S. dollar generally strengthened, in particular against commodity currencies such as the Australian dollar and the Canadian dollar. With Portfolio Funds typically holding long positions in these currencies, losses were posted to the Fund. Short positions in the euro were generally unprofitable as the currency ended relatively flat against the U.S. dollar despite poor economic performance in the Eurozone.

 

Many commodities joined the reversal theme. Following two good months, commodity markets fell in March. These included many oil markets and precious metals, two sectors where the Portfolio Funds trading advisors had built up long positions, as a result, the reversals posted losses. In other sectors, trends seem to continue. Natural gas, where the Portfolio Funds trading advisors have been short for a while, had another very big leg down. For many of the Portfolio Funds trading advisors, this was the best performing market. Some industrial metal and agricultural markets also experienced profits from short positions due to falling prices.

 

Equity indices generally saw positive performance. The Portfolio Funds trading advisors tended to be long, with the largest allocations to the U.S. and European indices. U.S. equity prices were up for the quarter, continuing the trend and producing gains. But equity prices in Europe were not able to keep up the momentum and fell, posting losses. The Portfolio Funds trading advisors also saw some profits from long positions in Japan and Asia.

 

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

 

$

254,235

 

1.37

%

Currencies

 

7,906,370

 

42.65

%

Energy

 

6,249,873

 

33.72

%

Interest rates

 

(734,672

)

-3.96

%

Metals

 

(682,880

)

-3.68

%

Stock indices

 

5,542,473

 

29.90

%

 

 

 

 

 

 

Total

 

$

18,535,399

 

100.00

%

 

16



 

The Fund experienced a net trading loss for the first quarter ended March 31, 2011 of $28,822,067.

 

The Fund declined more than 3% 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, 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 Systematic Momentum 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 Systematic Momentum as a whole, the individual Portfolio Fund returns varied considerably, ranging from -14.4% to +2.4%. Five managers had negative returns while only two ended the quarter with positive performance. For the most part, the Portfolio Funds that used higher leverage and a shorter-term time frame tended to underperform. Shorter-term trading strategies found market conditions in March especially problematic since they were the first to react to downward moves in most markets by closing out of long positions. When markets rebounded later in the month, many of these programs did not generate buy signals soon enough to capture the rally. Conversely, longer-term strategies retained their positions and benefited from the subsequent rally in equities and some commodities.

 

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 was Altis which incurred losses primarily due to poor positioning in the currency and energy markets. Altis operates with a higher volatility target than other constituent programs so it was not unexpected that the Portfolio Fund generated higher losses in a difficult trading environment.

 

The Fund 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 Fund’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 Fund’s main line of business.

 

Market movements result in frequent changes in the fair market value of the Portfolio Fund’s open positions and, consequently, in their earnings and cash flow. The Portfolio Fund’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates,

 

17



 

equity price levels, the market value of financial instruments and contracts, the diversification effects among the Portfolio Fund’s 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 Fund’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 Portfolio Funds’ losses in any market sector will be limited to Value at Risk or by each Portfolio Funds’ attempts to manage its market risks.

 

Quantifying the Fund’s Trading Value At Risk

 

Quantitative Forward Looking Statements

 

The following quantitative disclosures regarding the Fund’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 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).

 

Exchange maintenance margin requirements of the Portfolio Funds have been used 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 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

 

18



 

reduce the Value at Risk estimates) resulting from the fact that the Portfolio Fund’s 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 Fund on a standalone basis.

 

The Portfolio Funds’ 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.

 

Altis Class DS (1)

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

3,450,725

 

3.26

%

$

3,511,512

 

$

3,418,566

 

Energy

 

3,959,863

 

3.74

%

4,029,618

 

3,922,958

 

Interest Rates

 

428,908

 

0.40

%

436,463

 

424,911

 

Metals

 

1,442,302

 

1.36

%

1,467,709

 

1,428,860

 

Stock Indices

 

178,441

 

0.17

%

181,585

 

176,778

 

Currencies

 

1,695,804

 

1.60

%

1,725,677

 

1,680,000

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

11,156,043

 

10.53

%

$

11,352,564

 

$

11,052,073

 

 


(1) Average capitalization of Altis Class DS is $105,933,391.

 

Altis Class DS (1)

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

30,317

 

0.02

%

$

31,713

 

$

27,998

 

Energy

 

2,285,152

 

1.76

%

2,390,417

 

2,110,398

 

Interest Rates

 

918,768

 

0.71

%

961,090

 

848,506

 

Metals

 

4,563,228

 

3.52

%

4,773,430

 

4,214,260

 

Stock Indices

 

2,468,363

 

1.90

%

2,582,067

 

2,279,598

 

Currencies

 

6,914,190

 

5.33

%

7,232,688

 

6,385,434

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

17,180,018

 

13.24

%

$

17,971,405

 

$

15,866,194

 

 


(1) Average capitalization of Altis Class DS is $129,725,325.

 

19



 

Transtrend Class DS (2)

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

3,099,393

 

2.11

%

$

3,358,122

 

$

2,810,777

 

Energy

 

6,571,540

 

4.48

%

7,120,114

 

5,959,596

 

Interest Rates

 

842,185

 

0.57

%

912,489

 

763,761

 

Metals

 

1,256,364

 

0.86

%

1,361,242

 

1,139,371

 

Stock Indices

 

2,031,097

 

1.38

%

2,200,647

 

1,841,960

 

Currencies

 

1,901,979

 

1.30

%

2,060,751

 

1,724,866

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

15,702,558

 

10.70

%

$

17,013,365

 

$

14,240,331

 

 


(2) Average capitalization of Transtrend Class DS is $146,677,002.

 

Transtrend Class DS (2)

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

1,755,543

 

0.95

%

$

2,072,133

 

$

1,437,784

 

Energy

 

925,998

 

0.50

%

1,092,990

 

758,389

 

Interest Rates

 

283,024

 

0.15

%

334,064

 

231,796

 

Metals

 

2,904,094

 

1.57

%

3,427,810

 

2,378,443

 

Stock Indices

 

5,210,120

 

2.81

%

6,149,698

 

4,267,070

 

Currencies

 

6,893,794

 

3.72

%

8,137,000

 

5,645,992

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

17,972,573

 

9.70

%

$

21,213,695

 

$

14,719,474

 

 


(2) Average capitalization of Transtrend Class DS is $185,428,866.

 

20



 

Aspect Class DS (3)

 

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

2,037,214

 

2.50

%

$

2,156,802

 

$

1,869,294

 

Energy

 

1,374,215

 

1.69

%

1,454,884

 

1,260,944

 

Interest Rates

 

1,069,517

 

1.31

%

1,132,300

 

981,361

 

Metals

 

196,863

 

0.24

%

208,419

 

180,636

 

Stock Indices

 

2,468,842

 

3.03

%

2,613,768

 

2,265,345

 

Currencies

 

114,687

 

0.14

%

121,420

 

105,234

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

7,261,338

 

8.91

%

$

7,687,593

 

$

6,662,814

 

 


(3) Average Capitalization of Aspect Class DS is $81,487,367.

 

Aspect Class DS (3)

 

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

9,602

 

0.01

%

$

10,072

 

$

9,271

 

Energy

 

3,090,304

 

2.99

%

3,241,592

 

2,983,876

 

Interest Rates

 

27,832

 

0.03

%

29,195

 

26,874

 

Metals

 

294,068

 

0.28

%

308,464

 

283,941

 

Stock Indices

 

1,349,211

 

1.30

%

1,415,263

 

1,302,745

 

Currencies

 

1,713,117

 

1.66

%

1,796,984

 

1,654,119

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

6,484,134

 

6.27

%

$

6,801,570

 

$

6,260,826

 

 


(3) Average Capitalization of Aspect Class DS is $103,460,336.

 

21



 

Winton Class DS (4)

 

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

1,132,244

 

0.77

%

$

1,212,062

 

$

1,074,550

 

Energy

 

1,155,612

 

0.79

%

1,237,077

 

1,096,726

 

Interest Rates

 

425,361

 

0.29

%

455,347

 

403,687

 

Metals

 

1,403,885

 

0.96

%

1,502,852

 

1,332,349

 

Stock Indices

 

2,427,780

 

1.66

%

2,598,927

 

2,304,071

 

Currencies

 

2,425,180

 

1.65

%

2,596,143

 

2,301,603

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

8,970,062

 

6.12

%

$

9,602,408

 

$

8,512,986

 

 


(4) Average capitalization of Winton Class DS is $146,676,932.

 

Winton Class DS (4)

 

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

826,454

 

0.45

%

$

902,551

 

$

765,139

 

Energy

 

1,338,902

 

0.72

%

1,462,182

 

1,239,567

 

Interest Rates

 

818,399

 

0.44

%

893,754

 

757,681

 

Metals

 

448,533

 

0.24

%

489,832

 

415,256

 

Stock Indices

 

2,923,301

 

1.58

%

3,192,467

 

2,706,419

 

Currencies

 

2,822,298

 

1.53

%

3,082,164

 

2,612,909

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

9,177,887

 

4.96

%

$

10,022,950

 

$

8,496,971

 

 


(4) Average capitalization of Winton Class DS is $185,059,977.

 

22



 

John Locke Class DS (5)

 

March 31, 2012

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Agricultural Commodities

 

$

4,426,109

 

3.88

%

$

4,796,195

 

$

3,967,808

 

Energy

 

581,498

 

0.51

%

630,119

 

521,287

 

Interest Rates

 

1,523,634

 

1.34

%

1,651,032

 

1,365,870

 

Metals

 

1,759,043

 

1.54

%

1,906,125

 

1,576,903

 

Stock Indices

 

3,604,378

 

3.16

%

3,905,755

 

3,231,163

 

Currencies

 

371,497

 

0.33

%

402,560

 

333,031

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

12,266,159

 

10.76

%

$

13,291,786

 

$

10,996,062

 

 


(5) Average capitalization of John Locke Class DS is $114,082,113.

 

John Locke Class DS (5)

 

March 31, 2011

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector 

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk