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EX-13.01 - EX-13.01 - ML Transtrend DTP Enhanced FuturesAccess LLCa15-23236_1ex13d01.htm
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EX-32.02 - EX-32.02 - ML Transtrend DTP Enhanced FuturesAccess LLCa15-23236_1ex32d02.htm
EX-31.02 - EX-31.02 - ML Transtrend DTP Enhanced FuturesAccess LLCa15-23236_1ex31d02.htm
EX-32.01 - EX-32.01 - ML Transtrend DTP Enhanced FuturesAccess LLCa15-23236_1ex32d01.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended: December 31, 2015

 

or

 

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 0-52701

 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

30-0408288

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

c/o Merrill Lynch Alternative Investments LLC

250 Vesey Street, 11th Floor

New York, New York 10281

(Address of principal executive offices)

(Zip Code)

 

609-274-5838

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Units of Limited Liability Company Interest

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  

 

Yes  o  No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

 

Yes  o  No  x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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.

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x
(Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes  o  No  x

 

The Units of limited liability company interest of the registrant are not publicly traded. Accordingly, there is no aggregate market value for the registrant’s outstanding equity that is readily determinable.

 

As of February 29, 2016 Units of limited liability company interest with an aggregate Net Asset Value of $21,784,579 were outstanding and held by non-affiliates.

 

Documents Incorporated by Reference

 

The registrant’s 2015 Annual Report and Report of Independent Registered Public Accounting Firm, the annual report to security holders for the year ended December 31, 2015, is incorporated by reference into Part II, Item 8, and Part IV hereof and filed as an Exhibit herewith. Copies of the annual report are available free of charge by contacting Alternative Investments Client Services at 1-866-657-3784.

 

 

 



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

 

ANNUAL REPORT FOR 2015 ON FORM 10-K

 

Table of Contents

 

 

PAGE

PART I

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

10

 

 

 

Item 1B.

Unresolved Staff Comments

22

 

 

 

Item 2.

Properties

22

 

 

 

Item 3.

Legal Proceedings

22

 

 

 

Item 4.

Mine Safety Disclosures

22

 

 

 

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

 

 

 

Item 6.

Selected Financial Data

26

 

 

 

Item 7.

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

35

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 8.

Financial Statements and Supplementary Data

48

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

49

 

 

 

Item 9A.

Controls and Procedures

49

 

 

 

Item 9B.

Other Information

49

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

50

 

 

 

Item 11.

Executive Compensation

52

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

52

 

 

 

Item 14.

Principal Accounting Fees and Services

53

 

 

 

PART IV

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

53

 



 

PART I

 

Item 1:        Business

 

(a)                                 General Development of Business:

 

ML Transtrend DTP Enhanced FuturesAccess LLC (the “Fund”), a FuturesAccessSM Program (“FuturesAccess”) fund, which is an investment company as defined by Accounting Standards Codification (“ASC”) guidance, was organized under the Delaware Limited Liability Company Act on March 8, 2007 and commenced trading activities on April 2, 2007. The Fund engages in the speculative trading of futures on a wide range of commodities. Transtrend B.V. (the “Trading Advisor”) is the trading advisor of the Fund. The Trading Advisor trades the Transtrend Diversified Trend Program-Enhanced Risk Profile (the “Trading Program”) for the Fund.

 

Merrill Lynch Alternative Investments LLC (“MLAI”, the “Sponsor” or the “Managing Member”) is the sponsor and manager of the Fund. MLAI is an indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America Corporation and its affiliates are referred to herein as “BofA Corp.”. Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) is currently the exclusive clearing broker for the Fund. The Sponsor may select other parties as clearing broker(s). Merrill Lynch International (“MLI”) is the primary foreign exchange (“F/X”) forward prime broker for the Fund. The Sponsor may select other of its affiliates, or third parties, as F/X or other over-the-counter (“OTC”) prime brokers. MLPF&S and MLI are BofA Corp. affiliates.

 

FuturesAccess is a group of managed futures funds sponsored by MLAI (“FuturesAccess Funds”). FuturesAccess is exclusively available to investors that have investment accounts with Merrill Lynch Wealth Management, U.S. Trust and other divisions or affiliates of BofA Corp.  FuturesAccess Funds currently are composed of direct-trading funds advised by a single trading advisor. Although redemption terms vary among FuturesAccess Funds, FuturesAccess applies, with some exceptions, the same minimum investment amounts, fees and other operational criteria across all FuturesAccess Funds.  Each trading advisor participating in FuturesAccess employs different technical, fundamental, systematic and/or discretionary trading strategies.

 

The Trading Program is systematic and is based on quantitative analysis of signaled price behavior of certain instruments traded and not on fundamental analysis. The trading systems of the Trading Program are designed to profit form recurring non-random characteristics of price behavior in markets and to exploit the directional price movements of single instruments and of intra-market and inter-market combination of instruments, see “Trading Advisor’s Trading Program,” below. The Trading Advisor is not registered under the Investment Advisers Act of 1940, as amended (the “Advisor Act”).

 

The Fund issues units of limited liability company interest (“Units”) which are privately offered pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).

 

The Fund calculates the Net Asset Value per Unit of each Class of Units as of the last calendar day of each month, the fifteenth calendar day of each month and as of any other dates MLAI may determine in its discretion (each, a “Calculation Date”). The Fund’s Net Asset Value as of any Calculation Date generally equals the value of the Fund’s account under the management of the Trading Advisor as of that date, plus any other assets held by the Fund, minus accrued Sponsor, management and performance fees, trading liabilities, including brokerage commissions, any offering or operating costs, and all other liabilities of the Fund. MLAI or its delegates are authorized to make all Net Asset Value determinations.

 

As of December 31, 2015, the Net Asset Value of the Fund was $25,371,716. As of December 31, 2015, the Net Asset Value per Unit was $1.2314 for Class A, $1.0954 for Class C, $1.0714 for Class D, $1.2544 for Class I, $0.000 for Class DS, $0.000 for Class DT and $1.0643 for Class M. Effective as of April 30, 2015 all Class DS Units were redeemed.  Effective as of December 31, 2015 all Class DT Units were redeemed.

 

Since the Fund began trading activities, the highest and lowest period-end Net Asset Value per Unit are listed below. The highest period-end Net Asset Value per Unit for period end Class A was $1.3886 (February 28, 2009) and the lowest was $1.0489 (February 15, 2014). The highest period-end Net Asset Value per Unit for Class C was $1.3228 (February 28, 2009) and the lowest was $0.9228 (August 31, 2007). The highest period-end Net Asset Value per Unit for Class D was $1.2380 (February 28, 2009) and the lowest was $0.8612 (January 31, 2010). The highest period-end Net Asset Value per Unit for Class I was $1.3760 (February 28, 2009) and the lowest was $1.0475 (November 30, 2007). The highest period-end Net Asset Value per Unit for Class DS was $1.7301 (December 31, 2014) and the lowest was $1.0532 (April 30,

 

1



 

2007).  The highest period-end Net Asset Value per Unit for Class DT was $1.8881 (December 31, 2014) and the lowest was $1.0950 (August 31, 2007). The highest period-end Net Asset Value per Unit for Class M was $1.1218 (December 31, 2014) and the lowest was $.8775 (October 15, 2013).

 

The Net Asset Value of the Fund is generally calculated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). However, the Fund’s Limited Liability Company Operating Agreement allows MLAI to depart from U.S. GAAP in calculating the Fund’s Net Asset Value for all purposes other than for financial statement purposes, including for purposes of subscriptions and redemptions and fee calculations, if MLAI determines in its good-faith discretion that this departure is advisable in order to better reflect the true value of any asset or amount of any liability, or to further the fair and equitable treatment of investors.  MLAI may depart from U.S. GAAP in calculating the Fund’s Net Asset Value for these purposes if, for example, it determines that application of U.S. GAAP would cause an expense to be taken in a particular fiscal period — and therefore borne only by investors who hold Units during such period — but MLAI determines that it is more appropriate to spread such expense over additional fiscal periods.  In the event that MLAI departs from U.S. GAAP in calculating the Fund’s Net Asset Value for purposes of subscriptions and redemptions, calculation of fees and other non-financial statement purposes, the Fund’s audited financial statements will continue to be determined in accordance with U.S. GAAP.

 

(b)                                 Financial Information about Segments:

 

The Fund’s business constitutes only one segment for financial reporting purposes, i.e., a speculative “commodity pool.” The Fund does not engage in sales of goods or services.

 

(c)                                  Narrative Description of Business:

 

Advisory Agreement Term

 

The Advisory Agreement will continue in effect until December 31, 2016. Following that date, the Advisory Agreement will be automatically renewed for successive one-year periods, on the same terms, unless terminated by either the Trading Advisor or the Fund upon 90 days written notice to the other party. The Advisory Agreement may, however, be terminated at any time pursuant to any of the following: (i) the Trading Advisor may terminate the Advisory Agreement upon notice to the Fund and MLAI in the event that (a) the Fund or MLAI appoints a clearing broker other than a MLAI affiliate without the prior consent of the Trading Advisor, or (b) MLAI overrides a trading instruction of the Trading Advisor (other than with respect to MLAI overriding a trade (x) as necessary or advisable for the protection of the Fund or (y) as necessary to fund distributions or redemptions, to pay Fund expenses, or to comply with speculative position limits); and (ii) the Fund and/or MLAI, on the one hand, or the Trading Advisor, on the other, may terminate the Advisory Agreement as a result of a material breach of the Advisory Agreement by the other party, after notice of such material breach is provided to the breaching party and such material breach has not been cured within 10 days following the giving of such notice.  The Advisory Agreement will also terminate immediately if the Fund is terminated and dissolved as determined by MLAI.

 

Trading Advisor’s Trading Program

 

The Trading Program has two risk profiles:  the Standard Risk Profile and the Enhanced Risk Profile, investable in various currencies.  The Enhanced Risk Profile is approximately 1.5 times the leverage of the Standard Risk Profile.  The Trading Advisor will trade the Trading Program - Enhanced Risk Profile (USD) for the Fund.

 

The Trading Advisor trades the following instruments on U.S. and non-U.S. exchanges and markets:  futures, options, options on futures, swaps, swaps on futures, and forward contracts on F/X, interest rates, interest rate instruments, commodities, equity-related indices and instruments, and other indices, in all cases traded on exchanges, other trading venues and/or OTC markets. The underlying values of these instruments traded may also include other economic variables which are now or may become the subject of organized futures, options, options on futures, swaps, swaps on futures, and forward trading.  The instruments that the Trading Advisor trades may also include other derivative, margined instruments as well as spot F/X, in each case, traded on exchanges, other trading venues and/or OTC markets.  The Trading Program does not currently trade OTC F/X and derivatives on individual stocks for the Fund.

 

The applied principles of risk management play a dominant role in the Trading Advisor’s trading methodology.  The Trading Program is designed to pursue capital growth within the limits of a defined risk tolerance.  The Trading Program is essentially based on quantitative analysis of signaled price behavior of instruments traded and therefore not on fundamental analysis. The Trading Program is systematic by nature and requires a consistent application.  Discretionary inputs are not essential to the effectiveness of the program.

 

2



 

The applied market approach does not forecast markets or price levels but participates in a systematic and dynamic way in signaled price patterns.  The trading systems of the Trading Program are designed to profit from recurring, non-random characteristics of price behavior in markets.  In the trading systems there are elements which identify and respect the dominant market direction.  The trading systems exploit directional price movement of single instruments and of intra-market and inter-market combinations, or “synthetics” of instruments.

 

While the Trading Advisor generally will not use discretionary inputs in trading client accounts, in the event of exceptional market circumstances the Trading Advisor may use discretion in an attempt to limit risk to a position or an account.  The use of discretion by the Trading Advisor may have a positive or negative impact on the performance of the Fund.

 

The Trading Program may hold positions in different instruments with one or more trading systems.  The simultaneous application of diverging trading systems, each with a positive profit expectancy over the course of time, can contribute to a different timing of both purchase and sale transactions, thus enhancing smoother performance characteristics when compared to a single trading system.  However, the profitability of trading systems, individually or in combination, cannot be guaranteed and the Fund may incur substantial losses.

 

Once the acceptable portfolio components have been defined for an account, the Trading Advisor determines the relative proportions of all components within the portfolio on the basis of signaled correlation over the course of time, which is re-computed from time to time.  Correlation analysis contributes to the estimation of the risk of coinciding trended reversals at a portfolio level.

 

The allocation to instruments, i.e., the determination of portfolio components and their relative proportions, varies over the course of time, because, among other reasons, of changes to the list of instruments traded in the Trading Program and because of observed changes in price behavior, correlation and market liquidity.  The Trading Advisor reserves the right to expand or contract the instruments it trades.

 

The entry/exit tools used by the Trading Advisor may contain both proprietary trend-following and contra-trend elements and include techniques of dynamic profit targets and dynamic stop levels for individual trades.  The Trading Advisor may change its trading techniques at any time without prior notice to or approval from the Fund. The trading systems act at specific times or time intervals and upon specific price levels during a market session or during the day.

 

Although the Trading Advisor’s Trading Program is continually evolving, there were no fundamental or material changes to the Trading Program during 2015.

 

Forward Contracts and Counterparties

 

Currently, the only forward contracts entered into by the Fund are currency forwards. MLI is the only counterparty to these forward contracts. In the future the Fund may enter into other types of forwards and/or use other counterparties.  The standard terms of forward contracts entered into by the Fund are the term, the currency, the exchange rate, the principal amount and, in some cases the definition of a “disruption event,” i.e., a contingency pricing and settlement mechanism if an event occurs that causes the unavailability of the relevant exchange rate.  Forwards are governed by International Swaps and Derivatives Association documentation, and, in some cases, also by EMTA, Inc. documentation.

 

Employees

 

The Fund has no employees.

 

Use of Proceeds and Cash Management Income

 

Subscription Proceeds

 

The Fund’s cash is used as security for and to pay the Fund’s trading losses as well as its expenses and redemptions. The primary use of the proceeds of the sale of the Units is to permit the Trading Advisor to trade on a speculative basis in a wide range of commodities on behalf of the Fund.  While being used for this purpose, the Fund’s assets are also generally available for cash management, as described below under “Cash Management and Interest”.

 

3



 

Markets

 

The Trading Advisor trades the following instruments on U.S. and non-U.S. exchanges and markets:  futures, options, options on futures, swaps, swaps on futures, and forward contracts on F/X, interest rates, interest rate instruments, commodities, equity-related indices and instruments, and other indices, in all cases traded on exchanges, other trading venues and/or OTC markets.

 

The Fund trades on a variety of United States and foreign futures exchanges as well as OTC.  The Fund’s commitments to different types of markets — U.S. and non-U.S., regulated and non-regulated — may differ from time to time, as well as over time.  The Fund has no policy restricting its relative commitment to any of these different types of markets.

 

4



 

CONDENSED SCHEDULES OF INVESTMENTS

 

The Fund’s investments, defined as unrealized profit (loss) on open contracts on the Statements of Financial Condition, as of December 31, 2015 and 2014 are as follows:

 

December 31, 2015

 

 

 

Long Positions

 

Short Positions

 

Net Unrealized

 

 

 

 

 

Commodity Industry

 

Number of

 

Unrealized

 

Percent of

 

Number of

 

Unrealized

 

Percent of

 

Profit (Loss)

 

Percent of

 

 

 

Sector

 

Contracts

 

Profit (Loss)

 

Members’ Capital

 

Contracts

 

Profit (Loss)

 

Members’ Capital

 

on Open Positions

 

Members’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

92

 

$

3,968

 

0.02

%

(403

)

$

44,291

 

0.18

%

$

48,259

 

0.20

%

January 2016 - March 2017

 

Currencies

 

275

 

36,479

 

0.14

%

(159

)

53,762

 

0.21

%

90,241

 

0.35

%

January 2016 - March 2016

 

Energy

 

 

 

0.00

%

(245

)

660,439

 

2.60

%

660,439

 

2.60

%

January 2016 - December 2017

 

Interest rates

 

1,367

 

(601,993

)

-2.37

%

(558

)

49,006

 

0.19

%

(552,987

)

-2.18

%

March 2016 - September 2019

 

Metals

 

82

 

(52,912

)

-0.21

%

(240

)

287,629

 

1.13

%

234,717

 

0.92

%

January 2016 - October 2016

 

Stock indices

 

252

 

(51,524

)

-0.20

%

(236

)

(39,788

)

-0.16

%

(91,312

)

-0.36

%

January 2016 - April 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

(665,982

)

-2.62

%

 

 

$

1,055,339

 

4.15

%

$

389,357

 

1.53

%

 

 

 

December 31, 2014

 

 

 

Long Positions

 

Short Positions

 

Net Unrealized

 

 

 

 

 

Commodity Industry

 

Number of

 

Unrealized

 

Percent of

 

Number of

 

Unrealized

 

Percent of

 

Profit (Loss)

 

Percent of

 

 

 

Sector

 

Contracts

 

Profit (Loss)

 

Members’ Capital

 

Contracts

 

Profit (Loss)

 

Members’ Capital

 

on Open Positions

 

Members’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

240

 

$

(109,289

)

-0.15

%

(781

)

$

914,930

 

1.25

%

$

805,641

 

1.10

%

January 2015 - March 2016

 

Currencies

 

263

 

(67,357

)

-0.09

%

(394

)

81,614

 

0.11

%

14,257

 

0.02

%

January 2015 - March 2015

 

Energy

 

23

 

5,797

 

0.01

%

(332

)

2,501,921

 

3.43

%

2,507,718

 

3.44

%

January 2015 - December 2016

 

Interest rates

 

2,795

 

2,761,045

 

3.78

%

(780

)

(59,807

)

-0.08

%

2,701,238

 

3.70

%

March 2015 - December 2018

 

Metals

 

218

 

(776,487

)

-1.06

%

(256

)

641,852

 

0.88

%

(134,635

)

-0.18

%

January 2015 - October 2015

 

Stock indices

 

634

 

763,820

 

1.05

%

(142

)

(122,424

)

-0.17

%

641,396

 

0.88

%

January 2015 - June 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

2,577,529

 

3.54

%

 

 

$

3,958,086

 

5.42

%

$

6,535,615

 

8.96

%

 

 

 

No individual contract’s unrealized profit or loss comprised greater than 5% of Members’ Capital as of December 31, 2015 and December 31, 2014. With respect to each commodity industry sector listed in the above chart, the net unrealized profit (loss) on open positions is the sum of the unrealized profits (losses) of long positions and short positions of the open contracts, netting unrealized losses against unrealized profits as applicable.  Net unrealized profit and loss provides a rough measure of the exposure of the Fund to the various sectors as of the date listed, although such exposure can change at any time.

 

5



 

Margin

 

When a futures or options on futures position is established, “initial margin” is calculated by the exchange on which the position is listed and deposited with a Futures Commission Merchant (“FCM”) that is a member of the clearinghouse through which transactions on the relevant exchange are cleared.  An FCM must, in turn, deposit initial margin with the clearinghouse to secure its obligations to the clearinghouse with respect to the positions of its customers.  The amount of both the trader’s initial margin payment to the FCM and the FCM’s initial margin payment to the clearinghouse are determined on the basis of risk, taking into account the price and volatility of the commodity underlying the position and, in certain cases, the offsetting risks that exist within a portfolio of positions.  On most exchanges, at the close of each trading day “variation margin,” representing the unrealized gain or loss on the open positions, is either credited to or debited from an account.  A trader must maintain a minimum margin level for each outstanding futures position known as “maintenance margin,” which is set by the relevant exchange and based on the risk of the futures position, often a set percentage of the “initial margin.”  If “variation margin” payments cause the “initial margin” to fall below “maintenance margin” levels, a “margin call” is made, requiring the trader to deposit additional margin or have its position closed out.  A clearinghouse may have “maintenance margin” requirements for member FCMs.  An FCM may require a higher level of “initial margin” and “maintenance margin” from the trader than the clearinghouse requires from the FCM, but generally will not allow lower margin levels.  Margin is also required to be posted with counterparties when making investments through forward, swap or other OTC instruments.  The counterparties calculate margin based on the risk of the underlying commodity and will deposit margin with each other based on a previously agreed upon schedule.  In general, approximately 10% to 30% of the Fund’s assets are expected to be committed as margin for futures or options on futures positions at any one time, although these amounts could be substantially higher or lower.  The Fund’s exposure and liability are not limited to the amount placed on margin, but are based on the total value of the futures contracts being traded.  Fund assets not committed to margin will be held in cash or cash equivalents and will earn interest as described below.

 

As of December 31, 2015 the Fund employed $5,142,903 and $0 as initial margin to support futures and forward positions, respectively, representing approximately 13.44% and 0.00%, respectively, of the Fund’s total assets as of such date.

 

Custody of Assets

 

The Fund’s financial assets consist primarily of cash, futures and OTC FX forward and spot positions.  In addition, the Fund has authority to trade options on futures and forwards and certain other OTC derivatives including swaps, but these contracts typically represent a small percentage of the Fund’s financial assets, if any are traded at all.

 

Futures and OTC forwards and other instruments typically constitute a predominant amount of the Fund’s investment risk, but the notional value of these instruments is not included on the Fund’s balance sheet.

 

The vast majority of the net assets of the Fund is, and has historically been, held in the form of cash.  The Fund’s cash is used in various ways.  It can be:

 

·                        posted as margin with MLPF&S in segregated or secured accounts in connection with commodities trading on regulated exchanges;

·                        pledged as collateral to MLI for OTC forwards or options on forwards or to other OTC prime brokers for other OTC investments;

·                        deposited in savings or demand deposit accounts with the Fund’s custodian or other banking institutions, both in the United States and internationally;

·                        held in securities brokerage accounts maintained with MLPF&S; and

·                        held in segregated or secured accounts with MLPF&S, which generally invests the cash in short-term high-quality securities or other instruments viewed as cash equivalents.

 

Typically the vast majority of the Fund’s assets are held in segregated or secured accounts with MLPF&S.  In general, approximately 10% to 30% of the Fund’s assets are expected to be required as margin or collateral at any one time.  Approximately 90% of the Fund’s assets are held in customer segregated accounts at MLPF&S pursuant to applicable Commodity Futures Trading Commission (“CFTC”) regulations to margin U.S. exchange-traded futures contracts and options thereon, or in customer secured accounts at MLPF&S and used to margin futures trading on non-U.S. exchanges pursuant to CFTC regulations.  The remaining approximately 10% is expected to be deposited with MLI, other OTC prime brokers, or one or more third-party collateral custodians as margin for OTC trades.  These amounts could be substantially higher or lower and there is no obligation to maintain margin or collateral within these or any other specific ranges.

 

6



 

Assets held in segregated or secured accounts at MLPF&S may be invested only in CFTC-permitted investments, which include U.S. government and government agency securities, commercial paper and corporate notes and bonds guaranteed by the U.S. government, and money market mutual funds.  Under the applicable regulations, such permitted investments are subject to instrument and issuer based concentration and time to maturity limits and must be managed with the objectives of preserving principal and maintaining liquidity.

 

Cash deposited in savings or demand deposit accounts with the Fund’s custodian or other banking institutions may be in excess of the limits on federal insurance for deposits, and thus not insured by the Federal Deposit Insurance Corporation (“FDIC”), and would be subject to the risk of bank failure.

 

MLAI, as sponsor of the Fund, has a general policy of maintaining clearing and prime brokerage arrangements with its BofA Corp. affiliates, such as MLPF&S and MLI, although MLAI may, nevertheless, engage unaffiliated service providers as clearing brokers or prime brokers for the Fund.  Other affiliates may from time to time be involved in the clearing, custody or investment of the Fund’s assets, including as prime brokers.  However, the vast majority of the Fund’s assets are held with, and therefore subject to the credit risk of, MLPF&S.  MLAI believes that its policy is in the best interest of investors due to the enhanced dependability and quality of service provided by MLPF&S and MLI to FuturesAccess as a result of MLAI’s relationship and shared corporate infrastructure with these affiliates.  In addition, MLAI believes that MLPF&S is well capitalized and that the Fund benefits from the transparency provided to MLAI, as an affiliate of MLPF&S, into the controls MLPF&S has implemented to comply with the various regulatory requirements designed to protect customer funds.  However, there nonetheless exists a substantial risk of loss with respect to each of the above custody arrangements in the event of the bankruptcy or insolvency of MLI or MLPF&S if it does not properly segregate customer funds.  See “Risk Factors — Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges” below for a more detailed discussion of these risks.

 

Subject to the interest income arrangements discussed below, each BofA Corp. entity holding Fund assets, including MLPF&S, retains the additional economic benefit derived from possession and investment of those assets for the entity’s own account.

 

Cash Management and Interest

 

MLAI is primarily responsible for the placement of the Fund’s “cash assets” with MLPF&S or other brokers. In exercising this responsibility, MLAI’s primary considerations are safety of assets, seeking interest income, and the services provided by custodians.  A vast majority of the Fund’s cash has historically been held in futures brokerage accounts with affiliates.  To a smaller degree, the Fund’s cash assets may be held with the Fund’s bank custodian, which is at present the administrator.

 

MLAI retains the ability to change its cash management practices at any time, including by transferring a majority of the Fund’s cash assets to the Fund’s custodial bank accounts or other bank accounts.  Bank deposits may be in either savings accounts that pay interest, or demand deposit accounts, which may or may not pay interest and which may or may not be subject to FDIC insurance.  Any of these banks may be affiliated with MLAI if MLAI believes that to be in the best interests of the investors in the Fund.

 

MLPF&S and any other BofA Corp. affiliates that hold the Fund’s cash receive economic benefits, which may be substantial, from holding this cash, even in low interest rate environments in which the Fund receives little or no interest on these cash assets.

 

BofA Corp.’s “Interest Earning Program,” which offers interest on cash balances subject to a negotiated schedule, will generally apply to Fund cash assets during any time they are maintained by MLAI with its affiliates.  The present interest rate under the Interest Earning Program on U.S. dollar cash balances is the daily effective federal funds rate less 20 basis points, recalculated and accrued daily, and subject to a floor of 0%.  The daily effective federal funds rate is a volume-weighted average of rates on trades arranged by major brokers and is calculated by the Federal Reserve Bank of New York using data provided by the brokers.  Interest is computed based upon the daily net equity balance of the Fund’s account and is posted to the Fund’s account on a monthly basis.

 

MLPF&S, in the course of acting as commodity broker for the Fund, will have use of Fund cash and earn interest and receive other economic benefits as a result.  The interest income arrangements with regard to cash held with MLPF&S will be equivalent with those under the Interest Earning Program as discussed above.

 

7



 

Charges

 

The following table summarizes the charges incurred by the Fund for the years ended December 31, 2015, 2014 and 2013.

 

 

 

2015

 

2014

 

2013

 

Charges

 

Dollar
Amount

 

% of Average
Month-End
Net Assets

 

Dollar
Amount

 

% of Average
Month-End
Net Assets

 

Dollar
Amount

 

% of Average
Month-End
Net Assets

 

Other Expenses

 

$

828,767

 

1.68

%

$

451,448

 

0.62

%

$

545,922

 

0.45

%

Sponsor fee

 

363,598

 

0.74

%

370,594

 

0.51

%

520,856

 

0.43

%

Management fee

 

706,513

 

1.43

%

1,078,409

 

1.47

%

2,284,350

 

1.87

%

Performance fee

 

147,227

 

0.30

%

1,252,535

 

1.71

%

 

0.00

%

Total

 

$

2,046,105

 

4.15

%

$

3,152,986

 

4.31

%

$

3,351,128

 

2.75

%

 

The foregoing table does not reflect:  (i) the bid-ask spreads paid by the Fund on it forward trading, (ii) brokerage commissions, (iii) the benefits which may be derived by BofA Corp. from the deposit of certain of the Fund’s U.S. dollar assets maintained at MLPF&S, or (iv) sales commissions payable in connection with the sales of Class A, Class D and Class I Units of the Fund.  Bid-ask spreads and brokerage commissions are components of the trading profit or loss of the Fund which are netted against realized and unrealized trading gains or losses in determining trading profit or loss.  Benefits derived by BofA Corp. from the deposit of the Fund’s assets at MLPF&S are neither a direct expense of the Fund nor readily quantifiable.  Aggregate sales commissions are not included in the table of charges because they are not an expense of the Fund, but rather are paid to MLPF&S out of an investor’s subscription proceeds and therefore reduce the amount invested in the Fund by the investor.

 

The Fund’s average period-end Net Asset Values during 2015, 2014 and 2013 equaled $49,254,213, $73,229,591 and $122,272,149, respectively.

 

During 2015, the interest expense for the Fund was $358 or approximately 0.00% of the Fund’s average period-end Net Asset Values. During 2014, the interest expense for the Fund was $3,448 or approximately 0.00% of the Fund’s average period-end Net Asset Values. During 2013, the interest expense for the Fund was $3,284, or approximately 0.00% of the Fund’s average period-end Net Asset Values.

 

Description of Current Charges

 

Recipient

 

Nature of Payment

 

Amount of Payment

MLPF&S

 

Brokerage commissions

 

During 2015, 2014 and 2013, the average round-turn (each purchase and sale or sale and purchase of a single futures contract) rate of the Fund’s brokerage commissions were approximately $5.58, $6.11 and $5.81, respectively.

 

 

 

 

 

MLPF&S

 

Use of assets

 

BofA Corp. may derive an economic benefit from the deposit of certain of the Fund’s U.S. dollar assets in accounts maintained at MLPF&S.

 

8



 

MLAI

 

Sponsor fees

 

The Fund charges Sponsor fees on the period-end Net Asset Value at annual rates equal to 1.5% for Class A Units, 2.5% for Class C Units and 1.1% for Class I Units. Class D Units, Class DT Units and Class M Units are not charged Sponsor fees. No Sponsor fees are charged to Class M Units because investors purchasing Class M Units are subject to asset-based fees on BofA Corp. managed accounts in which the Class M Units are held.

 

 

 

 

 

MLPF&S

 

Sales commissions

 

Class A Units are subject to upfront sales commissions paid to MLPF&S ranging from 1.0% to 2.5% of an investor’s gross subscription amount. Class D and Class I Units are subject to upfront sales commissions paid to MLPF&S up to 2.5% of an investor’s gross subscription amount. Sales commissions are directly deducted from subscription amounts. Class C, Class DT and Class M Units are not subject to upfront sales commissions. No upfront sales commission is charged to Class M Units because investors purchasing Class M Units are subject to asset-based fees on BofA Corp. managed accounts in which the Class M Units are held.

 

 

 

 

 

MLI (or an affiliate); Other counterparties

 

Bid—ask spreads

 

Bid—ask spreads are not accounted for separately as an accounting item because bid-ask spreads are an integral part of the price paid or received on all contracts for the purpose of generally accepted accounting principles.

 

 

 

 

 

MLI (or an affiliate); Other counterparties

 

EFP differentials

 

Certain of the Fund’s currency trades may be executed in the form of “exchange of futures for physical” transactions, in which a counterparty (which may be MLI or an affiliate) receives an additional “differential” spread for exchanging the Fund’s cash currency positions for equivalent futures positions.

 

 

 

 

 

Trading Advisor

 

Performance fees

 

The Fund pays a 22.5% annual performance fee to the Trading Advisor with respect to all Classes of Units. The performance fee is calculated based on any increase in the aggregate Net Asset Value of the Classes of Units subject to the same rate of performance fees (“Class Group”), taken together, in excess of the Class Group’s highest Net Asset Value as of any previous December 31 after adjustment for subscriptions and the performance fee then paid (“High Water Mark”). The increase in Net Asset Value on which performance fees are calculated is prior to reduction for Sponsor fees. The performance fee is also paid on net redemptions and the High Water Mark is proportionately reduced. Net Asset Value for purposes of calculating the performance fee does not include any interest income earned by the Fund.

 

 

 

 

 

Trading Advisor
and MLAI

 

Management fees

 

The Fund pays monthly management fees to each of the Trading Advisor and MLAI based on the period-end Net Asset Value of the Fund (prior to reduction for the management fees being calculated and any accrued performance fees or Sponsor fees). The management fee rate payable to the Trading Advisor is 1.0% per year, and a separate management fee payable to MLAI is 0.5% per

 

9



 

 

 

 

 

year, for a total of 1.5% in management fees for all Classes of Units, except Class DT Units which pay a monthly management fee to the Trading Advisor at a rate equal to 1% per year and none to MLAI.

 

 

 

 

 

Others

 

Operating expenses of the Fund including audit, legal and tax services

 

Actual payments to third parties.

 

 

 

 

 

MLAI

 

Ongoing offering costs
reimbursed

 

Actual costs incurred.

 

Regulation

 

The CFTC has delegated to the National Futures Association (“NFA”) responsibility for the registration of “commodity trading advisors,” “commodity pool operators,” “futures commission merchants,” “introducing brokers” and their respective associated persons, and “floor brokers” and “floor traders.”  The Commodity Exchange Act (“CEA”) requires commodity pool operators such as MLAI, commodity trading advisors such as the Trading Advisor and commodity brokers or FCMs such as MLPF&S to be registered and to comply with various reporting and record keeping requirements.  CFTC regulations also require FCMs to maintain a minimum level of net capital.  In addition, the CFTC and certain commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options contracts traded on U.S. commodities exchanges.  All accounts owned or managed by the Trading Advisor will be combined for position limit purposes.  The Trading Advisor could be required to liquidate positions in order to comply with such limits.  Any such liquidation could result in substantial costs to the Fund.  In addition, many futures exchanges impose limits beyond which the price of a futures contract may not trade during the course of a trading day, and there is a potential for a futures contract to reach its daily price limit for several days in a row, making it impossible for the Trading Advisor to liquidate a position and thereby experiencing dramatic losses.  Currency forward contracts are not regulated as “swaps” under the CEA, but are subject to governmental regulation such as mandatory reporting and business conduct standards for swap dealers and major swap participants to the extent otherwise applicable to swaps under the CEA and applicable rules of the CFTC, see Item 1A “Risk Factors—F/X Forward Trading” and “—Regulatory Changes Could Restrict the Fund’s Operations.”

 

Other than in respect of the registration requirements pertaining to the Fund’s securities under Section 12(g) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”) the Fund is generally not subject to regulation by the Securities and Exchange Commission (the “SEC”).  However, MLAI is registered as an “investment adviser” under the Investment Advisers Act of 1940.  MLPF&S is also regulated by the SEC and the Financial Industry Regulatory Authority (“FINRA”).

 

(d)                              Financial Information about Geographic Areas

 

The Fund does not engage in material operations in foreign countries, nor is a material portion of the Fund’s revenue derived from customers in foreign countries.

 

The Fund trades on a number of foreign commodity exchanges.  The Fund does not engage in the sales of goods or services.

 

Item 1A:  Risk Factors

 

Past Performance Not Necessarily Indicative of Future Results

 

There can be no assurance that the Trading Program will produce profitable results.  The past performance of the Fund or the Trading Advisor is not necessarily indicative of how the Fund or the Trading Advisor may perform in the future.  There can be no assurance that the Fund will achieve its investment objectives or avoid substantial or total loss.  The Fund may sustain losses under future market conditions that are similar to conditions in which it may have achieved gains in the past.

 

10



 

Volatile Markets; Highly Leveraged Trading

 

Trading in the futures and OTC markets typically results in volatile performance.  Market price levels fluctuate dramatically and may be materially affected by unpredictable factors such as weather and governmental intervention.  The low margin requirements normally required in futures and OTC trading permit an extremely high degree of economic leverage.  This combination of leverage and volatility creates a high degree of risk.  Additionally, although the Trading Advisor may initiate stop-loss orders on certain positions to limit this risk, there can be no assurance that any stop-loss order will be executed or, even if executed, that it will be executed at the desired price or time.

 

Importance of General Market Conditions

 

Neither MLAI nor the Trading Advisor can predict or control overall market or economic conditions.  These conditions, however, can be expected to have a material effect on the performance of the Trading Program.

 

The Fund may incur major losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted.  The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving.  The financing available to the Fund from its banks, dealers and other counterparties is typically reduced in disrupted markets, which may result in substantial losses to the Fund.  Market disruptions may from time to time cause dramatic losses for the Fund and can result in the Trading Advisor’s strategy performing with unprecedented volatility and risk.

 

Managed Futures Trading Strategies and Trading Systems

 

Trend-Following Systems. Many managed futures trading systems are trend-following. Trend-following systems generally anticipate that a majority of their trades will be unprofitable and seek to achieve overall profitability by substantial gains made on a limited number of positions.  These strategies are generally only successful in markets in which strong price trends occur.  In stagnant markets in which these trends do not occur, or in “whipsaw markets” in which apparent trends develop but then quickly reverse, trend-following trading systems are likely to incur substantial losses.  Furthermore, the profit potential of trend-following systems may be diminished by the changing character of the markets, which may make historical price data, on which technical trading systems are based, only marginally relevant to future market patterns.

 

Discretionary Strategies. The Trading Advisor may utilize a discretionary, rather than systematic, trading strategy.  Discretionary trading advisors may allow emotion to affect trading decisions and may exhibit a lack of discipline in their trading that systematic strategies are designed to avoid.  Relying on subjective trading judgment may produce less consistent results than those obtained by more systematic approaches.

 

Technical Analysis and Trading Systems. The Trading Advisor may employ technical analysis and/or technical trading systems.  Technical strategies rely on information intrinsic to the market itself to determine trades, such as prices, price patterns, volume and volatility.  These strategies can incur major losses when factors exogenous to the markets themselves, including political events, natural catastrophes, acts of war or terrorism, dominate the markets.  The widespread use of technical trading systems frequently results in numerous managers’ attempting to execute similar trades at or about the same time, altering trading patterns and affecting market liquidity.

 

Fundamental Analysis. The Trading Advisor’s strategy may rely on fundamental analysis.  Fundamental analysis is premised on the assumption that markets are not perfectly efficient, that informational advantages and mispricings do occur and that econometric analysis can identify trading opportunities.  Fundamental analysis may result in substantial losses if these economic factors are not correctly analyzed, not all relevant factors are identified and/or market forces cause mispricings to continue despite the traders having correctly identified mispricings.  Fundamental analysis may also be more subject to human error and emotional factors than technical analysis.

 

11



 

Quantitative Trading. The Trading Advisor may engage in quantitative trading.  Quantitative trading strategies are highly complex, and, for their successful application, require relatively sophisticated mathematical calculations and relatively complex computer programs.  These programs anticipate that many of their trades may be unprofitable, seeking to achieve overall profitability through recognizing major profits on a limited number of positions while cutting losing positions quickly.  These trading strategies are dependent upon various computer and telecommunications technologies and upon adequate liquidity in the markets traded.  The successful execution of these strategies could be severely compromised by, among other things, a diminution in the liquidity of the markets traded, telecommunications failures, power loss and software-related “system crashes.”  There are also periods when even an otherwise highly successful system incurs major losses due to external factors dominating the market, such as natural catastrophes and political interventions.  Due to the high trading volume of quantitative trading strategies, the resulting transaction costs may be significant.  In addition, the difference between the expected price of a trade and the price a trade is executed at, or “slippage,” may be significant and may result in losses.

 

Importance of Market Judgment

 

Although the Trading Advisor may use systematic or quantitative valuation models in evaluating the economic components of many prospective trades, the market judgment and discretion of the Trading Advisor’s personnel are often fundamental to the implementation of the Trading Program.  The greater the importance of subjective factors, the more unpredictable a trading strategy becomes.  The Trading Advisor may not have the same access to market information as do certain of its competitors, and the market decisions made by the Trading Advisor will, accordingly, often be based on less information and analysis than those available to competing investors.

 

F/X Forward Trading

 

The Fund may trade currencies in the F/X Markets, in addition to its trading in the futures markets, including by trading in F/X forward contracts.  Prospective investors must recognize that F/X forward trading takes place in unregulated markets, rather than on futures exchanges or swap execution facilities, and may, but does not now, take place through “retail” F/X Markets subject to the jurisdiction of the CFTC or other regulatory bodies.  The responsibility for performing under a particular forward transaction currently rests solely with the counterparties to that transaction, not with any exchange or clearinghouse.  As a result, the Fund is exposed to the credit risk of the OTC counterparties, with which it trades F/X forwards and deposits collateral, including that of MLI.  See “Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges,” in this section below.

 

The Fund is also subject to the risk that a forward counterparty may not settle a transaction in accordance with its terms, because the counterparty is unwilling or unable to do so, potentially resulting in significant losses. A counterparty’s failure to perform could occur in respect of an offsetting forward contract on which the Fund remains obligated to perform.  The Fund will not, however, be excused from performance under any forward contracts into which it has entered due to defaults under other forward contracts.  In addition, counterparties to forwards generally have the right to terminate trades under a number of circumstances including, for example, declines in the Fund’s net assets and certain “key person” events.  Any premature termination of the Fund’s currency forward trades could result in significant losses for the Fund, because the Fund may be unable to quickly re-establish those trades and may only be able to do so at disadvantageous prices.  Forward market counterparties are under no obligation to enter into forward transactions with the Fund, including transactions through which the Fund is attempting to liquidate open positions.  In addition, the prices offered for the same forward contract may vary significantly among different forward market participants.

 

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the CFTC now regulates non-deliverable forwards as swaps, including deliverable forwards where the parties do not take delivery.  Although non-deliverable forwards are not currently required to be executed in regulated markets, such as futures exchanges or swap execution facilities, this may change in the future. See “Regulatory Changes Could Restrict the Fund’s Operations” in this section below.

 

Dodd-Frank amended the definition of “eligible contract participant,” and the Fund expects to meet the amended definition so long as its total assets exceed $10 million.  If the Fund does not meet the definition of “eligible contract participant,” it could lead to the Fund’s bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees.  “Retail forex” markets could also be significantly less liquid than the interbank market.  Moreover, the creditworthiness of the counterparties with whom the Fund may be required to trade could be significantly weaker than the creditworthiness of MLI and the currency forward counterparties with which the Fund would otherwise engage for its currency forward transactions.

 

12



 

The imposition of credit controls by governmental authorities or the implementation of regulations pursuant to Dodd-Frank might limit forward trading to less than that which MLAI would otherwise recommend, to the possible detriment of the Fund.

 

Derivatives Risks

 

The Trading Advisor uses derivative instruments, primarily futures and OTC F/X forwards, in implementing the Trading Program.  The market for many types of these derivative instruments is comparatively illiquid and inefficient, creating the potential for substantial mispricings, as well as sustained deviations between theoretical and market value.  In addition, the derivatives market is, in comparison to other markets, a relatively new market, and the events of 2008 and 2009, including the bailout of American International Group, Inc., demonstrated that even the most sophisticated market participants may misunderstand how the market in derivatives will perform during periods of unusual price volatility or instability, market illiquidity, or credit distress.  The primary risks associated with the use of derivatives are model risk, market risk and counterparty risk.

 

The Fund’s investments in uncleared OTC derivatives are subject to greater risk of counterparty default and less liquidity than exchange-traded derivatives, although derivatives traded on regulated exchanges or execution facilities are subject to risk of failure of the exchange or facility on which they are traded and the clearinghouse through which they are guaranteed.  Counterparty risk includes not only the risk of default and failure to pay mark-to-market amounts and return risk premium, if any, but also the risk that the market value of OTC derivatives will fall if the creditworthiness of the counterparties to those derivatives weakens.

 

In addition, there are increased risks associated with offshore OTC trading, including the risk that assets held by offshore brokers and unregulated trading counterparties may not benefit from the protection afforded to customer funds deposited with regulated FCMs or broker-dealers.

 

The prices of derivative instruments can be highly volatile.  Price movements of derivative instruments are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies.  In addition, governments from time to time intervene, directly and by regulation, in certain markets.  This intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations.

 

There was substantial disruption in the derivatives markets related to the bankruptcies of Lehman Brothers Holdings, Inc. and MF Global Inc. and uncertainty relating to the government bailout of American International Group, Inc. This type of disruption and uncertainty can cause substantial losses if transactions are prematurely terminated, especially due to default when payment may be delayed or completely lost.  Uncertainties in the derivatives markets continue due to proposed regulatory initiatives, new regulations requiring OTC derivatives clearing, and allegations of inappropriate behavior by market participants to cause or avoid payments under credit default swaps.  See “Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges” in this section below.

 

Trading in Options

 

The Trading Advisor may trade options on futures contracts or options on F/X forward contracts.  Although successful options trading requires many of the same skills as successful futures and forward trading, the risks involved are different.  For example, the assessment of near-term market volatility, which is directly reflected in the price of outstanding options, can be of much greater significance in trading options than it is in many long-term futures strategies.  The use of options can be extremely expensive if market volatility is incorrectly predicted.  A purchaser of options is exposed to the risk of loss of the entire premium paid; a seller, or writer, of call options is exposed to the risk of theoretically unlimited loss, and the seller of put options is exposed to the risk of substantial loss far in excess of the premium received.

 

Exchange of Futures for Physicals

 

The Trading Advisor may engage in exchange of futures for physical (“EFP”) transactions on behalf of the Fund.  As is the case with executing a transaction purely on an exchange or purely in the OTC market, EFP transactions, which are done partially on a futures exchange and partially in the OTC market, involve higher transaction costs.

 

Physical Commodities Trading

 

The Trading Advisor may engage in transactions that involve taking delivery of physical commodity assets

 

13



 

such as agricultural commodities, freight, coal, oil, gas and electric power.  These investments are subject to risks that are not typically directly applicable to other financial instruments, such as:  destruction; loss; industry-specific regulation, such as pollution control regulation; operating failures; and work stoppages.

 

Physical commodities trading, as opposed to commodity futures trading, is substantially unregulated, and if the Fund engages in this type of trading, it will not be assured the same access to these markets as it might have in a regulated context.

 

Exchange Rate Risks; Currency Hedging

 

The Fund may invest and trade in currencies for speculative and/or hedging purposes.  In addition, the Units are denominated, and the Fund values its assets in U.S. dollars and the Fund may trade and invest in assets denominated in non-U.S. currencies.

 

Currency-related investments are subject to the risk that the value of a particular currency will change in relation to the U.S. dollar, and the exchange rates of currencies may be highly volatile.  Among the factors that may affect currency values are direct government intervention, which is often intended specifically to change currency values, trade balances, the level of short-term interest rates, differences in the relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments.

 

While the Trading Advisor may from time to time hedge a certain amount of risks associated with currency trading, it is under no obligation to do so.  Even if it chooses to do so, it is not economically feasible and often simply not possible to fully or effectively hedge exchange-rate risks.  In a number of cases, otherwise highly successful investment funds have incurred significant, and in certain instances total, losses due to the decline in the value of the currencies in which their investments were denominated or in which they were invested for speculative purposes.

 

Off-Balance Sheet Risk

 

The Fund may invest in financial instruments with off-balance sheet risk.  These instruments include futures and forward contracts, swaps and options contracts sold short.  In entering into these contracts, there exists a market risk that the contracts may be significantly influenced by conditions, such as interest rate volatility, resulting in the contracts becoming less valuable.  An off-balance sheet risk is associated with a financial instrument if it exposes the investor to a loss in excess of the investor’s recognized asset carrying value in the financial instrument, if any, or if the ultimate liability associated with the financial instrument has the potential to exceed the amount that the investor recognizes as a liability in the investor’s statement of assets and liabilities.

 

In the past few years regulators have  alleged that certain interest rate benchmarks that underlie various swap agreements had been manipulated for several years and multiple banks involved in setting such benchmarks are currently under investigation for this manipulation.  Certain of these banks have been fined by, or entered into civil and criminal settlements with, various international regulators, including the U.S. Department of Justice, CFTC, and U.K. Financial Conduct Authority.  In entering into swap agreements, the Fund relies on the integrity of interest rates and other benchmarks.  If the level of these benchmarks is artificially influenced by market participants, the Fund could suffer losses.

 

Increased Assets Under Management

 

There appears to be a tendency for the rates of return achieved by managed futures advisors to decline as assets under management increase.  The Trading Advisor has not agreed to limit the amount of additional equity which it may manage and may be at or near its all-time high in assets under management.

 

The aggregate capital committed to the managed futures sector in general is also near its all-time high.  The more capital that is traded in these markets or that is committed to any one particular strategy, the greater the competition for a finite number of positions and the less the profit potential for all strategies or for any particular strategy.

 

Dependence on Key Individuals

 

The success of the Fund is significantly dependent upon the expertise of one or more of the Trading Advisor’s principals.  The loss of any one of these principal’s services may have a substantial impact on the performance of the Fund and may result in liquidation of the Fund which, if made at an inopportune time, may result in losses for the Fund.

 

14



 

Trading Advisor Risk

 

The Fund is subject to the risk of the bad judgment, negligence or misconduct of the Trading Advisor. There have been a number of instances in recent years in which private investment funds have incurred substantial losses due to manager misconduct.

 

Redemptions by Other Trading Advisor Fund Investors

 

Investors in other funds or accounts implementing the Trading Program or similar strategies may be able to redeem their investments more frequently or on less prior notice than Investors in the Fund.  Redemptions by investors in these funds or withdrawals from accounts that have less restrictive redemption terms could have a material adverse impact on the Fund’s portfolio and could disadvantage investors in certain circumstances.

 

Trade Execution Risk

 

The Trading Advisor may use executing brokers unaffiliated with BofA Corp. In the event of a trading error, the Fund may have no effective remedy against these executing brokers.

 

Changes in Trading Program

 

The Trading Advisor may make material changes to the Trading Program without the knowledge of MLAI.  It is virtually impossible for MLAI to detect these changes, particularly given the confidential, proprietary, systematic and/or quantitative nature of the Trading Program strategies, customarily referred to as “black box strategies.”

 

Illiquid Markets

 

Certain positions held by the Fund may become illiquid, preventing the Trading Advisor from acquiring positions otherwise indicated by the Trading Program or making it impossible for the Trading Advisor to close out positions against which the market is moving.

 

Most U.S. futures exchanges limit fluctuations in some futures contract prices during a single day by regulations referred to as “daily price limits.”  During a single trading day no trades may be executed in these contracts at prices beyond the daily price limit.  Once the price of a futures contract has increased or decreased to the limit point, positions can be neither taken nor liquidated.  Futures prices have occasionally moved to the daily limit for several consecutive days with little or no trading.  Similar occurrences could prevent the Fund from promptly liquidating unfavorable positions and subject the Fund to substantial losses.  Also, the CFTC or exchanges may suspend or limit trading.  Trading on non-U.S. exchanges may also be subject to price fluctuation limits and subject to periods of significant illiquidity.  Trading in the F/X Markets and other OTC markets is not subject to daily limits, although OTC trading is also subject to periods of significant illiquidity.

 

Possible Effects of Speculative Position Limits

 

The CFTC and U.S. commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options on futures contracts traded on U.S. commodities exchanges.  All proprietary or client accounts owned or managed by the Trading Advisor are combined for purposes of calculating position limits.  The Trading Advisor could be required to liquidate positions held for the Fund, or may not be able to fully implement the Trading Program, in order to comply with such limits, even though the positions attributable to the Fund do not themselves trigger the position limits or are a small portion of the aggregate positions directed by the Trading Advisor.  Position limits could force the Fund to liquidate profitable positions, result in a tracking error between the Fund’s portfolio and the Trading Advisor’s standard trading program and cause the Fund to incur substantial transaction costs.

 

In October 2011, the CFTC adopted rules that, among other things, established a separate position limits regime for 28 so-called “exempt,” i.e., metals and energy, and agricultural futures and options contracts and their economically equivalent swap contracts.  Position limits in spot months were generally set at 25% of the official estimated deliverable supply of the underlying commodity while position limits related to non-spot months were generally set at 10% of open interest in the first 25,000 contracts and 2.5% of the open interest thereafter.  Those proposed speculative position limits were vacated by a United States District Court, but the CFTC has proposed a new set of speculative position limits which are not yet finalized.  If the current proposal is approved, the size or duration of positions available to the Fund may be further limited.

 

15



 

In addition, Dodd-Frank significantly expands the CFTC’s authority to impose position limits with respect to futures contracts, options on futures contracts, swaps that are economically equivalent to futures or options on futures, swaps that are traded on a regulated exchange and certain swaps that perform a significant price discovery function.

 

The Sponsor is subject to CFTC-imposed position limits through its control of the Fund, and will have to aggregate positions of certain FuturesAccess Funds in determining whether the position limits are reached.  The CFTC’s current position limit proposal would, if implemented in substance, in addition to expanding the contracts subject to CFTC-imposed position limits, narrow certain exemptions from the aggregation requirements, making it more likely that a party such as the Sponsor hiring multiple trading advisors may be required to aggregate the positions controlled by the various trading advisors. Although the Sponsor may claim an exemption from the aggregation requirements for the majority of FuturesAccess Funds, the aggregation of positions of certain FuturesAccess Funds may be required.  If aggregation is required in the Fund’s case, the Trading Advisor may not be able to implement the Trading Program for the Fund in the same manner as for its other clients, causing the Fund to underperform other accounts utilizing the Trading Program, or the Fund may have to liquidate trading positions when the Trading Advisor would otherwise not advise doing so, resulting in losses to the Fund.

 

Any of the regulations discussed above could adversely affect the Fund in certain circumstances.

 

Trading on Non-U.S. Exchanges

 

The Trading Advisor may trade on futures exchanges outside the United States on behalf of the Fund.  Trading on non-U.S. exchanges is not regulated by any U.S. government agency and may involve certain risks not applicable to trading on U.S. exchanges.

 

For example, some non-U.S. exchanges, in contrast to U.S. exchanges, are “principals’ markets” similar to the forward markets in which performance is the responsibility only of the individual member with whom the Fund has entered into a futures contract and not of any exchange or clearinghouse.  In these cases, the Fund will be subject to the risk of the inability or refusal to perform with respect to the individual member with whom the Fund has entered into a futures contract.

 

Trading on non-U.S. exchanges may involve the additional risks of expropriation, burdensome or confiscatory taxation (including taxes on specific trading activities), moratoriums, exchange or investment controls and political or diplomatic disruptions, each of which might materially adversely affect the Fund’s trading activities.  The Fund could incur substantial losses trading on non-U.S. exchanges to which it would not have been subject had the Trading Advisor limited its trading to U.S. markets.

 

The U.S. tax treatment of non-U.S. futures trading may be adverse compared to the tax treatment of U.S. futures trading.  The profits and losses derived from trading non-U.S. futures and options will generally be denominated in non-U.S. currencies.  Consequently, the Fund will be subject to exchange-rate risk in trading those contracts.

 

Foreign Exchange Controls

 

Governments in non-U.S. markets may impose F/X controls at will, making it impossible to convert local currency into other currencies.  Should the Fund trade on futures exchanges outside the United States or otherwise invest in non-U.S. markets, these controls may effectively prevent Fund capital from being removed from a country where its futures contracts and other investments are traded.  In addition, certain countries do not have fully convertible currencies as a matter of policy, adding cost or delay to the trading of currency investments by the Fund.  The imposition of currency controls by a non-U.S. government may negatively affect performance and liquidity in the Fund as capital becomes trapped in that country.

 

Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges

 

The Fund is exposed to the risk that the bankruptcy or insolvency of its trading counterparties and other entities holding Fund assets — such as broker-dealers, FCMs, futures exchanges, clearinghouses, banks or other financial institutions, particularly MLPF&S, MLI and their affiliates — could result in all or a substantial portion of the Fund’s assets being lost permanently or impounded for a matter of years pending the final disposition of legal proceedings.  A bankruptcy or insolvency of this kind, or the threat of one, may cause MLAI to decide to liquidate the Fund or suspend, limit or otherwise alter trading, perhaps causing the Fund to miss significant profit opportunities.

 

16



 

MLAI has historically preferred BofA Corp. affiliates in clearing and prime brokerage relationships, and as a result has maintained the vast majority of its cash in futures brokerage accounts with its affiliates.  This policy exposes the Fund to the specific credit risk of these BofA Corp. affiliates because balances in these accounts are not subject to FDIC or other form of deposit insurance against loss from failure of the BofA Corp. affiliate.  Balances maintained with clearing brokers are, however, subject to the protections for customer segregated, cleared swaps customer accounts and secured accounts discussed below.

 

MLAI’s policy that the Trading Advisor use MLPF&S and MLI may increase the risks of insolvency described above by preventing the diversification of brokers and counterparties used by the Fund.

 

MLAI may have limited control over the selection of counterparties by the Fund.  The Fund also may not be restricted from dealing with any particular counterparty, regulated or unregulated, or from concentrating any or all of its transactions with a single counterparty or limited number of counterparties or from initially transacting, clearing or brokering with a non- BofA Corp. broker and from “giving up” those trades to MLPF&S or MLI.  In addition, to the extent assets are held at entities other than MLPF&S and MLI, the Sponsor may have limited ability to assess the extent to which the Trading Advisor maintains the Fund’s assets in unregulated accounts subject to the bankruptcy of the counterparties holding such assets.

 

The following paragraphs discuss the various uses of the Fund’s assets and the risks of loss — in addition to losses from trading — associated with each use.

 

Margin for Commodities Trading.  Although MLAI believes that MLPF&S is appropriately capitalized to function as the Fund’s FCM, cash posted as margin for commodities trading with MLPF&S is nevertheless subject to the risk of insolvency of MLPF&S.  The Fund maintains cash deposits with MLPF&S in segregated accounts, which are required by CFTC regulations to be separate from its proprietary assets for futures and options trading on U.S. exchanges.  Funds held in segregated accounts are intended to be readily identifiable as customer funds in the event of MLPF&S’s bankruptcy and are expected to be reserved for distribution to customers of MLPF&S.  If MLPF&S did not comply with the segregation requirement, however, the assets of the Fund might not be fully protected.  Even given proper segregation, the Fund may be subject to a risk of loss of its funds because, although CFTC regulations require that FCMs invest customer funds only in certain types of interest bearing financial instruments, these instruments are still subject to credit and market risk.  As a result, if the instruments in which customer segregated funds are invested lose value, there would be a shortfall in customer segregated funds held by MLPF&S in the event of MLPF&S’s insolvency.

 

In addition, there may be a shortfall in customer segregated funds held by MLPF&S in the event of a substantial default by one or more of MLPF&S’s other customers.  If MLPF&S becomes insolvent, only a pro rata share of all property available for distribution to all of MLPF&S’s customers would be recovered, whether or not another customer also defaults and even if this property is held in segregated accounts.

 

In addition, if BofA Corp. directly or indirectly owns 10% or more of the Fund, which would typically result from BofA Corp. providing seed capital to the Fund to help ensure that the Fund has enough capital to commence trading activities, the Fund’s account at MLPF&S would be considered a “proprietary account” under CFTC regulations and the Fund’s assets, including assets used to margin U.S. exchange-traded futures and options, would not be protected as “customer funds.”  If MLPF&S became insolvent at a time when the Fund’s assets on deposit with MLPF&S were not considered customer funds, the Fund would likely lose significantly more as a result of the bankruptcy than would otherwise be the case.  Where BofA Corp. provides seed capital it also establishes a regular redemption schedule providing for withdrawal of the capital when the Fund capitalization reaches a certain level.  Once BofA Corp.’s ownership of a FuturesAccess Fund falls below 10%, the account of the FuturesAccess Fund will be considered a customer account rather than a proprietary account.

 

MLPF&S is required by CFTC regulations to maintain in a secured account the amount required to margin futures and options positions established on non-U.S. futures exchanges in order to protect customer funds in the event of MLPF&S’s bankruptcy.  While the secured account requirement relating to trading non-U.S. futures exchanges is similar in some respects to the segregation requirement relating to trading on U.S. futures exchanges, they are not identical and there are special risks associated with funds maintained in a secured account.  Funds held in a secured account may be commingled with funds of non-U.S. persons and, because they are by necessity held in a non-U.S. jurisdiction, are subject to different insolvency laws and customer protection regulations, which may be less favorable than U.S. laws and regulations.  Moreover, funds transferred from a secured account to a non-U.S. FCM, exchange or clearing agency to margin trading on non-U.S. futures exchanges are not subject to the same limitations on permissible investments as funds held by U.S. FCMs.  In addition to these special risks, funds held in a secured account are subject to risks comparable to those applicable to funds in a

 

17



 

segregated account, namely that MLPF&S will not comply with the relevant regulations, that investments in the account will decline in value, of a shortfall in the event of the default by another customer, and that, if, BofA Corp. owns 10% or more of the Fund, the Fund’s assets will not be protected as “customer funds.”

 

If the Fund deposits assets with a particular entity and those assets are not held in segregation or in a secured account as “customer funds” for any of the reasons discussed above, in the event of the entity’s insolvency the Fund could be a general creditor of the entity even with regard to property specifically traceable to the Fund’s account.  As a result, the Fund’s claim would be paid along with the claims of other general creditors and the Fund would be subject to the loss of its entire deposit with the party.

 

To the extent the Fund enters into cleared swap transactions, the Fund will deposit collateral with MLPF&S in cleared swaps customer accounts, which are required by CFTC regulations to be separate from its proprietary collateral posted for cleared swaps transactions.  Cleared swap customer collateral is subject to regulations that closely parallel the regulations governing customer segregated funds but provide certain additional protections to cleared swaps collateral in the event of an FCM or FCM customer default.  For example, in the event of a default of both the FCM and a customer of the FCM, a clearing house is only permitted to access the cleared swaps collateral in the legally separate (but operationally commingled) account of the defaulting cleared swap customer of the FCM, as opposed to the treatment of customer segregated funds, under which the clearing house may access all of the commingled customer segregated funds of a defaulting FCM.

 

Collateral for OTC Transactions. Cash pledged as collateral with MLI or any other OTC prime broker for uncleared OTC trades is subject to the risk of the insolvency of the prime broker.  Unlike cash posted as margin for commodities trading on regulated exchanges, cash margin for OTC trades is not required to be segregated or held in a secured account.  With respect to cleared OTC trades, the Fund will not face a clearinghouse directly, but rather will do so through MLI or any other OTC prime broker that is registered with the CFTC and that acts as a clearing member.  The Fund may face the indirect risk of the failure of another clearing member customer to meet its obligations to its clearing member.  Such scenario could arise due to a default by the clearing member on its obligations to the clearinghouse triggered by a customer’s failure to meet its obligations to the clearing member.

 

Bank Deposits.  The vast majority of the cash deposited with banks would be in excess of the limits on federal insurance for deposits, and thus not insured by the FDIC, and would be subject to the risk of bank failure. Only up to $250,000 held in the interest bearing demand deposit accounts is insured under the FDIC’s general deposit insurance rules.

 

Cash in Securities Brokerage Accounts.  Cash in securities brokerage accounts with MLPF&S is subject to the risk of insolvency of MLPF&S.  While brokers are required to keep customer cash in a special reserve account for the benefit of customers, it is possible that a shortfall could exist in this account, in which case the Fund, along with other customers, would suffer losses.  The Securities Investor Protection Corporation provides protection against these losses, up to a limit, but the cash deposited by the Fund in a securities brokerage account would far exceed the limit.

 

Direct Investments.  Fund investments in U.S. government securities are backed by the full faith and credit of the U.S. government.  To the extent the Fund makes investments in non-government securities it would be subject to a risk of loss that depended on the type of security.

 

Historical events underscore the risks described above.  Significant losses incurred by many investment funds in relation to the bankruptcy and/or administration of Lehman Brothers Holdings Inc. and its affiliates illustrate the risks incurred in both derivatives trading and custody/brokerage arrangements.  The bankruptcy liquidation of MF Global Inc. also demonstrates that even customer funds subject to segregation requirements may be difficult for an FCM to locate, and customer funds held by an FCM in bankruptcy may not be distributed promptly and may be subject to a lengthy claims process.

 

18



 

Insolvency of Dual-Registered Entities

 

MLPF&S is registered as both an FCM with the CFTC and as a broker-dealer with the SEC.  Other counterparties and entities holding Fund assets may also be entities registered with both the CFTC and the SEC. In the event of an insolvency of a dual-registered entity, the distribution of CFTC regulated customer funds would be governed by the CFTC’s bankruptcy rules and Chapter 7 of the U.S. Bankruptcy Code, while the distribution of SEC regulated customer funds would be governed by the Securities Investor Protection Act of 1970 and applicable provisions of the U.S. Bankruptcy Code.  Uncertainty exists regarding the application of the two separate insolvency regimes to the insolvency of a single entity.

 

Risk of Loss Due to Trading Errors and the Failure of Trading Systems

 

The Fund is subject to the risk of failures or inaccuracies in the trading systems of the Trading Advisor.  Trades for the Fund may be placed or executed in error due to technical errors such as coding or programming errors in software, hardware problems and inaccurate pricing information provided by third parties or execution errors such as keystroke, typographic or inadvertent drafting errors.  Many exchanges have adopted “obvious error” rules that prevent the entry and execution of trades more than a specified amount away from the current best price on the exchange.  However, these rules may not be in place on the exchanges on which the Trading Advisor trades on behalf of the Fund and may not be enforced even if in effect.  These rules likely would not prevent the entry and execution of a trade entered close to the market price but at the wrong size.

 

The Fund is subject to the risk of the unavailability or failure of the computer systems of the exchanges on which the Trading Advisor trades.  Any such errors or failures could subject the Fund to substantial losses.

 

Government Intervention; Market Disruptions

 

The global financial markets have in the past several years experienced pervasive and fundamental disruptions that have led to extensive and unprecedented governmental intervention.  Government intervention has in certain cases been implemented on an “emergency” basis, suddenly and substantially eliminating market participants’ ability, at least on a temporary basis, to continue to implement certain strategies or manage the risk of their outstanding positions.  In addition, as one would expect given the complexities of the financial markets and the limited time frame within which governments have taken action, these interventions typically have been difficult to interpret and unclear in scope and application, resulting in confusion and uncertainty.  This confusion and uncertainty in itself has been materially detrimental to the efficient functioning of the markets as well as previously successful investment strategies.

 

The Fund may incur substantial losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted, the availability of credit is restricted or the ability to trade or invest capital, including exiting existing positions, is otherwise impaired.  The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving.  The financing available to private investment funds such as the Fund from banks, dealers and other counterparties is typically reduced in disrupted markets.  Any reduction may result in substantial losses to the Fund.  Market disruptions may from time to time cause dramatic losses for the Fund and these events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.

 

Regulatory Changes Could Restrict the Fund’s Operations

 

The Fund implements speculative, highly leveraged strategies.  From time to time there is governmental scrutiny of these types of strategies and political pressure to regulate their activities.  The CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading.  The regulation of futures, swaps, forward and options transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action.  In addition, as described in further detail above under “Possible Effects of Speculative Position Limits,” the U.S. Congress and the CFTC have expressed the concern that speculative traders, and commodity funds in particular, may be responsible for unwarranted and dramatic swings in the prices of commodities and the CFTC enacted position limits designed to address such speculative trading.  Non-U.S. governments have from time to time blamed the declines of their currencies on speculative currency trading and imposed restrictions on speculative trading in certain markets.

 

19



 

Regulatory changes could adversely affect the Fund by restricting the markets in which it trades, otherwise limiting its trading and/or increasing the taxes to which investors are subject.  Adverse regulatory initiatives could develop suddenly and without notice.

 

Dodd-Frank includes provisions that substantially increase the regulation of the OTC derivatives markets.  Regulations implementing Dodd-Frank will ultimately require that a substantial portion of derivatives currently traded over the counter be executed in regulated markets and/or be submitted for clearing to regulated clearinghouses.  Those OTC derivatives may include OTC F/X forwards and swaps which may be traded by the Fund.

 

Although the U.S. Treasury has the discretion to exclude F/X forwards and swaps from certain of the new regulatory requirements, it has done so to date only in limited circumstances.  Forwards and swaps that are not so excluded may be required by Dodd-Frank to be centrally cleared or traded on a regulated market.  Dodd-Frank may also require other OTC derivatives traded by the Fund, if any, to be centrally cleared or traded on a regulated market.  This may subject the Fund, the Trading Advisor, MLAI and/or the Fund’s counterparties to additional regulatory requirements.  Certain of these regulatory requirements could affect the Fund, the Trading Advisor or MLAI directly, while others could impact the Fund, the Trading Advisor or the MLAI indirectly due to the impact of the requirements on the Fund’s counterparties.  For example, OTC derivative dealers are now required to be registered with the CFTC (and ultimately will be required to register with the SEC) and are subject to new minimum capital and margin requirements, business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest and other regulatory burdens.  These new regulatory burdens have and will continue to increase the counterparties’ costs, which are generally passed through to other market participants such as the Fund in the form of higher fees, including clearing account maintenance fees, and less favorable dealer marks.  They may also render certain strategies in which the Trading Advisor might otherwise engage impossible, or so costly that they will no longer be economical, to implement.

 

The CFTC also now requires certain derivative transactions that were previously executed on a bi-lateral basis in the OTC markets to be executed through a regulated futures or swap exchange or execution facility. These requirements may make it more difficult and costly for investment funds, including the Fund, to enter into highly tailored or customized transactions.  They may also render certain strategies in which the Fund might otherwise engage impossible or so costly that they will no longer be economical to implement. If the Fund decides to execute derivatives transactions through these exchanges or execution facilities—and especially if it decides to become a direct member of one or more of these exchanges or execution facilities—the Fund would be subject to the rules of the exchange or execution facility, which would bring additional risks and liabilities, and potential requirements under applicable regulations and under rules of the relevant exchange or execution facility.  Even if the Fund indirectly participates in an exchange or execution facility, the Fund and/or the Trading Advisor may be required to consent to the exchange’s or execution facility’s jurisdiction and to the relevant rulebook, which could subject it to a wide range of regulations and other obligations, together with associated costs.  Like any other self-regulatory organization, exchanges and execution facilities regularly revise and interpret their rules, and such revisions and interpretations could adversely affect the Fund.

 

Although Dodd-Frank requires certain OTC derivative transactions previously entered into on a principal-to-principal basis to be submitted for clearing by a regulated clearinghouse, some of the derivatives that may be traded by the Fund may not be centrally cleared.  The risk of counterparty non-performance can be significant in the case of these OTC instruments, and bid-ask spreads may be unusually wide in these heretofore substantially unregulated markets.  While Dodd-Frank is intended in part to reduce these risks, its success in this respect may not be evident for some time after Dodd-Frank is fully implemented, a process that may take several years.  In addition, while Dodd-Frank’s requirement that certain swaps be traded on a regulated market is intended to improve transparency in the market for these swaps, and may for more liquid swaps decrease trading costs, it may actually increase trading costs for less liquid swaps.

 

While Dodd-Frank is intended to bring more stability and lower counterparty risk to derivatives markets by requiring central clearing of certain standardized derivatives trades, not all of the Fund’s trades will be subject to a clearing requirement because the trades are grandfathered or because they are bespoke, or because they are within a class that is not currently subject to mandatory clearing.  Furthermore, it is yet to be seen whether Dodd-Frank will be effective in reducing counterparty risk or if such risk may actually increase as a result of market uncertainty, mutuality of loss to clearinghouse members, or other reasons.

 

The overall impact of Dodd-Frank on the Fund remains highly uncertain and it is unclear how the OTC derivatives markets will adapt to this new regulatory regime, along with additional, sometimes overlapping, regulatory requirements imposed by non-U.S. regulators.

 

20



 

The “Volcker Rule” component of the Dodd-Frank materially restricts proprietary speculative trading by banks, “bank holding companies” and other regulated entities.  As a result, there has been a significant influx of new portfolio managers into private investment funds who had previously traded institutional proprietary accounts.  Such influx can only increase the competition for the Fund from other talented portfolio managers trading in the Fund’s investment sector.

 

On August 16, 2012, the European Market Infrastructure Regulation became effective (“EMIR”).  EMIR introduces certain requirements in respect of derivative contracts, which applies primarily to “financial counterparties” (“FCs”) such as European Union (“E.U.”) authorized investment firms, credit institutions, insurance companies, funds regulated under the E.U. Undertakings for Collective Investment in Transferable Securities Directives, referred to as “UCITS,” and alternative investment funds managed by E.U. authorized alternative investment fund managers, and “non-financial counterparties” (“NFCs”), which are entities established in the E.U. that are not financial counterparties.  NFCs whose transactions in OTC derivative contracts exceed EMIR’s prescribed clearing threshold (“NFC+s”) are generally subject to more stringent requirements under EMIR than NFCs whose transactions in OTC derivative contracts do not exceed such clearing threshold, including because such contracts are excluded from the threshold calculation on the basis that they are concluded in order to reduce risks directly relating to the NFC’s commercial activity or treasury financing activity (“NFC-s”).

 

Broadly, EMIR’s requirements in respect of derivative contracts are (i) mandatory clearing of OTC derivative contracts declared subject to the clearing obligation; (ii) risk mitigation techniques in respect of uncleared OTC derivative contracts; and (iii) reporting and record-keeping requirements in respect of all derivative contracts.

 

As FCs and NFCs are required to comply with EMIR’s risk mitigation obligations regardless of the identity of their counterparties, non-E.U. counterparties such as the Fund are likely to become indirectly subject to such requirements when they transact with E.U. counterparties, which will require compliance by their non-E.U. counterparties in order to satisfy their own obligations under EMIR.  E.U. FCs or NFC+s which transact with a non-E.U. counterparty that would be classed as an FC or an NFC+ if it had been established in the E.U. will also be required to ensure that certain specified OTC derivative contracts are cleared through a duly authorized central counterparty.  No class of OTC derivative contracts has as yet been declared subject to mandatory clearing in the E.U., although draft legislation covering various classes has been proposed.

 

The E.U. regulatory framework and legal regime relating to derivatives is set not only by EMIR but also by a new Directive and Regulation containing a package of reforms to the existing Markets in Financial Instruments Directive (Directive 2004/39/EC), collectively referred to as “MiFID II”.  MiFID II was published on June 12, 2014 in the Official Journal of the European Union but the majority of MiFID II’s provisions will only become effective on January 3, 2017.  In particular, MiFID II is expected to require transactions between FCs and NFC+s in sufficiently liquid OTC derivatives to be executed on a trading venue which meets the requirements of the MiFID II regime.  This trading obligation will also extend to FCs and NFC+s which trade with third country counterparties that would be classed as FCs or NFC+s if they were established in the E.U.

 

It is difficult to predict the full impact of these regulatory developments on the Fund. Prospective investors should be aware that the regulatory changes arising from EMIR and MiFID II may in due course significantly raise the costs of entering into derivative contracts and may adversely affect the Fund’s ability to engage in transactions in derivatives.

 

Banking Regulation

 

BofA Corp. is subject to certain U.S. banking laws, including the Bank Holding Company Act of 1956 (the “BHCA”), and to regulation by the Board of Governors of the Federal Reserve System.  If BofA Corp. directly, or indirectly through its subsidiaries, makes capital contributions to the Fund in an aggregate amount such that BofA Corp. may be deemed to control the Fund for purposes of the BHCA, or if BofA Corp. is otherwise deemed to control the Fund for purposes of the BHCA, the Fund may be subject to certain investment and other limitations.

 

Concerns Regarding the Downgrade of the U.S. Credit Rating and the Sovereign Debt Crisis in Europe

 

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+.  This downgrade or future downgrades by Standard & Poor’s or other credit rating agencies could have material adverse effects on financial markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on the investments made by the Fund and thereby the Fund’s financial condition and liquidity.  The ultimate impact on global markets and the Fund’s business is unpredictable.

 

Global markets and economic conditions have been negatively affected by the ability of E.U. member states to service their sovereign debt obligations.  The continued uncertainty over the outcome of the E.U.’s financial support programs and financial troubles could have an adverse effect on the Fund.

 

21



 

Item 1B: Unresolved Staff Comments

 

Not applicable.

 

Item 2:        Properties

 

The Fund does not use any physical properties in the conduct of its business.

 

The Fund’s offices are the administrative offices of MLAI (Merrill Lynch Alternative Investments LLC, 250 Vesey Street, 11th Floor, New York, New York 10281).  MLAI performs administrative services for the Fund from MLAI’s offices.

 

Item 3:        Legal Proceedings

 

None.

 

Item 4:        Mine Safety Disclosures

 

Not applicable

 

PART II

 

Item 5:        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)                                 Market Information:

 

There is no established public trading market for the Units. Investors in the Fund generally may redeem any or all of their Units at Net Asset Value, in whole or fractional Units, effective as of (i) the 15th calendar day of each month and/or (ii) the last calendar day of each month (each a “Redemption Date”), upon submitting a redemption request by the “Subscription/Redemption Notice Date,” which is eight business days prior to the 1st and 16th of every month.  MLAI may eliminate investors’ mid-month redemption right at any time.  The Net Asset Value of redeemed Units is determined as of the Redemption Date.  Investors will remain exposed to fluctuations in Net Asset Value during the period between submission of their redemption request and the applicable Redemption Date.

 

(b)                              Holders:

 

As of December 31, 2015, there were 392 holders of Units, with one Unit holder who owned 10.04% of the   Fund’s Units.

 

(c)                                   Dividends:

 

MLAI has not made and does not contemplate making any distributions on the Units.

 

(d)                                 Securities Authorized for Issuance Under Equity Compensation Plans:

 

Not applicable.

 

(e)                                  Performance Graph:

 

Not applicable.

 

22



 

(f)                                   Recent Sales of Unregistered Securities:

 

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 is MLPF&S.

 

The Fund’s sales of unregistered securities are as follows for each Class of Units:

CLASS A

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

 

 

$

1.3175

 

1/16/2015

 

 

 

1.3294

 

2/01/2015

 

 

 

1.3685

 

2/16/2015

 

 

 

1.3099

 

3/01/2015

 

 

 

1.3479

 

3/16/2015

 

 

 

1.3777

 

4/01/2015

 

24,688

 

17,957

 

1.3748

 

4/16/2015

 

15,600

 

11,060

 

1.4105

 

5/01/2015

 

 

 

1.3255

 

5/16/2015

 

 

 

1.2792

 

6/01/2015

 

 

 

1.2774

 

6/16/2015

 

 

 

1.2270

 

7/01/2015

 

 

 

1.1700

 

7/16/2015

 

 

 

1.2333

 

8/01/2015

 

 

 

1.2847

 

8/16/2015

 

 

 

1.2678

 

9/01/2015

 

 

 

1.1755

 

9/16/2015

 

74,100

 

61,058

 

1.2020

 

10/01/2015

 

 

 

1.2422

 

10/16/2015

 

9,900

 

8,136

 

1.2004

 

11/01/2015

 

 

 

1.2048

 

11/16/2015

 

 

 

1.2582

 

12/01/2015

 

 

 

1.3107

 

12/16/2015

 

 

 

1.2414

 

01/01/2016

 

 

 

1.2314

 

01/16/2016

 

 

 

1.3038

 

02/01/2016

 

 

 

 

1.2873

 

 

CLASS C

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

65,000

 

54,903

 

$

1.1839

 

1/16/2015

 

 

 

1.1941

 

2/01/2015

 

 

 

1.2286

 

2/16/2015

 

10,000

 

8,507

 

1.1755

 

3/01/2015

 

 

 

1.2091

 

3/16/2015

 

25,000

 

20,238

 

1.2353

 

4/01/2015

 

117,000

 

94,944

 

1.2323

 

4/16/2015

 

 

 

1.2637

 

5/01/2015

 

8,000

 

6,739

 

1.1871

 

5/16/2015

 

33,000

 

28,818

 

1.1451

 

6/01/2015

 

5,000

 

4,374

 

1.1431

 

6/16/2015

 

31,000

 

28,247

 

1.0975

 

7/01/2015

 

 

 

1.0461

 

7/16/2015

 

 

 

1.1022

 

8/01/2015

 

10,000

 

8,636

 

1.1476

 

8/16/2015

 

20,000

 

17,508

 

1.1321

 

9/01/2015

 

 

 

1.0492

 

9/16/2015

 

 

 

1.0724

 

10/01/2015

 

10,000

 

8,945

 

1.1077

 

10/16/2015

 

 

 

1.0712

 

11/01/2015

 

10,000

 

9,189

 

1.0745

 

11/16/2015

 

 

 

1.1216

 

12/01/2015

 

 

 

1.1680

 

12/16/2015

 

 

 

1.1049

 

01/01/2016

 

 

 

1.0954

 

01/16/2016

 

 

 

1.1599

 

02/01/2016

 

 

 

1.1448

 

 

23



 

CLASS D

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

 

 

$

1.1293

 

1/16/2015

 

 

 

1.1402

 

2/01/2015

 

1,000,000

 

851,499

 

1.1744

 

2/16/2015

 

 

 

1.1248

 

3/01/2015

 

 

 

1.1582

 

3/16/2015

 

 

 

1.1845

 

4/01/2015

 

 

 

1.1828

 

4/16/2015

 

200,000

 

164,704

 

1.2143

 

5/01/2015

 

100

 

87

 

1.1418

 

5/16/2015

 

 

 

1.1026

 

6/01/2015

 

 

 

1.1018

 

6/16/2015

 

 

 

1.0590

 

7/01/2015

 

 

 

1.0104

 

7/16/2015

 

 

 

1.0657

 

8/01/2015

 

 

 

1.1108

 

8/16/2015

 

 

 

1.0969

 

9/01/2015

 

 

 

1.0177

 

9/16/2015

 

 

 

1.0413

 

10/01/2015

 

 

 

1.0767

 

10/16/2015

 

 

 

1.0417

 

11/01/2015

 

 

 

1.0462

 

11/16/2015

 

 

 

1.0932

 

12/01/2015

 

 

 

1.1397

 

12/16/2015

 

 

 

1.0794

 

01/01/2016

 

 

 

1.0714

 

01/16/2016

 

 

 

1.1356

 

02/01/2016

 

 

 

1.1221

 

 

CLASS I

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

 

 

$

1.3360

 

1/16/2015

 

 

 

1.3483

 

2/01/2015

 

5,000

 

3,602

 

1.3880

 

2/16/2015

 

 

 

1.3289

 

3/01/2015

 

 

 

1.3677

 

3/16/2015

 

 

 

1.3981

 

4/01/2015

 

 

 

1.3954

 

4/16/2015

 

 

 

1.4319

 

5/01/2015

 

 

 

1.3459

 

5/16/2015

 

 

 

1.2990

 

6/01/2015

 

 

 

1.2974

 

6/16/2015

 

 

 

1.2465

 

7/01/2015

 

 

 

1.1888

 

7/16/2015

 

 

 

1.2533

 

8/01/2015

 

 

 

1.2983

 

8/16/2015

 

 

 

1.2814

 

9/01/2015

 

 

 

1.1878

 

9/16/2015

 

 

 

1.2150

 

10/01/2015

 

 

 

1.2559

 

10/16/2015

 

 

 

1.2201

 

11/01/2015

 

 

 

1.2248

 

11/16/2015

 

 

 

1.2792

 

12/01/2015

 

59,000

 

43,678

 

1.3331

 

12/16/2015

 

 

 

1.2642

 

01/01/2016

 

 

 

1.2544

 

01/16/2016

 

 

 

1.3288

 

02/01/2016

 

 

 

1.3124

 

 

CLASS DS

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

 

 

$

1.7301

 

1/16/2015

 

55,676

 

31,873

 

1.7468

 

2/01/2015

 

 

 

1.7992

 

2/16/2015

 

568,542

 

329,934

 

1.7232

 

3/01/2015

 

 

 

1.7744

 

3/16/2015

 

 

 

1.8147

 

4/01/2015

 

 

 

1.8121

 

4/16/2015

 

 

 

1.8603

 

5/01/2015

 

 

 

 

5/16/2015

 

 

 

 

6/01/2015

 

 

 

 

6/16/2015

 

 

 

 

7/01/2015

 

 

 

 

7/16/2015

 

 

 

 

8/01/2015

 

 

 

 

8/16/2015

 

 

 

 

9/01/2015

 

 

 

 

9/16/2015

 

 

 

 

10/01/2015

 

 

 

 

10/16/2015

 

 

 

 

11/01/2015

 

 

 

 

11/16/2015

 

 

 

 

12/01/2015

 

 

 

 

12/16/2015

 

 

 

 

01/01/2016

 

 

 

 

01/16/2016

 

 

 

 

02/01/2016

 

 

 

 

 

CLASS DT

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

 

 

$

1.8881

 

1/16/2015

 

 

 

1.9067

 

2/01/2015

 

 

 

1.9642

 

2/16/2015

 

 

 

1.8817

 

3/01/2015

 

 

 

1.9379

 

3/16/2015

 

 

 

1.9822

 

4/01/2015

 

 

 

1.9797

 

4/16/2015

 

 

 

2.0327

 

5/01/2015

 

 

 

1.9117

 

5/16/2015

 

 

 

1.8465

 

6/01/2015

 

58,863

 

31,897

 

1.8454

 

6/16/2015

 

 

 

1.7741

 

7/01/2015

 

15,684

 

9,173

 

1.6931

 

7/16/2015

 

 

 

1.7862

 

8/01/2015

 

 

 

1.8613

 

8/16/2015

 

 

 

1.8385

 

9/01/2015

 

2,772,043

 

1,608,380

 

1.7061

 

9/16/2015

 

 

 

1.7498

 

10/01/2015

 

 

 

1.8082

 

10/16/2015

 

 

 

1.7563

 

11/01/2015

 

 

 

1.7635

 

11/16/2015

 

 

 

1.8427

 

12/01/2015

 

 

 

1.9196

 

12/16/2015

 

 

 

1.8202

 

01/01/2016

 

 

 

 

01/16/2016

 

 

 

 

02/01/2016

 

 

 

 

 

24



 

CLASS M

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

1/01/2015

 

$

800,000

 

713,140

 

$

1.1218

 

1/16/2015

 

 

 

1.1327

 

2/01/2015

 

50,000

 

42,860

 

1.1666

 

2/16/2015

 

15,000

 

13,424

 

1.1174

 

3/01/2015

 

 

 

1.1506

 

3/16/2015

 

 

 

1.1767

 

4/01/2015

 

550,000

 

468,085

 

1.1750

 

4/16/2015

 

 

 

1.2063

 

5/01/2015

 

 

 

1.1343

 

5/16/2015

 

 

 

1.0953

 

6/01/2015

 

 

 

1.0945

 

6/16/2015

 

 

 

1.0520

 

7/01/2015

 

 

 

1.0037

 

7/16/2015

 

 

 

1.0587

 

8/01/2015

 

601,620

 

540,393

 

1.1035

 

8/16/2015

 

 

 

1.0905

 

9/01/2015

 

 

 

1.0118

 

9/16/2015

 

 

 

1.0352

 

10/01/2015

 

 

 

1.0703

 

10/16/2015

 

 

 

1.0340

 

11/01/2015

 

 

 

1.0384

 

11/16/2015

 

 

 

1.0850

 

12/01/2015

 

51,000

 

44,510

 

1.1312

 

12/16/2015

 

 

 

1.0723

 

01/01/2016

 

23,188

 

21,495

 

1.0643

 

01/16/2016

 

 

 

1.1079

 

02/01/2016

 

 

 

1.0945

 

 


(1) Beginning of the period Net Asset Value

 

Class A Units are subject to upfront sales commissions paid to MLPF&S ranging from 1.0% to 2.5% of  an investor’s gross subscription amount. Class D Units and Class I Units are subject to upfront sales commissions paid to MLPF&S up to 2.5% of an investor’s gross subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units, Class DS Units, Class DT Units and Class M Units are not subject to upfront sales commissions.

 

Item 5(b)

 

Not applicable.

 

Item 5(c)

 

Not applicable.

 

25



 

Item 6:   Selected Financial Data

 

The following selected financial data has been derived from the financial statements of the Fund.

 

Statements of Operations

 

For the year

 ended

 December 31,

 2015

 

For the year

 ended

 December 31,

 2014

 

For the year

 ended

 December 31,

 2013

 

For the year

 ended

 December 31,

 2012

 

For the year ended

 December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading profit (loss), net:

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

7,098,919

 

$

14,422,892

 

$

(257,587

)

$

11,822,071

 

$

(19,290,462

)

Change in unrealized, net

 

(6,146,258

)

1,648,149

 

2,100,635

 

(5,010,392

)

(1,469,413

)

Brokerage commissions

 

(389,706

)

(573,907

)

(802,619

)

(1,122,005

)

(1,084,608

)

Total trading profit (loss), net

 

562,955

 

15,497,134

 

1,040,429

 

5,689,674

 

(21,844,483

)

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

(358

)

(3,448

)

(3,284

)

7,111

 

(17,755

)

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Management fee to Trading Advisor

 

509,652

 

740,724

 

2,284,350

 

3,502,971

 

4,663,195

 

Management fee to MLAI

 

196,861

 

337,685

 

 

 

 

Performance fee

 

147,227

 

1,252,535

 

 

158,705

 

 

Sponsor fee

 

363,598

 

370,594

 

520,856

 

630,871

 

673,816

 

Other

 

828,767

 

451,448

 

545,922

 

656,058

 

644,087

 

Total expenses

 

2,046,105

 

3,152,986

 

3,351,128

 

4,948,605

 

5,981,098

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(2,046,463

)

(3,156,434

)

(3,354,412

)

(4,941,494

)

(5,998,853

)

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(1,483,508

)

$

12,340,700

 

$

(2,313,983

)

$

748,180

 

$

(27,843,336

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data

 

December 31,

 2015

 

December 31,

 2014

 

December 31,

 2013

 

December 31,

 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Members’ Capital

 

$

25,371,716

 

$

72,985,063

 

$

86,331,490

 

$

149,052,432

 

$

221,046,309

 

Net Asset Value per Series A Unit

 

1.2314

 

1.3175

 

1.1143

 

1.1397

 

1.1801

 

Net Asset Value per Series C Unit

 

1.0954

 

1.1839

 

1.0114

 

1.0448

 

1.0927

 

Net Asset Value per Series D Unit

 

1.0714

 

1.1293

 

0.9409

 

0.9480

 

0.9670

 

Net Asset Value per Series I Unit

 

1.2544

 

1.3360

 

1.1254

 

1.1465

 

1.1823

 

Net Asset Value per Series DS Unit**

 

 

1.7301

 

1.4415

 

1.4524

 

1.4814

 

Net Asset Value per Series DT Unit***

 

 

1.8881

 

1.5651

 

1.5612

 

1.5771

 

Net Asset Value per Series M Unit*

 

1.0643

 

1.1218

 

0.9347

 

0.9418

 

 

 


*Units issued on October 1, 2012

**Units fully redeemed as of April 30, 2015.

***Units fully redeemed as of December 31, 2015.

 

26



 

MLAI believes that the Net Asset Value used to calculate subscription and redemption value and to report performance to investors is a useful performance measure for the investors of the Fund.  Therefore, the charts below are referencing Net Asset Value at each Calculation Date.

 

 NET ASSET VALUE PER UNIT CLASS A

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.3232

 

n/a

 

$

1.3463

 

n/a

 

$

1.3119

 

n/a

 

$

1.3439

 

n/a

 

$

1.2687

 

n/a

 

$

1.2231

 

2012

 

n/a

 

$

1.1928

 

n/a

 

$

1.2228

 

n/a

 

$

1.2093

 

n/a

 

$

1.2132

 

n/a

 

$

1.3267

 

n/a

 

$

1.2378

 

2013

 

$

1.1068

 

$

1.1304

 

$

1.1540

 

$

1.1061

 

$

1.1249

 

$

1.1372

 

$

1.1522

 

$

1.1807

 

$

1.1463

 

$

1.1056

 

$

1.0849

 

$

1.0939

 

2014

 

$

1.0685

 

$

1.0659

 

$

1.0489

 

$

1.0787

 

$

1.0540

 

$

1.0818

 

$

1.0862

 

$

1.1002

 

$

1.1069

 

$

1.1329

 

$

1.1560

 

$

1.1463

 

2015

 

$

1.3294

 

$

1.3685

 

$

1.3099

 

$

1.3479

 

$

1.3777

 

$

1.3748

 

$

1.4105

 

$

1.3255

 

$

1.2792

 

$

1.2774

 

$

1.2270

 

$

1.1700

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.2528

 

n/a

 

$

1.2058

 

n/a

 

$

1.1726

 

n/a

 

$

1.1419

 

n/a

 

$

1.1567

 

n/a

 

$

1.1801

 

2012

 

n/a

 

$

1.3023

 

n/a

 

$

1.2757

 

n/a

 

$

1.2148

 

$

1.1940

 

$

1.1486

 

$

1.1491

 

$

1.1386

 

$

1.1335

 

$

1.1397

 

2013

 

$

1.1159

 

$

1.1029

 

$

1.1017

 

$

1.0598

 

$

1.0907

 

$

1.0513

 

$

1.0494

 

$

1.0656

 

$

1.0628

 

$

1.0781

 

$

1.0553

 

$

1.1143

 

2014

 

$

1.1457

 

$

1.1314

 

$

1.1518

 

$

1.1879

 

$

1.1955

 

$

1.2517

 

$

1.2292

 

$

1.2085

 

$

1.2467

 

$

1.2854

 

$

1.2570

 

$

1.3175

 

2015

 

$

1.2333

 

$

1.2847

 

$

1.2678

 

$

1.1755

 

$

1.2020

 

$

1.2422

 

$

1.2004

 

$

1.2048

 

$

1.2582

 

$

1.3107

 

$

1.2414

 

$

1.2314

 

 

 NET ASSET VALUE PER UNIT CLASS C

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.2365

 

n/a

 

$

1.2571

 

n/a

 

$

1.2239

 

n/a

 

$

1.2527

 

n/a

 

$

1.1816

 

n/a

 

$

1.1382

 

2012

 

n/a

 

$

1.1035

 

n/a

 

$

1.1304

 

n/a

 

$

1.1169

 

n/a

 

$

1.1196

 

n/a

 

$

1.2234

 

n/a

 

$

1.1404

 

2013

 

$

1.0142

 

$

1.0354

 

$

1.0566

 

$

1.0123

 

$

1.0291

 

$

1.0399

 

$

1.0532

 

$

1.0787

 

$

1.0469

 

$

1.0094

 

$

0.9900

 

$

0.9978

 

2014

 

$

0.9694

 

$

0.9666

 

$

0.9508

 

$

0.9774

 

$

0.9546

 

$

0.9794

 

$

0.9830

 

$

0.9952

 

$

1.0008

 

$

1.0239

 

$

1.0444

 

$

1.0352

 

2015

 

$

1.1941

 

$

1.2286

 

$

1.1755

 

$

1.2091

 

$

1.2353

 

$

1.2323

 

$

1.2637

 

$

1.1871

 

$

1.1451

 

$

1.1431

 

$

1.0975

 

$

1.0461

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.1649

 

n/a

 

$

1.1202

 

n/a

 

$

1.0885

 

n/a

 

$

1.0591

 

n/a

 

$

1.0719

 

n/a

 

$

1.0927

 

2012

 

n/a

 

$

1.1988

 

n/a

 

$

1.1734

 

n/a

 

$

1.1164

 

$

1.0968

 

$

1.0547

 

$

1.0547

 

$

1.0446

 

$

1.0396

 

$

1.0448

 

2013

 

$

1.0174

 

$

1.0052

 

$

1.0037

 

$

0.9651

 

$

0.9928

 

$

0.9565

 

$

0.9545

 

$

0.9688

 

$

0.9658

 

$

0.9793

 

$

0.9582

 

$

1.0114

 

2014

 

$

1.0342

 

$

1.0209

 

$

1.0389

 

$

1.0709

 

$

1.0774

 

$

1.1276

 

$

1.1068

 

$

1.0877

 

$

1.1217

 

$

1.1559

 

$

1.1299

 

$

1.1839

 

2015

 

$

1.1022

 

$

1.1476

 

$

1.1321

 

$

1.0492

 

$

1.0724

 

$

1.1077

 

$

1.0712

 

$

1.0745

 

$

1.1216

 

$

1.1680

 

$

1.1049

 

$

1.0954

 

 

 NET ASSET VALUE PER UNIT CLASS D

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.0694

 

n/a

 

$

1.0895

 

n/a

 

$

1.0630

 

n/a

 

$

1.0903

 

n/a

 

$

1.0305

 

n/a

 

$

0.9947

 

2012

 

n/a

 

$

0.9786

 

n/a

 

$

1.0045

 

n/a

 

$

0.9946

 

n/a

 

$

0.9991

 

n/a

 

$

1.0940

 

n/a

 

$

1.0219

 

2013

 

$

0.9212

 

$

0.9415

 

$

0.9617

 

$

0.9224

 

$

0.9386

 

$

0.9495

 

$

0.9626

 

$

0.9870

 

$

0.9588

 

$

0.9254

 

$

0.9087

 

$

0.9168

 

2014

 

$

0.9028

 

$

0.9012

 

$

0.8873

 

$

0.9131

 

$

0.8928

 

$

0.9169

 

$

0.9212

 

$

0.9337

 

$

0.9398

 

$

0.9625

 

$

0.9828

 

$

0.9751

 

2015

 

$

1.1402

 

$

1.1744

 

$

1.1248

 

$

1.1582

 

$

1.1845

 

$

1.1828

 

$

1.2143

 

$

1.1418

 

$

1.1026

 

$

1.1018

 

$

1.0590

 

$

1.0104

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.0202

 

n/a

 

$

0.9831

 

n/a

 

$

0.9573

 

n/a

 

$

0.9334

 

n/a

 

$

0.9466

 

n/a

 

$

0.9670

 

2012

 

n/a

 

$

1.0765

 

n/a

 

$

1.0558

 

n/a

 

$

1.0067

 

$

0.9900

 

$

0.9530

 

$

0.9540

 

$

0.9459

 

$

0.9423

 

$

0.9480

 

2013

 

$

0.9357

 

$

0.9254

 

$

0.9251

 

$

0.8904

 

$

0.9169

 

$

0.8843

 

$

0.8833

 

$

0.8975

 

$

0.8957

 

$

0.9092

 

$

0.8905

 

$

0.9409

 

2014

 

$

0.9753

 

$

0.9637

 

$

0.9817

 

$

1.0130

 

$

1.0202

 

$

1.0689

 

$

1.0503

 

$

1.0333

 

$

1.0666

 

$

1.1003

 

$

1.0767

 

$

1.1293

 

2015

 

$

1.0657

 

$

1.1108

 

$

1.0969

 

$

1.0177

 

$

1.0413

 

$

1.0767

 

$

1.0417

 

$

1.0462

 

$

1.0932

 

$

1.1397

 

$

1.0794

 

$

1.0714

 

 

 NET ASSET VALUE PER UNIT CLASS I

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.3208

 

n/a

 

$

1.3444

 

n/a

 

$

1.3105

 

n/a

 

$

1.3428

 

n/a

 

$

1.2681

 

n/a

 

$

1.2229

 

2012

 

n/a

 

$

1.1954

 

n/a

 

$

1.2260

 

n/a

 

$

1.2128

 

n/a

 

$

1.2171

 

n/a

 

$

1.3315

 

n/a

 

$

1.2426

 

2013

 

$

1.1135

 

$

1.1375

 

$

1.1614

 

$

1.1134

 

$

1.1325

 

$

1.1451

 

$

1.1604

 

$

1.1893

 

$

1.1548

 

$

1.1141

 

$

1.0934

 

$

1.1026

 

2014

 

$

1.0793

 

$

1.0769

 

$

1.0599

 

$

1.0902

 

$

1.0654

 

$

1.0937

 

$

1.0983

 

$

1.1127

 

$

1.1195

 

$

1.1460

 

$

1.1696

 

$

1.1600

 

2015

 

$

1.3483

 

$

1.3880

 

$

1.3289

 

$

1.3677

 

$

1.3981

 

$

1.3954

 

$

1.4319

 

$

1.3459

 

$

1.2990

 

$

1.2974

 

$

1.2465

 

$

1.1888

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.2531

 

n/a

 

$

1.2064

 

n/a

 

$

1.1737

 

n/a

 

$

1.1433

 

n/a

 

$

1.1585

 

n/a

 

$

1.1823

 

2012

 

n/a

 

$

1.3078

 

n/a

 

$

1.2815

 

n/a

 

$

1.2208

 

$

1.2000

 

$

1.1546

 

$

1.1553

 

$

1.1449

 

$

1.1400

 

$

1.1465

 

2013

 

$

1.1249

 

$

1.1120

 

$

1.1110

 

$

1.0690

 

$

1.1003

 

$

1.0607

 

$

1.0590

 

$

1.0755

 

$

1.0729

 

$

1.0884

 

$

1.0656

 

$

1.1254

 

2014

 

$

1.1596

 

$

1.1454

 

$

1.1662

 

$

1.2029

 

$

1.2108

 

$

1.2680

 

$

1.2454

 

$

1.2246

 

$

1.2635

 

$

1.3029

 

$

1.2743

 

$

1.3360

 

2015

 

$

1.2533

 

$

1.2983

 

$

1.2814

 

$

1.1878

 

$

1.2150

 

$

1.2559

 

$

1.2201

 

$

1.2248

 

$

1.2792

 

$

1.3331

 

$

1.2642

 

$

1.2544

 

 

 NET ASSET VALUE PER UNIT CLASS DS

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.6383

 

n/a

 

$

1.6690

 

n/a

 

$

1.6285

 

n/a

 

$

1.6702

 

n/a

 

$

1.5787

 

n/a

 

$

1.5239

 

2012

 

n/a

 

$

1.4992

 

n/a

 

$

1.5389

 

n/a

 

$

1.5238

 

n/a

 

$

1.5306

 

n/a

 

$

1.6759

 

n/a

 

$

1.5655

 

2013

 

$

1.4113

 

$

1.4423

 

$

1.4733

 

$

1.4131

 

$

1.4380

 

$

1.4547

 

$

1.4748

 

$

1.5121

 

$

1.4690

 

$

1.4178

 

$

1.3921

 

$

1.4045

 

2014

 

$

1.3831

 

$

1.3806

 

$

1.3594

 

$

1.3989

 

$

1.3677

 

$

1.4047

 

$

1.4113

 

$

1.4304

 

$

1.4399

 

$

1.4746

 

$

1.5057

 

$

1.4939

 

2015

 

$

1.7468

 

$

1.7992

 

$

1.7232

 

$

1.7744

 

$

1.8147

 

$

1.8121

 

$

1.8603

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.5629

 

n/a

 

$

1.5061

 

n/a

 

$

1.4665

 

n/a

 

$

1.4299

 

n/a

 

$

1.4502

 

n/a

 

$

1.4814

 

2012

 

n/a

 

$

1.6492

 

n/a

 

$

1.6175

 

n/a

 

$

1.5423

 

$

1.5167

 

$

1.4600

 

$

1.4616

 

$

1.4491

 

$

1.4435

 

$

1.4524

 

2013

 

$

1.4336

 

$

1.4178

 

$

1.4172

 

$

1.3641

 

$

1.4048

 

$

1.3548

 

$

1.3533

 

$

1.3750

 

$

1.3723

 

$

1.3928

 

$

1.3643

 

$

1.4415

 

2014

 

$

1.4941

 

$

1.4765

 

$

1.5040

 

$

1.5520

 

$

1.5630

 

$

1.6375

 

$

1.6091

 

$

1.5830

 

$

1.6341

 

$

1.6857

 

$

1.6495

 

$

1.7301

 

2015

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 NET ASSET VALUE PER UNIT CLASS DT

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2011

 

n/a

 

$

1.7290

 

n/a

 

$

1.7625

 

n/a

 

$

1.7211

 

n/a

 

$

1.7663

 

n/a

 

$

1.6710

 

n/a

 

$

1.6143

 

2012

 

n/a

 

$

1.5974

 

n/a

 

$

1.6411

 

n/a

 

$

1.6263

 

n/a

 

$

1.6350

 

n/a

 

$

1.7913

 

n/a

 

$

1.6747

 

2013

 

$

1.5176

 

$

1.5517

 

$

1.5857

 

$

1.5215

 

$

1.5489

 

$

1.5675

 

$

1.5899

 

$

1.6308

 

$

1.5849

 

$

1.5304

 

$

1.5033

 

$

1.5173

 

2014

 

$

1.5022

 

$

1.5002

 

$

1.4775

 

$

1.5207

 

$

1.4871

 

$

1.5276

 

$

1.5351

 

$

1.5562

 

$

1.5669

 

$

1.6051

 

$

1.6392

 

$

1.6267

 

2015

 

$

1.9067

 

$

1.9642

 

$

1.8817

 

$

1.9379

 

$

1.9822

 

$

1.9797

 

$

2.0327

 

$

1.9117

 

$

1.8465

 

$

1.8454

 

$

1.7741

 

$

1.6931

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2011

 

n/a

 

$

1.6570

 

n/a

 

$

1.5981

 

n/a

 

$

1.5574

 

n/a

 

$

1.5198

 

n/a

 

$

1.5426

 

n/a

 

$

1.5771

 

2012

 

n/a

 

$

1.7653

 

n/a

 

$

1.7329

 

n/a

 

$

1.6536

 

$

1.6269

 

$

1.5667

 

$

1.5691

 

$

1.5563

 

$

1.5510

 

$

1.5612

 

2013

 

$

1.5493

 

$

1.5329

 

$

1.5329

 

$

1.4761

 

$

1.5207

 

$

1.4673

 

$

1.4662

 

$

1.4904

 

$

1.4881

 

$

1.5110

 

$

1.4806

 

$

1.5651

 

2014

 

$

1.6273

 

$

1.6084

 

$

1.6387

 

$

1.6914

 

$

1.7037

 

$

1.7852

 

$

1.7546

 

$

1.7265

 

$

1.7825

 

$

1.8392

 

$

1.7999

 

$

1.8881

 

2015

 

$

1.7862

 

$

1.8613

 

$

1.8385

 

$

1.7061

 

$

1.7498

 

$

1.8082

 

$

1.7563

 

$

1.7635

 

$

1.8427

 

$

1.9196

 

$

1.8202

 

n/a

 

 

 NET ASSET VALUE PER UNIT CLASS M

 

 

 

Jan. 15th

 

Jan. 

 

Feb. 15th

 

Feb.

 

Mar. 15th

 

Mar.

 

Apr. 15th

 

Apr.

 

May 15th

 

May

 

Jun. 15th

 

Jun.

 

2012

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

2013

 

$

0.9151

 

$

0.9353

 

$

0.9553

 

$

0.9163

 

$

0.9324

 

$

0.9432

 

$

0.9563

 

$

0.9805

 

$

0.9525

 

$

0.9193

 

$

0.9027

 

$

0.9107

 

2014

 

$

0.8968

 

$

0.8952

 

$

0.8815

 

$

0.9071

 

$

0.8869

 

$

0.9108

 

$

0.9151

 

$

0.9275

 

$

0.9336

 

$

0.9562

 

$

0.9763

 

$

0.9687

 

2015

 

$

1.1327

 

$

1.1666

 

$

1.1174

 

$

1.1506

 

$

1.1767

 

$

1.1750

 

$

1.2063

 

$

1.1343

 

$

1.0953

 

$

1.0945

 

$

1.0520

 

$

1.0037

 

 

 

 

Jul. 15th

 

Jul.

 

Aug. 15th

 

Aug.

 

Sep. 15th

 

Sep.

 

Oct. 15th

 

Oct.

 

Nov. 15th

 

Nov.

 

Dec. 15th

 

Dec.

 

2012

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

$

1.0000

 

$

0.9834

 

$

0.9467

 

$

0.9477

 

$

0.9396

 

$

0.9360

 

$

0.9418

 

2013

 

$

0.9296

 

$

0.9193

 

$

0.9189

 

$

0.8845

 

$

0.9109

 

$

0.8785

 

$

0.8775

 

$

0.8916

 

$

0.8898

 

$

0.9032

 

$

0.8846

 

$

0.9347

 

2014

 

$

0.9688

 

$

0.9574

 

$

0.9752

 

$

1.0064

 

$

1.0135

 

$

1.0618

 

$

1.0434

 

$

1.0264

 

$

1.0596

 

$

1.0931

 

$

1.0696

 

$

1.1218

 

2015

 

$

1.0587

 

$

1.1035

 

$

1.0905

 

$

1.0118

 

$

1.0352

 

$

1.0703

 

$

1.0340

 

$

1.0384

 

$

1.0850

 

$

1.1312

 

$

1.0723

 

$

1.0643

 

 

27



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS A UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: September 1, 2007

Aggregate Subscriptions: $17,864,118

Current Capitalization:   $5,535,180

Worst Monthly Drawdown (2):  (8.49) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (24.30) % (March 2009 — December 2014)

 

Net Asset Value per Unit for Class A, December 31, 2015:   $1.2314

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

3.87

%

(4.34

)%

(0.82

)%

1.08

%

(0.48

)%

February

 

(1.51

)

1.20

 

(2.15

)

2.52

 

1.75

 

March

 

2.00

 

0.29

 

2.81

 

(1.10

)

(2.56

)

April

 

(3.59

)

1.70

 

3.83

 

0.32

 

2.44

 

May

 

(3.63

)

2.97

 

(6.36

)

9.36

 

(5.60

)

June

 

(8.40

)

1.18

 

(1.06

)

(6.70

)

(3.59

)

July

 

9.80

 

(1.30

)

0.82

 

5.21

 

2.43

 

August

 

(8.49

)

4.99

 

(3.91

)

(2.04

)

(3.75

)

September

 

5.67

 

5.37

 

(0.80

)

(4.77

)

(2.75

)

October

 

(3.01

)

(3.45

)

1.36

 

(5.45

)

(2.62

)

November

 

8.79

 

6.36

 

1.17

 

(0.87

)

1.30

 

December

 

(6.05

)

2.50

 

3.36

 

0.10

 

2.02

 

Compound Annual Rate of Return

 

(6.54

)%

18.24

%

(2.23

)%

(3.42

)%

(11.25

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since September 1, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since September 1, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 23.14 %.

 

28



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS C UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: July 1, 2007

Aggregate Subscriptions:    $40,994,512

Current Capitalization:   $9,193,249

Worst Monthly Drawdown (2):  (8.57) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (27.69) % (March 2009 —December 2014)

 

Net Asset Value per Unit for Class C, December 31, 2015:   $ 1.0954

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

3.78

%

(4.43

)%

(0.90

)%

0.99

%

(0.57

)%

February

 

(1.59

)

1.12

 

(2.23

)

2.44

 

1.67

 

March

 

1.92

 

0.20

 

2.73

 

(1.19

)

(2.64

)

April

 

(3.67

)

1.61

 

3.73

 

0.24

 

2.35

 

May

 

(3.71

)

2.88

 

(6.42

)

9.27

 

(5.68

)

June

 

(8.49

)

1.10

 

(1.15

)

(6.78

)

(3.67

)

July

 

9.70

 

(1.38

)

0.74

 

5.12

 

2.35

 

August

 

(8.57

)

4.90

 

(3.99

)

(2.12

)

(3.84

)

September

 

5.57

 

5.29

 

(0.89

)

(4.85

)

(2.83

)

October

 

(2.99

)

(3.54

)

1.29

 

(5.53

)

(2.70

)

November

 

8.70

 

6.27

 

1.08

 

(0.96

)

1.21

 

December

 

(6.22

)

2.42

 

3.28

 

0.02

 

1.94

 

Compound Annual Rate of Return

 

(7.46

)%

17.06

%

(3.20

)%

(4.38

)%

(12.13

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since July 1, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since July 1, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 9.54 %.

 

29



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS D UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: November 1, 2007

Aggregate Subscriptions:    $12,884,186

Current Capitalization:   $2,911,354

Worst Monthly Drawdown (2):  (8.38) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (21.20) % (March 2009 - May 2012)

 

Net Asset Value per Unit for Class D, December 31, 2015:   $ 1.0714

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

3.99

%

(4.22

)%

(0.69

)%

1.20

%

(0.36

)%

February

 

(1.38

)

1.32

 

(2.03

)

2.65

 

1.88

 

March

 

2.12

 

0.42

 

2.94

 

(0.99

)

(2.43

)

April

 

(3.47

)

1.83

 

3.95

 

0.45

 

2.57

 

May

 

(3.50

)

3.08

 

(6.24

)

9.50

 

(5.48

)

June

 

(8.29

)

1.31

 

(0.93

)

(6.59

)

(3.47

)

July

 

9.93

 

(1.17

)

0.94

 

5.34

 

2.56

 

August

 

(8.38

)

5.12

 

(3.78

)

(1.92

)

(3.64

)

September

 

5.79

 

5.52

 

(0.69

)

(4.65

)

(2.62

)

October

 

(2.83

)

(3.33

)

1.49

 

(5.33

)

(2.50

)

November

 

8.94

 

6.48

 

1.30

 

(0.75

)

1.41

 

December

 

(5.99

)

2.64

 

3.49

 

0.22

 

2.16

 

Compound Annual Rate of Return

 

(5.13

)%

20.02

%

(.75

)%

(1.96

)%

(9.91

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since November 1, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since November 1, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 7.14 %.

 

30



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS I UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: October 1, 2007

Aggregate Subscriptions:  $5,247,444

Current Capitalization:   $740,512

Worst Monthly Drawdown (2):  (8.51) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (22.92) % (March 2009 — January 2015)

 

Net Asset Value per Unit for Class I, December 31, 2015:   $1.2544

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

3.89

%

(4.31

)%

(0.78

)%

1.11

%

(0.45

)%

February

 

(1.46

)

1.24

 

(2.12

)

2.56

 

1.79

 

March

 

2.03

 

0.32

 

2.85

 

(1.08

)

(2.52

)

April

 

(3.55

)

1.74

 

3.86

 

0.35

 

2.46

 

May

 

(3.60

)

2.99

 

(6.32

)

9.40

 

(5.56

)

June

 

(8.37

)

1.22

 

(1.03

)

(6.68

)

(3.56

)

July

 

9.21

 

(1.26

)

0.85

 

5.25

 

2.47

 

August

 

(8.51

)

5.02

 

(3.87

)

(2.01

)

(3.73

)

September

 

5.73

 

5.41

 

(0.78

)

(4.74

)

(2.71

)

October

 

(2.48

)

(3.42

)

1.40

 

(5.42

)

(2.59

)

November

 

8.85

 

6.39

 

1.20

 

(0.84

)

1.33

 

December

 

(5.90

)

2.54

 

3.40

 

0.14

 

2.05

 

Compound Annual Rate of Return

 

(6.11

)%

18.71

%

(1.84

)%

(3.03

)%

(10.89

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since October 1, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since October 1, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 25.44 %.

 

31



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS DS UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: April 2, 2007

Aggregate Subscriptions:   $200,812,088

Current Capitalization:   $0

Worst Monthly Drawdown (2):  (6.81) % (December 2009)

Worst Peak-to-Valley Drawdown (3):  (21.03) % (March 2009 — May 2012)

 

Net Asset Value per Unit for Class DS, December 31, 2015:   $0.0000

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

3.99

%

(4.22

)%

(0.70

)%

1.20

%

(0.36

)%

February

 

(1.38

)

1.33

 

(2.02

)

2.65

 

1.87

 

March

 

2.12

 

0.41

 

2.94

 

(0.98

)

(2.43

)

April

 

(3.47

)

1.83

 

3.95

 

0.45

 

2.56

 

May

 

 

3.09

 

(6.24

)

9.49

 

(5.48

)

June

 

 

1.31

 

(0.94

)

(6.59

)

(3.47

)

July

 

 

(1.16

)

0.95

 

5.34

 

2.56

 

August

 

 

5.11

 

(3.79

)

(1.92

)

(3.63

)

September

 

 

5.51

 

(0.68

)

(4.65

)

(2.63

)

October

 

 

(3.33

)

1.49

 

(5.34

)

(2.50

)

November

 

 

6.49

 

1.29

 

(0.75

)

1.42

 

December

 

 

2.63

 

3.50

 

0.23

 

2.15

 

Compound Annual Rate of Return

 

1.12

%

20.02

%

(.75

)%

(1.96

)%

(9.91

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 2, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 2, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 74.93 %.

 

32



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS DT UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected”(1)

Inception of Trading: June 1, 2007

Aggregate Subscriptions:    $125,228,538

Current Capitalization:   $0

Worst Monthly Drawdown (2):  (8.34) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (20.29) % (March 2009 - December 2010)

 

Net Asset Value per Unit for Class DT, December 31, 2015:  $0.0000

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

2011

 

January

 

4.03

%

(4.15

)%

(0.61

)%

1.29

%

(0.28

)%

February

 

(1.34

)

1.37

 

(1.95

)

2.74

 

1.94

 

March

 

2.16

 

0.45

 

3.02

 

(0.90

)

(2.35

)

April

 

(3.43

)

1.87

 

4.04

 

0.53

 

2.63

 

May

 

(3.47

)

3.14

 

(6.16

)

9.56

 

(5.40

)

June

 

(8.25

)

1.35

 

(0.86

)

(6.51

)

(3.39

)

July

 

9.94

 

(1.12

)

1.03

 

5.41

 

2.65

 

August

 

(8.34

)

5.16

 

(3.71

)

(1.84

)

(3.55

)

September

 

5.99

 

5.55

 

(0.60

)

(4.57

)

(2.55

)

October

 

(2.48

)

(3.29

)

1.57

 

(5.26

)

(2.41

)

November

 

8.86

 

6.53

 

1.38

 

(0.66

)

1.50

 

December

 

(4.97

)

2.66

 

3.58

 

0.31

 

2.24

 

Compound Annual Rate of Return

 

(3.38

)%

20.64

%

0.25

%

(1.01

)%

(9.04

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since June 1, 2007 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since June 1, 2007 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 82.42 %.

 

33



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

(CLASS M UNITS) (5)

December 31, 2015

 

Type of Pool:  Single Advisor Non-“Principal Protected” (1)

Inception of Trading: October 1, 2012

Aggregate Subscriptions:  $8,353,841

Current Capitalization:   $6,991,421

Worst Monthly Drawdown (2):  (8.31) % (August 2015)

Worst Peak-to-Valley Drawdown (3):  (14.57) % (April 2015 — December 2015)

 

Net Asset Value per Unit for Class M, December 31, 2015:   $ 1.0643

 

Monthly Rates of Return (4)

 

Month

 

2015

 

2014

 

2013

 

2012

 

January

 

3.99

%

(4.23

)%

(0.69

)%

 

February

 

(1.37

)

1.33

 

(2.03

)

 

March

 

2.12

 

0.41

 

2.94

 

 

April

 

(3.46

)

1.83

 

3.95

 

 

May

 

(3.51

)

3.09

 

(6.24

)

 

June

 

(8.29

)

1.31

 

(0.94

)

 

July

 

9.93

 

(1.17

)

0.94

 

 

August

 

(8.31

)

5.12

 

(3.79

)

 

September

 

5.79

 

5.50

 

(0.68

)

 

October

 

(2.98

)

(3.33

)

1.49

 

(5.40

)

November

 

8.94

 

6.50

 

1.30

 

(0.75

)

December

 

(5.92

)

2.63

 

3.49

 

0.23

 

Compound Annual Rate of Return

 

(5.12

)%

20.02

%

(0.75

)%

(5.89

)%

 


(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment.  The CFTC refers to such funds as “principal protected”. The Fund has no such feature.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since October 1, 2012 by the Fund; a drawdown is measured on the basis of period-end Net Asset Value only, and does not reflect intra-month figures.

 

(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since October 1, 2012 from a period-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent period-end.  For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.

 

(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total capital of the Fund as of the beginning of such month.

 

(5) The information presented is based on Net Asset Value and Net Asset Value per Unit. The inception to date total return is 6.43%.

 

34



 

Item 7:            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Critical Accounting Policies

 

The Fund’s critical accounting policies are as follows:

 

·                  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. Actual results could differ from those estimates and such differences could be material.

·                  The fair value of a financial instrument 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.

·                  The fair value amounts of, and the net profits and losses on, derivative instruments is disclosed in the Statements of Financial Condition and Statements of Operations, respectively.

·                  Realized profits (losses) and changes in unrealized profits (losses) on open positions are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Operations.

 

Results of Operations

 

General

 

The Trading Program trades the following instruments on U.S. and non-U.S. exchanges and markets: futures, options, options on futures, swaps, swaps on futures, and forward contracts on F/X, interest rates, interest rate instruments, commodities, equity-related indices and instruments, and other indices.

 

Performance Summary

 

This performance summary is an outline description of how the Fund performed in the past, not necessarily any indication of how it will perform in the future.  In addition, the general causes to which certain price movements are attributed may or may not have caused such movements, but simply occurred at or about the same time.

 

 

 

Total Trading

 

Year ended December 31, 2015

 

Profit (Loss)

 

Stock Indices

 

$

1,221,002

 

Metals

 

887,121

 

Agricultural Commodities

 

(1,516,436

)

Currencies

 

(2,859,725

)

Energy

 

4,554,793

 

Interest Rates

 

(1,334,094

)

Subtotal

 

952,661

 

Brokerage Commissions

 

(389,706

)

Total

 

$

562,955

 

 

The Fund experienced a net trading profit of $952,661 before brokerage commissions and related fees for the year ended December 31, 2015. The Fund’s profits were primarily attributable to the energy, stock indices and metal sectors. The interest rates, agriculture and currency sectors posted losses.

 

The energy sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter from the Fund’s short positions in this sector. Throughout January, one of the largest “trend risk” concentrations of the Fund was “short commodities”, with “short energy” being its largest contributor. Despite a rally in oil markets at the end of January, the Fund scored well in this position, profiting from oil and oil products as well as from gas, electricity and coal. Losses were posted to the Fund in the middle of the first quarter due to the Fund’s short positions in energy markets. Profits were posted to the Fund at the end of the first quarter. The concerns over the Chinese growth were dominating, reflected by declining commodity markets. The Fund profited from these declines, mostly with its short positions in crude oil. Losses were posted to the Fund at the beginning of the second quarter. In April, energy shorts brought the largest losses. Shorts in U.S.

 

35



 

natural gas contributed to the energy losses due to a strong price rise in reaction to the release of inventory numbers. Losses were posted to the Fund in the middle of the second quarter. In the energy markets, the Fund had diverging positions: a large concentration of shorts in gas and electricity markets, while slowly building up longs in crude oil & distillates. Also, the rising U.S. gas price was not accompanied by rising oil prices. The Fund responded on the further rise by closing out most of its losing shorts. Losses posted to the Fund at the end of the second quarter came from the Fund’s short positions on gas resulting in losses in the U.S. as well as in Europe. Profits were posted to the Fund at the beginning of the third quarter due to the Fund’s short positions in oil markets. A significant part of these profits came from trading synthetics, including hybrids. Losses were posted to the Fund in the middle of the third quarter. The Fund lost the profits made on oil shorts earlier in August. Profits were posted to the Fund at the end of the third quarter due to the Fund’s short positions in various energy markets. Due to a steady decline throughout September of the European gas, coal and power markets, shorts in these markets added to the profits on short positions in other energy products. Profits were posted to the Fund at the beginning of the fourth quarter. Due to an upward price reaction on U.S. energy stock reports published in the last week of October, these positions did not conclude the month with profits. However, some of the largest profits in October did come from energy short positions. As the natural gas markets sank lower, the Trading Program’s short positions in these markets performed very well. Profits were posted to the Fund in the middle of the fourth quarter due to the Trading Program’s short positions. Profits were posted to the Fund at the end of the fourth quarter. OPEC raised its production ceiling, causing the oil price to continue its downtrend. As a result, the Fund profited from its short positions.

 

The stock indices sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Profits were posted to the Fund in the middle of the first quarter due to the Fund’s long positions in European equity markets. Profits were posted to the Fund at the end of the first quarter. Throughout March the Fund’s largest extreme risk concentration was ‘long equity markets’. The majority of these equity longs were located in QE-economies: the Eurozone and Japan. These equities did well. The European equities also formed the backbone of one of the Fund’s largest trend concentrations: ‘long ECB QE’. Long positions in the Xinhua China A50 ultimately became the most profitable equity long. Profits were posted to the Fund at the beginning of the second quarter. In April, the largest profits came from long positions in Asian equity markets. Profits were posted to the Fund in the middle of the second quarter from the Fund’s long equity positions in the Japanese-trend (long equity and short yen). Losses were posted to the Fund at the end of the second quarter. Greece not coming to an agreement with the ECB and the IMF in the last weekend of June resulted in an almost global risk-off move, hurting the Fund primarily in its long equity Japanese QE-positions and its longs in North American equity markets. Profits were posted to the Fund at the beginning of the third quarter due to the Fund’s long and short positions in the U.S. equity markets. The Fund had long positions in U.S. equities concentrated around sectors that demonstrated to be less sensitive to China and/or commodities. These positions were profitable. Losses were posted to the Fund in the middle of the third quarter. The largest losses came from long positions in U.S., European and Japanese equity markets. In September the stock markets generally came down, resulting in losses for the Fund. Losses were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning through the middle of the fourth quarter resulting from the Trading Program’s long equity positions. Losses were posted to the Fund at the end of the fourth quarter.

 

The metals sector posted profits to the Fund.  Losses were posted to the Fund at the beginning of the first quarter due to the Fund’s short positions in silver. Losses were posted to the Fund in the middle of the first quarter due to the Fund’s liquidated short positions in copper. Losses were posted to the Fund at the end of the first quarter due to the Fund’s short positions in silver. Losses were posted to the Fund at the beginning of the second quarter. Losses were posted to the Fund in the middle of the second quarter. Short precious metals were one of the Fund’s largest commodity short positions. Meanwhile, the Fund had built up long positions in base metals such as copper. When the silver market rallied, the base metals did not join. And when silver started to retreat somewhat after its rise, the base metals started to decline. Due to the resulting losses on shorts in silver and gold, and on longs in copper and zinc, the metal markets were the worst performing cluster in May. Profits were posted to the Fund at the end of the second quarter due to the Fund’s short positions in metal markets. Profits were posted to the Fund at the beginning of the third quarter due to the Fund’s short positions in metals. Losses were posted to the Fund in the middle of the third quarter. The largest losses came from short positions in gold. In August, declines in global stock markets were accompanied by rising (once again ‘safe haven’) gold prices, resulting in losses on the Fund’s short positions. Losses were posted to the Fund at the end of the third quarter due to the Fund’s short positions in gold and silver. Losses were posted to the Fund at the beginning of the fourth quarter due to the Trading Program’s short positions in metals. Profits were posted to the Fund in the middle of the fourth quarter from the Trading Program’s short positions in precious metals. Losses were posted to the Fund at the end of the fourth quarter.

 

The interest rate sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the Fund’s long positions in ECB-QE positions (short Euro and long European bond and equity markets), but also from long positions in bond markets elsewhere. The Fund shifted its “long bonds” positions from Europe to North America. Losses were posted to the Fund in the middle of the first quarter due to the Fund’s long positions in U.S. bond markets. Profits were posted to the Fund at the end of the first quarter due to the Fund’s long Eurozone bond positions as well

 

36



 

as longs in continental European interest rate instruments. Also, the interest rate instruments in both U.S. and U.K. economies started to rise again. The Fund was able to profit from this movement by re-building long positions in these markets. Losses were posted to the Fund at the beginning of the second quarter due to the Fund’s long positions in U.S. interest rate markets. Losses were posted to the Fund in the middle of the second quarter as the largest losses came from long positions in bond markets. Losses were posted to the Fund at the end of the second quarter due to the Fund’s long position in Eurozone equity markets. Losses were posted to the Fund at the beginning of the third quarter due to the Fund’s short positions in bonds. Losses were posted to the Fund in the middle of the third quarter as the largest losses came from long positions in European bond markets. Profits were posted to the Fund at the end of the third quarter due to the Fund’s long positions in global interest rate instruments. In the U.S., the decision of the Federal Open Market Committee to not raise the interest rate contributed to further rising U.S. bond markets, also affecting bond markets outside of the U.S., adding to profits on the long positions in these markets. Profits were posted to the Fund at the beginning of the fourth quarter. The Federal Open Market Committee decision in September not to raise the interest rate put downward pressure on the U.S. dollar. This was a factor that contributed to the U.S. bond markets continuing their rise. A similar development took place in Europe, where the market anticipated that the European Central Bank would continue its quantitative easing policy. Here, the Trading Program added to its long bond positions. Profits were posted to the Fund in the middle of the fourth quarter. The Trading Program profited from trading European interest rate instruments long versus short positions in the U.S. and Australia. Meanwhile the losing interest rate long positions in Korea and a large part of the losing long positions in the U.S. were liquidated. In Europe, long positions in interest rates (via synthetics as well as outrights) was also profitable. Losses were posted to the Fund at the end of the fourth quarter due to the Trading Program’s long positions in interest rate instruments.

 

The agriculture sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter due to the Fund’s position in long cattle and short sugar. Down-turning cattle prices caused losses on long positions in the first half of January, only partially compensated for by profits on short positions in the last part of January. Losses were posted to the Fund in the middle of the first quarter. Many commodity markets showed upward reactions in the first half of February, such as softs, grains and oilseeds. In some cases these reactions lasted long enough for the Fund to liquidate a large part of its shorts (soybeans) or even reverse to longs (cotton), leaving losses on these liquidated shorts, the largest ones in the soybean markets. Profits were posted to the Fund at the end of the first quarter due to the Fund’s short positions in agricultural commodities like sugar, coffee and soybeans. The largest profits from the declining markets in Brazil came from sugar and coffee. Losses were posted to the Fund at the beginning of the second quarter. In April, the Fund lost on its shorts especially in sugar. Profits were posted to the Fund in the middle of the second quarter. Divergence seemed to be the theme in May’s commodity markets. In the agricultural markets, the Fund profited from this. The Fund did well in downtrends in sugar and coffee, but also in an uptrend in cocoa. In cattle the Fund profited from being long. Losses were posted to the Fund at the end of the second quarter due to the Fund’s short positions in grains and oilseeds. Profits were posted to the Fund at the beginning of the third quarter due to the Fund’s short positions in corn, coffee, sugar and cattle. Profits were posted to the Fund in the middle of the third quarter due to the Fund’s short position in grains and sugar. Losses were posted to the Fund at the end of the third quarter due to the Fund’s short positions in grains and sugar. Also, U.S. crop reports in September triggered rising prices of wheat and corn, resulting in losses on the shorts in these markets. Losses were posted to the Fund at the beginning of the fourth quarter due the Trading Program’s short positions. The Trading Program’s short positions in meats resulted in profits posted to the Fund in the middle of the fourth quarter. Losses were posted to the Fund at the end of the fourth quarter. In December there was a reversal from the downtrend in cattle prices. There also was rise in hog prices during the month. The divergence in agriculture commodity markets is partly attributed to the worldwide extreme (El Nino) weather conditions.

 

The currency sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter due to the short positions in Japanese yen. In January the Swiss National Bank announced the abandonment of the cap on the Euro/Swiss franc exchange rate. As a result, the Fund lost on Swiss franc shorts versus the British pound and on long positions in Swiss equity markets. Profits were posted to the Fund in the middle of the first quarter. The Trading Program ended February with a large net long position in the British pound versus a wide range of currencies. The profits on these positions compensated for the losses suffered earlier. It also helped the Fund score positively in the currency cluster, despite the losses on the longs in emerging market currencies. Also longs in the New Zealand dollar and shorts in the Swiss franc contributed to the profits. Profits were posted to the Fund at the end of the first quarter due to the Fund’s short positions in the Euro and Brazilian real. The Russian ruble delivered the highest currency return on the long side. Losses were posted to the Fund at the beginning of the second quarter. In April, short Euro was a losing currency position. Losses were posted to the Fund in the middle of the second quarter. In the short Euro component the Fund closed out part of its losing positions, but short Euro remained the Fund’s largest currency position, which ended May with a loss. The largest losses on the long side came from the New Zealand dollar. Other losing longs were the currencies of Australia, Brazil, South Africa, Poland and Canada versus the Euro. Furthermore, in the second half of May, these currencies started to decline versus the U.S. dollar as well. Losses were posted to the Fund at the end of the second quarter due to the Fund’s short positions in the Euro and Japanese yen. Profits were posted to the Fund at the beginning of the third quarter. In July, with concerns about decline in the Chinese stock markets, a global risk-off move unfolded, and the U.S. dollar resulted in profits on the Fund’s long positions in

 

37



 

this currency. Losses were posted to the Fund in the middle of the third quarter. The largest losses came from long positions in Asian currencies. The Chinese ailing growth trend entered into a new chapter in August when the People’s Bank of China effectively devalued the renminbi. The immediate impact of this step was negative for the Fund’s currency positions. The Trading Program had just built up sizeable Chinese renminbi longs versus the U.S. dollar and a large part of the Euro shorts were versus longs in Asian currencies, for instance the Indian rupee and the Indonesian rupiah; as these currencies declined with the fall of the Chinese renminbi, the Fund lost on these Euro shorts too. The main part of the Fund’s losses in the currency markets in August was in connection with the Chinese renminbi devaluation. Profits were posted to the Fund at the end of the third quarter due to the Fund’s short positions in the Brazilian real.  Losses were posted to the Fund at the beginning of the fourth quarter. The Fund entered October with a wide variety of positions that were affected by the Chinese ailing growth trend. The reaction manifested in upward turning commodity-rich currencies such as those of Canada, South Africa, Australia and New Zealand. This caused losses on the Trading Program’s short positions in these markets. A strong performing currency for the Trading Program was the Indonesian rupiah, supported by the announcement of an economic stimulus package by the Indonesian government. The main currency at the long side of most of the losing currency shorts was a declining U.S. dollar. Profits were posted to the Fund in the middle of the fourth quarter due to the Trading Program’s short positions in Euro and the Swiss franc. Losses were posted to the Fund at the end of the fourth quarter due to the Trading Program’s short positions in the Swiss franc and the Polish zloty and comparable Japanese QQE-positions such as short positions in the Japanese yen.

 

 

 

Total Trading

 

Year ended December 31, 2014

 

Profit (Loss)

 

Stock Indices

 

$

(3,739,857

)

Metals

 

(194,739

)

Agricultural Commodities

 

3,411,319

 

Currencies

 

(1,180,674

)

Energy

 

5,246,328

 

Interest Rates

 

12,528,664

 

Subtotal

 

16,071,041

 

Brokerage Commissions

 

(573,907

)

Total

 

$

15,497,134

 

 

The Fund experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2014 of $16,071,041. The Fund’s profits were primarily attributable to the interest rates, energy and agriculture sectors posting profits. The stock indices, currency and metals sectors posted losses.

 

The interest rate sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the Fund’s long positions in this sector. Profits were posted to the Fund in the middle through the end of the first quarter due to the Fund’s long bonds positions. Profits were posted to the Fund at the beginning of the second quarter due to the Fund’s exposure in the European interest rate markets. Profits were posted to the Fund in the middle of the second quarter due to the Fund’s high trendpot number, which indicated a favorable trend in the interest rate market. Profits were posted to the Fund at the end of the second quarter due to the European bond markets rising. Profits were posted to the Fund at the beginning of the third quarter due to the Trading Program’s long positions in European bonds. Profits were posted to the Fund in the middle of the third quarter. The largest profits came from long positions in British interest rate instruments and continental European bond markets, which rose higher. Losses were posted to the Fund at the end of the third quarter due to the Trading Program’s long positions in U.S., U.K. and Australia bond markets. Profits were posted to the Fund at the beginning of the fourth quarter due to the Trading Program’s long interest rate positions in Great Britain and Sweden, and on the longer end of the yield curve in the U.S., Germany and South Korea. Profits were posted to the Fund in the middle of the fourth quarter. The largest profits came from typical ‘long QE’ positions in bond markets. Profits were posted to the Fund at the end of the fourth quarter because of the Fund’s long ‘safe haven’ bond positions.

 

The energy sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter from the Fund’s long positions in oil markets only to be reversed in the middle of the quarter.  Profits were posted to the Fund in the middle of the first quarter from the Fund’s long positions in gas and oil. Losses posted to the Fund at the end of the first quarter came from long positions in the oil markets. Profits were posted to the Fund at the beginning of the second quarter. In April the Fund held its largest long positions in the energy markets. Losses were posted to the Fund in the middle of the second quarter from the Fund’s long positions in gas and oil. In May the profits on the long oil positions could not fully compensate for the losses on the long gas positions. Profits posted to the Fund at the end of the second quarter came from the

 

38



 

Fund’s long positions in the oil markets. In June oil prices rallied to continue trading at higher levels. Losses were posted to the Fund at the beginning of the third quarter from the Trading Program’s long positions in oil and oil products such as gasoline. Losses were posted to the Fund in the middle of the third quarter. The Trading Program lost on its retained longs in crude oil. Short commodity positions in natural gas added to the losses. Profits were posted to the Fund at the end of the third quarter. The largest gains came from shorts in crude and gasoil. Profits were posted to the Fund at the beginning of the fourth quarter due to an accelerating decline of the energy markets. As a result, short positions in energy markets offered the best profits in October. Profits were posted to the Fund in the middle of the fourth quarter. The oil market decline became the most prominent trend during November. The Trading Program profited well because of the Fund’s short positions in crude oil and oil products. Profits were posted to the Fund at the end of the fourth quarter because of the Fund’s short positions in energy markets. The Fund profited well from the downtrend in oil.

 

The agriculture sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the rising prices of milk and oats. Profits were posted to the Fund in the middle of the first quarter. Profits were posted to the Fund at the end of the first quarter due to the Fund’s long positions in some agricultural markets (especially soy markets). In March a drought in Brazil caused uptrends in soybeans and coffee. Profits were posted to the Fund at the beginning of the second quarter due to a large extent from soybeans, and also from cotton and cattle. Losses were posted to the Fund in the middle of the second quarter due to corn, wheat, cotton and coffee markets turning downwards.  Losses were posted to the Fund at the end of the second quarter due to the severe drought in Brazil. In June, the Fund gave back some of the earlier gains in the existing positions in the soy markets. In sugar, the Fund turned to short positions in the first week of June; this turned out to be too fast, as these markets shortly turned higher. Profits were posted to the Fund at the beginning of the third quarter due to the Trading Program’s short positions in grain markets. Excellent crop-development weather in July produced strong harvests in many crops, superseding their expected demand. As a result the Fund profited well from the resulting downtrends in corn, cotton and sugar. Profits were posted to the Fund in the middle of the third quarter as short sugar was the most profitable position. The Trading Program continued to add to its ‘short commodities’ concentration, adding sizeable shorts grains and sugar which ultimately added to the positive performance, the largest gains coming from oilseeds and sugar. Profits were posted to the Fund at the end of the third quarter. The largest gains came from shorts in sugar, grains, oilseeds and rubber. Losses were posted to the Fund at the beginning of the fourth quarter because of the Fund’s short positions in grains and oilseeds. Because of a downturn in coffee and cocoa markets these long positions contributed to the losses in the agricultural markets. Profits were posted to the Fund in the middle of the fourth quarter due to sugar falling, resulting in profits on the Fund’s shorts. Cattle prices kept on rising resulting in gains as well. Losses were posted to the Fund at the end of the fourth quarter because of the Fund’s long positions in cattle.

 

The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. In January the losses came from long positions in Japanese, American and European equities. Profits were posted to the Fund in the middle of the first quarter from the Fund’s long positions in stocks only to be reversed at the end of the first quarter with losses posted to the Fund. Losses were posted to the Fund at the beginning of the second quarter due to the Fund’s exposure in long equities. In April despite the unrest in Ukraine, the Fund expanded its already large risk concentration of ‘risk-on’ positions. At the beginning of April, the largest components of this concentration were ‘long stocks’, ‘long emerging markets’ and ‘long commodities’. During early April the Fund added ‘long Japanese QE’ (long Japanese stocks and short Japanese yen). The Fund suffered losses in mid-April as most equity long positions turned losing. In the U.S. this reaction was mainly led by weakness in the technology sector. The Fund lost most on European longs in stock markets that were impacted by concerns over Ukraine. Profits were posted to the Fund in the middle of the second quarter from the Fund’s long positions in the Indian stock index. The stock markets in other emerging countries were generally strong as well, resulting most significantly in profits in Taiwan. In the developed markets the Fund profited from rising stock markets across most sectors, and in particular from the associated decline of the corresponding volatility index futures. Profits posted to the Fund at the end of the second quarter came from strong equity markets in Japan and Taiwan as well as the stock markets, resulting in accumulating profits on the long side in the U.S. Losses were posted to the Fund at the beginning of the third quarter. The biggest losses came from the Trading Program’s long positions in European equities, Latin American stocks and the U.S. stock market, including short volatility positions. Losses were posted to the Fund in the middle and end of the third quarter. The Trading Program suffered its largest losses in August and September on long positions in equity markets and related ‘risk-on’ positions. Losses were posted to the Fund at the beginning of the fourth quarter in connection with stock markets declining. Different factors contributed to these declines, such as disappointing macro-economic numbers from Germany and the U.S., and warnings from the IMF about a slowing global economic growth and a recession in the eurozone. Profits were posted to the Fund in the middle of the fourth quarter due to the Fund’s long positions in technology stocks via positions in broad based indices, sector indices and single stock futures, such as those on Apple and Yahoo. Losses were posted to the Fund at the end of the fourth quarter because of the Fund’s long positions in equity markets.

 

The currency sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter.  The Fund, as intended, participated significantly in the weak Japanese yen and the rising Eastern European

 

39



 

currencies, but remained too cautious on the “‘risk-off” side with regard to short positions in the currencies of the emerging economies and some other commodity-rich countries. Especially in the South African rand and the Canadian dollar, the Fund did not take advantage of the apparent potential for gains to the fullest extent. This was reflected by losses in the currency sector. Losses were posted to the Fund in the middle of the first quarter only to be reversed at the end of the first quarter. The largest profits in March came from the Fund’s long positions in emerging market currencies (especially the Indian rupee and the Brazilian real). Losses were posted to the Fund at the beginning of the second quarter. In April the largest losses in the currency markets were from short Japanese yen. Profits were posted to the Fund in the middle of the second quarter. In May the Fund profited from the strength of the currencies of India, Mexico, Turkey, Australia, South Korea, Poland, Russia and Norway. The long positions in these currencies turned out to be most profitable when traded against the euro. Losses were posted to the Fund at the end of the second quarter due to the Fund’s long positions in the Turkish lira. In Hungary newly proposed laws for banks impacted the currency, resulting in losses for the Fund. Losses were posted to the Fund at the beginning of the third quarter in connection with European banks getting hit by new rules imposed by Hungarian and Romanian regulators. This resulted in losses in the Romanian currency. Losses also came from long positions in Latin American currencies. Profits were posted to the Fund in the middle of the third quarter due to the Trading Program’s long positions in emerging market currencies. The Trading Program profited from its longs in the currencies of South Africa, Australia, Brazil and Mexico, and also managed to score positively in the currencies of South Korea, Malaysia, India and Turkey. The biggest winner on the short side of these currency trades was the euro. The (expected) policy of the European Central Bank for more aggressive quantitative easing seems to have contributed to the weakness of the euro. Losses were posted to the Fund at the end of the third quarter due to the Trading Program’s long position in the Australian, the Brazilian and the South African currencies. Losses were posted to the Fund at the beginning of the fourth quarter. The decline of the Japanese stock markets went hand in hand with a strengthening of the Japanese yen. As a consequence, the Trading Program suffered its largest losses on its ‘long Japanese QE’ positions, both on the long Japanese equities component and on the shorts Japanese yen. Profits were posted to the Fund in the middle of the fourth quarter. The largest profits came from the Turkish, the South African and the Kiwi longs, and from the Japanese and British shorts. Losses were posted to the Fund at the end of the fourth quarter because of the Fund’s position in the British pound and the euro at the short side and from the currencies of Turkey, South Africa, Mexico and Poland at the long side.

 

The metals sector posted losses to the Fund.  Losses were posted to the Fund at the beginning of the first quarter due to the Fund’s short positions in gold. Losses were posted to the Fund in the middle of the first quarter due to the Fund’s short positions in silver. Profits were posted to the Fund at the end of the first quarter due to the Fund’s short positions in copper and silver. Profits were posted to the Fund at the beginning of the second quarter due to nickel responding bullish on the developments around Ukraine as well as on an export ban in Indonesia, while other metal markets like copper reacted to different market factors. The Fund kept its large short silver positions throughout April, which position proved to offer a nice smoothing counterbalance to the large ‘risk-on’ concentration, and posted some profits. Profits were posted to the Fund in the middle of the second quarter due to the Fund’s short positions in silver. Losses were posted to the Fund at the end of the second quarter due to the Fund’s short positions in gold and silver. Gold and silver rose strongly, resulting in losses on the sizeable short positions in these metals. Losses were posted to the Fund at the beginning of the third quarter. Profits were posted to the Fund in the middle of the third quarter as sizable add-on in silver contributed to the positive performance. Profits were posted to the Fund at the end of the third quarter. The largest gains came from shorts in gold and silver. Profits were posted to the Fund at the beginning of the fourth quarter. Losses were posted to the Fund in the middle of the fourth quarter due to the Fund’s short position in gold, which rose gradually during November. Losses were posted to the Fund at the end of the fourth quarter.

 

40



 

 

 

Total Trading

 

Year ended December 31, 2013

 

Profit (Loss)

 

Stock Indices

 

$

12,903,880

 

Metals

 

3,012,643

 

Agricultural Commodities

 

567,255

 

Currencies

 

(3,024,130

)

Energy

 

(7,079,331

)

Interest Rates

 

(4,537,269

)

Subtotal

 

1,843,048

 

Brokerage Commissions

 

(802,619

)

Total

 

$

1,040,429

 

 

The Fund experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2013 of $1,843,048.  The Fund’s profits were primarily attributable to the stock indices metals and agriculture sector posting profits. The currency, interest rates and energy sectors posted losses.

 

The stock indices sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. The market movement in the first few days of January broadly set the stage for the rest of the month. Equity markets were strong globally; positions anticipating this delivered the largest positive contribution to the monthly result. Profits were posted to the Fund in the middle of the first quarter. Losses on the Trading Program’s long positions in markets that from the beginning of February reacted (such as those in China, Russia, the Netherlands and Mexico), were compensated by gains earned on rising stock markets (especially in Australia, Switzerland and the U.S.). Profits were posted to the Fund at the end of the first quarter which was based on the strength in the United States. Although positions in Australia, Hong Kong, South Africa, and Greece and in European banks resulted in some losses, on balance the Trading Program did not score significantly negative in any time zone. Profits were posted to the Fund at the beginning of the second quarter resulting from stock markets driven by the low interest rate policy in the U.S. and Western Europe. Profits were posted to the Fund in the middle of the second quarter. The largest gains (on the long side) in the stock markets came mainly from the United States and continental Europe. During the continued development of the Trading Program’s long equity positions, the Trading Program increasingly moved to emerging economies, resulting in profits in Malaysia and South Africa. Losses were posted to the Fund at the end of the second quarter. Many stock markets in June reacted negatively to the approaching end of the quantitative easing program, and this was felt by the Trading Program especially on long positions in Western Europe. The Trading Program’s long positions in South Africa received relatively the biggest blow. Profits on the Trading Program’s short positions in other emerging economies (Brazil, China, Russia, Turkey), as well as positions anticipating increasing volatility in the U.S., were not sufficient to compensate for these losses. Profits were posted to the Fund at the beginning of the third quarter. The biggest losses came from the Trading Program’s short positions, both in emerging economies (Russia, China, South Korea, Brazil, India and South Africa) as well as in some individual stocks and sector indices (e.g. banks). However, this was more than offset by gains on the Trading Program’s long positions in the U.S. and in Taiwan. The Trading Program was also able to score a net positive result in the zigzagging Europe with predominantly long positions. Losses were posted to the Fund in the middle of the third quarter. The Trading Program had a good start to August from rising equity markets in Europe, America and Japan but these trends soon reversed. The largest losses came from positions anticipating, - directly or indirectly - rising equity markets, especially those in the U.S. Profits were posted to the Fund at the end of the third quarter which were generated from the Trading Program’s long positions in equity markets. The stock indices posted profits to the Fund at the beginning of the fourth quarter. Most volatility manifested itself in the stock markets, which ultimately proved to be an important source of profits. The largest profits came from rising markets in Europe.  Profits were posted to the Fund in the middle of the fourth quarter due to rising equity markets in the U.S., Europe and Japan. Profits were posted to the Fund at the end of the fourth quarter. In mid-December Mr. Bernanke, Chairman of the U.S. Federal Reserved announced that the U.S. Federal Reserve would start tapering QE in January and freed from uncertainty about this, markets regained their upward momentum to finish higher.

 

The metals sector posted profits to the Fund.  Losses were posted to the Fund at the beginning of the first quarter only to be reversed in the middle of the first quarter. Profits were posted to the Fund in the middle of the quarter due to the Trading Program’s short positions in gold and silver. Profits were posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter. Disappointing economic growth in China contributed

 

41



 

to a major drop in metal prices benefitting the Trading Program. Profits were posted to the Fund in the middle of the second quarter due to the Trading Program’s short positions. Profits were posted to the Fund at the end of the second quarter due to the downward trends in metals. Losses were posted to the Fund at the beginning through the middle of the third quarter due to the Trading Program’s short positions base metals. Losses were posted to the Fund at the end of the third quarter due to the Trading Program’s long positions in gold. Losses were posted to the Fund at the beginning of the fourth quarter due to the Trading Program’s short positions. By the end of October, the Trading Program had reversed from short to net long positions in metals. Profits were posted to the Fund in the middle of the fourth quarter due to the Trading Program’s net long positions. However, the metals in which the Trading Program still had short positions (gold, silver and copper) came down more than the longs did. Responding to the decline the Trading Program turned quickly to more shorts in metals. This position was an important contributor to the diversification as well as the result. Profits were posted to the Fund at the end of the fourth quarter due to the Trading Program’s short positions in precious metals.

 

The agriculture sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter only to be reversed in the middle of the quarter. Profits were posted to the Fund in the middle of the first quarter by the Trading Program anticipating the continuing fall of the prices of wheat and beef. Profits were posted to the Fund at the end of the first quarter as the Trading Program anticipated further falling prices of coffee, sugar, wheat and meat. Losses were posted to the Fund at the beginning of the second quarter. The after-effects of a crop report from the end of March resulted in losses at the beginning of April. Profits were posted to the Fund in the middle of the second quarter. The sugar market experienced acceleration in its prevailing downward trend in May in which the Trading Program benefited from this development. The Trading Program benefitted from the rising price of soybeans due to the cold spring in the United States and delayed seeding of this crop. Profits were posted to the Fund at the end of the second quarter. Downward trends in wheat, soybean oil, milk and coffee; and upward trends in hogs resulted in profits posted to the Fund. Profits were posted to the Fund at the beginning of the third quarter due to the Trading Program’s positions in falling prices of corn and vegetable oils, and the rising prices of European potatoes. Losses were posted to the Fund in the middle of the third quarter. The Trading Program entered August with large short positions in grains, which proved to be successful at the beginning of August. But then grain prices started to rise. Especially the prices of oilseeds (soy, rapeseed, palm oil, etc.) shot up: a trend reversal resulting in losses. Losses were posted to the Fund at the end of the third quarter. Even though some of the divergent trends did pay off, such as the declining prices of corn, soybean oil and rape seed, and the rising prices of hogs and cocoa was not enough to offset losses in other positions. Losses were posted to the Fund at the beginning of the fourth quarter. In sugar and cotton, the Trading Program had already shifted earlier in October from short to long, to long positions but this did not work out well resulting in losses. Corn prices kept on declining, while soy meal and related commodities rose in November resulting in profits posted to the Fund in the middle of the fourth quarter. Profits were posted to the Fund at the end of the fourth quarter.

 

The currency sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Profits were earned in the carry trades with the high yielding currencies of New Zealand, Turkey, Romania, or Mexico on the long side and the low yielding currencies of Japan, Great Britain or the United States on the short side. Losing positions were those with the high yielding currency of South Africa on the long side and positions with the low yielding euro on the short side. This was taken advantage of with the Trading Program’s long positions versus the also low yielding currencies of Singapore, Hong Kong and Taiwan. Losses were posted to the Fund in the middle of the first quarter. The carry trades resulted in losses posted to the Fund when anticipating a falling U.S. dollar relative to the high yielding currencies of India, Hungary, Poland, Romania and Colombia. Profits were posted to the Fund at the end of the first quarter. The Trading Program was correctly positioned to profit from the falling euro and Japanese yen, and the strength of the currencies of Mexico, the U.S., Australia, Israel and Turkey.  Losses were posted to the Fund at the beginning of the second quarter. The Trading Program lost in the risk concentration around “short euro”. These losses were partially, but not enough to offset the losses, compensated by gains on “long carry” positions, in particular those with a long position in the high yielding currencies of Mexico, New Zealand, China, India and Romania. Losses were posted to the Fund in the middle of the second quarter. Significant movements in the currency markets were accelerating declines in the currencies of many emerging economies, such as those of Brazil, Chile, South Africa, Turkey and India; although the Chinese currency remained strong. The Trading Program suffered from its initially fairly large “long carry” and “short euro” positions. The Trading Program’s positions anticipating a further strengthening of currencies of resource-rich countries, such as Canada, Mexico, Russia, Australia and New Zealand, also suffered.  Although most of these positions were phased out over the course of May, losses prevailed. Eventually, the biggest risk concentration in the currency markets became “long U.S. dollar”, both versus Europe and versus emerging countries. Losses were posted to the Fund at the end of the second quarter. The “long carry” positions were largely phased out in May, so further losses on these positions remained limited in June. Greater were the losses due to a wide zigzag of the U.S. dollar versus the Western European currencies (euro, British pound, Swiss franc): from a stronger dollar to a weaker dollar and back to a stronger dollar again, the Trading Program that started at the beginning of June with a long dollar position was affected. The weakness of the currencies of emerging economies (e.g. Brazil, Turkey, Russia, India and Thailand) and positions profiting from the falling exchange rates of the currencies of Australia and New Zealand was not

 

42



 

enough to offset the losses in the other currency markets. Losses were posted to the Fund at the beginning of the third quarter. The European zigzag produced losses in the euro, the Swiss franc and the British pound. The reaction at the end of July in the Japanese QE trend produced losses on short Japanese yen positions. And the turn from “short emerging” to “long oil” was accompanied by losses on the Mexican peso and the Russian ruble. Losses were posted to the Fund in the middle of the third quarter due to the Trading Program’s long positions. Profits were posted to the Fund at the end of the third quarter due to the Trading Program’s short U.S. dollar and Japanese yen. Losses were posted to the Fund at the beginning of the fourth quarter.

 

The interest rate sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter due to the Trading Program’s long positions in European bond markets. Profits were posted to the Fund in the middle of the first quarter due to the Trading Program’s long positions in Korea and Japan, as well as on the shorter end of the yield curve in Great Britain. Profits were posted to the Fund at the end of the first quarter due to the Trading Program’s long positions in Korean and Japanese bonds. But most of the profits resulted from numerous, often hybrid, synthetic positions, of which a significant portion was “short euro” related.  Profits were posted to the Fund at the beginning of the second quarter. The upward trends of bonds in countries with a low interest rate policy resulted in profits to the Fund. Losses were posted to the Fund in the middle of the second quarter, resulting from the Trading Program’s long positions in the United States and continental Europe. Profits were posted to the Fund at the end of the second quarter from the Trading Program’s short positions, especially in the U.S., Canada, England, Germany and South Korea. Losses were posted to the Fund at the beginning of the third quarter. Losses were posted to the Fund in the middle of the third quarter. In and around the U.S., the Trading Program built on the ‘long inflation’ theme, with positions anticipating rising interest rates. The majority of these positions turned out to be unsuccessful. Losses were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning of the fourth quarter due to a European recovery especially in the financial markets. Profits were posted to the Fund in the middle of the fourth quarter. In the U.S. bond markets the Trading Program turned from losing long positions to (in the second half of November profitable short positions on the longer end of the yield curve. Losses were posted to the Fund at the end of the fourth quarter. The Trading Program’s largest losses came from its long positions in European bond markets.

 

The energy sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter when anticipating falling prices of electricity, coal and carbon emissions delivered positive results.  Losses were posted to the Fund in the middle through the end of the first quarter due to the oil markets. Losses were posted to the Fund at the beginning of the second quarter. Losses were posted to the Fund in the middle of the second quarter resulting from the Trading Program’s long positions in both oil and gas. Losses were posted to the Fund at the end of the second quarter due to oil markets. Profits were posted to the Fund at the beginning of the third quarter from rising oil markets. Profits continued to be posted to the Fund in the middle of the third quarter resulting from the Trading Program’s long positions in oil. Losses were posted to the Fund at the end of the third quarter. At the beginning of September the Trading Program held fairly large long positions in crude oil futures, and futures on derivatives such as gasoline. Oil markets declined at the end of September resulting in losses. Losses were posted to the Fund at the beginning through the middle of the fourth quarter. In November natural gas prices accelerated strongly coming from lows; a particularly unfavorable movement for a trend following strategy. Profits were posted to the Fund at the end of the fourth quarter.

 

Variables Affecting Performance

 

The principal variables that determine the net performance of the Fund are gross profitability from the Fund’s trading activities and interest income.

 

The Fund currently earns interest based on the prevailing Fed Funds rate plus a spread for short cash positions and minus a spread for long cash positions.  The current short term interest rates have remained extremely low when compared with historical rates and thus has contributed negligible amounts to overall Fund performance.

 

During the periods set forth above in “Selected Financial Data”, the interest rates in many countries were at unusually low levels. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund’s profit potential generally tends to be diminished.  On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments.

 

The Fund’s management fees and Sponsor fees are a constant percentage of Fund’s assets.  Brokerage commissions, which are not based on a percentage of the Fund’s assets, are based on actual round turns.  The performance fees payable to the Trading Advisor are based on increase in the aggregate Net Asset Value of  Classes of Units subject to the same rate of performance fees in excess of the High Water Mark, excluding interest and prior to reduction for Sponsor fees.

 

43



 

Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits.  Most of the contracts traded by the Fund are highly liquid and can be closed out at any time.

 

Except in unusual circumstances, factors—regulatory approvals, cost of goods sold, employee relations and the like—which often materially affect an operating business, have no material impact on the Fund.

 

Liquidity; Capital Resources

 

The Fund borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Fund’s U.S. dollar deposits.  These borrowings are at a prevailing short-term rate in the relevant currency.

 

Substantially all of the Fund’s assets are held in cash with the brokers. Changes in interest rates could cause periods of strong up or down price trends, during which the Fund’s profit or loss potential might increase. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow. The Fund should be able to close out its open trading positions and liquidate its holdings relatively quickly and at market prices, except in unusual circumstances.  This typically permits the Fund to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so.

 

As a commodity pool, the Fund maintains an extremely large percentage of its assets in cash, which it must have available to post initial and variation margin on futures contracts.  This cash is also used to fund redemptions.  While the Fund has the ability to fund redemption proceeds from liquidating positions, as a practical matter positions are not liquidated to fund redemptions.  In the event that positions were liquidated to fund redemptions, MLAI, as the Manager of the Fund, has the ability to override decisions of the Trading Advisor to fund redemptions if necessary, but in practice the Trading Advisor would determine in its discretion which investments should be liquidated.

 

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.

 

Recent Accounting Developments

 

Recent accounting developments, if any, are discussed in the notes to the financial statements, which are included in Exhibit 13.01.

 

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

The Fund is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes and all or substantially all of the 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 Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Fund’s open positions and the liquidity of the markets in which it trades.

 

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

 

Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund’s speculative trading and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the 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 Fund’s losses in any market sector will be limited to Value at Risk or by the Fund’s attempts to manage its market risk.

 

44



 

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 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 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Securities Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

 

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

 

Exchange maintenance margin requirements have been used by the Fund 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 Fund), the margin requirements for the equivalent futures positions have been used as Value at Risk.  In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.

 

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

 

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

 

The following table indicates the average, highest and lowest trading Value at Risk associated with the Fund’s open positions by market category for the fiscal periods. During the periods ended December 31, 2015 and December 31, 2014, the Fund’s average period-end Net Asset Value was approximately $49,254,313 and $73,229,591, respectively.

 

45



 

December 31, 2015

 

 

 

Average Value

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

at Risk

 

Capitalization

 

at Risk

 

at Risk

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

2,218,992

 

4.51

%

$

5,359,321

 

$

130,141

 

Currencies

 

409,142

 

0.83

%

701,872

 

328,594

 

Energy

 

1,064,594

 

2.16

%

2,692,054

 

397,868

 

Interest Rates

 

2,810,546

 

5.71

%

6,230,990

 

1,104,541

 

Metals

 

248,017

 

0.50

%

568,582

 

70,442

 

Stock Indices

 

957,110

 

1.94

%

$

1,950,685

 

$

216,522

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,708,401

 

15.65

%

$

17,503,504

 

$

2,248,108

 

 

December 31, 2014

 

 

 

Average Value

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

at Risk

 

Capitalization

 

at Risk

 

at Risk

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

3,037,879

 

4.15

%

$

5,165,177

 

$

1,101,291

 

Currencies

 

1,631,342

 

2.23

%

3,638,805

 

231,766

 

Energy

 

1,675,904

 

2.29

%

4,490,242

 

35,455

 

Interest Rates

 

1,953,406

 

2.67

%

3,116,899

 

950,913

 

Metals

 

1,973,085

 

2.69

%

4,906,949

 

202,084

 

Stock Indices

 

922,629

 

1.26

%

1,661,203

 

401,182

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

11,194,245

 

15.29

%

$

22,979,275

 

$

2,922,691

 

 

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

 

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

 

Non-Trading Risk

 

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

 

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

 

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

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

The following qualitative disclosures regarding the Fund’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Fund 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 Fund’s primary market risk exposures as well as the strategies used and to be used by MLAI and the Trading Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks,

 

46



 

any one of which could cause the actual results of the Fund’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, 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 Fund. There can be no assurance that the Fund’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Fund.

 

The following were the primary trading risk exposures of the Fund as of December 31, 2015, by market sector.

 

Interest Rates

 

Interest rate movements directly affect the price of derivative sovereign bond positions held by the Fund and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Fund’s profitability. The Fund’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries.  However, the Fund also takes positions in the government debt of smaller nations e.g., Australia. MLAI anticipates that G-7 interest rates will remain the primary market exposure of the Fund for the foreseeable future.

 

Currencies

 

The Fund trades in a number of currencies. However, the Fund’s major exposures have typically been in the Japanese yen/U.S. dollar, New Zealand dollar/Japanese yen and Swiss franc/Japanese yen positions. The Fund does not anticipate that the risk profile of the Fund’s currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk of maintaining Value at Risk in a functional currency other than U.S. dollars.

 

Stock Indices

 

The Fund’s primary equity exposure is to S&P 500, Nikkei and German DAX equity index price movements. The Fund is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices.

 

Metals

 

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

 

Agricultural Commodities

 

The Fund’s primary agricultural commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Soybeans, corn, and livestock accounted for the substantial bulk of the Fund’s agricultural commodities exposure as of December 31, 2015. However, it is anticipated that the Fund will maintain an emphasis on cotton, grains and sugar, in which the Fund has historically taken its largest positions.

 

Energy

 

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

 

Qualitative Disclosures Regarding Non-Trading Risk Exposure

 

The following were the primary non-trading risk exposures of the Fund as of December 31, 2015.

 

Foreign Currency Balances

 

The Fund’s primary foreign currency balances are in British pound, Japanese yen and Euros.

 

47



 

U.S. Dollar Cash Balance

 

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

 

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 itself intervene in the markets to hedge or diversify the Fund’s market exposure, MLAI may urge the Trading Advisor to reallocate positions in an attempt to avoid over-concentrations.  However, such interventions are unusual, except in cases in which it appears that the Trading Advisor has begun to deviate from past practice and trading policies or to be trading erratically. MLAI’s basic control procedures consist of the process of monitoring the Trading Advisor with the market risk controls being applied by the Trading Advisor itself.

 

Risk Management

 

Risk management plays a role in the Trading Advisor’s trading methodology. The Trading Program is designed to pursue capital growth within the limits of a defined risk tolerance. Specific risk provisions are computed for each market exposure.  Risk assessments are determined on the basis of a regular or continuous evaluation of daily price behavior, possibly leading to regular adjustments during the lifetime of exposures.

 

Non-Trading Risk

 

The Fund controls 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 Fund has 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 Fund in order to facilitate margin payments and pay expenses and redemptions. MLAI does not take any steps to limit the cash flow risk on its cash held on deposit at MLPF&S.

 

Item 8: Financial Statements and Supplementary Data

 

The following quarterly information is unaudited.

 

Net Income(Loss) by Quarter

Eight Quarters through December 31, 2015

 

 

 

Fourth

 

Third

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

 

2015

 

2015

 

2015

 

2015

 

2014

 

2014

 

2014

 

2014

 

Total Income (Loss)

 

$

295,376

 

$

2,732,665

 

$

(7,406,137

)

$

4,940,693

 

$

5,544,615

 

$

6,851,075

 

$

4,916,717

 

$

(1,818,721

)

Total Expenses

 

340,158

 

338,041

 

(146,723

)

1,514,629

 

1,600,373

 

517,838

 

486,929

 

547,846

 

Net Income (Loss)

 

$

(44,782

)

$

2,394,624

 

$

(7,259,414

)

$

3,426,064

 

$

3,944,242

 

$

6,333,237

 

$

4,429,788

 

$

(2,366,567

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) per weighted average Unit (1)

 

$

(0.0015

)

$

0.0798

 

$

(0.2016

)

$

0.0695

 

$

0.0803

 

$

0.1229

 

$

0.0781

 

$

(0.0365

)

 


(1) The Net Income (Loss) per weighted average unit is based on the weighted average of the total units for each quarter.

 

The financial statements required by this Item are included in Exhibit 13.01.

 

The supplementary financial information (“information about oil and gas producing activities”) specified by Item 302(b) of Regulation S-K is not applicable.

 

48



 

Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A: Controls and Procedures

 

Disclosure Controls and Procedures

 

MLAI’s Chief Executive Officer and Chief Financial Officer, on behalf of the Fund, have 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) with respect to the Fund as of and for the year which ended December 31, 2015, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective.

 

Management’s Annual Report on Internal Control over Financial Reporting:

 

The Fund’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Fund’s internal control over financial reporting is a process designed under the supervision of MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund and is effected by management, other personnel and service providers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and included those policy and procedures that:

 

·                  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Fund.

 

·                  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that  receipts and expenditures of the Fund are being made only in accordance with authorizations of management and directors of the Fund; and

 

·                  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Fund’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Fund’s management assessed the effectiveness of the Fund’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report entitled Internal Control — Integrated Framework (2013).

 

Based on its assessment the Fund’s management concluded that at December 31, 2015, the Fund’s internal control over financial reporting was effective.

 

Changes in Internal Control over Financial Reporting

 

No change in internal control over financial reporting (in connection with Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act) occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

 

Item 9B:  Other Information

 

Not applicable.

 

49



 

PART III

 

Item 10: Directors, Executive Officers and Corporate Governance

 

10(a) and 10(b)           Identification of Directors and Executive Officers:

 

As a limited liability company, the Fund has no officers or directors and is managed by MLAI. Trading decisions are made by the Trading Advisor on behalf of the Fund.

 

The managers and executive officers of MLAI and their respective business backgrounds are as follows:

 

Nancy Fahmy

Chief Executive Officer, President and Manager

 

 

Barbra E. Kocsis

Chief Financial Officer and Vice President

 

 

Dominick A. Carlino

Vice President and Manager

 

 

Ninon Marapachi

Vice President and Manager

 

 

Jeff McGoey

Vice President and Manager

 

 

Greg Parets

Vice President and Manager

 

 

Devesh Saksena

Vice President and Manager

 

Nancy Fahmy, age 41, has been the Chief Executive Officer and President of MLAI since October 2015.  Ms. Fahmy was a Vice President of MLAI from January 2014 until her appointment as the Chief Executive Officer and President. Ms. Fahmy has been registered with the CFTC as an associated person of MLAI since October 22, 2015, and she has been listed as a principal of MLAI since January 9, 2014. Ms. Fahmy was previously a NFA associate member and registered as an associated person of MLPF&S from March 2009 to November 2010. Ms. Fahmy has been a Managing Director within the Global Wealth and Retirement Services group (“GWRS”), which is a business unit within the BofA Corp. Global Wealth & Investment Management group (“GWIM”), a division within BofA Corp. and responsible for Private Equity and Real Assets Technical Sales and Origination within MLAI from December 2012 until her appointment as Chief Executive Officer. She joined MLAI as a Director in November 2008 and was head of Private Equity and Real Assets Technical Sales from that date to December 2012. In these capacities, Ms. Fahmy was responsible for a team of private equity and real assets specialists that worked with financial advisors, portfolio managers and clients to educate and raise capital. Ms. Fahmy holds a B.S. degree in Business Administration and Finance with a minor in Economics from the University of Delaware.

 

Barbra E. Kocsis, age 49, is the Chief Financial Officer for MLAI and is a Director within BofA Corp.’s Global Technology and Operations group, positions she has held since October 2006. She has been listed with the CFTC as a principal of MLAI since May 21, 2007.  Ms. Kocsis’ responsibilities include providing a full range of specialized financial and tax accounting services for the Alternative Investment products offered through the Selling Agent.  She graduated cum laude from Monmouth College with a Bachelor of Science in Business Administration — Accounting.

 

Dominick A. Carlino, age 43, has been a Managing Director of MLAI, heading Relationship Management and Business Development, since May 2013. Mr. Carlino has been listed as a principal of MLAI since January 2, 2014.  In his role, he is responsible for enhancing and driving relationships between MLAI and key asset management partners. Mr. Carlino was on a garden leave from July 2012 through May 2013.  Prior to joining Merrill Lynch, Mr. Carlino was Senior Managing Director and Head of Business Development at AlphaOne Capital Partners LLC, an equity-focused alternative asset management firm, from March 2011 through July 2012.  From April 2005 through March 2011, he served as an Executive Director within Morgan Stanley Alternative Investment Partners LP, a registered commodity pool operator, focused on business development and distribution.  Mr. Carlino has been listed as a principal of MLAI since January 2, 2014.  Mr. Carlino holds an M.B.A. and a B.S. degree in Finance from Villanova University.

 

Ninon Marapachi, age 38,  has been the head of the Hedge Fund Origination and Product Management team within the BofA Corp. Alternative Investments Group, a division within BofA Corp. that provides investment professionals and their clients with access to investment products and other services, since September 2008.  Ms. Marapachi has been listed

 

50



 

as a principal of MLAI since January 3, 2014.  She has been an NFA associate member since February 2011 and registered as an associated person of MLPF&S since March 2011.  Her team is responsible for sourcing, structuring, negotiating and managing hedge funds and managed futures products on the GWIM hedge fund platform.  In addition, since September 2013 she has been a Director for the Board of Sponsors for Educational Opportunities, a non-profit organization with a goal to provide educational and career programs to young people from underserved communities to maximize their opportunities for higher education and future success.  Ms. Marapachi graduated magna cum laude with a B.A. degree in Economics from Mount Holyoke College.

 

Jeff McGoey, age 39, has been a Vice President of MLAI and a Director within GWIM responsible for Alternative Investment Platform Oversight for BofA Corp. since December 2010.  Mr. McGoey has been listed as a principal of MLAI since January 13, 2014.  Mr. McGoey served as a Vice President with portfolio oversight to ten derivative based closed end funds from March 2009 through December 2010.  Within GWIM Alternative Investments, from May 2008 through December 2010, Mr. McGoey was a Vice President holding various roles including hedge fund and private equity origination, exchange fund and customized fund oversight, and managing various strategic initiatives across the organization until December 2010.  Mr. McGoey is a CFA Charter holder, maintains the CAIA designation and holds a B.A. degree in Economics from Rutgers College in New Jersey.

 

Greg Parets, age 39, has been Head of Cross Platform Initiatives for the Alternative Investments Group of GWIM since June 2013.  Mr. Parets joined BofA Corp. in September 2010 as Head of Strategic Initiatives in the Alternative Investments Group’s Origination & Product Management team and remained in this role until June 2013.  In this role, he led creation and implementation of an industry-leading platform to offer hedge funds, managed futures, and select private equity funds to advisory accounts. Mr. Parets was in between employers from April 2010 to September 2010. Prior to joining BofA Corp., he worked at UBS Wealth Management Americas, a provider of wealth management products and services, where he was Team Lead for the Strategy & Business Development Group from July 2006 through January 2009 and Head of Segment Strategy & Client Experience from February 2009 through April 2010.  Mr. Parets has been listed as a principal of MLAI since January 2, 2014.  Mr. Parets graduated summa cum laude from The George Washington University with a B.B.A. degree in International Business and cum laude from Harvard Law School with a J.D.

 

Devesh Saksena, age 37, has been a Vice President of MLAI  since October 2015. He has been listed with the CFTC as a principal of MLAI since November 2015.  Mr. Saksena has been the Head of Business Management and Governance for MLAI since he joined MLAI in June 2015. Prior to joining MLAI, Mr. Saksena was previously listed as a principal of Dicken Commodities Inc. (“Dicken”) where Mr. Saksena was Chief Operating Officer from January 2013 to January 2015.  Prior to that, Mr. Saksena was Head of Operational Due Diligence and Director of North American Business for Schroders NewFinance Capital LLP from June 2008 to October 2012.  Mr. Saksena is a qualified chartered accountant from the UK and is a Fellow of the Institute of Chartered Accountants in England & Wales, and holds a B.A. degree with honors in Industrial Economics from the University of Nottingham (U.K.).

 

MLAI acts as the sponsor, general partner or manager to five public futures funds whose units of limited partnership interests or limited liability company interests are registered under the Securities Exchange Act: Aspect FuturesAccess LLC, ML BlueTrend FuturesAccess LLC, ML Select Futures I L.P., ML Transtrend DTP Enhanced FuturesAccess LLC, and ML Winton FuturesAccess LLC. Because MLAI serves as the sole sponsor, general partner or manager of each of these funds, the officers and managers of MLAI effectively manage them as officers and directors of such funds.

 

(c)                               Identification of Certain Significant Employees:

 

None.

 

(d)                                 Family Relationships:

 

None.

 

(e)                                  Business Experience:

 

See Items 10(a) and (b) above.

 

(f)                                   Involvement in Certain Legal Proceedings:

 

None.

 

51



 

(g)                                  Promoters and Control Persons:

 

Not applicable.

 

(h)                                 Section 16(a) Beneficial Ownership Reporting Compliance:

 

During the fiscal year ended December 31, 2015, there was a late Form 3 filing by Devesh Saksena, a manager of MLAI.  Except as disclosed in the preceding sentence, to the Fund’s knowledge, all required Section 16(a) filings during the fiscal year ended December 31, 2015 were timely and correctly made.

 

Code of Ethics:

 

MLAI and BofA Corp. have adopted a code of ethics which applies to the Fund’s (MLAI’s) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Fund.  A copy of the code of ethics is available to any person, without charge, upon request by calling 1-866-MER-ALTS.

 

Nominating Committee:

 

Not applicable. (Neither the Fund nor MLAI has a nominating committee.)

 

Audit Committee; Audit Committee Financial Expert:

 

Not applicable. (Neither the Fund nor MLAI has an audit committee.  There are no listed shares of the Fund or MLAI.)

 

Item 11: Executive Compensation

 

The managers and officers of MLAI are remunerated by BofA Corp. in their respective positions.  The Fund does not have any officers, managers or employees. The Fund pays Sponsor fees to MLAI and brokerage commissions to MLPF&S, which is a BofA Corp. affiliate. MLAI also receives management fees.  MLAI or BofA Corp. affiliates may also receive certain economic benefits from possession of the Fund’s U.S. dollar assets.  The managers and officers receive no compensation from the Fund.  See Item 1(c) “Narrative Description of Business—Description of Current Charges.”

 

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

(a)                                 Security Ownership of Certain Beneficial Owners:

 

Not applicable. (The Units represent limited liability company interests. The Fund is managed by its Manager, MLAI.)

 

(b)                                 Security Ownership of Management:

 

MLAI owns 88 Class D Units which represent less than 1% of the Fund’s Net Asset Value.  The managers and executive officers of MLAI do not own any Units.

 

(c)                                  Changes in Control:

 

None.

 

(d)                                 Securities Authorized for Issuance Under Equity Compensation Plans:

 

Not applicable.

 

Item 13: Certain Relationships and Related Transactions, and Director Independence

 

See Item 1(c) “Narrative Description of Business—Description of Current Charges” regarding certain fee arrangements with respect to the Fund and MLAI or other BofA Corp. affiliates.

 

52



 

Director Independence:

 

No person who served as a manager of MLAI during 2015 could be considered independent based on the definition of an independent director under the NASDAQ rules.

 

Item 14: Principal Accounting Fees and Services

 

(a)                                 Audit Fees

 

Aggregate fees billed directly to the Fund for professional services rendered by the principal accountant, PricewaterhouseCoopers LLP, for the audit of the Fund’s annual financial statements and review of financial statements included in the Fund’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the years ended December 31, 2015 and 2014 were $182,400 and $177,067, respectively.

 

(b)                                 Audit-Related Fees

 

There were no other audit-related fees billed for the years ended December 31, 2015 and 2014, related to the Fund.

 

(c)                                  Tax Fees

 

No fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers and their respective affiliates for the years ended December 31, 2015 and 2014 for professional services rendered to the Fund in connection with tax compliance, tax advice and tax planning.

 

(d)                                 All Other Fees

 

No other fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers and their respective affiliates for the years ended December 31, 2015 and 2014 for professional services rendered to the Fund, other than as set forth in the preceding paragraph (a).

 

(e)                                Neither the Fund nor MLAI has an audit committee to pre-approve principal accountant fees and services.  In lieu of an audit committee, the managers and the principal financial officer pre-approve all services prior to the commencement of services.

 

PART IV

 

Item 15: Exhibits, Financial Statement Schedules

 

1.                                      Financial Statements (found in Exhibit 13.01):

 

 

Page

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

1

 

 

FINANCIAL STATEMENTS:

 

 

 

Statements of Financial Condition as of December 31, 2015 and 2014

2

 

 

Statements of Operations for the years ended December 31, 2015, 2014 and 2013

3

 

 

Statements of Changes in Members’ Capital for the years ended December 31, 2015, 2014 and 2013

4

 

 

Financial Data Highlights for the years ended December 31, 2015, 2014 and 2013

6

 

 

Notes to Financial Statements

9

 

53



 

2.                                      Financial Statement Schedules:

 

Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.

 

3.                                      Exhibits:

 

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

 

Designation

 

Description

 

 

 

3.01

 

Certificate of Formation of ML Transtrend DTP Enhanced FuturesAccess LLC.

 

 

 

Exhibit 3.01:

 

Is incorporated by reference from Exhibit 3.01 contained in the registrant’s Registration Statement on Form 10 filed on June 25, 2007.

 

 

 

3.02

 

Third Amended and Restated Limited Liability Company Operating Agreement of ML Transtrend DTP Enhanced FuturesAccess LLC.

 

 

 

Exhibit 3.02

 

Is incorporated by reference from Exhibit 3.02 contained in the registrant’s Report on Form 8-K filed on December 6, 2012.

 

 

 

3.03

 

Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of ML Transtrend DTP Enhanced FuturesAccess LLC.

 

 

 

Exhibit 3.03

 

Is incorporated by reference from Exhibit 3.02(i) contained in the registrant’s Report on Form 8-K filed on November 13, 2013.

 

 

 

3.04

 

Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of ML Transtrend DTP Enhanced FuturesAccess LLC.

 

 

 

Exhibit 3.04

 

Is incorporated by reference from Exhibit 3.01(i) and 3.02(ii) contained in the registrant’s Report on Form 8-K filed on April 9, 2015.

 

 

 

10.01

 

Customer Agreement between ML Transtrend DTP Enhanced FuturesAccess LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

 

 

 

Exhibit 10.01:

 

Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Registration Statement on Form 10 filed on November 13, 2007.

 

 

 

10.02

 

Advisory Agreement by and among ML Transtrend DTP Enhanced FuturesAccess LLC, Merrill Lynch Alternative Investments LLC and Transtrend B.V.

 

 

 

Exhibit 10.02:

 

Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Form 10-K for the year ended December 31, 2008, filed on March 31, 2009.

 

 

 

10.03

 

Amendment to the Advisory Agreement by and among ML Transtrend DTP Enhanced      FuturesAccess LLC, Merrill Lynch Alternative Investments LLC and Transtrend B.V.

 

 

 

Exhibit 10.03:

 

Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K    filed on March 13, 2014.

 

 

 

13.01

 

2015 Annual Report and Report of Independent Registered Public Accounting Firm.

 

 

 

Exhibit 13.01:

 

Is filed herewith.

 

 

 

31.01 and 31.02

 

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

 

 

 

Exhibit 31.01 and 31.02:

 

Are filed herewith.

 

54



 

32.01 and 32.02

 

Section 1350 Certifications

 

 

 

Exhibit 32.01 and 32.02:

 

Are filed herewith.

 

 

 

99.1

 

Amended and Restated Selling Agreement effective as of July 8, 2011 between Merrill Lynch Alternative Investments LLC (for itself, and as sponsor on behalf of the investment funds listed therein) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (as selling agent).

 

 

 

Exhibit 99.1:

 

Is incorporated by reference from Exhibit 99.1 contained in the registrant’s Report on Form 8-K filed on July 11, 2011.

 

 

 

101

 

The following materials from the Fund’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2015 formatted in XBRL (Extensible Business Reporting Language): ( i )Statements of Financial Condition (ii) Statements of Operations (iii) Statements of  Changes in Members’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text.

 

 

 

Exhibit 101

 

Is filed herewith.

 

55



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

By:  MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC, MANAGER

 

By:

/s/Nancy Fahmy

 

Nancy Fahmy

 

Chief Executive Officer and President

 

(Principal Executive Officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/Nancy Fahmy

 

Chief Executive Officer, President and Manager

 

March 18, 2016

Nancy Fahmy

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Barbra E. Kocsis

 

Chief Financial Officer and Vice President

 

March 18, 2016

Barbra E. Kocsis

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/Dominick A. Carlino

 

Vice President and Manager

 

March 18, 2016

Dominick A.Carlino

 

 

 

 

 

 

 

 

 

/s/Ninon Marapachi

 

Vice President and Manager

 

March 18, 2016

Ninon Marapachi

 

 

 

 

 

 

 

 

 

/s/Jeff McGoey

 

Vice President and Manager

 

March 18, 2016

Jeff McGoey

 

 

 

 

 

 

 

 

 

/s/ Greg Parets

 

Vice President and Manager

 

March 18, 2016

Greg Parets

 

 

 

 

 

 

 

 

 

/s/Devesh Saksena

 

Vice President and Manager

 

March 18, 2016

Devesh Saksena

 

 

 

 

 

56



 

ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC

 

2015 FORM 10-K

 

INDEX TO EXHIBITS

 

 

 

Exhibit

 

 

 

Exhibit 13.01

 

2015 Annual Report and Report of Independent Registered Public Accounting Firm

 

 

 

Exhibit 31.01 and 31.02

 

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

 

 

 

Exhibit 32.01 and 32.02

 

Sections 1350 Certifications

 

 

 

Exhibit 101

 

The following materials from the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 formatted in XBRL (Extensible Business Reporting Language): ( i )Statements of Financial Condition (ii) Statements of Operations (iii) Statements of Changes in Members’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text.

 

57