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EX-32.01 - EX-32.01 - ML SELECT FUTURES I LPa16-6564_1ex32d01.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

x

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

 

For the quarterly period ended March 31, 2016

 

OR

 

 

o

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

 

For the transition period from                  to                 

 

Commission File Number 0-50269

 

ML SELECT FUTURES I L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3879393

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

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)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of March 31, 2016, 105,246 units of limited partnership interest were outstanding.

 

 

 



 

ML SELECT FUTURES I L.P.

 

QUARTERLY REPORT FOR MARCH 31, 2016 ON FORM 10-Q

 

Table of Contents

 

 

 

PAGE

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

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

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

25

 



 

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Equity in commodity futures trading accounts:

 

 

 

 

 

Cash (includes restricted cash of $907,325 for 2016 and $1,166,429 for 2015)

 

$

24,410,894

 

$

24,387,681

 

Unrealized profit on open futures contracts

 

196,394

 

214,306

 

Unrealized profit on open forwards contracts

 

1,380

 

23,963

 

Cash and cash equivalents

 

552,465

 

547,201

 

Due from Manager

 

16,672

 

 

Other assets

 

6,213

 

5,148

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

25,184,018

 

$

25,178,299

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on open futures contracts

 

$

69,925

 

$

190,624

 

Unrealized loss on open forward contracts

 

4,978

 

2,365

 

Redemptions payable

 

349,758

 

442,287

 

Wrap fee payable

 

120,315

 

119,721

 

Other liabilities

 

6

 

6

 

Total liabilities

 

544,982

 

755,003

 

 

 

 

 

 

 

PARTNERS’ CAPITAL:

 

 

 

 

 

 

 

 

 

 

 

General Partner (0.41 Units and 0.41 Units)

 

96

 

92

 

Limited Partners (105,246 Units and 108,563 Units)

 

24,638,940

 

24,423,204

 

 

 

 

 

 

 

Total Partners’ Capital

 

24,639,036

 

24,423,296

 

 

 

 

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

25,184,018

 

$

25,178,299

 

 

 

 

 

 

 

NET ASSET VALUE PER UNIT

 

 

 

 

 

(Based on 105,246 and 108,563 Units outstanding; unlimited Units authorized)

 

$

234.1081

 

$

224.9680

 

 

See notes to financial statements.

 

1



 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the three

 

For the three

 

 

 

months ended

 

months ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

TRADING PROFIT (LOSS):

 

 

 

 

 

 

 

 

 

 

 

Realized, net

 

$

1,245,935

 

$

3,080,979

 

Change in unrealized, net

 

77,591

 

(1,061,981

)

 

 

 

 

 

 

Total trading profit (loss), net

 

1,323,526

 

2,018,998

 

 

 

 

 

 

 

INVESTMENT INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

17,537

 

2,013

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Wrap fee

 

358,469

 

480,278

 

Direct commission fee

 

39,179

 

 

Total expenses before reimbursement

 

397,648

 

480,278

 

Reimbursement of direct commission fee

 

(39,179

)

 

 

 

 

 

 

 

Total expenses after reimbursement

 

358,469

 

480,278

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)

 

(340,932

)

(478,265

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

982,594

 

$

1,540,733

 

 

 

 

 

 

 

NET INCOME (LOSS) PER UNIT:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of General Partner and Limited Partner Units outstanding

 

107,662

 

126,930

 

 

 

 

 

 

 

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

 

$

9.13

 

$

12.14

 

 

See notes to financial statements.

 

2



 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(unaudited)

 

 

 

 

 

General

 

Limited

 

 

 

 

 

Units

 

Partner

 

Partners

 

Total

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL,

 

 

 

 

 

 

 

 

 

December 31, 2014

 

128,326

 

$

750,192

 

$

31,436,379

 

$

32,186,571

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

36,015

 

1,504,718

 

1,540,733

 

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(3,200

)

 

(836,674

)

(836,674

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL,

 

 

 

 

 

 

 

 

 

March 31, 2015

 

125,126

 

$

786,207

 

$

32,104,423

 

$

32,890,630

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL,

 

 

 

 

 

 

 

 

 

December 31, 2015

 

108,563

 

$

92

 

$

24,423,204

 

$

24,423,296

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

4

 

982,590

 

982,594

 

 

 

 

 

 

 

 

 

 

 

Redemptions

 

(3,317

)

 

(766,854

)

(766,854

)

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL,

 

 

 

 

 

 

 

 

 

March 31, 2016

 

105,246

 

$

96

 

$

24,638,940

 

$

24,639,036

 

 

See notes to financial statements.

 

3



 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

FINANCIAL DATA HIGHLIGHTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND MARCH 31, 2015 (unaudited)

 

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

 

 

 

Three months ended

 

Three months ended

 

 

 

March 31, 2016

 

March 31, 2015

 

 

 

 

 

 

 

Per Unit Operating Performance:

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

224.9680

 

$

250.8188

 

 

 

 

 

 

 

Realized trading profit (loss)

 

11.5587

 

24.2567

 

Change in unrealized, net

 

0.7482

 

(8.4473

)

Interest income, net

 

0.1630

 

0.0158

 

Expenses

 

(3.6942

)

(3.7839

)

Expense reimbursement

 

0.3644

 

0.0000

 

 

 

 

 

 

 

Net asset value, end of period

 

$

234.1081

 

$

262.8601

 

 

 

 

 

 

 

Total Return: (1) (2) (3)

 

 

 

 

 

 

 

 

 

 

 

Total return

 

4.06

%

4.80

%

 

 

 

 

 

 

Ratios to Average Partners’ Capital (2) (3):

 

 

 

 

 

 

 

 

 

 

 

Expenses before reimbursement by Manager

 

1.61

%

1.46

%

Reimbursement by Manager

 

-0.16

%

0.00

%

Expenses after reimbursement by Manager

 

1.45

%

1.46

%

Net investment loss

 

-1.38

%

-1.45

%

 


(1) The total return is based on compounded monthly returns and is calculated for limited partner units taken as a whole. An individual limited partner’s return may vary from these returns based on timing of capital transactions.

(2) Includes the impact of Performance fees of 0% and 0%, respectively.

(3) The ratios and total return are not annualized.

 

See notes to financial statements.

 

4



 

ML SELECT FUTURES I L.P.

(A Delaware Limited Partnership)

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1.              ORGANIZATION

 

ML Select Futures I L.P. (the “Partnership”), which is an investment company as defined by Accounting Standards Codification (“ASC”) guidance, was organized under the Delaware Revised Uniform Limited Partnership Act in August 1995 and commenced trading activities on April 16, 1996. The Partnership engages in the speculative trading of futures and forward contracts on a wide range of commodities. Sunrise Capital Partners, LLC (“Trading Advisor” or “Sunrise”) is the trading advisor of the Partnership. The Trading Advisor trades its Expanded Diversified Program (the “Trading Program”) for the Partnership.

 

Merrill Lynch Alternative Investments LLC (“MLAI”, the “Sponsor” or the “General Partner”), is the general partner and sponsor of the Partnership. 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 Partnership. The General Partner may select other parties as clearing broker(s). Merrill Lynch International (“MLI”) is the primary foreign exchange (“F/X”) forward prime broker for the Partnership. The General Partner 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. MLAI and each limited partner share in the profits and losses of the Partnership in proportion to their respective interests in it.

 

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

 

The Partnership considers all highly liquid investments, with a maturity of three months or less when acquired, to be cash equivalents classified as Level II within the fair value hierarchy discussed in Note 3. As of March 31, 2016, the Partnership holds cash equivalents. Cash was held at a nationally recognized financial institution.

 

In the opinion of management, these interim financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of the Partnership as of  March 31, 2016 and December 31, 2015 and the results of its operations for the three month periods ended March 31, 2016 and 2015.  However, the operating results for the interim periods may not be indicative of the results for the full year.

 

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015.

 

5



 

Estimates

 

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

 

6



 

2.              CONDENSED SCHEDULES OF INVESTMENTS

 

The Partnership’s investments, defined as unrealized profit (loss) on open contracts on the Statements of Financial Condition, as of March 31, 2016 and December 31, 2015, are as follows:

 

March 31, 2016

 

 

 

Long Positions

 

Short Positions

 

Net Unrealized

 

 

 

 

 

Commodity Industry

 

Number of

 

Unrealized

 

Percent of

 

Number of

 

Unrealized

 

Percent of

 

Profit (Loss)

 

Percent of

 

 

 

Sector

 

Contracts / Notional*

 

Profit (Loss)

 

Partners’ Capital

 

Contracts / Notional*

 

Profit (Loss)

 

Partners’ Capital

 

on Open Positions

 

Partners’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

20

 

$

(10,304

)

-0.04

%

(55

)

$

12,632

 

0.05

%

$

2,328

 

0.01

%

April 2016 - August 2016

 

Currencies - Futures

 

21

 

2,081

 

0.01

%

(20

)

(4,843

)

-0.02

%

(2,762

)

-0.01

%

June 2016

 

Currencies - Forwards*

 

134,656

 

1,380

 

0.01

%

(131,058

)

(4,978

)

-0.02

%

(3,598

)

-0.01

%

June 2016

 

Energy

 

 

 

0.00

%

(11

)

10,893

 

0.04

%

10,893

 

0.04

%

April 2016

 

Interest rates

 

14

 

9,593

 

0.04

%

(24

)

3,399

 

0.01

%

12,992

 

0.05

%

June 2016

 

Metals

 

21

 

(1,720

)

-0.01

%

(18

)

27,045

 

0.11

%

25,325

 

0.10

%

May 2016 - June 2016

 

Stock indices

 

53

 

77,905

 

0.32

%

(9

)

(212

)

0.00

%

77,693

 

0.32

%

April 2016 - June 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

78,935

 

0.33

%

 

 

$

43,936

 

0.17

%

$

122,871

 

0.50

%

 

 

 

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 / Notional*

 

Profit (Loss)

 

Partners’ Capital

 

Contracts / Notional*

 

Profit (Loss)

 

Partners’ Capital

 

on Open Positions

 

Partners’ Capital

 

Maturity Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

$

 

0.00

%

(78

)

$

(8,544

)

-0.03

%

$

(8,544

)

-0.03

%

February 2016 - May 2016

 

Currencies - Futures

 

 

 

0.00

%

(1

)

1,215

 

0.00

%

1,215

 

0.00

%

March 2016

 

Currencies - Forwards*

 

38,743

 

1,123

 

0.00

%

(1,966,349

)

20,475

 

0.08

%

21,598

 

0.08

%

March 2016

 

Interest rates

 

 

 

0.00

%

(14

)

1,904

 

0.01

%

1,904

 

0.01

%

June 2016

 

Energy

 

 

 

0.00

%

(68

)

(27,109

)

-0.11

%

(27,109

)

-0.11

%

January 2016 - February 2016

 

Metals

 

27

 

15,316

 

0.06

%

(74

)

(30,727

)

-0.13

%

(15,411

)

-0.07

%

February 2016 - March 2016

 

Stock indices

 

70

 

77,380

 

0.32

%

(28

)

(5,753

)

-0.02

%

71,627

 

0.30

%

January 2016 - March 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

93,819

 

0.38

%

 

 

$

(48,539

)

-0.20

%

$

45,280

 

0.18

%

 

 

 


*Currencies-Forwards present notional amounts as converted to USD.

 

No individual contract’s unrealized profit or loss comprised greater than 5% of Partners’ Capital as of March 31, 2016 and December 31, 2015. 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 netting unrealized losses against unrealized profits as applicable.  Net unrealized profit and loss provides a rough measure of the exposure of the Partnership to the various sectors as of the date listed, although such exposure can change at any time.

 

7



 

3.              FAIR VALUE OF INVESTMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8



 

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

 

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

 

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

 

Transfers of investments between different levels of the fair value hierarchy, if any, are recorded as of the beginning of the reporting period. There were no transfers to or from any level during the three month period ended March 31, 2016 or the year ended December 31, 2015.

 

The Partnership’s unrealized profit (loss) on open forwards and futures contracts, by the above fair value hierarchy levels, as of March 31, 2016 and December 31, 2015, are as follows:

 

Net unrealized profit (loss)

 

 

 

 

 

 

 

 

 

on open contracts

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Futures

 

$

196,394

 

$

174,299

 

$

22,095

 

$

 

Forwards

 

1,380

 

 

1,380

 

 

 

 

$

197,774

 

$

174,299

 

$

23,475

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Futures

 

$

69,925

 

$

49,975

 

$

19,950

 

$

 

Forwards

 

4,978

 

 

4,978

 

 

 

 

$

74,903

 

$

49,975

 

$

24,928

 

$

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

$

122,871

 

$

124,324

 

$

(1,453

)

$

 

 

9



 

Net unrealized profit (loss)

 

 

 

 

 

 

 

 

 

on open contracts

 

Total

 

Level I

 

Level II

 

Level III

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Futures

 

$

214,306

 

$

165,328

 

$

48,978

 

$

 

Forwards

 

23,963

 

 

23,963

 

 

 

 

$

238,269

 

$

165,328

 

$

72,941

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Futures

 

$

190,624

 

$

115,180

 

$

75,444

 

$

 

Forwards

 

2,365

 

 

2,365

 

 

 

 

$

192,989

 

$

115,180

 

$

77,809

 

$

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

$

45,280

 

$

50,148

 

$

(4,868

)

$

 

 

The Partnership’s volume of trading forwards and futures as of the three month period ended March 31, 2016 and year ended December 31, 2015 are representative of the activity throughout these periods.

 

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

 

The Partnership maintains margin deposits and cash collateral with its futures and forwards brokers, respectively, based on the greater of exchange margin or amounts determined by the respective broker. At March 31, 2016 and December 31, 2015, the initial margin deposits (cash) are used to satisfy the margin requirements to establish the futures or forward contracts and are presented on the Statements of Financial Condition in Cash in the Equity in commodity trading accounts. The variation margin on open contracts is presented gross on the Statements of Financial Condition in Unrealized profit or loss on futures or forwards contracts, respectively. The Partnership is subject to agreements which support the ability to settle net with its counterparties; however, the Partnership has elected to present the related balances on the Statements of Financial Condition on a gross basis. The net of these amounts plus the restricted cash presented within the Cash in the Equity in commodity trading accounts on the Statements of Financial Condition represents the Partnership’s net exposure.

 

The following table indicates the trading profits and losses before brokerage commissions, by commodity industry sector for each of the three month periods ended March 31, 2016 and 2015:

 

10



 

 

 

For the three months ended

 

For the three months ended

 

 

 

March 31, 2016

 

March 31, 2015

 

Commodity Industry Sector

 

Profit (loss) from trading, net

 

Profit (loss) from trading, net

 

 

 

 

 

 

 

Agriculture

 

$

(59,567

)

$

(51,012

)

Currencies

 

258,373

 

174,022

 

Energy

 

46,689

 

151,343

 

Interest rates

 

508,455

 

768,828

 

Metals

 

136,831

 

(44,701

)

Stock indices

 

432,745

 

1,020,518

 

 

 

 

 

 

 

Total, net

 

$

1,323,526

 

$

2,018,998

 

 

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

 

4.              MARKET AND CREDIT RISKS

 

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

 

Market Risk

 

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

 

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

 

Credit Risk

 

The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions because exchanges typically (but not universally)

 

11



 

provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the investors of the exchange/clearinghouse is pledged to support the financial integrity of the exchange/clearinghouse.  In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties.  Margins, which may be subject to loss in the event of a default, are generally required in exchange traded contracts and in the over the counter markets counterparties may also require margin. The credit risk associated with these instruments from counterparty nonperformance is the unrealized profit (loss) on open contracts, if any, included in the Statements of Financial Condition.

 

MLAI, as sponsor of the Partnership, has a general policy of maintaining clearing and prime brokerage arrangements with BofA Corp. affiliates, such as MLPF&S and MLI, although MLAI may engage non-BofA Corp. affiliated service providers as clearing brokers or prime brokers for the Partnership. This policy may increase risk to the Partnership by preventing the diversification of brokers used by the Partnership.

 

The Partnership, in its normal course of business, enters into various contracts, with MLPF&S acting as its futures clearing broker and MLI as its forwards prime broker.  Due to the relationship with MLPF&S, in the event of default, all futures balances are eligible for offset with a net settlement due to MLPF&S.  Due to the relationship with MLI, in the event of default, all forwards balances are eligible for offset with a net settlement due to MLI.

 

Indemnifications

 

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

 

5.              RELATED PARTY TRANSACTIONS

 

MLAI owns a General Partner interest which represents less than 1% of the Partnership’s Net Asset Value as of March 31, 2016.

 

MLAI, the Partnership and certain other FuturesAccessSM Program Funds, MLAI’s HedgeAccess® Program of  hedge funds and other BofA Corp. funds (each a “Serviced Fund” and collectively, the “Serviced Funds”) have entered into a transfer agency and investor services agreement with Financial Data Services, Inc. (the “Transfer Agent”), a wholly owned subsidiary of BofA Corp. and affiliate of MLAI.  The Transfer Agent provides registrar, distribution disbursing agent, transfer agent and certain other services related to the issuance, redemption, exchange and transfer of Units.  The fees charged by the Transfer Agent for its services were 0.02% per year of the aggregate net assets of the Serviced Funds. The fee is paid monthly in arrears.  The Transfer Agent also receives reimbursement for its out-of-pocket expenses and certain extraordinary expenses.  MLAI allocates the Transfer Agent fees to each of the Serviced Funds, including the Partnership, on a monthly basis based on each Serviced Fund’s net assets. The Transfer Agent fee allocated to the Partnership for the three month periods ended March 31, 2016 and 2015 is paid on behalf of the Partnership by MLAI. These fees are included in the wrap fees discussed further below.

 

The Partnership’s brokerage commissions and administrative fees are included in the wrap fee which covers all of BofA Corp.’s costs and expenses, other than bid-ask spreads, certain trading fees and extraordinary expenses.

 

12



 

Effective January 1, 2016, the Partnership began paying a direct commission fee at the time of entering into the trades. As these fees would otherwise be covered by the Partnership’s wrap fee, the Manager has elected to reimburse the Partnership for those fees on a monthly basis. For the period January 1, 2016 through March 31, 2016, $39,179 of these fees have been recorded as reimbursement from the Manager. The balance of $16,672 included in Due from Manager on the Statement of Financial Condition as of March 31, 2016 represents the reimbursement amount still owed to the Partnership as of March 31, 2016.

 

Wrap fees and interest, net, as presented on the Statements of Operations, are all received from or paid to related parties. Equity in commodity trading accounts, including cash and Unrealized profit (loss), as presented on the Statements of Financial Condition are held with a related party.

 

6.              SUBSEQUENT EVENTS

 

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

 

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

 

MONTH-END NET ASSET VALUE PER UNIT

 

The Partnership calculates the Net Asset Value per Unit as of the close of business on the last business day of each calendar month and such other dates as MLAI may determine in its discretion (each, a “Calculation Date”). The Partnership’s Net Asset Value will generally equal the value of the Partnership’s account under the management of its Trading Advisor as of such date, plus any other assets held by the Partnership, minus accrued wrap fee, profit share and other liabilities of the Partnership.  MLAI is authorized to make all Net Asset Value determinations.

 

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 Partnership.  Therefore, the charts below are referencing Net Asset Value at each Calculation Date.

 

PERIOD-END NET ASSET VALUE PER INITIAL UNIT

 

 

 

Jan.

 

Feb.

 

Mar.

 

2015

 

$

260.1297

 

$

262.9219

 

$

262.8601

 

2016

 

$

227.1967

 

$

230.2900

 

$

234.1081

 

 

Liquidity and Capital Resources

 

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

 

Substantially all of the Partnership’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 Partnership’s profit or loss potential might increase. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow.

 

13



 

The Partnership 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 Partnership to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so.

 

As a commodity pool, the Partnership 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 Partnership 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 General Partner of the Partnership, 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.

 

For the three months ended March 31, 2016, Partnership capital increased 0.88% from $24,423,296 to $24,639,036.  This increase was attributable to the net income from operations of $982,594 coupled with the redemption of 3,317 redeemable Units resulting in an outflow of $766,854. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent months.

 

Critical Accounting Policies

 

Statement of Cash Flows

 

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

 

Investments

 

All investments (including derivatives) are held for trading purposes.  Investments are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date.  Investments denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Profits or losses are realized when contracts are liquidated.  Unrealized profits or losses on open contracts are included as a component of equity in commodity trading accounts on the Statements of Financial Condition. Realized profits or losses and any change in net unrealized profits or losses from the preceding period are reported in the Statements of Operations.

 

Fair Value Measurements

 

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

 

Futures Contracts

 

The Partnership trades exchange listed futures contracts.  A listed futures contract is a firm commitment to buy or sell a standardized quantity of an underlying asset over a specified duration.  The Partnership buys and sells contracts based on indices of financial assets such as stocks, domestic and global stock indices, as well as contracts on various physical commodities. Prices paid or received on these contracts are determined by the ask or bid provided by the exchanges on which they are traded.  Contracts may be settled in physical form or cash settled depending upon the contract.  Upon the execution of a trade, margin requirements determine the amount of cash that must be on deposit to secure the transaction.  These amounts are considered restricted cash on the Partnership’s Statements of Financial Condition.  Contracts are priced daily by the Partnership and the profit or loss is based on the daily mark to market and is

 

14



 

recorded as unrealized profit (loss).  When the contract is closed, the Partnership records a realized profit or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.  Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker or directly with the exchange on which the contracts are traded, credit exposure is limited.  Realized profit (loss), net and change in unrealized profit (loss), net on futures contracts are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Operations.  The Partnership also trades futures contracts on the London Metals Exchange (LME). The valuation pricing for LME contracts is based on action of a committee that incorporates prices from the most liquid trading sessions of the day and can also rely on other inputs such as supply and demand factors and bids and asks from open outcry sessions.

 

Forward Foreign Currency Contracts

 

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

 

Interest Rates and Income

 

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 the Sponsor 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%, except for currencies designated by MLPF&S as “negative interest rate currencies.”  MLPF&S deposits certain of the Fund’s assets as margin or collateral with clearinghouses and/or depositories.  As a result of the present low interest rate environment, clearinghouses and depositories charge MLPF&S fees to account for the negative interest rates on cash balances for certain currencies, which may change from time to time.  Accordingly, MLPF&S will charge the Fund a “negative interest rate fee” for any currencies designated by MLPF&S as a “negative interest rate currency.”

 

Income Taxes

 

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

 

The Partnership follows the ASC guidance on accounting for uncertainty in income taxes.  This guidance provides how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements.  This guidance also requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority.  Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year.  A prospective investor should be aware that, among other things, income taxes could have a material adverse effect on the periodic calculations of the Net Asset Value of the Partnership, including reducing the Net Asset Value of the Partnership to reflect

 

15



 

reserves for income taxes, such as foreign withholding taxes, that may be payable by the Partnership. This could cause benefits or detriments to certain investors, depending upon the timing of their entry and exit from the Partnership. MLAI has analyzed the Partnership’s tax positions and has concluded that no provision for income tax is required in the Partnership’s financial statements. The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States — 2012.

 

Reform Act

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the definition of “eligible contract participant” and the Partnership expects to meet the amended definition as it applies to trading in “retail forex” transactions so long as its total assets exceed $10 million.  If the Partnership does not meet the definition of “eligible contract participant” for purposes of trading in “retail forex” transactions, it could lead to the Partnership being unable to trade such transactions in the interbank market and bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees.  “Retail forex” markets available to parties that do not meet the definition of “eligible contract participant” could also be significantly less liquid than the interbank market.  Moreover, the creditworthiness of the counterparties with whom the Partnership may be required to trade in such circumstances could be significantly weaker than the creditworthiness of MLI and the currency forward counterparties with which the Partnership would otherwise engage for its currency forward transactions.

 

Results of Operations

 

January 1, 2016 to March 31, 2016

 

January 1, 2016 to March 31, 2016

 

The Partnership experienced a net trading profit of $1,323,526 before brokerage commissions and related fees in the first quarter of 2016. The Partnership’s profits were primarily attributable to the interest rates, stock indices, currency, metals and energy sectors. The agriculture sector posted losses.

 

The interest rate sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the first quarter as global bond markets spiked sharply as investors rushed to shelter when equity and commodity markets melted down. As opportunities arose in the bond sector, the Trading Program rolled into long positions across the globe and captured solid returns. Specifically beneficial were long positions across the U.S. yield curve and in the German bund, with profits long Japanese government bonds and German bobl. Profits were posted to the Partnership in the middle of the quarter as global bonds offered a variety of divergent opportunities. In the first half of February, long positions were effective as investors fled to safety and drove global bond values upward. As markets calmed, bond prices trailed off and a variety of shorting opportunities emerged upon which the Trading Program capitalized on. The best markets for the Trading Program were German bunds, bobl and longer term U.S. bonds. Profits were posted to the Partnership at the end of the quarter. Global bond markets offered the Trading Program some solid opportunities, most notably, in the Italian 10 year market which had a general upward trend throughout March and some very choppy price action along the way down. The Trading Program found additional profits in other European markets including the long gilt, French 10 year, and German bund and these gains were sufficient to offset small losses in short and medium term U.S. Treasuries and the Bobl.

 

The stock indices sector posted profits the Partnership. Losses were posted to the Partnership at the beginning of the first quarter. January was tumultuous to portfolios. In the U.S., major equity indices were down and outside the U.S. outcomes were even worse with many emerging equity markets down. Profits were posted to the Partnership in the middle of the quarter as global equity offered opportunities on both the long and short positions, depending on the timing and duration of investments made by the Trading

 

16



 

Program. In early February, longer term long positions were battered but some of the shorter term positions found opportunities when prices continued their collapse. Later in February, the opportunities reversed. Come month end, the Trading Program’s most profitable investments were in Hong Kong’s Hang Seng, China’s H-shares, Japan’s Topix, and India’s Nifty. Profits were posted to the Partnership at the end of the quarter due to the Trading Program’s long positions the S&P, Russell and NASDAQ.

 

The currency sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the quarter where the Trading Program’s investment approach took short positions in multiple foreign markets (long the U.S. dollar) which trended downward as the month’s chaos unfolded. The Trading Program found profits in the short positions in the British pound, Canadian dollar, Euro, Polish zloty, and Singapore dollar while only losing money in two markets, short positions in the Australian dollar and long Japanese yen. Profits were posted to the Partnership in the middle of the quarter as the Japanese yen offered a shorting opportunity early in the month before stabilizing. In addition, the Trading Program found profits in the Swiss franc which dropped sharply to start the month, however it later rallied and stabilized as February progressed. Profits were posted to the Partnership at the end of the quarter. The Trading Program’s best returns were found trading the ebbs and flows of the Australian dollar and Euro which while both moving upward during March, also vacillated enough over the course of the month to agree with some of the Trading Program’s shorter term investment approaches.

 

The metals sector posted profits to the Partnership.  Profits were posted to the Partnership at the beginning of the quarter from industrial metals such as copper and nickel. Losses were posted to the Partnership in the middle of the quarter. The big winner in February was gold where the Trading Program’s long positions profited with the month’s early price spike and subsequent stabilization. Zinc, copper, silver and aluminum were losses with the Trading Program and collective losses in those markets offset gains in gold. Profits were posted to the Partnership at the end of quarter. In the global metals sector, gold, copper and silver each presented shorter term opportunities upon which the Trading Program’s systems were able to capitalize.

 

The energy sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the quarter as the downward price aligned well with the Trading Program’s range of short positions. By month end, the Trading Program booked solid profits shorting RBOB gasoline, crude oil, natural gas, heating oil, and gasoil, however there was a flat outcome in brent crude. Losses were posted to the Partnership in the middle of the quarter. The gains which were earned investing in brent crude’s and natural gas’ slight price recoveries were offset by losses in RBOB gasoline, gasoil and heating oil. Losses were posted to the Partnership at the end of the quarter. The Trading Program profited on upticks in the brent crude and gasoil markets but less successfully navigated RBOB Gasoline, Heating Oil, Crude Oil and Natural Gas which rose fairly steadily off of a late February floor.

 

The agriculture sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the first quarter. Corn, soybeans and soymeal moved upward against the Trading Program’s positions to offset profits earned in cattle and coffee. Profits were posted to the Partnership in the middle of the quarter. The Trading Program’s short positions in sagging prices led to gains across nearly every market in which the Trading Program invested. Best for January was corn and additional profits were found in soybeans, cotton, soymeal, wheat, coffee and rubber. Only cattle bucked the downward commodity trend enough to generate a loss for the Trading Program in February. Losses were posted to the Partnership at the end of the quarter. Other than a small profit in corn, losses for the Trading Program were uniformly spread across cotton, the soy complex, rubber, wheat, cattle, sugar and coffee, none of which cooperated with our investment approach.

 

17



 

January 1, 2015 to March 31, 2015

 

January 1, 2015 to March 31, 2015

 

The Partnership experienced a net trading profit of $2,018,998 before brokerage commissions and related fees in the first quarter of 2015. The Partnership’s profits were primarily attributable to the stock indices, interest rate, currency and energy sectors. The metals and agriculture sectors posted losses.

 

The stock indices sector posted profits to the Partnership. Losses were posted to the Partnership at the beginning of the first quarter due to the long positions in many facets of sagging U.S. equity markets. Profits were posted to the Partnership in the middle of the quarter. The Trading Program was successful in the equities sector for February. Global markets rallied on solid economic and earnings data, constructive input from the U.S. Federal Reserve, and other inputs finding their way upward after a rough January correction from Australian SPI 200, NASDAQ, S&P 500, Dow Jones, Swedish OMX, German DAX and EU Euro Stoxx. Losses were posted to the Partnership at the end of the quarter as the Trading Program suffered losses in the S&P 500, NASDAQ and the Dow.

 

The interest rate sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the first quarter. Global bonds led the way for the Trading Program in January as investors reached for safety in the face of equity market retracement and ongoing downward price pressure on commodities. With bond prices rising around the world, most of the Trading Program’s long positions were profitable in January with the best returns emerging in U.S. 30, 10 and 5 year treasuries, Japanese government bonds, and European bobl. Additional profits were added in Australian and Canadian bond markets, and only the Trading Program’s positions in the British Short Sterling and the U.S. 2 year treasury markets failed to make profits for the Partnership in January. Losses were posted to the Partnership in the middle of the quarter. Global bond markets were challenging for February and the Trading Program was largely unprofitable across the board in the various markets in which the Partnership invests. Particularly challenging were the British Long Gilt and U.S. 30, 10 and 5 year treasuries, each of which whipped around and ultimately trended downward against the Trading Program’s long positions during February as investor fears eased after a panicky January. Losses were posted to the Partnership at the end of the quarter. Global bonds were perhaps the trickiest sector during March with prices vacillating in connection with commentary and speculation on the potential timing and magnitude of anticipated U.S. rate hikes resulting in losses incurred long the German bund and U.S. 30 year treasury.

 

The currency sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the first quarter. A sharp loss short the Swiss franc on the Swiss government’s mid-month bolstering effort was offset by gains short the Euro, Australian dollar, New Zealand dollar, Danish krone, and Singapore dollar, among other currencies. Losses were posted to the Partnership in the middle of the quarter as the Trading Program incurred another monthly loss in Swiss francs as the Swiss National Bank continued a series of measures at intervention. Profits were posted to the Partnership at the end of the quarter. In this sector, the U.S. dollar continued to surge versus most currencies and the outcome for the Partnership was profitable investing short the Euro, British pound, South African rand, and various other global denominations.

 

The energy sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning of the first quarter.  The Partnership’s short positions across the sector were profitable with natural gas and gasoil leading the way. Only RBOB gasoline failed to yield profit in January as, overall, energy continued to be a source of opportunity for the Trading Program. Losses were posted to the Partnership in the middle of the quarter. February saw a waning of the downward price move as markets across the energy sector rallied and appeared to set a potential bottom after months of gloom. The Trading Program was hit hardest on its positions short Brent crude, gasoil, heating oil and RBOB gasoline and also suffered a slight loss for

 

18



 

February in WTI crude. Profits were posted to the Partnership at the end of the quarter. The Trading Program found its best opportunities in the energy sector. Despite a lot of intra-month price vacillation, prices ultimately moved downward in March and as a result the Partnership was able to capitalize on short positions in various components of its diversified investment models. Brent crude, heating oil, and RBOB gasoline offered the best outcomes and ultimately, only the Partnership’s short position in crude oil lost money for March.

 

The metals sector posted losses to the Partnership. Profits were posted to the Partnership at the beginning of the first quarter. Driving January’s success were sharp downward moves in the copper and aluminum markets as industrial metals got caught in the downdraft of energy and equity prices. The Trading Program’s short positions were not as successful in nickel and whippy gold and silver markets continued to test investment approach but, overall, profits in the sector outweighed losses to lead to a successful January in metals for the Partnership. Losses were posted to the Partnership in the middle of the quarter. The Trading Program suffered losses shorting copper in the face of a solid rally in that market and also misplayed gold with an unsuccessful long trade and platinum with an unsuccessful short trade. Losses were posted to the Partnership at the end of the quarter. The global metals sector was unprofitable for the Trading Program, particularly gold and silver markets that did not settle into any defined pattern.  The industrial metals provided little sanctuary as only a short position in nickel yielded a profit for the Trading Program in March versus losing positions in copper, zinc and aluminum.

 

The agriculture sector posted losses to the Partnership. Losses were posted to the Partnership at the beginning of the first quarter where wheat backtracked sharply against the Partnership’s long position and caused a loss that outweighed small gains earned for Partnership in long corn and short rubber and cotton positions. Profits were posted to the Partnership in the middle of the quarter due to the Partnership’s short positions in coffee and wheat, which aligned nicely with falling prices in those markets. Profits were posted to the Partnership at the end of the quarter. Leading the way were short positions that captured a sharp drop in sugar prices and a less significant, but still profitable drop in coffee prices during March.

 

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

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

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

 

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

 

The Partnership, 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 Partnership’s past performance is not necessarily indicative of its future results.

 

19



 

Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s attempts to manage its market risk.

 

Quantifying The Partnership’s Trading Value At Risk

 

Quantitative Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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

 

The following table indicates the average, highest and lowest trading Value at Risk associated with the Partnership’s open positions by market category for the fiscal period.  For the three month periods ended March 31, 2016 and 2015, the Partnership’s average capitalization was $24,527,225 and $32,775,392, respectively.

 

20



 

March 31, 2016

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

$

45,056

 

0.18

%

$

49,986

 

$

39,998

 

Metals

 

179,410

 

0.73

%

199,040

 

159,269

 

Stock Indices

 

550,401

 

2.24

%

610,623

 

488,613

 

Interest Rates

 

92,039

 

0.38

%

102,110

 

81,707

 

Energy

 

77,169

 

0.31

%

85,613

 

68,506

 

Agricultural Commodities

 

16,492

 

0.07

%

18,297

 

14,641

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

960,567

 

3.91

%

$

1,065,669

 

$

852,734

 

 

March 31, 2015

 

 

 

Average

 

% of Average

 

Highest Value

 

Lowest Value

 

Market Sector

 

Value at Risk

 

Capitalization

 

At Risk

 

At Risk

 

 

 

 

 

 

 

 

 

 

 

Currencies

 

$

553,312

 

1.69

%

$

639,708

 

$

498,481

 

Metals

 

142,148

 

0.43

%

164,343

 

128,061

 

Stock Indices

 

438,390

 

1.34

%

506,842

 

394,947

 

Interest Rates

 

174,180

 

0.53

%

201,377

 

156,920

 

Energy

 

283,969

 

0.87

%

328,309

 

255,829

 

Agricultural Commodities

 

557,894

 

1.70

%

645,006

 

502,609

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

2,149,893

 

6.56

%

$

2,485,585

 

$

1,936,847

 

 

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

 

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

 

Non-Trading Risk.

 

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

 

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

 

The Partnership also has non-trading market risk on 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.

 

21



 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

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

 

The following were the primary trading risk exposures of the Partnership as of December 31, 2015 by market sector. There have been no material changes at March 31, 2016.

 

Interest Rates

 

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

 

Currencies

 

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

 

Stock Indices

 

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

 

Metals

 

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

 

22



 

Agricultural Commodities

 

The Partnership’s primary agricultural commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Corn, grains, cotton, coffee and sugar accounted for the substantial bulk of the Partnership’s agricultural commodities exposure.

 

Energy

 

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

 

Qualitative Disclosures Regarding Non-Trading Risk Exposure

 

The following were the primary non-trading risk exposures of the Partnership as of December 31, 2015. There have been no material changes at March 31, 2016.

 

Foreign Currency Balances

 

The Partnership’s primary foreign currency balances are in Japanese yen, Australian dollar, Swiss franc and Euros.

 

U.S. Dollar Cash Balance

 

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

 

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 Partnership’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

 

While the Trading Advisor relies on mechanical technical trading systems in making investment decisions, the overall strategy does include the latitude to depart from this approach if market conditions are such that, in the opinion of the Trading Advisor, execution of trades recommended by the mechanical systems would be difficult or unusually risky to an account.

 

Non-Trading Risk

 

The Partnership 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.

 

23



 

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

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

MLAI’s Chief Executive Officer and Chief Financial Officer, on behalf of the Partnership, 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 Partnership as of the end of the quarter which ended March 31, 2016, and, based on their evaluation, have concluded that these disclosure controls and procedures are 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 March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control, over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.      Legal Proceedings

 

None.

 

Item 1A.   Risk Factors

 

There are no material changes from risk factors as previously disclosed in the Partnership’s report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 18, 2016.

 

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

 

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

 

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

 

24



 

 

 

Subscription

 

 

 

 

 

Amount

 

Units

 

NAV (1)

 

 

 

 

 

 

 

 

 

Jan-16

 

$

 

 

$

224.9680

 

Feb-16

 

 

 

227.1967

 

Mar-16

 

 

 

230.2900

 

Apr-16

 

 

 

234.1081

 

 


(1) Beginning of the month Net Asset Value

 

(b)         Not applicable.

(c)          Not applicable.

 

Item 3.                               Defaults Upon Senior Securities

 

None.

 

Item 4.                               Mine Safety Disclosures

 

Not applicable.

 

Item 5.                               Other Information

 

None.

 

Item 6.                               Exhibits

 

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

 

31.01 and

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

 

Exhibit 31.01

and 31.02:                                       Are filed herewith.

 

32.01 and

32.02                                                                   Section 1350 Certifications

 

Exhibit 32.01

and 32.02                                           Are filed herewith.

 

Exhibit 101   Are filed herewith.

The following materials from the Partnership’s quarterly Report on Form 10-Q for the three month period ended March 31, 2016 formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Financial Condition (ii) Statements of Operations (iii) Statements of Changes in Partners’ Capital (iv) Financial Data Highlights and (v) Notes to Financial Statements, tagged as blocks of text.

 

25



 

SIGNATURES

 

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

 

 

 

 

 

ML SELECT FUTURES I L.P.

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

MERRILL LYNCH ALTERNATIVE

 

 

 

 

INVESTMENTS LLC

 

 

 

(General Partner)

 

 

 

 

 

 

 

 

Date: May 13, 2016

 

By:

/s/ NANCY FAHMY

 

 

 

Nancy Fahmy

 

 

 

 

Chief Executive Officer and President

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

Date: May 13, 2016

 

 

By:

/s/ BARBRA E. KOCSIS

 

 

 

Barbra E. Kocsis

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

26