Item 1: Business
(a) General Development of Business:
ML BlueTrend 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 April 30, 2008 and commenced trading activities on September 1, 2008. The Fund engages in the speculative trading of futures and forward contracts on a wide range of commodities. BlueCrest Capital Management Limited (the “Trading Advisor”) is the trading advisor of the Fund. The Trading Advisor trades the BlueTrend Program (the “Trading Program”) for the Fund.
BlueCrest Capital Management LLP was the trading advisor for the Fund at the beginning of 2014. Effective as of July 1, 2014 BlueCrest Capital Management LLP was restructured from an English-incorporated limited liability partnership to a Guernsey-domiciled company, BlueCrest Capital Management Limited. Effective as of January 1, 2015 Systematica Investments Limited replaced BlueCrest Capital Management Limited as the trading advisor (the “Trading Advisor”) for the Fund. The Trading Advisor trades the BlueTrend Program (the “Trading Program”) for the Fund. BlueCrest Capital Management Limited (the “Former Trading Advisor”) transferred assets and liabilities to Systematica Investments Limited (the “New Trading Advisor”). The Former Trading Advisor and the New Trading Advisor have informed MLAI that this restructuring was undertaken as a result of the Former Trading Advisor’s spinning off the Trading Program into a separate advisory firm.
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 “BAC”. 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 BAC 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 BAC. FuturesAccess Funds currently are composed of direct-trading funds advised by a single trading advisor or funds of funds for which MLAI acts as the advisor and allocates capital among multiple trading advisors. 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 Advisor is registered under the Investment Advisers Act of 1940. The Trading Advisor may delegate any of its duties and obligations under the Advisory Agreement to any of its duly appointed sub-investment managers (each a “Trading Advisor Subsidiary”), including, but not limited to, Systematica Investments Jersey Limited; provided that the Trading Advisor shall act in good faith and shall exercise reasonable skill and care in the selection, use and monitoring of the Trading Advisor Subsidiary. The Trading Advisor Subsidiary may sub-delegate any of its duties and obligations to any of its duly appointed sub-investment managers, including, but not limited to: (i) BlueCrest Capital Management Guernsey L.P. (operating solely through its Geneva branch); (ii) BlueCrest Capital Management (Singapore) Pte. Ltd.; and (iii) Systematica Investments GP Limited, as general partner of Systematica Investments Guernsey LP (operating solely through its Geneva branch).
The Trading Program is a systematic trend follower. The Trading Program focuses on daily futures and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy, metals, agriculturals and soft commodities. See “Trading Advisor’s Trading Program,” below.
The Fund issues units of limited liability company interest (“Units”) which are privately offered pursuant to Regulation D of the Securities Act of 1933 (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 and 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’s, management and performance fees, trading liabilities, including brokerage commissions, any offering or operating costs, amortized organizational and initial offering 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, 2014, the Net Asset Value of the Fund was $86,519,327. As of December 31, 2014, the Net Asset Value per Unit was $1.0634 for Class A, $1.0089 for Class C, $1.0914 for Class I, $1.3536 for Class DS, $1.1571 for Class DT and $1.0018 for Class M.
Since the Fund began trading activities, the highest and lowest month-end Net Asset Value per Unit are listed below. The highest month-end Net asset Value per units for Class A was $1.2738 (April 30, 2011) and the lowest was $0.9398 (March 31, 2014). The highest month-end Net Asset Value per Unit for Class C was $1.2538 (April 30, 2011) and the lowest was $0.8984 (March 31, 2014). The highest month-end Net Asset Value per Unit for Class D was $1.3027 (April 30, 2011) and the lowest was $1.0221 (August 31, 2009). The highest month-end Net Asset Value per Unit for Class I was $1.2883 (April 30, 2011) and the lowest was $0.9617 (March 31, 2014). The highest month-end Net Asset Value per Unit for Class DS was $1.5347 (April 30, 2011) and the lowest was $1.0408 (September 30, 2008). The highest month-end Net Asset Value per Unit for Class DT was $1.2688 (April 30, 2011) and the lowest was $1.0036 (March 31, 2014). The highest month-end Net Asset Value per Unit for Class M was $1.0876 (April 30, 2013) and the lowest was $0.8755 (March 31, 2014).
The Net Asset Value of the Fund is generally calculated in accordance with generally accepted accounting principles (“GAAP”). However, the Fund’s Limited Liability Company Operating Agreement allows the Sponsor to depart from 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 the Sponsor 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. The Sponsor may depart from GAAP in calculating the Fund’s Net Asset Value for these purposes if, for example, it determines that application of 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 the Sponsor determines that it is more appropriate to spread such expense over additional fiscal periods. In the event that the Sponsor departs from 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 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 Fund and MLAI are parties to an Advisory Agreement with the Trading Advisor. The Advisory Agreement will continue in effect until December 31, 2015. Thereafter, 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 120 days’ 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 90 days’ notice in the event that the Trading Advisor independently determines not to pursue, for any accounts, the trading strategy in which the Trading Advisor engages on behalf of the Fund; 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 due notice and an opportunity to cure. 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 is a systematic trend follower, but its decision-making inputs are technical. The Trading Advisor aims to apply scientific techniques to the analysis and modeling of markets. The Fund trades daily futures
and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy, metals, agriculturals and soft commodities.
The Trading Program’s systematic trading team combines research/model development, implementation and execution functions. The Fund’s portfolio construction is regularly reviewed.
The trading strategy utilized by the Fund is a systematic trading model. Capital allocation decisions between the models, between the markets within a model and individual buy and sell decisions within such markets are made on a systematic basis using quantitative analysis.
Although the Trading Advisor’s Trading Program is continually evolving, there were no fundamental or material changes to the Trading Program during the 2014 fiscal year
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”.
Markets
The Trading Advisor applies its proprietary systems to a broadly-diversified portfolio of futures and forward markets pursuant to their BlueTrend Program. The Trading Program may trade in the following markets: CBOT, CME, EUREX, IME, LME, LIFFE, MATIF, ME, MEFF, NYMEX, NZFOE, SFE, SIMEX, TIFFE, TSE and may expand to include trading in other markets. The Fund trades daily futures and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy, metals, agricultural and soft commodities.
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.
Market Types
The Fund trades on a variety of United States and foreign futures exchanges as well as OTC. Substantially all of the Fund’s off-exchange trading takes place in the highly liquid, institutionally based currency forward markets.
Many of the Fund’s currency trades are executed in the spot and forward FX markets (the “FX Markets”) where there are no direct execution costs. Instead, the participants, banks and dealers in the FX markets take a “spread” between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Fund.
CONDENSED SCHEDULES OF INVESTMENTS
The Fund’s investments, defined as net unrealized profit (loss) on open contracts on the Statements of Financial Condition, as of December 31, 2014 and 2013 are as follows:
December 31, 2014
December 31, 2013
*Currencies-Forwards present notional amounts as converted to USD.
No individual contract’s unrealized profit or loss comprised greater than 5% of Members’ Capital as of December 31, 2014 and December 31, 2013. 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 (loss) of long positions and short positions of the open contracts. 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.
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, swaps 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 occasionally be substantially higher. 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, 2014 the Fund employed $10,300,030 and $3,531,291 as initial margin to support futures and forward positions, respectively, representing approximately 11.24% and 3.85%, 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 the MLPF&S; and
· invested in securities or other instruments generally viewed as cash equivalents, which are in turn held in segregated or secured accounts with MLPF&S.
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.
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 BAC 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 BAC 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 management of the Fund’s “cash assets.” 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 or by retaining an asset management firm to invest the Fund’s cash assets in U.S. government and money market securities. 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 or asset management firms 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 BAC 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.
BAC’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.
At present, due to the low interest rate environment that has prevailed in the United States since 2008, the Interest Earning Program’s U.S. dollar floor rate of 0% applies. In interest rate environments like the current one in which the Fund does not earn interest under the Interest Earning Program, MLAI may seek to transfer cash from affiliates if it believes that any interest earned on this cash was consistent with its goal of safely maintaining these assets and otherwise would offset
the advantages of maintaining cash with its affiliates.
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.
Charges
The following table summarizes the charges incurred by the Fund for the years ended December 31, 2014, 2013 and 2012.
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 BAC 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 BAC 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 month-end Net Assets during 2014, 2013 and 2012 equaled $92,425,259, $151,678,934 and $216,845,969, respectively.
During 2014, the interest income of the Fund was $3,304, or approximately 0.00% of the Fund’s average month-end Net Asset Values During 2013, the interest income of the Fund was $2,577, or approximately 0.00% of the Fund’s average month-end Net Asset Values. During 2012, the interest expense for the Fund was $8,831, or approximately 0.00% of the Fund’s average month-end Net Asset Values.
Description of Current Charges
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 requires commodity pool operators such as MLAI, commodity trading advisors such as 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 Commodity Exchange Act (“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
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 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 in the future under market conditions in which it achieved gains in the past.
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 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.
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.
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 the Sponsor would otherwise recommend, to the possible detriment of the Fund.
Derivatives Risks Generally
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 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 Fund 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 Fund’s Statements of Financial Condition. Contracts are priced daily by the Fund and the profit or loss based on the daily mark to market are recorded as unrealized profits. When the contract is closed, the Fund records a realized profit or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. The Fund also trades futures contracts on the London Metals Exchange (LME). The valuation pricing for LME contracts is based on action of a committee that incorporates prices from the most liquid trading sessions of the day and can also rely on other inputs such as supply and demand factors and bid and asks from open outcry sessions.
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 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 in General
The Trading Advisor may engage in transactions that involve taking delivery of physical commodity assets 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.
Recently it was 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 or criminal settlements with, various international regulators, involving 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.
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 BAC. 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.
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 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 the Sponsor to decide to liquidate the Fund or suspend, limit or otherwise alter trading, perhaps causing the Fund to miss significant profit opportunities.
The Sponsor has historically preferred BAC 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 BAC affiliates because balances in these accounts are not subject to FDIC or other form of deposit insurance against loss from failure of the BAC affiliate. Balances maintained with clearing brokers are, however, subject to the protections for customer segregated, cleared swaps customer accounts and secured accounts discussed below.
The Sponsor’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.
The Sponsor 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-BAC 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 the Sponsor 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 BAC directly or indirectly owns 10% or more of the Fund, which would typically result from BAC 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 BAC 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 BAC’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 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, BAC 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 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.
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 non-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.
Recent 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.
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 SEC and the CFTC. 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.
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, the Sponsor and/or the Fund’s counterparties to additional regulatory requirements. Certain of these regulatory requirements could affect the Fund, the Trading Advisor or the Sponsor directly, while others could impact the Fund, the Trading Advisor or the Sponsor 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 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 will require a substantial portion of derivative transactions that are currently executed on a bi-lateral basis in the OTC markets to be executed through a regulated security, futures or swap exchange or execution facility. Certain CFTC-regulated derivatives trades are currently subject to these rules. Such 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.
Although Dodd-Frank will require many 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.
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.
On August 16, 2012, the European Market Infrastructure Regulation became effective (“EMIR”). EMIR introduces certain requirements in respect of derivative contracts, which will apply 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-EU counterparties such as the Fund are likely to become indirectly subject to such requirements
when they transact with EU counterparties, which will require compliance by their non-EU counterparties in order to satisfy their own obligations under EMIR. EU FCs or NFC+s which transact with a non-EU counterparty that would be classed as an FC or an NFC+ if it had been established in the EU will also be required to ensure that certain specified OTC derivative contracts are cleared through a duly authorised central counterparty. No class of OTC derivative contracts has as yet been declared subject to mandatory clearing in the EU, although draft legislation covering various classes has been proposed.
Certain risk mitigation obligations under EMIR (such as the obligation to reconcile portfolios and confirm transactions in a timely fashion) have already been implemented through secondary measures, while others, such as the requirement to exchange collateral, are still being finalised.
The EU 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 EU.
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
BAC 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 BAC directly, or indirectly through its subsidiaries, makes capital contributions to the Fund in an aggregate amount such that BAC may be deemed to control the Fund for purposes of the BHCA, or if BAC is otherwise deemed to control the Fund for purposes of the BHCA, the Fund may be subject to certain investment and other limitations.
In addition to the changes in the regulation of U.S. markets described above, it is impossible to predict what additional interim or permanent governmental regulations, restrictions or limitations may be imposed, whether in the U.S. or non-U.S. markets, on, for example: (x) the markets in which the Fund invests and the strategies of the Fund; and (y) BAC. Such measures could have a material and adverse effect on the Fund, including expenses that result from increased compliance requirements.
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 effect 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.
Item 1B:
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2:
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, 10080). MLAI performs administrative services for the Fund from MLAI’s offices.
Item 3:
Item 3: Legal Proceedings
None.
Item 4:
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5:
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 5(a)
(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 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 first of every month. 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, 2014, there were 723 holders of 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.
(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 was MLPF&S.
CLASS A
CLASS C
CLASS I
CLASS DS
CLASS DT
CLASS M
(1) Beginning of the month 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 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.
Item 6:
Item 6: Selected Financial Data
The following selected financial data has been derived from the financial statements of the Fund.
*Units issued on December 1, 2012.
**Units fully redeemed as of December 31, 2013.
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and report performance to investors is useful information for the members of the Fund.
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS DS
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS DT
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS M
ML BLUETREND FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: August 1, 2009
Aggregate Subscriptions: $11,184,579
Current Capitalization: $3,914,576
Worst Monthly Drawdown(2): (8.54)% (June 2013)
Worst Peak-to-Valley Drawdown(3): (26.22)% (May 2011 - December 2014)
Net Asset Value per Unit for Class A, December 31, 2014: $1.0634
Monthly Rates of Return (4)
(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 August 1, 2009 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since August 1, 2009 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 6.34%.
ML BLUETREND FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: August 1, 2009
Aggregate Subscriptions: $63,269,577
Current Capitalization: $28,153,234
Worst Monthly Drawdown(2): (8.61)% (June 2013)
Worst Peak-to-Valley Drawdown(3): (28.35)% (May 2011 - December 2014)
Net Asset Value per Unit for Class C, December 31, 2014: $1.0089
Monthly Rates of Return (4)
(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 August 1, 2009 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since August 1, 2009 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 0.89%.
ML BLUETREND FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: August 1, 2009
Aggregate Subscriptions: $16,205,054
Current Capitalization: $0
Worst Monthly Drawdown(2): (8.42)% (June 2013)
Worst Peak-to-Valley Drawdown(3): (19.50)% (May 2011 - December 2013)
Net Asset Value per Unit for Class D, December 31, 2014: $0.0000
Monthly Rates of Return (4)
(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 August 1, 2009 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since August 1, 2009 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 5.35%.
ML BLUETREND FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: August 1, 2009
Aggregate Subscriptions: $14,461,361
Current Capitalization: $2,305,631
Worst Monthly Drawdown(2): (8.51)% (June 2013)
Worst Peak-to-Valley Drawdown(3): (25.35)% (May 2011 - December 2014)
Net Asset Value per Unit for Class I, December 31, 2014: $1.0914
Monthly Rates of Return (4)
(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 August 1, 2009 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since August 1, 2009 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 9.14%.
ML BLUETREND FUTURESACCESS LLC
(CLASS DS UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: September 1, 2008
Aggregate Subscriptions: $160,536,270
Current Capitalization: $35,135,941
Worst Monthly Drawdown(2): (8.42)% (June 2013)
Worst Peak-to-Valley Drawdown(3): (22.92)% (May 2011 - December 2014)
Net Asset Value per Unit for Class DS, December 31, 2014: $1.3536
Monthly Rates of Return (4)
(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, 2008 by the Fund; a drawdown is measured on the basis of month-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, 2008 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 35.36%.
ML BLUETREND FUTURESACCESS LLC
(CLASS DT UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 1, 2010
Aggregate Subscriptions: $2,103,692
Current Capitalization: $11,730,252
Worst Monthly Drawdown(2): (8.34)% ( June 2013 )
Worst Peak-to-Valley Drawdown(3): (20.90)% (May 2011 - December 2014)
Net Asset Value per Unit for Class DT, December 31, 2014: $1.1571
Monthly Rates of Return (4)
(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 February 1, 2010 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since February 1, 2010 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 15.71%.
ML BLUETREND FUTURESACCESS LLC
(CLASS M UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: December 1, 2013
Aggregate Subscriptions: $10,954,662
Current Capitalization: $5,279,693
Worst Monthly Drawdown(2): (8.42)% ( June 2013 )
Worst Peak-to-Valley Drawdown(3): (15.93)% (May 2013 - December 2014)
Net Asset Value per Unit for Class M, December 31, 2014: $1.0018
Monthly Rates of Return (4)
(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 December 1, 2013 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since December 1, 2013 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-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 (0.96)%.
Item 7:
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 accounting principles generally accepted in the United States of America (“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 is a systematic trend follower, but it decision-making inputs are technical. The Fund trades daily futures and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy metals, agricultural and soft commodities.
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.
Year ended December 31, 2014
The Fund experienced a net profit of $10,065,265 before brokerage commissions and related fees for the year ended December 31, 2014. Profits were primarily attributable to the Fund trading in the interest rate, currency and agriculture sectors posting profits. The metal, stock indices and energy 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. The top performing individual markets fell in January within the fixed income sectors. The Fund’s strategy entered January with a small net long bias to the sector and added to this over the course of January, benefitting from the flight out of risk assets into the safe haven of fixed income. Profits were posted to the Fund in the middle of the first quarter. The Fund’s small net long bias was maintained steadily through February. Losses 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. In April the U.S. Federal Reserve, European Central Bank, Bank of England and Bank of Japan all kept key interest rates unchanged. Peripheral yields in Europe continued to fall, and economic data improved modestly, but inflation remained low and medium-term inflation
expectations also looked to have drifted lower. Profits were posted to the Fund in the middle of the second quarter as the short term interest rates sector benefitted from the general strength of fixed income markets. Profits were posted to the Fund at the end of the second quarter. In June the short term interest rate sector detracted slightly from performance, however this was more than offset by the positive contribution from the bond sector. Losses were posted to the Fund at the beginning of the third quarter as yields generally fell in Europe. Performance in the short term interest rate sector was influenced by changes in expectations of future rate changes, and detracted from performance. Profits were posted to the Fund in the middle of the third quarter. The Fund maintained its long positioning across many fixed income markets during August and benefitted as yields fell (prices rose), particularly in the developed markets where many benchmark yields fell, such as the German 10Y yield and the German 2Y yield. Losses were posted to the Fund at the end of the third quarter. The Trading Program reduced its long positioning across many fixed income markets during September, but the initial positions led to modest losses at the start of September as yields rose (prices fell), particularly in the U.S. Profits were posted to the Fund at the beginning of the fourth quarter. Positive performance in the fixed income sector was driven by long positioning across both bonds and short interest rates, and resulted in the sector producing each of the top three performing individual markets for the strategy. Positioning benefitted as prices rose in the first half October, and a gradual reduction in exposure then helped protect these gains as bond prices fell during the second half of October. Profits were posted to the Fund in the middle of the fourth quarter. Long positioning was moderately increased across fixed income markets during November, across both the bonds and short interest rates sectors, which benefitted strongly as yields declined in many markets. Profits were posted to the Fund at the end of the fourth quarter. Long positioning across fixed income markets was maintained during December, across both the bonds and short interest rates sectors. While bonds provided a positive contribution, the performance across individual markets was mixed and the sector contained some of the best and worst performing individual markets, with the Japanese government bonds and Italian BTP amongst the strongest and U.S. Treasuries amongst the weakest.
The currency sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter as the U.S. dollar, as measured by the Dollar Index, rose in January. Looking across individual currency pairs, the Australian dollar and the Euro both weakened vs. U.S. dollar while the Japanese yen strengthened. The sector detracted from performance in January with many moves representing a reversal of recent trends. Losses were posted to the Fund in the middle of the first quarter as the U.S. dollar, as measured by the Dollar Index, fell in February as most developed market currencies, Euro, British pound, Australian dollar and the Japanese yen rose against the U.S. dollar. The Fund held a net long bias to the U.S. dollar and although performance varied across currency pairs, the FX sector detracted from performance. Profits were posted to the Fund at the end of the first quarter. In currency markets the U.S. dollar was modestly stronger, as the Dollar index increased in March. In developed markets the Euro weakened against the U.S. dollar, as did the British pound. The Japanese yen also weakened while the Australian dollar strengthened. In emerging markets the Brazilian real and Russian ruble both strengthened, respectively. The FX sector was the largest positive contributor to performance, as persistent trends were identified and captured. Losses were posted to the Fund at the beginning of the second quarter due to the U.S. dollar being weaker, as several developed market currencies appreciated versus the dollar. In April the currency sector saw mixed returns, with prices of some major markets moving sideways or reversing the existing trends. The more difficult individual markets, detracting from performance, included NZD-USD and USD-JPY which both represented reversals of existing trends. The switch to overall net short positioning in U.S. dollar indicated a flexible response to broader market movements as the U.S. Dollar index (DXY) fell toward the end of April. Profits were posted to the Fund in the middle of the second quarter. In May the U.S. dollar strengthened. Profits were posted to the Fund at the end of the second quarter due to a strong individual contributor, NZD-USD, which having fallen in May rallied in June. Losses were posted to the Fund at the beginning of the third quarter due to weakening of several emerging market currencies. The EUR-USD and NZD-USD both experienced declines in July. Profits were posted to the Fund in the middle of the third quarter. The currency sector contributed positively to performance. The U.S. dollar generally strengthened against many major currencies, including the Euro, Japanese yen and New Zealand dollar but weakened slightly against the Australian dollar. Losses were posted to the Fund at the end of the third quarter. The currency sector contributed negatively to performance, as the accelerating movement in U.S. dollar strength led to losses in some currency pairs, including both Australian dollar and New Zealand dollar versus U.S. dollar. Profits were posted to the Fund at the beginning of the fourth quarter. The currencies sector contributed positively to performance overall, through a number of smaller contributions from individual markets. Short positioning in Euro and Japanese yen benefitted from a modest continuation of existing trends in both markets, with actions by the Bank of Japan, causing Japanese yen to notably weaken at the end of October. Profits were posted to the Fund in the middle of the fourth quarter. The currency sector provided one of the best performing individual markets through short positioning in JPY, which benefitted as the yen continued to weaken in response to actions by the Bank of Japan. Profits were posted to the Fund in the end of the fourth quarter. The U.S. dollar continued to strengthen, with the dollar index finishing December at its high for the year, and the Euro continued to weaken, with EUR-USD finishing at its low for the year. The fund switched its net U.S. dollar bias from a small short to long early in December and consequently benefitted from the moves.
The agriculture sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter as wheat continued its decline falling during January. Profits were posted to the Fund in the middle of the first
quarter as drought conditions in Brazil helped push the agricultural sector higher, including soybeans which were one of the top performing markets for the strategy. Profits were posted to the Fund at the end of the first quarter. The crops sector reacted to a bullish report from the U.S.D.A., particularly for soybeans and corn, while risks in Ukraine also impacted wheat, pushing prices higher. Profits were posted to the Fund at the beginning of the second quarter. In April the agricultural sector was active as prices of the benchmark contracts rose on higher than expected demand figures, adding to gains for corn, wheat and soybeans. Profits were posted to the Fund in the middle of the second quarter. Losses were posted to the Fund at the end of the second quarter. The crop sector detracted from returns as several markets, such as soybeans, saw sharp price movements. Soybean prices largely held in the same range for most of the second quarter, but then broke lower after data from the USDA showed high levels of planting and stockpiles. Profits were posted to the Fund at the beginning of the third quarter. The crops sector was a positive contributor as, having switched to a short bias, it was correctly positioned to benefit from the continued declines in prices, such as falling corn and wheat prices. Profits were posted to the Fund in the middle of the third quarter. Profits were posted to the Fund at the end of the third quarter. The crops sector contributed strongly as short positioning benefitted from a resumption of the downward trend that had developed in benchmark markets in the summer. Losses were posted to the Fund at the beginning of the fourth quarter. Previously established downward trends in the crops sector generally reversed course during October, and ran counter to the short positioning held by the strategy. This was exemplified by corn, which rose and was one of the bottom returning markets for the strategy during October. Losses were posted to the Fund in the middle of the fourth quarter. The crops sector detracted from the Fund, as most markets experienced choppy price during November. Losses were posted to the Fund in the end of the fourth quarter as rallies early in December tended to reverse by month end.
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter as gold regained some of its safe haven status, up in January, while industrial metals tended to fall on weaker growth and demand expectations. Losses were posted to the Fund in the middle of the first quarter. Precious metals continued the trend from January with prices rising, while industrial metals were more subdued and registered small price gains as a group. Profits were posted to the Fund at the end of the first quarter. Fears of a slowdown in Chinese growth caused a sell-off in the copper market. Gold prices fell in March on reduced demand for the safe haven asset. Losses were posted to the Fund at the beginning of the second quarter. In April the metals sector was relatively range-bound. Metal prices generally recovered from the losses of March. Losses were posted to the Fund in the middle of the second quarter as gold was particularly weak as it lost ground in connection with a stronger dollar and rising risk appetites in general. Losses were posted to the Fund at the end of the second quarter. Profits were posted to the Fund at the beginning of the third quarter. In July the metals sector contributed small positive gains as base metal prices modestly extended recent gains. Losses were posted to the Fund in the middle of the third quarter. The metals sector detracted slightly with varied price movements across markets. Profits were posted to the Fund at the end of the third quarter. Losses were posted to the Fund at the beginning of the fourth quarter. Profits were posted to the Fund in the middle of the fourth quarter as the metal complex provided a modest positive contribution to the Fund. Losses were posted to the Fund at the end of the fourth quarter as markets experienced large ranges but small net moves in December.
The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The equity sector detracted from performance as markets retreated. In response to these market moves the Fund cut risk exposure to the sector. While the most significant price moves were seen in the Nikkei, other major indices such as the S&P 500, EuroStoxx and FTSE also experienced falls. Profits were posted to the Fund in the middle of the first quarter. The equity sector provided the largest contribution to performance in February. Long positioning of the Fund’s strategy benefitted from the strong equity markets, as investor risk appetite returned and the recent focus on emerging market concerns faded. Losses were posted to the Fund at the end of the first quarter as equity sector returns were mixed and demonstrated few persistent trends. Losses were posted to the Fund at the beginning of the second quarter due to price drops in stocks linked to the technology area. Long positioning was maintained in the equity sector during April, though with a reduced delta. Benchmark indices saw diverse returns, with muted performance in the S&P500 and Nasdaq; the Nikkei recorded loss; and the FTSE 100 recorded gain. Profits were posted to the Fund in the middle of the second quarter. In May the equities sector was a strong contributor to performance, with long positions benefitting from a widespread rally across benchmark contracts. Profits were posted to the Fund at the end of the second quarter. In June equity indices around the globe showed diverse performance, for example the S&P 500 and the Nikkei indices rose, while the FTSE and EuroStoxx indices fell. The Fund maintained a long bias to the equity sector through June. Profits were posted to the Fund at the beginning of the third quarter. The Fund saw a small gain coming from the equity sector, where it maintained a long bias through July. The exposure was trimmed towards July month end as many developed market indices lost ground in moves triggered by poor economic data and flaring of geopolitical concerns. Profits were posted to the Fund in the middle of the third quarter as a long bias in the equity sector was maintained, and slightly increased through August. This benefitted the Trading Program as many equity markets recovered ground lost in July, and some such as the S&P 500, which broke through the 2000 level, reached new highs; though differentiation was still observed as a number of markets, notably in Asia, did not participate in the broader move. Losses were posted to the Fund at the end of the third quarter. A long bias in the equity sector was significantly
reduced over September, and implemented broadly across geographies, helping to protect against the price falls that occurred across a number of markets. Losses were posted to the Fund at the beginning of the fourth quarter. A long bias in the equities sector was quickly reduced during October as a number of global markets initially fell. The strategy briefly reached a small net short positioning in equities, though this was not sustained as equity markets then generally rallied during the second half of October. The equities sector was the largest detractor from returns. Profits were posted to the Fund in the middle of the fourth quarter as the Trading Program increased its long bias in the equities sector during November, adding exposure to a number of markets globally and consequently benefitted from an extension of the rally that had taken hold during the latter half of October, particularly in major developed countries. Losses were posted to the Fund at the end of the fourth quarter. Political events influenced markets during December as Prime Minister Abe’s coalition was re-elected in Japan, while deadlock occurred in Greece’s presidential election. Economic data were mixed during December; with further improvement in U.S. labor markets highlighted by strong monthly payroll numbers, while growth momentum slowed in the Euro area and fuelled speculation that quantitative easing may still be necessary.
The energy sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The energy complex was generally lower in January, with the exception of natural gas where the cold winter weather resulted in higher demand in the U.S. With the Fund’s strategy holding net long exposure to the sector, the general price fall in the sector resulted in it detracting from performance. Profits were posted to the Fund in the middle of the first quarter. In February, cold weather conditions in the U.S. lifted natural gas and heating oil prices. Crude oil prices resumed an upward move in February after recent price consolidation, with West Texas Intermediate rising. Losses were posted to the Fund at the end of the first quarter. An overall long bias was maintained in the energy sector in March, though reduced physical demand for crude oil and a modest sale of stocks by the U.S. limited any price reaction to the geopolitical risks linked to Russia. Natural gas prices fell back in March as forecasts predicted warming weather trends. Profits were posted to the Fund at the beginning of the second quarter. In April the energy sector was relatively range-bound, while natural gas was lifted by production issues arising in key supply areas. Profits were posted to the Fund in the middle of the second quarter due to oil prices moving higher. Profits were posted to the Fund at the end of the second quarter due to a strong contribution in performance from RBOB gasoline. Losses were posted to the Fund at the beginning of the third quarter. This was driven by two of the worst performing individual markets in July: WTI Crude and Gasoline RBOB. The crude oil and distillate markets reversed the previously established positive trend on improved supply estimates, despite the ongoing geopolitical tensions; this prompted a marked reduction in the Trading Program’s risk allocated to the sector. Losses were posted to the Fund in the middle of the third quarter. Long positioning in energies, particularly gasoline and crude oil, caused losses as price falls were extended through August on renewed supply availability and fears of economic weakness inducing lower demand. Losses were posted to the Fund at the end of the third quarter. Losses were posted to the Fund at the beginning of the fourth quarter. Mixed results occurred in the energy sector, as individual markets provided both winning and losing positions, to result in a net loss. Losses were posted to the Fund in the middle of the fourth quarter. The energy sector detracted as large price movements and volatility were seen in many markets. During November crude oil declined, following OPEC’s decision to maintain production levels. Profits were posted to the Fund at the end of the fourth quarter as most energy markets continued to build on the moves witnessed in December, with WTI and Brent crude down.
Year ended December 31, 2013
The Fund experienced a net loss of $11,344,124 before brokerage commissions and related fees for the year ended December 31, 2013. Profits were primarily attributable to the Fund trading in the stock indices sectors posting profits. The agriculture, currency, energy, interest rate and metal sectors posted losses.
The stock indices posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Equity markets around the globe benefitted as the more optimistic mood at the start of the year drove indices to multi-year highs. The Trading Program benefitted from this rally as it maintained, and slightly increased, its net long exposure to the sector. The result was that the equity sector was the largest contributor to the Fund’s performance. Losses were posted to the Fund in the middle of the first quarter as equity index performance varied markedly around the globe. Profits were posted to the Fund at the end of the first quarter. The equity sector provided the strongest positive contribution to performance in March as many, but not all, equity indices rallied strongly. Profits were posted to the Fund at the beginning of the second quarter as the Trading Program held a net long exposure to the equity markets. Equity indices around the globe continued to rally in April including the Nikkei as stimulus plans were announced by the Bank of Japan. The EuroStoxx index was up. In the U.S., where many companies reporting earnings in April exceeded analyst forecasts, the S&P 500 index was up. Profits were posted to the Fund in the middle of the second quarter as equity indices in the U.S. and Europe continued to rally. Losses were posted to the Fund at the end of the second quarter. European and U.S. equity markets reversed their recent price trends in June, with the indices finishing in negative territory despite staging a slight recovery from the intra-month lows as month-end approached. European markets lagged the U.S. The Japanese stock market continued to exhibit significant volatility, but in contrast to European and U.S. stock markets, was only marginally down for June. In aggregate, these moves were against the net long bias that the Trading Program held at the beginning of June resulting in losses posted to the Fund. Profits were posted to the Fund at the beginning of the third quarter as equity indices around the globe generally responded to the positive sentiment and rallied strongly. In the U.S., the corporate earnings season kicked off and typically exceeded expectations, lifting the S&P 500 index higher. These moves benefitted the Trading Program’s long positions in the equity sector, a directional bias that was added to over the course of July and as a result the sector contained the three largest individual contributors to Fund performance. Losses were posted to the Fund in the middle of the second quarter. Equity markets while initially continuing the rally seen in July, then fell back and finished August in negative territory. The Trading Program held a long bias in the sector at the start of August, and although this was substantially reduced over the month, maintained the long bias at month end. As a result the equity sector was the worst performing sector for the Fund in August. Profits were posted to the Fund at the end of the third quarter. The equity sector provided the greatest contribution to returns, with the Trading Program benefitting from the net long exposure held at the start of September and as indices rose the strategy added to the exposure before trimming slightly as markets retreated into month-end. At the same time volatility in the equity markets continued to fall, benefitting the Trading Program’s short positions held in the VIX index. Profits were posted to the Fund at the beginning of the fourth quarter. Global equity markets tended to rally through October, with the Nikkei being the only major market to underperform. The IBEX 35 index, which rose in October, was one of the largest individual contributors to performance. Profits were posted to the Fund in the middle of the fourth quarter as global equity markets continued to rally through November. Of the major indices the performance of the Nikkei stood out; having lagged other indices in October. Losses were posted to the Fund at the end of the quarter as markets initially fell moving against the long bias held by the Fund. The model reacted by reducing the long bias and consequently the exposure in the second half of December, when markets rallied, was lower, and left the sector contribution close to flat by the end of December.
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The metal sector marginally detracted from performance with no significant individual drivers. Losses were posted to the Fund in the middle of the first quarter as metal markets fell moving against the net long position that the Trading Program held at the start of February. Profits were posted to the Fund at the end of the first quarter. The metal sector provided a positive contribution to the Trading Program’s performance as copper prices continued to fall during March. Profits were posted to the Fund at the beginning of the second quarter resulting from the Trading Program’s net short exposure in gold and copper which fell during April. In May gold prices continued to move lower resulting in losses posted to the Fund in the middle of the second quarter. The second quarter ended with profits posted to the Fund. Both precious and base metals slid in June as markets reacted to the U.S Federal Reserve’s statements on QE and also to signs that China’s growth might be reined in. Copper fell through June in response to uncertainty about Chinese demand. The fall benefitted the Trading Program’s short position in the market resulting in profits posted to the Fund. Gold fell towards the end of June. Losses were posted to the Fund at the beginning of the third quarter as the downward price trends in both base and precious metals reversed. Gold recovered from June’s lows, up in July, while copper was fairly range-bound finishing up in July. Both of these moves were against the short bias that the Trading Program held in the sector, which consequently detracted from returns. Losses were posted to the Fund in the middle of the third quarter. Gold continued the rally that started in July and copper, which peaked intra-month fell back at the end of August. These price moves were against the Trading Program’s short bias that it held at the beginning of August and despite switching to a long bias, the sector still detracted from returns. Losses were posted to the Fund at the end of the third quarter. Gold prices fell in September despite having surged after the U.S. Federal Reserve did not initiate tapering of its QE program. Having held a long bias in the metal sector at the beginning of September, a position that had reversed by month’s end, losses were posted to the Fund at the beginning of the fourth quarter. The intra-month volatility was also evident in commodity markets such as gold, where price movements largely reflected changing sentiment with respect to the U.S. debt ceiling discussions and later in October the potential delay in
tapering by the U.S. Federal Reserve. Profits were posted to the Fund in the middle of the fourth quarter. The Trading Program reversed the net direction bias it held in the metal sector in November moving from a small net long to a net short position. Losses were posted to the Fund at the end of the quarter as gold continued to fall in December.
The agriculture sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The agriculture sector marginally detracted from performance with no significant individual drivers. Losses were posted to the Fund in the middle of the first quarter as crop markets fell moving against the net long position that the Trading Program held at the start of February. Losses were posted to the Fund at the end of the first quarter. Within the commodity markets the crop sector detracted from performance, and contained one of the worst performing individual markets - corn. With prices having risen steadily through March, approaching their year-to- date highs, inventory data released by the USDA indicated that inventories and projected planting were both significantly higher than market expectations. The result was a sharp fall in corn prices on the day the USDA released their data. Losses were posted to the Fund at the beginning of the second quarter. Corn plunged in April as inventory data and planting forecasts exceeded analyst forecasts which contributed to the negative performance from the crop sector. Profits were posted to the Fund in the middle of the second quarter. The Trading Program switched from a net short to net long bias, benefitting from price rises, such as the increase in soybean futures from rising Chinese demand. Losses were posted to the Fund at the end of the second quarter as soybeans, reversed their recent price trends. Losses were posted to the Fund at the beginning of the third quarter. The crop sector detracted marginally from returns as several markets, including soybeans which were down moved against the long bias that the Trading Program held at the start of the July and by the end of the month was net short the crop sector. Profits were posted to the Fund in the middle of the third quarter. One notable mover was soybeans, which reversed their recent trend lower as hot, dry weather in the U.S. Midwest threatened to lower yields from the world’s biggest grower; soybean futures finished higher at the end of August. Losses were posted to the Fund at the end of the third quarter. The crop sector also posted a negative performance contribution. The Trading Program’s short position in corn benefitted as prices dropped due to fall in demand. Losses were posted to the Fund at the beginning of the fourth quarter due to losses from crops. Profits were posted to the Fund in the middle of the fourth quarter as the price of corn continued to fall in November. Profits were posted to the Fund at the end of the fourth quarter. The agricultural sector was a positive contributor to performance in December and contained one of the top performing markets, wheat. Wheat prices fell in December as forecasts showed reduced risk of frost damage to crops in the U.S.
The currency sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. In the FX markets, the broader Dollar Index initially rose before falling to finish down at the end of January. The moves in individual currencies were, in some cases, more extreme and in aggregate the FX sector delivered a strong positive contribution. The continued weakening of the Japanese yen saw U.S. dollar-Japanese yen rise, reaching levels not seen since mid-2010; this move benefitted the Trading Program’s short Japanese yen position. Losses were posted to the Fund in the middle of the first quarter. In FX markets, the broad Dollar Index rallied strongly, having generally trended downward over the previous two and a half months. The strong moves in individual currency pairs resulted in the sector containing two of the worst performing markets and combined to leave the FX sector as the second highest detractor. Profits were posted to the Fund at the end of the first quarter. Losses were posted to the Fund at the beginning of the second quarter. In FX markets, the broad Dollar Index continued to fall in April. The Japanese yen continued to weaken and the Euro reversed recent moves and strengthened. In combination, moves in the FX markets resulted in the sector delivering a small negative performance contribution. Losses were posted to the Fund in the middle of the second quarter. In FX markets, the broad Dollar Index reversed recent moves and rose in May. The Japanese yen continued to weaken however, the intra-month move was more substantial having weakened mid-month before recovering slightly. In combination, moves in the FX markets resulted in the sector delivering a negative performance contribution. Losses were posted to the Fund at the end of the second quarter. Aggregate moves in the currency space resulted in a negative contribution from the sector. Losses were posted to the Fund at the beginning of the third quarter. The U.S. dollar, as represented by the Dollar Index, initially rallied before falling back and finishing down in July. In combination, moves in the currency markets resulted in the FX sector delivering a negative performance. Losses were posted to the Fund in the middle of the third quarter. Movements in currency markets, where the Dollar Index rose in August having been fairly range bound, resulted in a series of small gains and losses across the set of markets traded; the cumulative result being flat performance for the sector. Losses were posted to the Fund at the end of the third quarter as the Dollar Index fell reversing the positive trend that had appeared in the second half of August. With mixed performance between markets, for example U.S. dollar-Japanese yen up and Euro-British pound up the sector detracted from the Fund performance in September. Losses were posted to the Fund at the beginning of the fourth quarter. the Dollar Index finished the month almost unchanged, but moved intra- month; this fluctuation, coupled with mixed performance across other individual markets, caused the sector to detract from the Fund’s performance. Profits were posted to the Fund in the middle of the fourth quarter. The FX sector contained both one of the largest individual contributors and one of the largest detractors from the Fund’s performance. The Trading Program’s short bias to the Japanese yen proved profitable as it weakened against the U.S. dollar; however the long bias to the Australian dollar detracted from performance as it
weakened against the U.S. dollar. Losses were posted to the Fund at the end of the fourth quarter as the U.S. dollar, as measured by the Dollar Index, fell in December.
The energy sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Energy markets, in general, rallied strongly in January which benefitted the Trading Program’s long positions; RBOB Gasoline, which rose in price in January, was one of the top individual contributors to the Trading Program’s performance. Losses were posted to the Fund in the middle of the first quarter. The worst performing sector in February was the energy sector. In general these markets continued their upward trend through the first half of February before reversing and then finishing the month significantly lower (for example, Brent Crude rallied before reversing and finishing the month down). The sharp price falls followed the latest inventory data released by the American Petroleum Institute (API) which indicated that U.S. crude stock piles had risen to their highest level since December. Losses were posted to the Fund at the end of the first quarter. The unusually cold start to spring in the U.S. led to a surge in the price of natural gas, while optimism on the economic recovery in the U.S. were in part responsible for the rise in WTI crude futures. Losses were posted to the Fund at the beginning of the second quarter resulting from the Trading Program’s net long exposure in the energy complex. U.S. crude oil inventories climbed and the International Energy Agency trimmed its forecast for global demand, WTI crude futures fell over the first half of April before recovering slightly into month end. Losses were posted to the Fund in the middle of the second quarter. Despite the initial rallies of several markets, most markets proceeded to fall and ended down in May which went against the Trading Program’s net long position in the sector. Losses were posted to the Fund at the end of the second quarter. WTI crude prices rose as investors reacted to the worsening unrest in Syria and a shrinking of U.S. stockpiles. Elsewhere, natural gas prices fell as mild weather shrank demand and saw inventories rise. Profits were posted to the Fund at the beginning of the third quarter. Most energy markets rallied in July with WTI crude up during the month following successive weekly drops in U.S. inventories. Profits were posted to the Fund in the middle of the third quarter. The energy complex generally saw prices rise over the course of August in response to growing tensions involving Syria. These price rises benefitted the Trading Program’s long positions in the energy sector, and saw risk being added during August. Losses were posted to the Fund at the end of the third quarter. As tensions involving Syria eased prices in the energy complex fell from their recent highs, for example Brent Crude fell in September. Gasoline futures slid as inventories were expected to rise. Losses were posted to the Fund at the beginning of the fourth quarter as energy prices displayed a reasonable level of price volatility, however most fell over the month; West Texas Intermediate saw prices react to changing inventory data, initially rallying as stockpiles fell before prices falling as data mid-month showed a strong rise in inventories. In October, Natural Gas prices initially rose before finishing down while West Texas Intermediate prices rallied before falling to finish down in October. Losses were posted to the Fund in the middle of the fourth quarter as a as a number of markets experienced sharp reversals of their recent trend; one of the largest individual detractors was natural gas, which having initially continued to cheapen, finished the month of November sharply higher. Losses were posted to the Fund at the end of the fourth quarter. Shrinking stockpiles and the plan to start part of the Keystone XL pipeline in January saw West Texas Intermediate Crude prices peak intra-month before they settled back to finish up. As a result of prices retreating in the final few trading days of the year, and the net long positioning of the Fund, the sector detracted from returns.
The interest rate sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. A consequence of the risk-on rally that benefitted the equity sector in January was that fixed income markets retreated, with both bond futures and short term interest rate futures falling. This price movement was against the long positions held by the Trading Program and resulted in the fixed income sectors being the largest detractors from performance; these sectors also contained the three worst performing markets over the period as well. In response to these falls in price, the Trading Program substantially reduced position sizes within both the bond and short term interest rate sectors. Profits were posted to the Fund in the middle of the first quarter. In response to the weaker European data and concerns over the economic environment in both Europe and the U.S., global fixed income markets tended to reflect lower interest rates in February. This benefitted the Trading Program’s net long positions in both bond and short term interest rate futures. Profits were posted to the Fund at the end of the first quarter as the Trading Program maintained its net long positions in both the bond and short term interest rate futures. European and UK 10 year bond futures rose, while the moves in the U.S. and Japanese 10 year bond futures were slightly more muted. Price movements in the short term interest rate sector were less consistent and led to the sector detracting slightly from performance. Profits were posted to the Fund at the beginning of the second quarter. The size of the moves in U.S. fixed income drove three of the markets across maturities to be the largest individual positive contributors to Fund performance. Losses were posted to the Fund in the middle of the second quarter. In light of the significant moves witnessed in global fixed income markets, reversing many trends that had persisted for extended periods of time, the largest detractors from Fund performance were the fixed income sectors (both bonds and short term interest rates). Losses were posted to the Fund at the end of the second quarter. In response to the falls in fixed income markets in June caused by extensive deleveraging of market participants following comments from Federal Reserve Chairman Bernanke on potential reduction in quantitative easing, the Trading Program continued to reduce long positions before starting to initiate a net short bias across the sector. The speed and magnitude of the market moves was such that the Trading Program had insufficient time to reposition before experiencing losses, and as a result both bonds and short term interest rates detracted
from Fund performance in June. Losses were posted to the Fund at the beginning of the third quarter. Market movements within the fixed income sectors varied as the U.S. bond futures ended July down, however European bund futures were up intra-month and ended up as a detracting market. The fixed income sectors, bonds and short term interest rates, contributed negatively to performance in aggregate. Profits were posted to the Fund in the middle of the third quarter. Fixed income markets, both short term interest rates and bonds, benefitted as yields rose in general. However, performance across the various markets and regions varied and the sector contained both one of the top contributing markets (Brazilian IRS) and one of the largest detractors Australian 3 year bonds. Profits were posted to the Fund at the end of the third quarter. Fixed income futures, both bonds and short term interest rates, rose over the course of September. As a result, the Trading Program moved from holding a slight short bias to a slight long bias in the sectors, and was able to benefit from these moves. The Japanese Government Bond (“JGB”) futures, which rose during September was one of the largest individual contributors to Fund returns. Profits were posted to the Fund at the beginning of the fourth quarter with bond prices around the globe generally rising, the fixed income sectors, both bonds and short term interest rates, contributed positively to performance. The Trading Program added to its net long exposure over the course of October. However, movements were not uniform across the markets covered by the strategy, and the bond sector contained both one of the greatest individual contributors and one of the largest detractors from performance in October. The JGB position, in which the Trading Program was net long, benefitted as the futures rose, while the Australian 3 year bond finished down and detracted from performance. Losses were posted to the Fund in the middle of the fourth quarter with the bond sector ending up as the largest detractor for November while the short term interest rate sector contributed positively to returns. In the U.S. and UK yields rose in response to increased optimism for the economic outlook, while in other regions such as Japan and Germany yields were almost unchanged in November. At the front end of the yield curve, the long bias that the Trading Program held in short term interest rate futures benefitted as both the U.S. Federal Reserve and the European Central Bank continued to stress that interest rates would not rise for some time yet. Losses were posted to the Fund at the end of the fourth quarter. With yields rising in most markets the moves were against the Trading Program’s long bias held in the sector, which resulted in the strategy reducing its net exposure.
Year ended December 31, 2012
The Fund experienced a net profit of $3,659,741 before brokerage commissions and related fees for the year ended December 31, 2012. Profits were primarily attributable to the Fund trading in the interest rate and stock indices sectors posting profits. The agriculture, currency, energy and metal 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. Short term interest rates performed well following support for a low rate environment by various central banks with long Eurodollar and Euribor positions being among the Fund’s top performing markets. Losses were posted to the Fund in the middle of the first quarter as unclear direction in fixed income markets, resulted in the fund’s net long bonds and short term rates exposure detracting from performance. Losses were posted to the Fund at the end of the first quarter. The month began with the Fund a net long fixed income position and therefore experienced losses as a result of the extreme upward moves in yields mid-month in which the resulting increase in price volatility saw the Fund trim positions within the sector, remaining net long in aggregate however with reduced positions. Profits were posted to the Fund at the beginning of the second quarter. The Fund’s long bias in its fixed income positions (bonds and short term interest rates) was responsible for the largest contribution to performance, in general, the market expectation was for rates to remain lower for longer. Profits were posted to the Fund in the middle of the second quarter. The Fund’s long position in fixed income markets saw both the bond and short term interest rate sectors deliver strong returns; the bond sector contained the three top performing positions (Gilts, Bunds and U.S. long bonds) as the continuing financial crisis pushed yields ever lower. Losses were posted to the Fund at the end of the second quarter. The continued economic weakness being witnessed around the globe fuelled further action from the world’s central banks, benefitting the Fund’s long positions in short term interest rate futures; consequently, the Euro dollar
and Short Sterling short term interest rate positions were two of the top contributors for June. Meanwhile, in the bond sector performance was mixed as the Japanese bond prices continued to rally resulting in the Japanese Government Bond (10Y bond) being one of the top performing positions in the Fund. In Europe, German bond futures fell over the month reversing their recent price trend, and resulted in the Bund and Bobl futures being among the largest detractors from performance. Profits were posted to the Fund at the beginning of the third quarter. The fixed income sectors (bonds and short term interest rates) posted the largest positive contributions to the Fund’s return as the expectations were generally for interest rates to remain lower for longer, and in some cases central banks cut rates or extended stimulus measures. Consequently, the trading program’s long positions in the Euribor short term interest rate futures was a top performing position in the Fund. Losses were posted to the Fund in the middle of the third quarter. The trading program’s short term interest rate positions contributed positively to performance, as the U.S. Federal Reserve Chairman Bernanke’s Jackson Hole speech indicated that the low level of interest rates was likely to remain for a longer period of time. However, this was not enough to offset losses in the trading program’s bonds. Losses were posted to the Fund at the end of the third quarter as bonds detracted from performance, as bond prices retreated in reaction to more optimistic market sentiment. Losses were posted to the Fund at the beginning of the fourth quarter. The bond sector witnessed the worst performance this month, with it seeing the most significant hit during the third week of October; during this period macro data releases globally appeared stronger than expected, including the unexpected fall in the U.S. unemployment rate. In reaction to this data, global fixed income markets retreated. Profits were posted to the Fund in the middle of the fourth quarter. Both bonds and short term interest rates, profited as yields, in general, fell over the course of the month of November. This move was not, however, without some challenges as most markets in the sector saw a significant retracement (rise in yields) over the third week which then reversed before month end. Variation in the economic outlook for individual countries saw the bond sector contain both one of the top and bottom performing markets; Japanese government bonds rallied strongly benefitting the fund’s long position, meanwhile Australian government bonds were down on the month, moving against the fund’s long position. Losses were posted to the Fund at the end of the fourth quarter. The bond sector was the largest detractor from the Fund’s returns in December, and indeed contained two of the worst performing markets. In general, bond markets witnessed price falls (increases in yield) through the middle of the month of December, in lieu of improved sentiment; these moves went against the trading program’s long positions held by the Fund, and despite many markets reverting before year end the recovery was not sufficient to offset the earlier losses. Small losses were also experienced in the short term interest rate sector as, in general, futures markets finished the month slightly lower.
The stock indices sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. January’s market conditions became increasingly risk-seeking, fuelled by large liquidity infusions globally. The risk-seeking sentiment was evident in equity markets with the Standard & Poors 500 and the MSCI World up in January. Profits were posted to the Fund in the middle of the first quarter due to the Fund’s net long equities exposure generated gains following the rally seen in those markets. Profits were posted to the Fund at the end of the first quarter as equity markets were up in the U.S., however down in Europe. Losses were posted to the Fund at the beginning of the second quarter. Over the course of April the Fund’s Margin to Equity increased, at the end of March to the end of April. The main changes to risk (in terms of VaR) were increases in the energy and bond sectors and a reduction in the equity sector. Losses were posted to the Fund in the middle of the second quarter. Equity markets saw substantial falls, which led to a small loss from the sector, the extent and persistence of recent moves have seen the proportion of the Fund’s risk deployed in the sector drop to a multi-year low. Losses were posted to the Fund at the end of the second quarter. Profits were posted to the Fund at the beginning of the third quarter. A net long bias in equity markets led to the sector providing a positive contribution however, performance across individual indices was mixed. Profits were posted to the Fund in the middle through the end of the third quarter. In September, the trading program benefitted from a short position in the VIX futures, with implied volatility continuing to fall as markets perceived that the European Central Bank actions had reduced risk. Losses were posted to the Fund at the beginning of the fourth quarter. Performance across the markets within the equity sector was mixed, so although the sector finished in negative territory in October it contained some of the top performing individual markets. While some indices, such as the S&P 500 index, oscillated several times over the month challenging the trend following approach, others such as the Hang Seng index displayed more consistent positive trends which were captured profitably. Profits were posted to the Fund in the middle of the fourth quarter. Equity indices typically fell in the first half of December before exhibiting a strong rally over the second half, the result was that they ended up in positive territory benefiting the trading program’s net long positions. Profits were posted to the Fund at the end of the fourth quarter. The U.S. fiscal cliff discussions dominated the markets attention as the New Year approached, and the strong recovery experienced in the U.S. equity markets on the last trading day of the year contributed to the sector’s performance. While most equity indices finished the month in positive territory the Japanese indices were the outstanding performers.
The agriculture sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter as agricultures in general were on a downward path. Losses were posted to the Fund in the middle of the first quarter as agricultures were mixed with no consistency of price moves across markets. Profits were posted to the Fund at the end of the first quarter with gains from crops. Profits were posted to the Fund at the beginning through the middle of the
second quarter as concerns about food price inflation continued to push agricultural markets, such as soybean, higher and resulted in a positive contribution from the sector. Losses were posted to the Fund at the end of the second quarter. Within the crops sector, corn prices surged as the heat wave in the U.S. Midwest damaged harvests; the rally in corn being one of the top detractors from Fund performance in June. The impact of the hot, dry weather was felt across other crops as well with soybean prices increased. Profits were posted to the Fund at the beginning of the third quarter due to the trading program’s long position in soybean futures which was one of the top performance contributors. Profits were posted to the Fund in the middle of the quarter. Agricultural markets were mixed in August with some crops, such as soybean, continuing their strong rally while others, such as wheat and corn, retreated. Losses were posted to the Fund at the end of the third quarter. Several crops reversed their recent price rallies in September as speculation grew that U.S. harvests may be larger than forecast and production in South America looked set to be higher than expected. Soybeans, for example, which had rallied during the year to the end of August and fell in September. Losses were posted to the Fund at the beginning of the fourth quarter due to the trading program’s positions in crops. Losses were posted to the Fund in the middle of the fourth quarter. In response to the falls seen in crop prices the Fund reduced the net long exposure it had held in the sector, moving to neutral overall. Losses were posted to the Fund at the end of the fourth quarter. The crops sector detracted slightly from the Fund’s performance as agricultural futures, including Corn, Wheat and Soybean fell over the month of December.
The currency sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The International Monetary Fund cut its forecast for global growth in 2012 and in 2013. Europe may go into recession this year, but the severity is uncertain. European leaders made yet another attempt to put fiscal rules in place and to enhance their financial firepower to regain investor confidence. However, the fiscal compact may lack the weight to provide a solid anchor for monetary union. Greece remains an unresolved issue and even if the private sector initiative is finalized, the market appears skeptical on the effectiveness of a new economic program and hence expects debt workouts may be recurrent. Losses were posted to the Fund in the middle of the first quarter. In the U.K., the Bank of England added funds to their quantitative easing program. In Japan, the central bank announced further monetary stimulus, resulting in the Japanese yen depreciating against U.S. dollar during the month. Losses were posted to the Fund at the end of the first quarter as markets continue to be volatile. Losses were posted to the Fund at the beginning of the second quarter only to be reversed in the middle of the quarter. Profits were posted to the Fund in the middle of quarter. The combination of Eurozone fears and evidence of a slowing global economy resulted in a sharply stronger U.S. dollar, which benefitted the Fund’s foreign exchange positioning having entered May with a net long U.S. dollar bias which was added to as the month progressed. Losses were posted to the Fund at the end of the second quarter. Losses were experienced in the Foreign Exchange sector where the Euro rallied strongly into month end and the U.S. dollar weakened, reversing the strong moves seen in May. Profits were posted to the Fund at the beginning of the third quarter. In the Fund’s foreign exchange, the fall in value of the EUR and the rise of the Australian dollar helped the trading program deliver a positive contribution to the Fund’s performance. Losses were posted to the Fund in the middle of the third quarter where markets moved against a number of the positions held by the Fund. Profits were posted to the Fund at the end of the third quarter. The continued weakening of the U.S. dollar benefitted the Fund’s short U.S. dollar bias and was one factor that led to the sector’s positive performance. Losses were posted to the Fund at the beginning of the fourth quarter. Profits were posted to the Fund in the middle of the fourth quarter as currencies were relatively muted over the month of November with the exception of weakness in Japanese yen. The U.S.D. Index rose, EUR/U.S. dollar by 0.12% but U.S. dollar/Japanese yen rallied 3.3% over the month, as the Japanese yen continued to fall vs. .U.S. dollar. Profits were posted to the Fund at the end of the fourth quarter. Finally, in the FX markets, although the move in the broader Dollar Index was relatively modest, there was dispersion across currencies that presented opportunities for the strategy; the continued rise of U.S. dollar-Japanese yen and fall of U.S. dollar-Norwegian krone helped the sector deliver a strong contribution to performance.
The energy sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Long oil positions performed well due to the increasing oil prices spurred by the likelihood of sanctions being imposed on Iran. Profits were posted to the Fund in the middle of the first quarter. Iran’s continued nuclear aspirations and the resulting sanctions contributed to a supply fear rally in oil which the Fund captured given its net long energies position. Profits were posted to the Fund at the end of the first quarter due to the Fund’s short position in natural gas, which benefitted from the continued fall in prices as a result of excess supply. Losses were posted to the Fund at the beginning of the second quarter. News that U.S. output grew to the highest level since 1999 (as drilling accelerated), consequently leading to increased stockpiles, resulted in prices falling across many energy markets; these moves went against the long bias that the Fund held in the sector. Losses were posted to the Fund in the middle of the second quarter. The Fund’s long positions in most energy markets saw the sector contain poor performing positions, and resulted in the sector being the largest detractor. Over the course of May the strategy substantially reduced its exposure to energies, in response to the market moves, cutting exposure by approximately 80%. Losses were posted to the Fund at the end of the second quarter. The reduction in exposure to the energy sector seen during May continued in June, as energy markets (in general) first fell heavily and then rebounded aggressively; as a result the exposure to the sector at the end of the month was the lowest level seen in recent
years. Profits were posted to the Fund at the beginning of the third quarter as energy markets rallied in July. However, the performance contribution to the Fund was more muted due to the trading program’s light positioning in the sector following the price movements of the previous few months. Profits were posted to the Fund in the middle of the third quarter. The energy complex rallied as economic figures released early in the month of August indicated growth in the U.S. These gains were maintained and added to over the remainder of the month, with West Texas Intermediate, Brent Crude, RBOB Gasoline and Gas Oil futures all rising. Losses were posted to the Fund at the end of the third quarter. A surge in U.S. crude oil inventories coupled with news that Saudi Arabia may be moving to reduce prices caused energy futures to fall sharply in the middle of September reversing the prevailing positive price trend resulting in a negative performance contribution given the trading program’s long position bias in the sector. Losses were posted to the Fund at the beginning of the fourth quarter. The energy markets retreated in the second half of October, with West Texas Intermediate crude reaching its lowest level since July after falling in just four trading sessions. The sector’s move was against the long positions that the trading program held in the energy complex. Losses were posted to the Fund in the middle of the fourth quarter as the energy markets saw mixed performance. West Texas Intermediate crude prices oscillated several times over the month of November. Natural gas prices rose over the first half of the month of November but then fell substantially after government data showed an unexpected gain in U.S. stockpiles, the net result was that prices fell by about -6.8% over the month. Losses were posted to the Fund at the end of the fourth quarter. West Texas Intermediate crude finished December higher, having fallen early in the month; natural gas prices fell finishing the month down since their mid-November peak.
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The metals markets were up January which moved against the Fund’s short positions. Losses were posted to the Fund in the middle of the first quarter as metals ended broadly flat with most exhibiting a fall at the end of February. Losses were posted to the Fund at the end of the first quarter as metals were generally down. Losses were posted to the Fund at the beginning of the second quarter which reversed in the middle of the quarter. The metals sector contributed positively to performance as markets continued their downward trends. Losses were posted to the Fund at the end of the second quarter. Losses were posted to the Fund at the beginning of the third quarter due to the gold prices rising resulting in moving against the trading program’s short positions. Losses were posted to the Fund in the middle of the third quarter. The metals sector was the only sector to provide a negative contribution to Fund’s performance, with gold prices rising and hence moving against the Fund’s short positions. Losses were posted to the Fund at the end of the third quarter as the metals sector detracted from performance slightly. Losses were posted to the Fund at the beginning of the fourth quarter as prices of both base and precious metals retreated and the Fund reversed its aggregate long exposure to the sector finishing the month with a small short position. Losses were posted to the Fund in the middle of the fourth quarter as the Fund reversed its aggregate short exposure in the metals sector to finish the month with a small long position. Mixed price movements were seen within the sector, with gold down over the month of December and copper up.
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 all 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.
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. The Net Asset Value of the Fund’s cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Fund’s profit potential generally increases. 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 Exhibit 13.01.
Item 7A:
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.
Quantifying The Fund’s Trading Value At Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s market risk exposures contain “forward-looking statement” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the 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 (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by the 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 years ended December 31, 2014 and 2013, the Fund’s average month-end Net Asset Value was approximately $92,425,259 and $151,678,934, respectively.
December 31, 2014
December 31, 2013
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
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, 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, and an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the 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, 2014, 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 U.S. dollar/Japanese yen, U.S. dollar/Euro and U.S. dollar/New Zealand dollar 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 grains accounted for the substantial bulk of the Fund’s agricultural commodities exposure as of December 31, 2014.
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 only non-trading risk exposures of the Fund as of December 31, 2014.
Foreign Currency Balances
The Fund’s primary foreign currency balances are in Japanese Yen, British Pound and Euros.
U.S. Dollar Cash Balance
The Fund holds U.S. dollars only in cash at MLPF&S. 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 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 simply of the ongoing process of monitoring the Trading Advisor with the market risk controls being applied by the Trading Advisor itself.
Risk Management
The management of risk is an integral part of the BlueCrest Trading Program. The Trading Advisor’s focus within risk management is on targeting, measuring and managing risk. Owing to the leverage inherent in futures trading, position sizes are set according to the Trading Advisor’s expectation of the risk that the positions will provide, rather than the amount of capital required to fund the positions.
Non-Trading Risk
The Fund controls the non-trading exchange rate risk by regularly converting foreign 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:
Item 8: Financial Statements and Supplementary Data
Net Income(Loss) by Quarter
Eight Quarters through December 31, 2014
(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.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A:
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act) with respect to the Fund as of and for the year which ended December 31, 2014, and, based on its evaluation, has 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, 2014. 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 (1992).
Based on its assessment the Fund’s management concluded that at December 31, 2014, 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, 2014 that has materially affected, or is reasonable likely to materially affect, the Fund’s internal control over financial reporting.
Item 9B:
Item 9B: Other Information
Not applicable.
PART III
Item 10:
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:
Keith Glenfield
Chief Executive Officer, President and Manager
Barbra E. Kocsis
Chief Financial Officer and Vice President
Spencer Boggess
Vice President and Manager
James D. Bowden
Vice President and Manager
Dominick A. Carlino
Vice President and Manager
James L. Costabile
Vice President and Manager
Nancy Fahmy
Vice President and Manager
Ninon Marapachi
Vice President and Manager
Jeff McGoey
Vice President and Manager
Greg Parets
Vice President and Manager
Steven L. Suss
Vice President and Manager
Keith Glenfield, age 40, has been the Chief Executive Officer and President of MLAI since June 2013. Mr. Glenfield has been a Managing Director and Head of Global Wealth and Retirement Solutions group’s (“GWRS”) Alternative Investments Group, a division within BAC that provides investment professionals and their clients with access to investment products and other services, since September 2012. GWRS is a business unit within the BAC Global Wealth & Investment Management Group (“GWIM”), a division within BAC. In this role, Mr. Glenfield is responsible for product management and development, strategy, operating risk and controls and other aspects of BAC’s alternative investment platform. From August 2009 through August 2012, Mr. Glenfield was the Chief Operating Officer of GWRS. In addition to his responsibilities as Chief Operating Officer of GWRS, Mr. Glenfield was also responsible for leading business development within GWRS’s Capital Markets Group from January 2012 through August 2012. Prior to assuming these roles Mr. Glenfield was the Chief Administration Officer for GWRS’s Capital Markets Group from August 2008 until August 2009 and GWRS’s Investment Management and Guidance Group from April 2008 to August 2008. Prior to becoming Chief Administration Officer for GWRS’s Investment Management and Guidance Group, Mr. Glenfield was responsible for the Financial Planning and Wealth Management Analytics team within GWRS from February 2005 through April 2008. Mr. Glenfield has been registered with the CFTC as an associated person and listed as a principal of MLAI since June 10, 2013. Mr. Glenfield has also been registered with the CFTC as an associated person of MLPF&S since June 10, 2013. Mr. Glenfield holds a B.S. degree in Finance from the College of New Jersey and an M.B.A. from Rutgers University.
Barbra E. Kocsis, age 48, is the Chief Financial Officer for MLAI, has been listed with the CFTC as a principal of MLAI since May 21, 2007 and is a Director within BAC’s Global Wealth Investment Management Technology and Operations group, positions she has held since October 2006. 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.
Spencer Boggess, age 47, has been a Vice President of MLAI since January 2014. Mr. Boggess has served as a Managing Director and the Head of Alternative Investments Due Diligence for Merrill Lynch’s Wealth Management with GWRS since March 2009 with responsibility for research and due diligence for hedge funds, private equity and third-party
fund of funds. During this time, Mr. Boggess has also served as Portfolio Manager for a range of registered and private placement fund of funds. Prior to this, Mr. Boggess served as Head of Hedge Fund Research and Investment at BAC from July 2007 through March 2009 and President and CEO of Bank of America Capital Advisors LLC (“BACA”) from July 2007 to present. BACA is an investment advisor focusing on alternative investment products. Mr. Boggess has been listed as a principal of MLAI since January 2, 2014. Mr. Boggess received his B.A. degree from the University of Virginia and has also done graduate work at the University’s Woodrow Wilson School of Foreign Affairs.
James D. Bowden, age 61, has been a Vice President of MLAI since January 2014. Mr. Bowden joined BACA in March 1998 to form the group and to manage BAC’s private equity fund of funds business. In that capacity, he has acted as the primary investment strategist for various private placement offerings and client advisory activities associated with the private equity asset class. He has also served as a member of BACA’s investment committee since March 1998. In addition, Mr. Bowden has assisted GWIM professionals with the marketing and fundraising efforts for BAC’s private equity fund of funds products since March 1998. Mr. Bowden has been listed as a principal of MLAI since January 2, 2014. Mr. Bowden received his M.B.A. and his B.B.A. degree from the University of Michigan. He is a Certified Public Accountant.
Dominick A. Carlino, age 42, has been a Vice President of MLAI since January 2014. Mr. Carlino has been a Managing Director within GWRS heading Relationship Management and Business Development since May 2013. 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.
James L. Costabile, age 39, has been a Vice President of MLAI and a Managing Director within GWRS responsible for alternative investment distribution for BAC since July 2007 and US Trust since January 2009. U.S. Trust is a division of BAC. Mr. Costabile has been listed as a principal of MLAI since July 14, 2010. He has also been registered with the CFTC as an associated person of MLPF&S since August 20, 2007. Mr. Costabile was previously registered as an associated person of Citigroup Global Markets Inc., a broker-dealer within Citigroup, Inc., a global financial services company, from December 5, 2003 to July 6, 2007. Mr. Costabile was responsible for, among other things, sales of alternative investment products to high net worth and institutional clientele at Citigroup Global Markets Inc. from November 7, 1997 to July 6, 2007. As part of MLAI’s management team, Mr. Costabile oversees the team of sales professionals and specialists responsible for supporting hedge funds, private equity and real asset offerings. Mr. Costabile received a B.S. from Fordham University and holds the Chartered Alternative Investment Analyst designation.
Nancy Fahmy, age 40, has been a Vice President of MLAI since January 2014. Ms. Fahmy has been a Managing Director within GWRS and responsible for Private Equity and Real Assets Technical Sales and Origination within MLAI since December 2012. 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 has been listed as a principal of MLAI since January 9, 2014. Ms. Fahmy was previously an NFA Associate Member and registered as an Associated Person of MLPF&S from March 2009 to November 2010. Ms. Fahmy holds a B.S. degree in Business Administration and Finance with a minor in Economics from the University of Delaware.
Ninon Marapachi, age 37, has been a Vice President of MLAI since January 2014. Ms. Marapachi is a Managing Director and has been the head of the Hedge Fund Origination and Product Management team within the BAC Alternative Investments Group, a division within BAC that provides investment professionals and their clients with access to investment products and other services, since September 2008. Her team is responsible for sourcing, structuring, negotiating and managing hedge funds and managed futures products on GWRS’ 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 has been an NFA Associate Member since February 2011 and registered as an Associated Person of MLPF&S since March 2011. Ms. Marapachi has been listed as a principal of MLAI since January 3, 2014. Ms. Marapachi graduated magna cum laude with a B.A. degree in Economics from Mount Holyoke College.
Jeff McGoey, age 38, has been a Vice President of MLAI and a Director within GWRS responsible for Alternative Investment Platform Oversight for BAC since December 2010. Mr. McGoey served as a Vice President with portfolio oversight to ten derivative based closed end funds from March 2009 through December 2010. Within GWRS
Alternative Investments since May 2008, Mr. McGoey was a Vice President holding various roles including hedge fund and private equity origination, exchange fund and customized fund oversight, and has managed various strategic initiatives across the organization until December 2010. Mr. McGoey has been listed as a principal of MLAI since January 13, 2014. 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 38, has been Head of Cross Platform Initiatives for the Alternative Investments Group of GWIM since June 2013. Mr. Parets joined BAC 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 BAC, 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.
Steven L. Suss, age 55, has been a Vice President of MLAI since June 2012. He has been a Managing Director within GWRS’s Alternative Investments Group since January 2008, responsible for managing finance, operational and other business aspects of BAC’s alternative investment platform. Mr. Suss has been listed as a principal of MLAI since June 12, 2012. Mr. Suss is also a director and the President of BACAP Alternative Advisors Inc. (“BACAP”), an alternative investment advisor affiliated with BAC. He has held these positions at BACAP since July 1, 2007, and is responsible for the management and supervision of the overall business of BACAP. Mr. Suss also served as Senior Vice President of BACA from July 2007 to December 2013. Mr. Suss was responsible within BACA for the management of financial reporting and the operational affairs of the investment vehicles managed by BACA. Mr. Suss received a B.B.A. from the University of Texas at Austin.
MLAI acts as the sponsor, general partner or manager to seven 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., Systematic Momentum FuturesAccess LLC, ML Transtrend DTP Enhanced FuturesAccess LLC, ML Trend-Following Futures Fund L.P, 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.
(g) Promoters and Control Persons:
Not applicable.
(h) Section 16(a) Beneficial Ownership Reporting Compliance:
To the Fund’s knowledge, all required Section 16(a) filings during the fiscal year ended December 31, 2014 were timely and correctly made.
Code of Ethics:
MLAI and BAC 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:
Item 11: Executive Compensation
The managers and officers of MLAI are remunerated by BAC 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 BAC affiliate. MLAI also receives a portion of the management fees and performance fees (with respect to the calendar year 2015, MLAI will receive a portion of the gross asset value attributable to certain Classes of Units rather than a portion of the management fees, see Item 1 “Description of Current Charges-Management fees”.) MLAI or BAC affiliates may also receive certain economic benefits from possession of the Fund’s U.S. dollar assets. The managers and officers receive no “other compensation” from the Fund, and the managers receive no compensation for serving as managers of MLAI. There are no compensation plans or arrangements relating to a change in control of either the Fund or MLAI.
Item 12:
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:
As of December 31, 2014 MLAI owned no Unit-equivalent member interests. The directors and executive officers of MLAI did not own any Units.
(c) Changes in Control:
None.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
Item 13:
Item 13: Certain Relationships and Related Transactions, and Director Independence
Not applicable.
Director Independence:
No person who served as a manager of MLAI during 2014 could be considered independent (based on the definition of an independent director under the NASDAQ rules).
Item 14:
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, in connection with the audit of the Fund’s annual financial statements, 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, 2014 and 2013 were $177,067 and $173,595, respectively.
(b) Audit-Related Fees
There were no other audit-related fees billed for the years ended December 31, 2014 and 2013 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, 2014 and 2013 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, 2014 and 2013 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 billings prior to the commencement of services.
PART IV
Item 15:
Item 15: Exhibits, Financial Statement Schedules
1.
Financial Statements (found in Exhibit 13.01):
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS:
Statements of Financial Condition as of December 31, 2014 and 2013
Statements of Operations for the years ended December 31, 2014, 2013 and 2012
Statements of Changes in Members’ Capital for the years ended December 31, 2014, 2013 and 2012
Financial Data Highlights for the years ended December 31, 2014, 2013 and 2012
Notes to Financial Statements
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:
Exhibit 10.02:
Is incorporated by reference from Exhibit 10.02 contained in the registrant’s Report on Form 10-K for the year-ended December 31, 2010, filed on March 15, 2011.
10.03
Amendment to Amended and Restated Advisory Agreement among ML BlueTrend FuturesAccess LLC, Merrill Lynch Alternative Investments LLC and BlueCrest Capital Management LLP.
Exhibit 10.03:
Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K filed on May 9, 2011.
10.04
Novation and Amendment to Amended and Restated Advisory Agreement among ML BlueTrend FuturesAccess LLC, Merrill Lynch Alternative Investments LLC, BlueCrest Capital Management LLP and BlueCrest Capital Management Limited.
Exhibit 10.04:
Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K filed on August 6, 2014.
10.05
Novation and Amendment to Amended and Restated Advisory Agreement among ML BlueTrend FuturesAccess LLC, Merrill Lynch Alternative Investments LLC, BlueCrest Capital Management Limited and Systematica Investments Limited.
Exhibit 10.05:
Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K filed on January 7, 2015.
10.06
Amendment to Amended and Restated Advisory Agreement among ML BlueTrend FuturesAccess LLC, Merrill Lynch Alternative Investments LLC and Systematica Investments Limited.
Exhibit 10.06:
Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K filed on February 5, 2015.
13.01
2014 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.
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 Merrell 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.
The following materials from the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 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.
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.
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/Keith Glenfield
Chief Executive Officer, President and Manager
March 20, 2015
Keith Glenfield
(Principal Executive Officer)
/s/ Barbra E. Kocsis
Chief Financial Officer and Vice President
March 20, 2015
Barbra E. Kocsis
(Principal Financial Officer)
/s/Spencer Boggess
Vice President and Manager
March 20, 2015
Spencer Boggess
/s/James D. Bowden
Vice President and Manager
March 20, 2015
James D..Bowden
/s/Dominick A. Carlino
Vice President and Manager
March 20, 2015
Dominick A. Carlino
/s/James L. Costabile
Vice President and Manager
March 20, 2015
James L. Costabile
/s/Nancy Fahmy
Vice President and Manager
March 20, 2015
Nancy Fahmy
/s/Ninon Marapachi
Vice President and Manager
March 20, 2015
Ninon Marapachi
/s/Jeff McGoey
Vice President and Manager
March 20, 2015
Jeff McGoey
/s/ Greg Parets
Vice President and Manager
March 20, 2015
Greg Parets
/s/Steven L. Suss
Vice President and Manager
March 20, 2015
Steven L. Suss
ML BLUETREND FUTURESACCESS LLC
2014 FORM 10-K
INDEX TO EXHIBITS
Exhibit
Exhibit 13.01
2014 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, 2014 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.