Item 1: Business
(a) General Development of Business:
Aspect 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 May 17, 2004 and commenced trading activities on April 1, 2005. The Fund engages in the speculative trading of futures and forward contracts on a wide range of commodities. Aspect Capital Limited (the “Trading Advisor”) is the trading advisor of the Fund. The Trading Advisor trades the Aspect Diversified Program (the “Trading Program”) for the Fund.
Merrill Lynch Alternative Investments LLC (“MLAI”, the “Sponsor” or the “Managing Member”) is the sponsor and manager of the Fund. MLAI is an indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America Corporation and its affiliates are referred to herein as “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 Program applies a systematic and diversified global investment system. This trading system employs multiple trading strategies that seek to identify and exploit directional moves in market behavior primarily through the use of U.S. exchange-traded futures and F/X traded and OTC contracts. 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, the fifteenth calendar day of each month and as of any other dates MLAI may determine in its discretion (each, a “Calculation Date”). The Fund’s “Net Asset Value” as of any Calculation Date generally equals the value of the Fund’s account under the management of the Trading Advisor as of that date, plus any other assets held by the Fund, minus accrued Sponsor’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 $147,800,719 and the Net Asset Value per Unit was $1.7318 for Class A, $1.5768 for Class C, $2.0448 for Class D, $1.7810 for Class I, $2.029 for Class DS, $2.1534 for Class DT and $1.0933 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 Unit for Class A was $1.7318 (December 31, 2014) and the lowest was $0.9690 (April 30, 2005). The highest month-end Net Asset Value per Unit for Class C was $1.5790 (February 29, 2012) and the lowest was $0.9682 (April 30, 2005).
The highest month-end Net Asset Value per Unit for Class D was $2.0448 (December 31, 2014) and the lowest was $0.9702 (April 30, 2005). The highest month-end Net Asset Value per Unit for Class I was $1.7810 (December 31, 2014) and the lowest was $0.9693 (April 30, 2005). The highest month-end Net Asset Value per Unit for Class DS was $2.0290 (December 31, 2014) and the lowest was $1.1631 (March 30, 2007). The highest month-end Net Asset Value per Unit for Class DT was $2.1534 (December 31, 2014) and the lowest was $1.1828 (August 30, 2007). The highest month-end Net Asset Value per Unit for Class M was $1.0933 (December 31, 2014) and the lowest was $0.7867 (March 15, 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 have entered into an advisory agreement with the Trading Advisor. The advisory agreement will continue in effect until December 31, 2016. Thereafter, the Advisory Agreement will be automatically renewed for successive three-year periods, on the same terms, unless terminated at any time by either the Trading Advisor or the Fund upon 90 days’ notice to the other party. The Advisory Agreement may, however, be terminated at any time by Fund and/or MLAI, on the one hand, or the Trading Advisor, on the other, as a result of a material breach of the advisory agreement by the other party, after due notice and a reasonable 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 applies a systematic and broadly diversified global trading system, which deploys multiple investment strategies that, primarily through the use of listed futures and F/X OTC contracts, seek to identify and exploit directional moves in the market behavior of a broad range of financial instruments and other assets including, but not limited to, currencies; interest rates; equities; equity indices; debt securities, including bonds; and commodities, including energy, metal and agricultural commodities. The Trading Advisor does not engage in retail, off-exchange foreign currency investment pursuant to the Trading Program. By maintaining comparatively small exposure to any individual market and maintaining positions in a variety of contracts, the aim is to achieve long-term diversification.
The Trading Program employs an automated system to collect, process and analyze market data (including current and historical price data) and identify and exploit directional moves in market behavior. The Trading Program trades across a variety of frequencies to exploit trends over a range of timescales. Positions are taken according to the aggregate signal and are adjusted to control risk.
Generally, the Trading Program maintains positions in the majority of markets that have been identified as being available for investment by the program. Market concentration varies according to the strength of signals, volatility and liquidity, among other factors.
The core objectives of the Trading Program are to:
· produce strong medium-term capital growth;
· seek and exploit profit opportunities in both rising and falling markets using a quantitative and systematic investment process;
· seek long-term diversification away from overall movements in traditional bond and stock markets; and
· minimize risk by operating in a diverse range of markets and sectors using an investment process that adheres to pre-defined and monitored risk limits and determines market exposure in accordance with factors including, but not limited to, market correlation, volatility, liquidity and the cost of market access.
The Trading Program is not applied by the Trading Advisor with any pre-determined preference for any market. Rather, allocations to strategies and individual markets depend upon an analysis of a range of factors which may include liquidity, correlation and cost of execution. Allocations are currently made on a long-term average risk basis which takes into account varying levels of market volatility and intra-market correlation. These allocations are subject to regular review and may change from time to time at the Trading Advisor’s discretion.
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’s trading involves the speculative trading of listed futures and F/X OTC contracts, although the percentage of the Fund’s assets allocated to either class of contracts will vary from time to time.
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 unrealized profit (loss) on open contracts in 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, netting unrealized losses against unrealized profits as applicable. Net unrealized profit and loss provides a rough measure of the exposure of the Fund to the various sectors as of the date listed, although such exposure can change at any time
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 $15,651,421 and $10,093,241 as initial margin to support futures and forward positions, respectively, representing approximately 9.73% and 6.27%, respectively, of the Fund’s total assets as of such date.
Custody of Assets
The Fund’s financial assets consist primarily of cash, futures and OTC FX forward and spot positions. In addition, the Fund has authority to trade options on futures and forwards and certain other OTC derivatives including swaps, but these contracts typically represent a small percentage of the Fund’s financial assets, if any are traded at all.
Futures and OTC forwards and other instruments typically constitute a predominant amount of the Fund’s investment risk, but the notional value of these instruments is not included on the Fund’s balance sheet.
The vast majority of the net assets of the Fund is, and has historically been, held in the form of cash. The Fund’s cash is used in various ways. It can be:
· posted as margin with MLPF&S in segregated or secured accounts in connection with commodities trading on regulated exchanges;
· pledged as collateral to MLI for OTC forwards or options on forwards or to other OTC prime brokers for other OTC investments;
· deposited in savings or demand deposit accounts with the Fund’s custodian or other banking institutions, both in the United States and internationally;
· held in securities brokerage accounts maintained with MLPF&S; and
· 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 $138,955,668, $231,463,799 and $299,617,773, respectively.
During 2014, the Fund earned $3,957 in interest income, or approximately 0.00% of the Fund’s average month-end Net Assets. During 2013, the interest expense for the Fund was $8,964, or approximately 0.00% of the Fund’s average month-end Net Assets. During 2012, the interest expense for the Fund was $9, or approximately 0.00% of the Fund’s average month-end Net Assets.
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 (“CEA”) requires commodity pool operators such as MLAI, commodity trading advisors such as the Trading Advisor and commodity brokers or FCMs such as MLPF&S to be registered and to comply with various reporting and record keeping requirements. CFTC regulations also require FCMs to maintain a minimum level of net capital. In addition, the CFTC and certain commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options contracts traded on U.S. commodities exchanges. All accounts owned or managed by the Trading Advisor will be combined for position limit purposes. The Trading Advisor could be required to liquidate positions in order to comply with such limits. Any such liquidation could result in substantial costs to the Fund. In addition, many futures exchanges impose limits beyond which the price of a futures contract may not trade during the course of a trading day, and there is a potential for a futures contract to reach its daily price limit for several days in a row, making it impossible for the Trading Advisor to liquidate a position and thereby experiencing dramatic losses. Currency forward contracts are not regulated as “swaps” under the CEA, but are subject to governmental regulation such as mandatory reporting and business conduct standards for swap dealers and major swap participants to the extent otherwise applicable to swaps under the CEA and applicable rules of the CFTC, see Item 1A
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. 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 (i) the 15th calendar day of each month and/or (ii) the last calendar day of each month (each a “Redemption Date”), upon submitting a redemption request by the “Subscription/Redemption Notice Date,” which is eight business days prior to the 1st and 16th of every month. MLAI may eliminate investors’ mid-month redemption right at any time. The Net Asset Value of redeemed Units is determined as of the Redemption Date. Investors will remain exposed to fluctuations in Net Asset Value during the period between submission of their redemption request and the applicable Redemption Date.
(b) Holders:
As of December 31, 2014, there were 2,123 holders of Units, none of whom owned 5% or more of the Fund’s Units.
(c) Dividends:
MLAI has not made and does not contemplate making any distributions on the Units.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
(e) Performance Graph:
Not applicable.
(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 D
CLASS I
CLASS DS
CLASS DT
CLASS M
(1) Beginning of the period Net Asset Value
Class A Units are subject to upfront sales commissions paid to MLPF&S ranging from 1.0% to 2.5% of an investor’s gross subscription amount. Class D Units and Class I Units are subject to upfront sales commissions paid to MLPF&S up to 2.5% of an investor’s gross subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units, Class DS Units, Class DT Units and Class M Units are not subject to upfront sales commissions.
Item 5(b)
Not applicable.
Item 5(c)
Not applicable.
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 April 1, 2012
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
ASPECT FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2005
Aggregate Subscriptions: $66,064,646
Current Capitalization: $21,386,741
Worst Monthly Drawdown(2): (8.25)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (24.70)% (March 2012 - December 2014)
Net Asset Value per Unit for Class A, December 31, 2014: $1.7318
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 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 April 1, 2005 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 73.18%.
ASPECT FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2005
Aggregate Subscriptions: $262,886,658
Current Capitalization: $77,465,333
Worst Monthly Drawdown(2): (8.33)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (26.24)% (March 2012 - December 2014)
Net Asset Value per Unit for Class C, December 31, 2014: $1.5768
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 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 April 1, 2005 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 57.68%.
ASPECT FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2005
Aggregate Subscriptions: $43,349,494
Current Capitalization: $5,075,852
Worst Monthly Drawdown(2): (8.13)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (22.29)% (March 2012 - November 2014)
Net Asset Value per Unit for Class D, December 31, 2014: $2.0448
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 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 April 1, 2005 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 104.48%.
ASPECT FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2005
Aggregate Subscriptions: $40,245,601
Current Capitalization: $2,150,219
Worst Monthly Drawdown(2): (8.22)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (24.09)% (March 2012 - December 2014)
Net Asset Value per Unit for Class I, December 31, 2014: $1.7810
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 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 April 1, 2005 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 78.10%.
ASPECT FUTURESACCESS LLC
(CLASS DS UNITS) (5) (6)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2007
Aggregate Subscriptions: $117,485,350
Current Capitalization: $23,951,811
Worst Monthly Drawdown(2): (8.13)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (22.28)% (March 2012 - November 2014)
Net Asset Value per Unit for Class DS, December 31, 2014: $2.0290
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2007 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 April 1, 2007 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 81.01%.
(6) Class DS was previously known as Class D-SM.
ASPECT FUTURESACCESS LLC
(CLASS DT UNITS) (5) (6)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: June 1, 2007
Aggregate Subscriptions: $122,713,553
Current Capitalization: $11,715,686
Worst Monthly Drawdown(2): (8.09)% (June 2009)
Worst Peak-to-Valley Drawdown(3): (21.65)% (March 2012 - November 2014)
Net Asset Value per Unit for Class DT, December 31, 2014: $2.1534
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since June 1, 2007 by the Fund; a drawdown is measured on the basis of 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 June 1, 2007 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 79.47%.
(6) Class DT was previously known as Class D-TF.
ASPECT FUTURESACCESS LLC
(CLASS M UNITS) (5) (6)
December 31, 2014
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2012
Aggregate Subscriptions: $13,928,493
Current Capitalization: $6,055,077
Worst Monthly Drawdown(2): (6.44)% (May 2013)
Worst Peak-to-Valley Drawdown(3): (21.86)% (June 2012 - November 2014)
Net Asset Value per Unit for Class M, December 31, 2014: $1.0933
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2012 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 April 1, 2012 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 9.33%.
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 applies a systematic and broadly diversified global investment system, which deploys multiple investment strategies that, primarily through the use of listed futures and F/X OTC contracts, seek to identify and exploit directional moves in the market behavior of a broad range of financial instruments and other assets including, but not limited to, currencies; interest rates; equities; equity indices; debt securities, including bonds; and commodities, including energy, metal and agricultural 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.
The Fund experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2014 of $42,912,847. The Fund’s profits were primarily attributable to energy, interest rate, currency and agriculture sectors posting profits. The metals and stock indices sectors posted losses.
The energy sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Oil prices fell early in January on speculation that supplies from Libya would recover, but the Trading Program’s long natural gas exposure profited from cold weather and the resulting draws on stockpiles. Profits were posted to the Fund in the middle of the first quarter due to the Fund’s long exposures to energies. Losses were posted to the Fund at the end of the first quarter as long positions in oil markets suffered as prices fell on expectations that supply from Iraq will more than offset any potential disruptions from Libya and Ukraine. Natural gas prices also declined following milder weather forecasts in the
U.S. Profits were posted to the Fund at the beginning of the second quarter. In April, bullish U.S. natural gas inventory data rewarded the long positioning. Losses were posted to the Fund in the middle of the second quarter. In May, natural gas was the source of losses in energies as stock levels in North America and the weather outlook started to improve. Profits were posted to the Fund at the end of the second quarter in connection with the escalating violence in Iraq which boosted the price of crude oil. Losses were posted to the Fund at the beginning of the third quarter. The energy sector proved difficult to trade in July. Both crude oil and distillates turned bearish against the Trading Program’s reducing longs as the world’s biggest consumer of oil, the United States, reported both rising inventories and signs of weaker fuel demand. Losses were posted to the Fund in the middle of the third quarter due to the short exposure in natural gas. Natural gas futures advanced as a burst of late-summer heat slowed stockpiling of the power-plant fuel. Profits were posted to the Fund at the end of the third quarter due to the Trading Program’s short position in the energy market, which provided the bulk of the profits due to the downward trend of the energy market. Profits were posted to the Fund at the beginning of the fourth quarter. The energies sector was the top performing sector in October; oil prices declined on expectations that slowing growth will reduce demand for the increased global production levels. Profits were posted to the Fund in the middle of the fourth quarter. Performance was dominated by the energies sector, where short positions in oil markets produced the best profits. Profits were posted to the Fund at the end of the fourth quarter. The energies sector again dominated performance as oil prices continued their decline. Forecasts of future oil demand were reduced even as OPEC members reiterated that production would not be cut, and the Trading Program’s short positions profited as prices dropped. The natural gas short position also performed well as mild weather combined with high stock level data to push prices down.
The interest rate sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Performance in fixed income markets was a function of the Fund’s mixed positioning. Generally falling yields meant profits from long positions in Japanese and Euro zone bonds, but losses from the predominantly short positions elsewhere, most notably in UK Gilts following low inflation figures and in Canada following dovish comments from the Bank of Canada. Profits were posted to the Fund in the middle of the first quarter. The Fund also made gains in fixed income as investors generally sought the safety of bonds towards the end of February. Slowing inflation numbers in the Euro zone further provided support to bond prices, particularly in Italy. Profits were posted to the Fund at the end of the first quarter as the Ukrainian uncertainty drove increased demand for European bonds, benefiting the Fund’s long positions. Profits were posted to the Fund at the beginning of the second quarter due to long exposures in European, North American and Japanese bonds, which dominated the gains. Profits were posted to the Fund in the middle of the second quarter due to long positions in European bonds and other regions. Profits were posted to the Fund at the end of the second quarter in connection with the European Central Bank’s decision to set deposit rates to negative, in an effort to boost lending in the region. This allowed the European bonds and global equities to rally. Profits were posted to the Fund at the beginning of the third quarter due to long exposures to fixed income markets. Profits were posted to the Fund in the middle of the third quarter. Long fixed income exposures were strong performers in August. Early in August, an escalation of geopolitical tensions saw equity markets turn fragile and nervous investors sought the safety of fixed income markets. Losses were posted to the Fund at the end of the third quarter due to the fall in bond prices reducing the Trading Program’s positive performance. Profits were posted to the Fund at the beginning of the fourth quarter. Long positions in UK fixed income performed strongly following the release of low UK inflation figures. Profits were posted to the Fund in the middle of the fourth quarter. In Europe, the threat of negative inflation and the potential for full quantitative easing drove government bond yields lower. Other government bonds were also profitable as low inflation again delayed expectations of initial rate hikes in the UK and U.S. Profits were posted to the Fund at the end of the fourth quarter. The long positions in government bonds continued to profit from the general risk aversion and deteriorating outlook in Europe. The best profits came from German bonds and also UK Gilts after lower inflation and industrial production figures suggested that the UK economic recovery was starting to falter.
The currency sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Emerging market currencies experienced sharp moves, and the Fund profited from some of its short positions. However, the currencies sector was dragged into negative territory as the Japanese yen reversed its trend, buoyed by safe-haven buying. Profits were posted to the Fund in the middle of the first quarter. The U.S. dollar weakened and this led to gains from the Fund’s net short dollar exposures particularly against the New Zealand dollar, British pound and Swiss franc. Profits were posted to the Fund at the end of the first quarter as the interest rate hike by the Reserve Bank of New Zealand and a large increase in the country’s trade surplus boosted the New Zealand dollar. Profits were posted to the Fund at the beginning of the second quarter due to the long British sterling position. Despite the Fund also making gains from capturing strengthening emerging market currencies such as the Korean won and Brazilian real, reversals in the Japanese yen, Canadian dollar and New Zealand dollar reduced the sector’s profits. Losses were posted to the Fund in the middle of the second quarter. In May, currencies delivered mixed results: rallies in British sterling and the New Zealand dollar lost momentum, but there were profits from longs in the Norwegian krone and also in the Indian rupee following the election of a new government. Profits were posted to the Fund at the end of the second quarter as the New Zealand dollar resumed its rally following a hawkish Reserve Bank of New Zealand statement. Losses were posted to the Fund at the beginning of the third
quarter. The Trading Program’s net short U.S. dollar exposure dominated the losses, in particular against the New Zealand dollar where the Reserve Bank of New Zealand used rhetoric to talk down the strength of the local currency. Profits were posted to the Fund in the middle of the third quarter. The weaker Euro was a profitable theme for the Fund. The two best performing currency pairs in August were the Trading Program’s short Euro exposures against the Norwegian krone and the U.S. dollar. Profits were posted to the Fund at the end of the third quarter due to the Trading Program’s long U.S. dollar and short Euro positions. Profits were posted to the Fund at the beginning of the fourth quarter. Performance from the currencies sector was close to flat, with gains from the Trading Program’s mostly long U.S dollar positions being offset by losses from the long exposure to the Norwegian krone, which fell against the Euro as oil prices declined. Profits were posted to the Fund in the middle of the fourth quarter. The U.S. dollar resumed its rally, most significantly against the Japanese yen following the poor economic data there and the government’s further commitment to reflationary economic policies. Profits were posted to the Fund at the end of the fourth quarter as the currencies sector finished strongly, as the U.S. dollar continued its rally. As well as further gains from short positions in the Euro, Swiss franc and Japanese yen, the Trading Program also profited from sharp declines in the Russian ruble and Norwegian krone as the low oil price started to impact these currencies.
The agriculture sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter as agricultural markets performed well as bearish trends continued in wheat and sugar. Losses were posted to the Fund in the middle of the first quarter. Coffee, sugar and the soy complex rallied as drought affected Brazil, the world’s biggest exporter of these crops. The Fund made gains from long exposures to the soy contracts but incurred losses from short exposures to wheat. Losses were posted to the Fund at the end of the first quarter. In agricultural markets, the best performers were lean hogs, where a virus outbreak drove prices higher, and soy markets which also rose on concerns about tighter supplies in the U.S. However, losses came from short positions in wheat amid concerns that the Ukrainian situation will threaten supplies. Profits were posted to the Fund at the beginning of the second quarter. In April, the soy complex continued to make gains as the effects of poor North American and South American harvests drove prices higher. Profits were posted to the Fund in the middle of the second quarter. In May, performance in agricultural markets was mixed as shorts in wheat and soybean oil profited, but cotton and lean hog prices saw pullbacks. Profits were posted to the Fund at the end of the second quarter due to gains from the Fund’s shorts in wheat amid easing concerns over global supplies. The Fund’s long exposure to live cattle also made gains as tight supplies in that market drove prices higher. Profits were posted to the Fund at the beginning of the third quarter. Agricultural markets proved profitable in July as bearish price action in grains, sugar and cotton rewarded the Trading Program’s short positions. 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 because of the Trading Program’s short positions in wheat and sugar. Wheat prices declined over September, driven by signs of increasing supply in particular from the Black Sea region as tensions eased between Ukraine and Russia. Sugar prices also continued their bearish trend to the benefit of the Trading Program. Losses were posted to the Fund at the beginning of the fourth quarter. The Trading Program’s short wheat position was undermined as concerns about the effects of adverse weather drove prices back upwards. Losses were posted to the Fund in the middle of the fourth quarter due to the cold weather’s effect on wheat planting, driving prices higher and causing losses for the Trading Program’s short positions. Losses were posted to the Fund at the end of the fourth quarter
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The emerging markets concerns weighed on industrial metals prices, hurting the Fund’s long positions in all markets except aluminum. Losses were posted to the Fund in the middle of the first quarter due to the Trading Program’s short exposures to precious metals. Losses were posted to the Fund at the end of the first quarter as the Fund’s long zinc positions struggled amid concerns about industrial activity in China. Profits were posted to the Fund at the beginning of the second quarter as long exposures to nickel made gains as the combination of an Indonesian ore export ban and sanctions on large Russian ore producers drove the price higher. Losses were posted to the Fund in the middle of the second quarter due to the Fund’s short copper positions as Chinese economic reforms improved demand forecasts. Losses were posted to the Fund at the end of the second quarter due to the Fund’s short positions in gold and silver resulting in metals being the worst performing sector in June. Profits were posted to the Fund at the beginning of the third quarter. In metals, dwindling warehouse supplies of zinc saw the Trading Program make gains from an established long exposure. Profits were posted to the Fund in the middle of the third quarter and losses were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning of the fourth quarter. Losses were posted to the Fund in the middle and end of the fourth quarter.
The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. The Fund’s losses were from predominantly long equities exposure which overwhelmed the small profits from the sector’s few short positions. In January, poor payrolls data in the United States exacerbated concerns about the economic recovery. Also, weak Chinese PMI data and Argentina’s rapid Peso devaluation triggered an emerging markets sell-off which became a global equity market retracement. Profits were posted to the Fund in the middle of the first quarter due to the Fund’s net long exposure to stock indices. Losses were posted to the Fund at the end of the first quarter. The tension in Ukraine also
drove risk aversion in financial markets, and this combined with weak economic data from China to depress stock markets. However, as concerns about Ukraine later eased and rumors emerged of a Chinese stimulus package, stock markets partially recovered and the sector finished March close to flat. Profits were posted to the Fund at the beginning of the second quarter. Profits were posted to the Fund in the middle of the second quarter. Towards the end of May, stock indices rallied as positive economic data in the United States helped improve investor sentiment and market uncertainty declined, helping the Fund’s predominantly long positions. Profits were posted to the Fund at the end of the second quarter due to the Fund’s exposure in equity markets which were further boosted by favorable U.S. labor, housing and inflation data. Losses were posted to the Fund at the beginning of the third quarter due to reversal in equity markets. Despite a background of escalating geopolitical tensions, global equity markets traded higher for most of July. However, during the last few days of July, robust economic data from the United States was interpreted as an indication that the Fed may have to raise interest rates sooner than otherwise expected. As a result, equity markets sold off. European and U.S. stock indices made the majority of the losses. Profits were posted to the Fund in the middle of the third quarter. The top performing markets were the long exposures to U.S. indices. Some of the core European and Asian indices were small detractors, but did not prevent the sector registering a profit. Losses were posted to the Fund at the end of the third quarter due to weak European economic data and Chinese slowdown concerns which negatively affected the stock index prices. Losses were posted to the Fund at the beginning of the fourth quarter. Stock markets fell as a range of factors combined to derail investor confidence: weak data was released in the USA and the Euro zone, heightening Euro zone deflation concerns, and the International Monetary Fund cut its global growth forecasts. Profits were posted to the Fund in the middle of the fourth quarter due to long positions in stock indices performing strongly. Lower oil prices helped improve the global economic outlook, and equity markets were also buoyed by an interest rate cut in China and renewed commitment to economic stimulus measures in the euro zone and in Japan, which fell back into recession. Losses were posted to the Fund at the end of the fourth quarter. In financial markets, risk aversion returned as the deteriorating political situation in Greece sent European stock markets tumbling. This caused losses for all the Trading Program’s long positions in stock indices except for those in Chinese indices, which finished the year strongly in connection with new banking legislation.
The Fund experienced a net trading loss before brokerage commissions and related fees for the year ended December 31, 2013 of $4,823,115. The Fund’s profits were primarily attributable to stock indices, metals and agriculture sectors posting profits. The currency, interest rate and energy sectors posted losses.
The stock indices sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the Trading Program’s long exposures in stock indices. Losses were posted to the Fund in the middle of the first quarter. The Trading Program’s long exposures to stock indices made gains on North American and Japanese indices, but these were not enough to offset losses from Southern European and Chinese indices. Profits were posted to the Fund at the end of the first quarter as the dominant news item during the second half of March was the banking crisis in Cyprus, causing the Fund to give back some of its earlier gains from stock indices. By the end March, the reopening of banks in Cyprus reassured markets and stock indices ended the month as the top sector. Following the Japanese government’s upgrade to its economic assessment, and the confirmation of Haruhiko Kuroda as the new governor of the Bank of Japan, Japanese stock indices in particular made strong gains. Profits were posted to the Fund at the beginning of the second quarter. A reduction in inflation concerns following April’s Federal Open Market Committee minutes which showed a possible early end to QE helped foster a generally positive economic outlook which, combined with some strong corporate earnings results, propelled stock markets higher. This benefited the Trading Program’s long positions where Japanese indices led performance. Profits were posted to the Fund in the middle of the second quarter due to the Trading Program’s long positions in stock indices, which rose at the beginning of May. Losses were posted to the Fund at the end of the second quarter as gains from newly opened short exposures to some emerging markets were not enough to offset the losses incurred from reducing longs in the
rest of the sector. Profits were posted to the Fund at the beginning of the third quarter. The early market driver in July was the release of stronger non-farm payrolls figures in the United States. This boosted stocks as the Trading Program was well positioned to take advantage of these moves. Losses were posted to the Fund in the middle of the third quarter. The general market mood reversed sharply towards the end of August as the U.S. considered military action against Syria. Against this backdrop, stock markets sold off. Profits were posted to the Fund at the end of the third quarter. Initially, the Trading Program made gains from its long positions in stock indices. The end of September was marked by a deadlock in U.S. Congress surrounding the fiscal budget, while uncertainty surrounding the German and Italian governments added to nervousness. The Trading Program gave back some of its earlier gains from stock indices but not enough to offset profits posted to the Fund. Profits were posted to the Fund at the beginning of the fourth quarter. As the prospect of an imminent stimulus reduction by the U.S. Federal Reserved waned, following a U.S. government shutdown and softer labor statistics, global equity markets rallied. The Trading Program’s long exposures in stock indices contributed to the majority of profits. Profits continued to be posted to the Fund in the middle of the fourth quarter. The combination of easy monetary policies and expectations of growth drove developed equity markets higher. In the early part of December, positive data from the United States led to speculation that the U.S. Federal Reserve would begin tapering its quantitative easing program. This led stock markets to decline and the U.S. dollar to weaken. However, when the U.S. Federal Reserve actually announced a smaller than anticipated amount of tapering in mid December as stock markets rallied, benefiting the Trading Program resulting in profits posted to the Fund at the end of the fourth quarter.
The metals sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the Trading Program’s long exposures in certain base metals. The Trading Program’s net long exposures to industrial metals dominated the losses in the metals sector in the middle of the first quarter. Profits were posted to the Fund at the end of the first quarter attributable to the Trading Program’s short positions in industrial metals. Profits were posted to the Fund at the beginning of the second quarter. The Trading Program’s short positions in precious metals dominated performance when prices collapsed in the middle of the April as the price of gold saw a large drop as fears emerged that Cyprus and other crisis-hit countries may be forced to sell their gold reserves. Profits were posted to the Fund in the middle of the second quarter. Short positions in gold and silver were profitable in May, as prices fell largely in response to the U.S. dollar’s strength. Profits continued to be posted the Fund at the end of the second quarter. The Trading Program’s short positions across both precious and industrial metals contributed strongly in June as prices continued to fall, with gold at one point trading below U.S. dollar. Losses were posted to the Fund at the beginning of the third quarter. Metals continued to rise in July as gold was particularly strong in response to the weakening U.S. dollar, making the Trading Program’s short position the worst performer for July. Losses were posted to the Fund in the middle of the third quarter. The metals sector was the worst performer in August, with losses incurred from the Trading Program’s short positions in both industrial and precious metals. Losses were posted to the Fund at the end of the quarter. The Trading Program’s short positions suffered as prices of industrial metals rose on signs of stronger demand. Losses were posted to the Fund at the beginning of the fourth quarter due to the Trading Program’s short exposures to precious and industrial metals. The Trading Program made profits from its short exposure to metals in the middle of the fourth quarter. Gold and silver dropped in price, driven predominantly by expectations of a stronger U.S. dollar. Aluminum traded down after data showed a developing global supply glut. Losses were posted to the Fund at the end of the fourth quarter due to the Trading Program’s short positions in industrial metals.
The agriculture sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter only to be reversed in the middle of the quarter. Snowstorms provided relief to drought stricken U.S. wheat and bumper crops caused coffee and sugar to also trade lower, making the predominantly short agricultural sector the top performer in February. Profits continued to be posted to the Fund at the end of the first quarter due to the Trading Programs short positions in agriculture. Losses were posted to the Fund at the beginning of the second quarter due to the Trading Program’s short positions in wheat and other grains markets. Profits were posted to the Fund in the middle of the second quarter due to the Trading Program’s short sugar position as forecasts of large crop yields pushed prices lower. Profits were posted to the Fund at the end of the second quarter. Agricultural markets were profitable in June capturing continued trends on the short side in grains such as wheat and corn and in coffee. Losses were posted to the Fund at the beginning through the middle of the third quarter. Losses were posted to the Fund at the end of the third quarter as the Trading Program’s short positions suffered in September as prices of sugar and wheat rose on signs of stronger demand. Profits were posted to the Fund at the beginning of the fourth quarter due to the Trading Program’s short exposure to coffee as wet weather boosted the crop outlook in Brazil. Profits continued to be posted to the Fund in the middle of the fourth quarter. Profits were posted to the Fund at the end of the fourth quarter from gains made in wheat markets as prices declined following reports of larger than expected global supplies.
The currency sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the Trading Program’s short exposure to the Japanese yen and long exposure to the Euro. Losses were posted
to the Fund in the middle of the first quarter. The Trading Program’s net short exposure to the U.S. dollar, in particular against the Euro, dominated the losses in the currency sector. Profits were posted to the Fund at the end of the first quarter due to the Trading Program’s long exposure to the Mexican peso which made profits amid stronger outlook for the Mexican economy. Losses were posted to the Fund at the beginning of the second quarter as the short Japanese yen and long New Zealand dollar positions continued to generate profits which was not enough to offset losses in the Swedish krona. The high unemployment and dovish interest rate forecasts in Sweden led to a reversal in the Swedish krona’s recent strength. Losses were posted to the Fund in the middle of the second quarter as the New Zealand and Australian dollars fell against the U.S. dollar, causing losses for the Trading Program after it was revealed that the Reserve Bank of New Zealand had taken steps to curb currency strength, and the Reserve Bank of Australia cut interest rates. Losses were posted to the Fund at the end of the second quarter due to a reversal in the recent U.S. dollar weakness which led to losses against the Japanese yen and British sterling. Losses were posted to the Fund at the beginning of the third quarter. The early market driver in July was the release of stronger non-farm payrolls figures in the United States. This boosted the U.S. dollar and the Trading Program was well positioned to take advantage of these moves. However, the market mood changed course mid July as Chairman of the U.S. Federal Reserve, Ben Bernanke sought to clarify his June comments on the end of Quantitative Easing. Pointing to low inflation and below-target employment. Chairman Ben Bernanke’s dovish reassurances in July pushed back market expectations on tapering resulting in the U.S. dollar retreat. Losses were posted to the Fund in the middle of the third quarter. In the United Kingdom, growth data mid August helped drive the prices of UK Gilts lower, to the benefit of the Trading Program’s short exposure. However, the Trading Program’s net short exposure to Sterling suffered and dominated losses in currencies. Losses were posted to the Fund at the end of the third quarter. Returns from currencies were muted overall, although the Trading Program’s long exposure to the New Zealand dollar profited after the central bank signaled that rates may rise. Losses were posted to the Fund at the beginning of the fourth quarter. Although the net short exposure to the U.S. dollar and net long exposure to the Euro generated gains earlier in October, currency markets reversed later - resulting in losses. The Euro depreciated against its prevailing trend on speculation that slowing Eurozone inflation will prompt the European Central Bank to cut rates. Profits were posted to the Fund at the middle of the fourth quarter due to the Trading Program benefitting from its continued short exposure to the Japanese yen. Profits were posted to the Fund at the end of the fourth quarter as market participants in Japan speculated that the Bank of Japan would maintain its monetary easing policy. This caused the Japanese yen to weaken, leading to gains from the Trading Program’s net short yen exposure.
The interest rate sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter due to the Trading Program’s net long bond exposures. German bonds dominated the losses as European sentiment continued to strengthen. Profits were posted to the Fund in the middle of the first quarter due to the Trading Program’s long exposures in Japanese and German bonds. Profits were posted to the Fund at the end of first the quarter. The Trading Program’s long positions in bonds were profitable as Eurozone uncertainty boosted safe haven demand. Profits were posted to the Fund at the beginning of the second quarter from the Trading Program’s long positions where Japanese indices led performance. Government bond positions in Japan suffered, as a sharp single-day correction caused some of the recent profits to be given back. However, the long positions in the remainder of the bonds sector were more successful, led by European markets - where speculation of a European Central Bank rate cut pushed German yields down. Profits were posted to the Fund in the middle of the second quarter. Stronger global economic data also helped bolster risk appetite, causing bond markets to sell off against the Trading Program’s long positions. The second half of May was dominated by uncertainty over the future of the U.S. Federal Reserve’s asset purchase program accelerating the sell-off in government bonds. Losses were posted to the Fund at the end of the second quarter due to the Trading Program’s long bond and rates exposures, particularly in Australia. Losses were posted to the Fund at the beginning of the third quarter due to the Trading Program’s short fixed income positions, with UK positions further affected by lower than expected inflation data. Profits were posted to Fund in the middle of the third quarter as the Trading Program’s long positions in Japanese government bonds generated gains. In the UK, better than expected growth data mid August helped drive the prices of UK gilts lower, to the benefit of the Trading Program’s short exposure. Losses were posted to the Fund at the end of the third quarter as speculation around impending policy announcements in the U.S. and elsewhere, with market participants focused on the timing of the U.S. Federal Reserve’s “tapering” and other interest rate moves, drove fixed income markets. Initially, the Trading Program made gains from its long positions in short exposures to fixed income as yields rose. However, the gains from fixed income were later eroded as bonds reversed course following the U.S. Federal Reserve’s decision not to begin withdrawing stimulus. Profits were posted to the Fund at the beginning of the fourth quarter. The Trading Program’s performance in fixed income markets reflected geographical differences. Losses from short exposures to longer maturity bonds in North America, the UK and Germany were more than offset by gains from long exposures in Japan, Italy and Australia. Profits were posted to the Fund in the middle of the fourth quarter due to the Trading Program’s gains from its long positions in Italian bonds and short position in Australian bonds. Losses were posted to the Fund at the end of the fourth quarter due to the Trading Program’s long positions in Japanese bonds detracting from the performance, following the news that Japan’s Government Pension Investment Fund is to reduce its local debt holdings.
The energy sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter as reformulated gasoline rallied strongly as the risk appetite was partnered with reducing inventories. Losses were posted to the Fund in the middle of the first quarter. The increased production of crude oil in the United States resulted in the Trading Program’s long exposures to the energy sector incurring the worst losses in February. Profits were posted to the Fund at the end of the first quarter. The energies sector performed negatively as prices of oil products fell following a combination of weak Chinese industrial production data and strong inventories in March. Loses were posted to the Fund at the beginning of the second quarter. Profits from the Trading Program’s long natural gas positions were not enough to offset losses from declining oil prices. Losses were posted to the Fund in the middle of the second quarter from the long natural gas position as higher than expected inventories in the U.S. which triggered a sell-off. Losses were posted to the Fund at the end of the second quarter as oil markets stayed range-bound. Loses were posted to the Fund at the beginning of the third quarter. Profits from the Trading Program’s long natural gas positions were not enough to offset losses from declining oil prices. Profits were posted to the Fund in the middle of the third quarter as the potential for U.S. military action in Syria pushed oil prices higher, benefiting the Trading Program’s long positions, as fears of supply disruptions mounted. Losses were posted to the Fund at the end of the third quarter as the Trading Program’s long oil positions were adversely impacted by the easing of geopolitical concerns over Syria. Profits were posted to the Fund at the beginning of the fourth quarter only to be reversed in the middle of the fourth quarter. The Trading Program’s short exposure to natural gas incurred losses due to a price from colder than expected weather in North America coupled with large draws on inventory. Losses also occurred elsewhere in the energies sector as refinery outages saw crude oil products reverse their bearish trends. Losses were posted to the Fund at the end of the fourth quarter as natural gas prices rose on weather news in the United States, causing losses from the Trading Program’s short position.
The Fund experienced a net trading loss before brokerage commissions and related fees for the year ended December 31, 2012 of $25,123,931. Profits were primarily attributable to the Fund trading in the interest rate sector posting profits. The agriculture, energy, currency, stock indices and metal sectors posted losses.
Interest rate sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Towards the end of January the U.S. Federal Reserve forecast that U.S. interest rates would remain low until the end of 2014, boosting U.S. treasuries. Gains were also made on long fixed income positions. Euribor futures rose amid the prospect of further liquidity injections by the European Central Bank. Losses were posted to the Fund in the middle of the first quarter as bonds traded lower incurring losses from the Trading Program’s reducing long exposures. The Reserve Bank of Australia did not cut rates, contributing to the Trading Program making losses from its Australian bond exposures. The U.S. Federal Reserve upwardly revised the economic outlook for the U.S. leading to a global sell-off in bonds which amounted to losses from the Trading Program’s fixed income exposures resulting in losses posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter as fixed income advanced, leading to gains from the Trading Program’s long bond and interest rate positions. Profits were posted to the Fund in the middle of the second quarter as the central bank action also drove the Trading Program’s positive performance in fixed income. The Reserve Bank of Australia signaled the possibility of further rate cuts, thus driving the prices of Australian fixed income higher and benefiting the Trading Program’s long positioning. Losses were posted to the Fund at the end of the second quarter as fixed income sectors contributed negatively with losses dominated by long positions in German government bonds. U.S. Treasuries also declined following the U.S. Federal Reserve’s decision to extend ‘Operation Twist’ rather than provide a more aggressive form of easing. Profits were posted to the Fund at the beginning of the third quarter. The Bank of England extended their Quantitative Easing program while central banks in the Eurozone, China, Korea and South Africa cut rates in July. Accordingly, the Trading Program made gains across its long fixed income positions, except in Australia where the Reserve
Bank surprised markets and kept rates on hold. Losses were posted to the Fund in the middle of the third quarter. Increased optimism surrounding Euro zone issues, the prospect of further quantitative easing by global central banks and strong U.S. economic data helped boost risk appetite during the month of August. As a result, losses arose from the Fund’s long exposure to fixed income. Losses were posted to the Fund at the end of the third quarter. In Europe, a ratification of the European Stability Mechanism by Germany and a strengthening of the pro-Euro political landscape helped increase risk appetite. As a result, the Trading Program generally incurred losses from long fixed income exposures. Losses were posted to the Fund at the beginning of the fourth quarter as positive sentiment regarding the Eurozone drove markets, causing bond markets to continue to fall and making the bonds sector the worst performing sector. Profits were posted to the Fund in the middle of the fourth quarter. The safe haven of government bonds attracted demand amid the uncertainty, leading to gains from most long positions held in the bonds sector. Losses were posted to the Fund at the then end of the fourth quarter as the Trading Programs had long exposure to Japanese government bonds and as global government bond markets (other than Germany) sold off, making this the worst sector for the month of December.
The agriculture sector posted losses to the Fund. Losses were posted to the Fund at the beginning through the middle of the first quarter due to the Trading Program’s short positions in agriculturals. Profits were posted to the Fund at the end of the first quarter as the Trading Program’s short position in coffee made gains as prices fell on signs that output from Brazil and Vietnam will increase. Profits were posted to the Fund at the beginning of the second quarter with gains coming in particular from long positions in the soy complex as news of strong demand, combined with poor weather in South America, pushed prices higher. Losses were posted to the Fund in the middle through the end of the second quarter as losses sustained from the net short position in the sector were lessened by long positions held in the soy complex which gained as news of low soil-moisture levels in the U.S. drove grain prices higher. Profits were posted to the Fund at the beginning of the third quarter. The impact of a U.S. drought pushed soy prices higher, to the benefit of the Trading Program’s long positions. Profits were posted to the Fund in the middle of the third quarter. Short positions in sugar also made gains as prices fell due to declining demand from India and an acceleration of harvesting in Brazil. Losses were posted to the Fund at the end of the third quarter as the established trends in grains such as soy and corn reversed following improved conditions for the new planting season. Losses were posted to the Fund at the beginning of the fourth quarter as long positions in grains saw losses, but short positions in sugar and coffee gained from falling prices which was not enough to offset losses. Losses were posted to the Fund in the middle of the fourth quarter as long soy positions were negatively affected by expectations of high supplies. One highlight among commodities was the Trading Program’s short position in coffee, which made gains on forecasts of high production in Brazil and Vietnam. Losses were posted to the Fund at the end of the fourth quarter as the Trading Program’s short coffee exposure continued to profit following news of favorable harvesting conditions in South America. The rest of the sector struggled however, especially grains markets where prices fell following forecasts of higher supply levels.
The energy sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter as natural gas continued to trend lower, making the Trading Program’s short position the top performer. Additional gains in energies came from the Trading Program’s long position in reformulated gasoline as the price rallied on reports of U.S. refinery shutdowns. Profits were posted to the Fund in the middle of the first quarter as increased global demand and Iranian-induced supply-stresses meant the oil complex rallied strongly. Profits were posted to the Fund at the end of the first quarter due to the Trading Program’s short position in natural gas that made gains as continued warm weather and reports of high supplies pushed prices lower. Losses were posted to the Fund at the beginning of the second quarter. Oil markets fell as the International Energy Agency gave signs that the oil supply and demand in balance has started to ease, while talks between Iran and the West progressed. Losses were posted to the Fund in the middle of the second quarter. Oil prices were further pushed downwards by increasing inventories in the U.S. and a potential increase in supply by Saudi Arabia. Natural gas experienced a strong rally following short covering to the detriment of the Trading Program’s short positioning. Losses were posted to the Fund at the end of the second quarter as natural gas prices surged following reports of smaller than expected inventories and above average temperatures in the U.S. The Trading Program’s losses from natural gas were slightly offset by gains from short positions in crude oil as prices declined following weak U.S. and European employment data. Losses were posted to the Fund at the beginning of the third quarter. Natural gas appreciated in price as a result of hot weather in the U.S. and the Trading Program’s short exposures in the oils complex caused losses as geopolitical tensions and potential supply disruptions resulted in higher oil prices. Losses were posted to the Fund in the middle of the third quarter due to the Trading Program’s short positions in the energies sector. Oil prices rose due to the stronger U.S. economic data as well as bullish inventory statistics. However some gains were made from the Trading Program’s short natural gas positions amid forecasts of milder weather in the U.S. which was not enough to offset losses. Losses were posted to the Fund at the end of the third quarter. The Trading Program’s short natural gas exposure incurred losses as the onset of colder weather drove prices higher. Losses were posted to the Fund at the beginning of the fourth quarter as oil markets fell amid concerns over global demand and high West Texas Intermediate crude oil inventory levels, causing losses from long positions in oil products but gains from the short position in crude oil itself. Losses were posted to the Fund in the middle of the fourth quarter due to short positions
in oil markets as prices rose due to unrest in the Middle East. Losses were posted to the Fund at the end of the fourth quarter as the energies sector finished the month close to flat as gains from a growing short position in natural gas were offset by small losses from the oils complex.
The currency sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. The U.S. dollar fell in response, to the benefit of the Trading Program’s positions. Profits were posted to the Fund in the middle of the first quarter. In Asia, the Bank of Japan began a liquidity operation, focusing on purchasing longer maturity Japanese government bonds in an apparent to bring about some inflation. This led the Japanese yen to weaken sharply against its longer term trend making. However, higher yielding currencies contributed to making the currencies sector a positive performer overall despite reversals in the Japanese yen and Euro. In Australia, as interest rates were left unchanged with rhetoric suggesting potential monetary easing in the near future, the Australian dollar fell making it the along with the Japanese yen the Trading Program’s worst performers resulting in losses posted to the Fund at the end of the first quarter. Losses were posted to the Fund at the beginning of the second quarter as the Trading Program’s long position in U.S. dollar/Japanese yen made losses as the U.S. dollar fell following a weaker-than-expected U.S. Gross Domestic Product growth figure towards the end of the month. Losses were posted to the Fund in the middle of the second quarter as the short U.S. dollar exposure was significantly reduced and switched to long towards the end of the month. Losses were posted to the Fund at the end of the second quarter as the U.S. dollar declined, resulting in losses for the Trading Program. Gains made from the Euro based cross pairs currencies such as the Swedish krona, Polish zloty and Hungarian forint continued to be supported by Eurozone uncertainty were not enough to overcome the losses from the Trading Program’s short Euro position against the U.S. dollar. Profits were posted to the Fund at the beginning of the third quarter as the Trading Program’s short Euro position, especially against the Swedish krona, made the currencies sector the top performer. Losses were posted to the Fund in the middle of the third quarter. The Euro also had a strong month, advancing against both the U.S. dollar and the Japanese yen, causing further losses for the Fund. The weakening Australian dollar and strengthening Swiss franc also led to negative performance from the Trading Program’s positioning in these currencies relative to the U.S. dollar. Losses were posted to the Fund at the end of the third quarter. The U.S. dollar depreciated in the middle of September, as the U.S. Federal Reserve initiated an open-ended quantitative easing program, thus benefiting the Trading Program’s short exposures especially against the New Zealand and Singapore dollar. However, some of these currency gains were offset by losses from a stronger Euro where the Trading Program held a net short exposure. Losses were posted to the Fund at the beginning of the fourth quarter as the U.S. dollar strengthened against commodity currencies, leading to losses from the currencies sector. Additionally, the long position in the Swedish krona against the Euro suffered from uncertainty over the economic outlook for Sweden. Profits were posted to the Fund in the middle of the fourth quarter as the Trading Program’s short exposure to the Japanese yen against the U.S. dollar made gains following the Japanese government’s decision to dissolve parliament and call an early election in December. Additional gains came from the Trading Program’s short Euro positions against other European currencies. Profits were posted to the Fund at the then end of the fourth quarter. The Trading Program’s short exposure to the Japanese yen profited from the resulting moves.
The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter as the rise in global stock markets resulted in losses from short positions, especially in Asian indices. Notably, Chinese indices were also driven upwards by speculation of further monetary easing by The People’s Bank of China. Profits were posted to the Fund in the middle of the first quarter as the European Central Bank’s anticipated long-term refinancing operation was over-subscribed when it finally occurred. As a result, world equity markets rallied to the Trading Program’s benefit. Profits continued to be posted to the Fund at the end of the first quarter as the Trading Program made gains from its long stock index exposures. Losses were posted to the Fund at the beginning of the second quarter. Japanese stock indices fell sharply, and in an effort to boost Japan’s economy the Bank of Japan expanded its asset purchase program. Losses were posted to the Fund in the middle of the second quarter. Risk aversion dominated markets following poor U.S. labor market data at the start of the month, increasing concerns about Greece exiting the Euro and the health of banks in Spain. Equity markets sold off and the U.S. dollar strengthened. The Trading Program responded to these sharp reversals and switched to a net short position in stock indices by the middle of the month. Losses were posted to the Fund at the end of the second quarter. The majority of June’s losses occurred on the last trading day as European leaders agreed to ease repayment rules for Spanish banks and help reduce Italy’s borrowing costs. Broadly, June was characterized by a return of risk appetite amid expectations that central banks would act to help spur growth. Losses were posted to the Fund at the beginning through the middle of the third quarter. Increased optimism surrounding Euro zone issues, the prospect of further quantitative easing by global central banks and stronger U.S. economic data helped boost risk appetite during the month of August. As a result, losses arose from the Trading Program’s long exposure to fixed income and the remaining short positions within the stock indices sector. Losses were posted to the Fund at the end of the third quarter. In Europe, a ratification of the European Stability Mechanism by Germany and a strengthening of the pro-Euro political landscape helped increase risk appetite. As a result, the Trading Program incurred losses from the remaining short stock indices exposures. Losses were posted to the Fund
at the beginning of the fourth quarter. The month of October began with a strong U.S. jobs report, which led to equity markets making gains while bonds sold off. However, equity markets later fell after the IMF cut its growth forecasts for most developed countries and focus turned to a disappointing U.S. earnings season. As a result losses came from the Trading Program’s net long exposure to stock indices, in particular from its long position in the Nasdaq 100. Profits were posted to the Fund in the middle of the fourth quarter as stock markets fell during the first half of the month, but later hopes that an agreement would be reached to provide aid to Greece led to a resurgence of risk appetite. Additionally, strong global economic data boosted stock markets, leading to profits from the Trading Program’s net long exposure to stock indices over the month. Profits were posted to the Fund at the end of the fourth quarter as long positions in stock indices were all generally profitable as markets ended the year positively.
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter from the Trading Program’s short positions in zinc and aluminum. Losses were posted to the Fund in the middle through the end of the first quarter. Losses were posted to the Fund at the beginning of the second quarter which reversed in the middle of the second quarter. The metals contributed positively to performance in May with gains being derived from short positions across both industrial and precious metals as prices declined with the general sell off in risky assets. Losses were posted to the Fund at the end of the second quarter as metal prices rose over the month of June resulting in losses for the Trading Program. Profits were posted to the Fund at the beginning of the third quarter as the Trading Program made gains from its short positions in base metals. Losses were posted to the Fund in the middle of the third quarter due to the Fund’s short positions in platinum. Losses were posted to the Fund at the end of the third quarter. In Europe, a ratification of the European Stability Mechanism by Germany and a strengthening of the pro-Euro political landscape helped increase risk appetite. As a result, the Trading Program generally incurred losses from the short exposures to industrial metals. Losses were posted to the Fund at the beginning of the fourth quarter as the Trading Program’s long position in gold struggled as metals prices fell on uncertainty about demand, in particular from China. Losses were posted to the Fund in the middle of the fourth quarter as the Trading Program’s short positions in industrial metals saw losses as prices rose following strong Chinese export data and as risk appetite started to return to markets in the second half of the month of November. Losses were posted to the Fund at the then end of the fourth quarter as losses in the metals sector came from long positions across the precious metals, with silver especially suffering as the price dropped in the third week.
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 December 31, 2013, the Fund’s average month-end Net Asset Value was approximately $138,955,668 and $231,463,799, 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/Swiss franc 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 both 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, cocoa and livestock 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 primary 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 pounds 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 itself intervene in the markets to hedge or diversify the Fund’s market exposure, MLAI may urge the Trading Advisor to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual, except in cases in which it appears that the Trading Advisor has begun to deviate from past practice and trading policies or to be trading erratically. MLAI’s basic control procedures consist of the ongoing process of monitoring the Trading Advisor with the market risk controls being applied by the Trading Advisor itself.
Risk Management
With respect to market and liquidity risk, the Trading Advisor employs a value-at-risk methodology and other risk management procedures to monitor the exposure of the Trading Program to this risk within pre-defined guidelines. If risk exceeds the maximum prescribed level, risk reducing investments will be entered into. Additionally, the Trading Advisor has developed mechanisms designed to provide that risk is controlled effectively at both an individual market and portfolio level. In seeking to control the risks of the Trading Program, the Trading Advisor may intervene in the risk management framework in extreme market situations where the Trading Advisor believes that an intervention is in the best interests of its clients. The Trading Advisor has an Operational Risk Committee, chaired by the Trading Advisor’s Chief Risk Officer, which is responsible for managing all operational risk affecting the Trading Advisor. Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people and systems or external events. It includes the risk of failure of a broker or other service provider, the risk of the loss of investment or operational capability at the Trading Advisor, the risk of breaches of intellectual property security and the risk of breaches of law or regulation.
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) per quarter
Eight quarters through December 31, 2014
(a) 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. 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:
Designation
Description
3.01
Amended and Restated Certificate of Formation of Aspect FuturesAccess LLC.
Exhibit 3.01:
Is incorporated by reference from Exhibit 3.01 contained in the registrant’s Report on Form 8-K filed on February 14, 2012.
3.02
Fifth Amended and Restated Limited Liability Company Operating Agreement of Aspect FuturesAccess LLC.
Exhibit 3.02
Is incorporated by reference from Exhibit 3.02 contained in the registrant’s Report on Form 8-K filed on December 6, 2012.
3.03
Amendment to the Fifth Amended and Restated Limited Liability Company Operating Agreement of Aspect FuturesAccess LLC
Exhibit 3.03
Is incorporated by reference from Exhibit 3.02(i) contained in the registrant’s Report on Form 8-K filed on October 18, 2013.
10.01
Customer Agreements between ML Aspect FuturesAccess LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Exhibit 10.01:
Is incorporated by reference from Exhibit 10.01 contained in Amendment No. 1 to the registrant’s Registration Statement on Form 10 filed on February 12, 2008.
10.02
Advisory Agreement among ML Aspect FuturesAccess LLC, ML Aspect FuturesAccess Ltd., Aspect Capital Limited and Merrill Lynch Alternative Investments LLC.
Exhibit 10.02:
Is incorporated by reference from Exhibit 10.02 contained in the registrant’s Registration Statement on Form 10 filed on December 20, 2004.
10.03
Amendment to Advisory Agreement among Aspect FuturesAccess LLC, Aspect Capital Limited and Merrill Lynch Alternative Investments LLC.
Exhibit 10.03:
Is incorporated by reference from Exhibit 10.01 contained in the registrant’s Report on Form 8-K filed on December 10, 2014.
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.
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.
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.
ASPECT FUTURESACCESS LLC
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
ASPECT 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.