Item 1: Business
(a) General Development of Business:
ML Winton FuturesAccess LLC (the “Fund”) was organized under the Delaware Limited Liability Company Act on May 17, 2004 and commenced trading activities on February 1, 2005. The Fund issues new units of limited liability company interest (“Units”) at Net Asset Value per Unit (see Item 6 for discussion of net asset value and net asset value per unit for subscriptions and redemptions purposes hereinafter referred to as Net Asset Value and Net Asset Value per Unit for all other purposes) as of the beginning of each calendar month. The Fund engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Winton Capital Management Limited (“Winton”) is the trading advisor of the Fund.
Merrill Lynch Alternative Investments LLC (“MLAI”), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”), is the manager of the Fund. Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the Fund’s commodity broker.
As of December 31, 2006, the capitalization of the Fund was $323,202,651 and the Net Asset Value per Unit for all other purposes, $1.2084 for Class A, $1.1864 for Class C, $1.1463 for Class D and $1.2079 for Class I. The capitalization and Net Asset Value per Unit for financial reporting purposes in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) was $323,050,144 and $1.2076 for Class A, $1.1859 for Class C, $1.1460 for Class D and $1.2069 for Class I.
The highest month-end Net Asset Value per Unit for all other purposes for Class A since Winton began trading the Fund was $1.2084 (December 31, 2006) and the lowest was $1.0223 (February 28, 2005). The highest month-end Net Asset Value per Unit for all other purposes for Class C since Winton began trading the Fund was $1.1864 (December 31, 2006) and the lowest was $1.0214 (February 28, 2005). The highest month-end Net Asset Value per Unit for all other purposes for Class I since Winton began trading the Fund was $1.2079 (December 31, 2006) and the lowest was $1.0226 (February 28, 2005). The highest month-end Net Asset Value per Unit for all other purposes for Class D since Winton began trading the Fund was $1.1463 (December 31, 2006) and the lowest was $0.9601 (April 30, 2005).
(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:
General
The Fund trades in the international futures and forward markets with the objective of achieving substantial capital appreciation.
The Fund has entered into an advisory agreement with Winton whereby Winton trades the Fund’s assets through a managed account using The Winton Diversified Program. In The Winton Diversified Program, Winton applies its trend-following systems to a broadly-diversified portfolio of futures and forward markets, including, but not limited to, precious and industrial metals, grains, petroleum products, soft commodities, domestic and foreign interest rate futures, domestic and foreign stock indices (including S&P 500, DAX, and Nikkei 225), currencies and their cross rates, and minor currency markets.
One of the goals of the Fund is to provide diversification to a limited portion of the risk segment of the investors’ (each a “Member and collectively “Members”) portfolios into an investment field that has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings.
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 Winton to trade on a speculative basis in a wide range of different futures and forwards markets on behalf of the Fund. While being used for this purpose, the Fund’s assets are also generally available for cash management, as more fully described below under “Cash Assets”.
Market Sectors
Winton trades in a variety of liquid U.S. and non-U.S. futures and forward contracts. Forward markets include major currencies and precious and base metals.
Market Types
The Fund trades on a variety of United States and foreign futures exchanges. 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 foreign exchange 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.
Custody of Assets
Substantially all of the Fund’s assets are currently held in Commodity Futures Trading Commission (“CFTC”) regulated customer accounts at MLPF&S.
Cash Assets
The Fund will generally earn interest, as described below, on its “Cash Assets”, which can be generally described as the cash actually held by the Fund plus its “open trade equity” (unrealized gain and loss marked to market daily on open positions). Cash Assets are held primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are comprised of the Fund’s cash balances which may be held in the offset accounts (as described below) - which include “open trade equity” (unrealized gain and loss on open positions) on United States futures contracts, which is paid into or out of the Fund’s account on a daily basis; the Fund’s cash balances in foreign currencies derived from its trading in non-U.S. dollar denominated futures and options contracts, which includes open trade equity on those exchanges which settle gains and losses on open positions in such contracts prior to closing out such positions. Cash Assets do not include and the Fund does not earn interest income on the Fund’s gains or losses on its open forward, commodity option and certain foreign futures positions since such gains and losses are not collected or paid until such positions are closed out.
The Fund’s Cash Assets may be greater than, less than or equal to the Fund’s Net Asset Value (on which the redemption value of the Units is based) primarily because Net Asset Value reflects all gains and losses on open positions as well as accrued but unpaid expenses.
Interest Earned on the Fund’s U.S. Dollar Cash Assets
The Fund’s U.S. dollar Cash Assets are held in cash at MLPF&S, which utilizes offset accounts.
Offset accounts are non-interest bearing demand deposit accounts maintained with banks unaffiliated with Merrill Lynch. An integral feature of the offset arrangements is that the participating banks specifically acknowledge that the offset accounts are MLPF&S customer accounts, not subject to any Merrill Lynch liability.
MLPF&S credits the Fund, as of the end of each month, with interest at the most favorable rate payable by MLPF&S to accounts of Merrill Lynch affiliates but not less than 75% of such prevailing rate on the average daily U.S. dollar Available Assets. The Fund is credited with interest on any of its assets and net gains actually held by MLPF&S non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of interest, which Merrill Lynch pays to the Fund, from possession of such assets.
The banks at which the offset accounts are maintained make available to Merrill Lynch interest-free overnight credits, loans or overdrafts in the amount of the Fund’s U.S. dollar Available Assets held in the offset accounts, charging Merrill Lynch a small fee for this service. The economic benefits derived by Merrill Lynch - net of the interest credits paid to the Fund and the fee paid to the offset banks - from the offset accounts have not exceeded 0.75% per annum of the Fund’s average daily U.S. dollar Cash Assets held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Administrative Fees paid by the Fund to MLPF&S and MLAI, respectively.
Interest Paid by Merrill Lynch on the Fund’s Non-U.S. Dollar Cash Assets
Under the single currency margining system implemented for the Fund, the Fund itself does not deposit foreign currencies to margin trading in non-U.S. dollar denominated futures contracts and options, if any. MLPF&S provides the necessary margin, permitting the Fund to retain the monies which would otherwise be required for such margin as part of the Fund’s U.S. dollar Cash Assets. The Fund does not earn interest on foreign margin deposits provided by MLPF&S. The Fund does, however, earn interest on its non-U.S. dollar Cash Assets. Specifically, the Fund is credited by Merrill Lynch with interest at prevailing short-term local rates on assets and net gains on non-U.S. dollar denominated positions for such gains actually held in cash by the Fund. Merrill Lynch charges the Fund Merrill Lynch’s cost of financing realized and unrealized losses on such positions.
The Fund holds foreign currency gains and finances foreign currency losses on an interim basis until converted into U.S. dollars and either paid into or out of the Fund’s U.S. dollar Cash Assets which generally occurs weekly. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Fund while held in foreign currencies are subject to exchange rate risk.
Charges
The following table summarizes the charges incurred by the Fund for the year ended December 31, 2006 and the period February 1, 2005 (Commencement of Operations) to December 31, 2005.
(1) net of reimbursement of $5,965 in 2005
(2) for all other purposes
The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund’s U.S. dollar assets maintained at MLPF&S.
The Fund’s average month-end Net Assets Value for all other purposes during 2006 and 2005 equaled $216,130,543 and $50,868,505, respectively.
During 2006, the Fund earned $10,650,742 in interest income, or approximately 4.93% of the Fund’s average month-end Net Assets Value for all other purposes. During 2005, the Fund earned $1,641,584 in interest income, or approximately 3.23% of the Fund’s average month-end Net Asset Value for all other purposes.
Description of Current Charges
Recipient
Nature of Payment
Amount of Payment
MLPF&S
Brokerage Commissions
During 2006 and 2005, the round-turn (each purchase and sale or sale and purchase of a single futures contract) rate of the Fund’s Brokerage Commissions was approximately $9.82 and $9.34, respectively.
MLPF&S
Use of assets
Merrill Lynch may derive an economic benefit from the deposit of certain of the Fund’s U.S. dollar assets in accounts maintained at MLPF&S.
MLAI
Sponsor Fees
A flat-rate monthly charge of 0.125 of 1% (1.50% annual rate) on Class A units, flat-rate monthly charge of 0.2083 of 1% (2.50% annual rate) on Class C units, a flat-rate monthly charge of 0.0917 of 1% (1.10% annual rate) on Class I units (including the monthly interest credit and before reduction for accrued month-end redemptions, distributions, brokerage commissions, sponsor fees, management fees or performance fees, in each case as of the end of the month of determination). Class D does not pay a Sponsor fee.
MLAI and MLPF&S
Sales Commissions
Class A Units are subject to a sales commission paid to Merrill Lynch ranging from 1.0% to 2.5%. Class D and Class I Units are subject to sales commissions up to 0.5%. The rate assessed to a given subscription is based upon the subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units are not subject to any sales commissions.
Merrill Lynch International Bank (“MLIB”) (or an affiliate); Other counterparties
Bid-ask spreads
Bid-ask spreads on forwards and related trades.
MLIB (or an affiliate); Other counterparties
EFP differentials
Certain of the Fund’s currency trades may be executed in the form of “exchange of futures for physical” transactions, in which a counterparty (which may be MLIB or an affiliate) receives an additional “differential” spread for exchanging the Fund’s cash currency positions for equivalent futures positions.
Winton
Annual performance fees
20% of any New Trading Profits, as defined, generated by the Fund as a whole, as of the end of each calendar year.
Winton
Management Fees
A flat rate monthly charge of 0.1667 of 1% of the Fund’s month-end net assets (a 2% annual rate).
Others
Operating expenses of the Fund including audit, legal and tax services.
Actual payments to third parties.
MLAI; Others
Ongoing Offering Costs reimbursed
Actual costs incurred.
Regulation
MLAI, Winton and MLPF&S are each subject to regulation by the CFTC and the National Futures Association (“NFA”). Other than in respect of the registration requirements pertaining to the Fund’s securities under Section 12(g) of the Securities Exchange Act of 1934, the Fund is generally not subject to regulation by the Securities and Exchange Commission (the “SEC”). However, MLAI is registered as an “investment adviser” under the Investment Advisers Act of 1940. MLPF&S is also regulated by the SEC and the National Association of Securities Dealers.
(i) through (xii) - not applicable.
(xiii) The Fund has no employees.
(d) Financial Information about Geographic Areas
The Fund does not engage in material operations in foreign countries, nor is a material portion of the Fund’s revenue derived from customers in foreign countries.
The Fund trades on a number of foreign commodity exchanges. The Fund does not engage in the sales of goods or services.
Item 1A:
Item 1A: Risk factors
Past Performance Not Necessarily Indicative of Future Results Past performance is not necessarily indicative of future results. The trading advisor’s past performance may not be representative of how it may trade in the future for the Fund.
Volatile Markets; Highly Leveraged Trading Futures and forward trading is highly leveraged, and market price levels are volatile and materially affected by unpredictable factors such as weather and governmental intervention. The combination of leverage and volatility creates a high degree of risk.
Importance of General Market Conditions Overall market or economic conditions - which neither MLAI nor the trading advisor can predict or control - have a material effect on the performance of any managed futures strategy.
Forward Trading The Fund will trade currencies in the forward market in addition to in the futures markets. The forward markets are over-the-counter, not exchange, markets, and in trading in these markets, the Fund will be dependent on the credit standing of the counterparties with which they trade, without the financial support of any clearinghouse system. In addition, the prices offered for the same forward contract may vary significantly among different forward market participants. 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.
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.
Trading Advisor Risk The Fund is subject to the risk of the bad judgment, negligence or misconduct of its 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.
Changes in Trading Strategy The trading advisor may make material changes in its trading strategies without the knowledge of MLAI.
Illiquid Markets Certain positions held by the Fund may become illiquid, preventing the Fund’s trading advisor from acquiring positions otherwise indicated by its strategy or making it impossible for the trading advisor to close out positions against which the market is moving.
Certain futures markets are subject to “daily price limits,” restricting the maximum amount by which the price of a particular contract can change during any given trading day. Once a contract’s price has moved “the limit,” it may be impossible or economically non-viable to execute trades in such contract. From time to time, prices have moved
“the limit” for a number of consecutive days, making it impossible for traders against whose positions the market was moving to prevent large losses.
Trading on Non-U.S. Exchanges The trading advisor trades extensively on non-U.S. exchanges. These exchanges are not regulated by any United States governmental agency. The Fund could incur substantial losses trading on foreign exchanges to which it would not have been subject had its trading advisor limited its trading to U.S. markets.
The profits and losses derived from trading foreign futures and options will generally be denominated in foreign currencies; consequently, the Fund will be subject to a certain degree of exchange-rate risk in trading such contracts.
The Fund Could Lose Assets and Have Its Trading Disrupted Due to the Bankruptcy of One of the Parties
The Fund is subject to the risk of insolvency of a counterparty, an exchange, a clearinghouse or MLPF&S. Fund assets could be lost or impounded during lengthy bankruptcy proceedings. Were a substantial portion of the Fund’s capital tied up in a bankruptcy, MLAI might suspend or limit trading, perhaps causing the Fund to miss significant profit opportunities. There are increased risks in dealing with unregulated trading counterparties including the risk that assets may not benefit from the protection afforded to “customer funds” deposited with regulated dealers and brokers.
Item 2:
Item 2: Properties
The Fund does not use any physical properties in the conduct of its business.
The Fund’s administrative offices are the administrative offices of MLAI (Merrill Lynch Alternative Investments LLC, Princeton Corporate Campus, 800 Scudders Mill Road - Section 2G, Plainsboro, New Jersey 08536). MLAI performs administrative services for the Fund from MLAI’s offices.
Item 3:
Item 3: Legal Proceedings
There have been no administrative, civil or criminal actions, whether pending or concluded, against MLAI or Merrill Lynch or any of its individual principals during the past five years which would be considered “material” as that term is defined in Section 4.24(l)(2) of the Regulations of the CFTC, except as described below.
On May 21, 2002, MLPF&S, with no admission of wrongdoing or liability, agreed to pay $48 million to the State of New York, $50 million to the remaining states, Washington, D.C. & Puerto Rico and $2 million to NASAA relating to an investigation conducted by the New York Attorney General concerning research practices.
On March 19, 2003, Merrill Lynch & Co., Inc., the parent company and an approved person of MLPF&S, consented to an injunctive action instituted by the Securities and Exchange Commission (the “SEC”). In its complaint, the SEC alleged that three years ago, in 1999, Merrill Lynch aided and abetted Enron Corp.’s (“Enron”) violations of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-3 and 13b2-1 thereunder, as a result of Merrill Lynch engaging in certain year-end transactions designed and proposed by Enron. Without admitting or denying the allegations, Merrill Lynch consented to the entry of an injunction enjoining it from violating the above-referenced provisions, and agreed to pay disgorgement, penalties and interest in the amount of $80 million. In its release announcing the settlement, the Commission acknowledged that in agreeing to resolve this matter on the terms described above, the Commission took into account certain affirmative conduct by Merrill Lynch.
In April 2003, MLPF&S entered into a settlement with the SEC, the National Association of Securities Dealers (the “NASD”) and the New York Stock Exchange (the “NYSE”) as part of a joint settlement with the SEC, the NASD and the NYSE arising from a joint investigation by the SEC, the NASD and the NYSE into research analysts conflicts of interests. Pursuant to the terms of the settlement with the SEC, NASD and NYSE, MLPF&S, without admitting or denying the allegations, consented to a censure. In addition, MLPF&S agreed to a payment of (I) $100
million, which was offset in its entirety by the amount already paid by MLPF&S in the related proceeding with the State of New York and the other states (II) $75 million to fund the provision of independent research to investors; and (III) $25 million to promote investor education. The payments for the provision of independent research to investors and to promote investor education are required to be made over the course of the next five years. MLPF&S also agreed to comply with certain undertakings.
In March 2006, MLPF&S entered into a settlement with the SEC arising from an investigation related to MLPF&S’ retention and production of e-mail. The SEC found that MLPF&S willfully violated Section 17(a) of the Exchange Act, and Rules 17a-4(b)(4) and 17a-4(j) thereunder. Without admitting or denying the allegations, Merrill Lynch consented to the entry of an injunction enjoining it from violating the above-referenced provisions, entered into an undertaking regarding its policies and procedures and agreed to pay a civil penalty $2,500,000.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
None.
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, and none is likely to develop. Members may redeem Units on ten days written notice to MLAI as of the last day of each month at their Net Asset Value, subject to certain early redemption charges.
(b) Holders:
As of December 31, 2006, there were 5,263 holders of Units including MLAI.
(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.
Recent Sales of Unregistered Securities: Uses of Proceeds From Registered Securities:
Issuance to accredited investors pursuant to Regulation D and Section 4(6) under the Securities Act. The selling agent of the following Class of Units was MLPF&S.
(1) Net Asset Value for all other purposes
Class A Units are subject to a sales commission paid to Merrill Lynch ranging from 1.0% to 2.5%. Class D and Class I Units are subject to sales commissions up to 0.5%. The rate assessed to a given subscription is based upon the subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units are not subject to any 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.
(1) commencement of operations
For financial reporting purposes in conformity with U.S. GAAP, the Fund deducted the total initial offering costs payable to MLAI at inception from Members’ Capital for purposes of determining Net Asset Value. For all other purposes, including computing Net Asset Value for purposes of member subscription and redemption activity, such payment is amortized over 60 months. Consequently, as of December 31, 2006 and 2005, the Net Asset Value and Net Asset Value per Unit of the different Classes for financial reporting purposes and for all other purposes are as follows:
December 31, 2006
December 31, 2005
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and report performance to investors throughout the year is the most valuable information to the Members of the Fund. Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for “all other purposes”.
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A
$
1.1029
$
1.0768
$
1.1124
$
1.1783
$
1.1326
$
1.1180
$
1.1124
$
1.1577
$
1.1428
$
1.1565
$
1.1869
$
1.2084
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C
$
1.0943
$
1.0675
$
1.1018
$
1.1659
$
1.1191
$
1.1041
$
1.0975
$
1.1413
$
1.1256
$
1.1381
$
1.1668
$
1.1864
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D
$
1.0360
$
1.0131
$
1.0479
$
1.1113
$
1.0646
$
1.0528
$
1.0489
$
1.0932
$
1.0808
$
1.0955
$
1.1255
$
1.1463
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I
$
1.0972
$
1.0715
$
1.1073
$
1.1732
$
1.1283
$
1.1154
$
1.1100
$
1.1558
$
1.1414
$
1.1553
$
1.1862
$
1.2079
Pursuant to CFTC policy, monthly performance is presented from February 1, 2005 (commencement of operations).
ML WINTON FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31, 2006
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 2005
Aggregate Subscriptions: $39,363,434
Current Capitalization: $38,735,519
Worst Monthly Drawdown(2): (5.95)% (September 2005)
Worst Peak-to-Valley Drawdown(3): (8.72)% (September-October 2005)
Net Asset Value per Unit Class A, December 31, 2006: $1.2084
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such Funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 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 February 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 equity 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 for all other purposes. The inception to date total return based on GAAP is 20.76%.
ML WINTON FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31, 2006
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 2005
Aggregate Subscriptions: $204,051,738
Current Capitalization: $202,316,205
Worst Monthly Drawdown(2): (6.01)% (September 2005)
Worst Peak-to-Valley Drawdown(3): (8.85)% (September-October 2005)
Net Asset Value per Unit Class C, December 31, 2006: $1.1864
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such Funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 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 February 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 equity 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 for all other purposes. The inception to date total return based on GAAP is 18.59%.
ML WINTON FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31, 2006
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2005
Aggregate Subscriptions: $46,331,876
Current Capitalization: $44,963,275
Worst Monthly Drawdown(2): (7.06)% (September 2005)
Worst Peak-to-Valley Drawdown(3): (9.70)% (September-October 2005)
Net Asset Value per Unit Class D, December 31, 2006: $1.1463
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such Funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 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 February 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 equity 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 for all other purposes. The inception to date total return based on GAAP is 14.60%.
ML WINTON FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31, 2006
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 2005
Aggregate Subscriptions: $37,247,206
Current Capitalization: $37,187,652
Worst Monthly Drawdown(2): (6.04)% (September 2005)
Worst Peak-to-Valley Drawdown(3): (8.76)% (September-October 2005)
Net Asset Value per Unit Class I, December 31, 2006: $1.2079
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such Funds as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 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 February 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 equity 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 for all other purposes. The inception to date total return based on GAAP is 20.69%
Item 7:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operational Overview
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 in fact have caused such movements, but simply occurred at or about the same time.
The Fund is unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses, as well as gains.
While there can be no assurance that the Fund will be profitable under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Fund.
Results of Operations
General
Winton has been the Fund’s sole advisor since February 1, 2005. Winton is a trend-following trader, whose system tracks the daily price movements from these markets around the world, and carries out certain computations to determine each day how long or short the portfolio should be to maximize profit within a certain range of risk. If rising prices are anticipated, a long position will be established; a short position will be established if prices are expected to fall.
The trading methods applied by Winton are proprietary, complex and confidential. Winton plans to continue the testing and reworking of its trading methodology and, therefore, retains the right to revise any methods or strategy, including the technical trading factors used, the commodity interests traded and/or the money management principles applied.
Technical analysis refers to analysis based on data intrinsic to a market, such as price and volume. This is to be contrasted with fundamental analysis which relies on factors external to a market, such as supply and demand. Winton’s trading system uses no fundamental factors.
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 in fact have caused such movements, but simply occurred at or about the same time.
The Fund posted gains for the year with stock indices, currencies and the metal sectors posting gains while agricultural commodities, energy and interest rate sectors posted losses.
Stock indices were the most profitable for the Fund. The year began with higher equity and lower fixed income prices due to better than expected sentiment indicators and company earnings reports. Equity markets continued through the first quarter with their bullish run, with the European bourses leading the charge. A combination of strong corporate earnings and solid consumer demand led to several indices posting four to five year highs. The disappointing U.S. retail sales and consumer price figures coupled with a bout of profit taking led to a somewhat exaggerated spike in fixed income markets. However, this was steadily erased by the continuation of the drift down in bond prices as a subsequent succession of stronger than expected consumer confidence indicators which led to increased expectations of a lengthening cycle of the U.S. Federal interest rate rises. Mid-year Far East indices were pushed higher driven by the inflow of new domestic investment linked with the beginning of the financial year. Having reached local highs, global equity markets tumbled sharply and stocks rallied due to the U.S. Federal Reserve comments, that an end of the rate-hike cycle environment would lift the damper on growth. Global markets traded in a relatively low volume environment towards the end of the year with short term price volatility continuing to create periods of intense activity. The year ended with significant gains produced in the equity sector primarily due to intra month volatility. Despite the strong October, rally in stock, the main indices were able to hold onto these gains as investors continued to support the market after periods of falling prices, which led to short term volatility which was exacerbated by the serious weakening in the U.S. dollar.
The currency sector posted profits for the Fund. Currencies remained mostly without direction throughout the beginning of the year as financial markets were somewhat range bound with foreign exchange markets in particular enjoying a period of relative calm. The long awaited breaching of the 116 level in the U.S. dollar/Japanese yen led to some volatile price action mid-year as the Japanese yen began to strengthen, heading towards a 113 handle as speculators and domestic end-users repositioned themselves accordingly. There was also a sharp sell-off seen in several emerging market currencies as the market activity declined due to recent increase in volatility in global financial markets which led to risk reduction in portfolios across the board. The weakening Japanese industrial production and lower retail sales data also assisted the strong gains in fixed income as Japanese bonds surged. Fixed income returns were further bolstered as U.S. and European bonds moved higher. The ongoing backdrop of the Chinese stance towards its currency bands came to the forefront which led to some short term volatility in the Japanese
yen valuations. Currency markets dominated activity the end of the year, as the U.S. dollar came under significant pressure. A steady flow of disappointing economic data led to concerns over a U.S. economic slowdown, and the prospects of a further US. Federal rate hike became more remote. Foreign exchange volatility increased with the euro leading the charge against the U.S. dollar the resulting market reaction was to push the euro to a 20 month high, while the British sterling rose to its highest level against the U.S. dollar for more than 14 years.
The metals sector also posted profits for the Fund. Base metal prices were bolstered by continuing demand from China’s expanding economy and short covering ahead of the Chinese New Year. Both aluminum and zinc reached all time highs beginning of the year as precious metals and energies endured a volatile period on the Iran/U.S./Europe “nuclear standoff”, with gold reaching a 25 year high and silver continuing to surge upwards posting a 22 year high. Large gains continued to be posted mid-year in both the base and precious metal markets. As prices surged higher, there were some predictable bouts of profit taking, but the overall upward trend still remained strong. Headline grabbing moves was the equity market sell-off and the continued surge in base metal markets. However, the prevailing mood in the markets turned negative during several trading sessions. This was led by the sudden pull back in base metals, with copper generating much of the momentum. Having rallied 23% in eight trading sessions, bouts of profit taking led to growing concern of price exuberance and copper proceeded to decline by around 12% in a week. This volatility unnerved many investors and affected other metal markets. This coincided with a growing concern that the U.S. Federal Reserve would continue to raise short term rates, as inflationary fears mounted. As a result, the equity positions suffered across all geographical sectors, wherein the long metals positions posted strong gains despite the intra month price volatility. Base metals continued to exhibit significant short term price swings at the end of the year as trading volumes weakened. Gains were posted as nickel prices reached their highest level in 19 years on speculation that global inventories will be eroded by rising demand from makers of stainless steel and precious metals declined across the board with gold down 5% and silver falling 12%. The year ended with base metals taking a backseat with the high volatility seen in recent months replaced by a steadier gradual increase in prices, while gold and silver reported strong increases of 6% and 13% respectively as the weak U.S. dollar contributed to higher prices in these generally safe commodities.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the Fund posting losses for the sector.
The energy sector posted losses for the Fund. The beginning of the year the energy sector endured a very volatile period partly resulting from the Iran/U.S./Europe “nuclear standoff”. This also forced the sector into a period of increased volatility, as both military and terrorist activities in the key energy production areas led to rising energy prices. Prices fell at the end of the year due to the news that British Petroleum would drop plans to shut the largest U.S. oil field and also tropical storm Ernesto veered away from the Gulf of Mexico. A combination of factors, including the calming of the situation in the Middle East and growing levels of inventories, led to a strong decline in the price of oil trading below the $60 level for the first time since March of 2006. The year ended with a slide in energy prices, with crude oil down 5.3% and heating oil down 12.1%.
The interest rate sector was the least profitable for the Fund. Gains were made in short end rates the beginning of the year due to the on-going strength of the U.S. economy which led to a flattening of the yield curve. Expectations of further European Central Bank rate hikes led to a twenty basis point decline in Euribor futures which proved to be the main profit driver in the interest rate sector. Gains were also recorded in the fixed income markets, as they continued to sell off during mid-year which was driven by the continued strength of the U.S. economy. A succession of solid economic data releases underpinned this price action and short end U.S. interest rates were pushed higher as traders became more hawkish. However, in Europe there was more stability in rates as the front end of the yield curve held firm. Bond markets rallied as investors’ “flight to quality” took hold; although this was then counteracted by growing inflationary fears leading to a stalemate at the longer end of the curve. Negative returns for the fourth quarter were largely driven by the Federal Open Market Committee decision, which delivered the anticipated 25 basis point increase in rates along with dovish comments, suggesting economic growth in the U.S. has been slowing. The Fund returned all profits in the sector during the month of December amid uncertain market conditions. This increase in the uncertainty forced many market participants to reduce positions and wait for the dust to settle before re-entering the market. The year ended as the growing perception that the interest rate cycle has turned in the U.S. was the dominant theme as the year ended which was driven by the slowing U.S. housing market and the ensuing drag on consumer spending.
The Fund posted an overall loss for the period with stock indices, metals, and energy sectors posting gains while currencies, agricultural commodities and interest rate sectors posted losses. The Fund began trading at the beginning of February 2005.
Stock indices were the most profitable for the Fund. Solid profits were posted at the beginning of the year due to the strong U.S. inflation and aggressive comments from the U.S. Federal Reserve. Losses were posted the beginning of the second quarter due to a number of weak U.S. economic statistics and disappointing earnings reports. At mid-quarter, solid gains were once again recorded continuing through the end of the quarter as solid U.S. employment and retail sales data confirmed continued growth in the U.S. while stable inflation data and lower oil prices soothed concerns about the pace of U.S. Federal Reserve rate hikes ahead. Strong gains early in the year and continuing through the third quarter in equity markets were caused by a rally as stronger earnings boosted confidence. The fourth quarter continued with equity markets very bullish, primarily due to the continuing strong economic data coming out of the U.S. The renewed strength of the Nikkei was once again a feature of the equity performance, as the index pushed through the 15,000 mark. The year ended with a strong finish as the European markets proved the best performers.
Metals posted the second highest profit for the Fund. Profits spiraled downwards at the end of the first quarter, and continued through the entire second quarter. The third quarter had a relatively flat performance. However, the fourth quarter posted profits for the Fund. The year ended with metal continuing to push higher, in both base and precious metals.
The energy sector also posted profits for the Fund. A gain in the middle of the first quarter was attributed to continuing cold weather and the possibility that OPEC would cut production in March. However, the second quarter posted losses for the Fund due to oil prices slumping to a three-month low because of rising inventory. Gains were posted in the third quarter by the spike in energy prices caused by Hurricane Katrina and the impact on U.S. energy production and distribution. Significant gains were also produced in the fourth quarter, as the contraction from the August and September highs continued unabated: with the benchmark crude oil future trading $14.00 lower than its summer highs. The year ended with significant price movement in the energy sector. The forecast of a warm winter in the U.S. hinted at a fall in demand from the U.S. consumer for heating products, causing a slide in crude oil prices.
The currency sector posted losses for the Fund. Modest gains were made in the beginning of the year in currencies as the U.S. dollar continued to weaken over concerns about the large U.S. budget deficit and worries that Asian central banks may slow purchases of U.S. assets. Currency returns continued to be mixed during the second quarter as the U.S. dollar regained some of the ground it lost earlier in the year as strong U.S. economic data and France’s rejection of the European Union constitution supported the U.S. dollar. Currencies endured a volatile third quarter as the long awaited decision by China to take the first steps to reforming its currency markets had a slight impact on currency positions. Although gains were made in the first two months of the fourth quarter, the year did not
end on a positive note. Currency losses were exacerbated as economic indictors from Japan suggested, on balance, that the decade long deflationary cycle may be coming to an end. This combined with the aggressive Japanese Yen weakness of the previous month to create a surge in buying pressure that pushed the U.S. dollar/yen rate from 121.2 to 115.8.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the Fund posting losses for this sector.
The interest rate sector was the least profitable for the Fund. The year began with solid gains in short-term rates against small losses in bonds as the yield curve finally steepened after Alan Greenspan. U.S. Federal Reserve Chairman testified before Congress about the challenges posed by the decline in forward rates. Following a strong May, bonds posted a small increase after a volatile month in June. Profits came from trading in the Euro, balanced by losses in U.S. Treasuries, and in particular short end Eurodollars, as sustained Federal Reserve tightening proved more likely. Fixed income positions suffered as the markets slid in connection with comments from Federal Reserve Chairman Greenspan on the continued robustness of the U.S. economy, and the perceived reduction in future demand from China which may now invest in other currencies besides U.S. Treasuries. The after effects of the U.S. hurricane season continued to plague the markets later in the quarter. The initial belief that the Federal Reserve would react to the inevitable impact on the U.S. economy by holding interest rates steady proved mistaken. As a result, the sell off in the U.S. Treasuries dragged bond markets down across the globe. Short term interest rate futures came under similar pressure, as the continued high level of oil prices and other input prices continued to add weight to inflationary fears in the U.S. The fourth quarter began with falling energy prices, perceived tightening of the U.S. labor markets and stronger than expected retail sales data led to front end interest rate contracts declining by the equivalent of 20 to 25 basis points, as investors continued to back the growing strength of the U.S. economy and the associated increase in inflationary pressure. Returns for December were largely influenced by the market perception that the current cycle of Federal rate hikes is coming to an end: after recent comments from key Federal Reserve members failed to reaffirm its optimistic stance of recent times.
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.
During all periods set forth above “Selected Financial Data”, the interest rates in many countries were at unusually low levels. The low interest rates in the United States (although higher than in many other countries) negatively impacted revenues because interest income is typically a major component of the Fund’s profitability. 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 the Fund’s assets. Brokerage Commissions, which are not based on a percentage of the Fund’s assets, are based on actual round turns. Performance fees payable to Winton are based on the new Trading Profits generated by the Fund excluding interest and after reduction of the Brokerage Commissions.
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 virtually no 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.
Because substantially all of the Fund’s assets are held in cash, the Fund should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices, except in very unusual circumstances. This permits Winton to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there is a readily available market value for the Fund’s positions and assets, the Fund’s monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units.
(The Fund has no applicable off-balance sheet arrangements and tabular disclosure or contractual obligations of the type described in Items 3.03(a)(4) and 3.03(a)(5) of Regulation S-K.)
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 Winton, 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 form civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Fund’s risk exposure in the various market sectors traded by Winton is quantified below in terms of Value at Risk. Due to the Fund’s mark-to-market 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 period. During the year ended December 31, 2006 and the period from February 1, 2005 (commencement of operations) to December 31, 2005, the Fund’s average month-end Net Asset Value for all other purposes was $216,130,543 and 50,868,505, respectively.
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%-95% 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. This cash flow risk is immaterial.
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 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 Winton 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, 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, 2006, by market sector.
Interest Rates.
Interest rate risk is the principal market exposure of the Fund. 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, Japanese 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, grains, livestock, cotton and coffee accounted for the substantial bulk of the Fund's agricultural commodities exposure as of December 31, 2006. However, it is anticipated that Winton will maintain an emphasis on cotton, grains and coffee.
Energy.
The Fund's primary energy market exposure is to natural gas and crude oil price movements, often resulting from political developments in the Middle East. Oil prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Fund as of December 31, 2006.
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 intervene in the markets to hedge or diversify the Fund's market exposure, MLAI may urge Winton to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual, except in cases in which it appears that Winton has begun to deviate from past practice and trading policies or to be trading erratically, MLAI’s basic control procedures consist of simply of ongoing process of monitoring Winton with the market risk controls being applied by Winton itself.
Risk Management
Winton attempts to control risk in all Winton’s of the investment process - from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. Winton double checks the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, Winton seeks to control overall risk as well as the risk of any one position, and Winton trades only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. Winton factors the point of exit into the decision to enter (stop loss). The size of Winton's positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.
To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the Winton investment strategies. Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts for a program, or a change in position size in relation to account equity. The weighting of capital committed to various markets in the investment programs is dynamic, and Winton may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant.
Winton may determine that risks arise when markets are illiquid or erratic, which may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events. In such cases, Winton at its sole discretion may override computer-generated signals and may at times use discretion in the application of its quantitative models, which may affect performance positively or negatively.
Adjustments in position size in relation to account equity have been and continue to be an integral part of Winton's investment strategy. At its discretion, Winton may adjust the size of a position in relation to equity in certain markets or entire programs. Such adjustments may be made at certain times for some programs but not for others. Factors which may affect the decision to adjust the size of a position in relation to account equity include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions.
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 by Quarter (unaudited)
Eight Quarters through December 31, 2006
(1) commencement of operations
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 of Regulation S-K is not applicable. MLAI promoted the Fund and is its controlling person.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with the Fund’s independent registered public accounting firm on accounting and financial disclosure.
Item 9A:
Item 9A: Controls and Procedures
MLAI, the manager of the Fund, with the participation of MLAI’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Fund as of the end of the period covered by this annual report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Fund’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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 itself has no officers or directors and is managed by MLAI. Trading decisions are made by Winton on behalf of the Fund.
The managers and executive officers of MLAI and their respective business backgrounds are as follows:
Benjamin C. Weston
Chief Executive Officer and President
Robert D. Ollwerther
Chief Operating Officer and Manager
Barbra E. Kocsis
Chief Financial Officer
Robert M. Alderman
Vice President and Manager
Andrew B. Weisman
Manager
Benjamin C. Weston was born in 1954. Mr. Weston is the Chief Executive Officer, President and a Manager of MLAI and Head of MLAI’s Hedge Fund Development and Management Group at Merrill Lynch where he is responsible for all hedge fund investment activities for Merrill Lynch worldwide. Mr. Weston joined Merrill Lynch from Indeman Capital Management (IDM), a hedge fund incubation business formed in 2003 with the backing of Ritchie Capital Management and Azimuth Trust. Before founding IDM, Mr. Weston worked as a consultant for Ritchie Capital which he joined in September 2002 from Credit Suisse First Boston where he was a Managing Director and Head of the Funds Development Group. The Funds Development Group developed and launched a series of market-leading hedge funds, including three that today rank in the world’s 50 largest funds. Until 2000, Mr. Weston served on the Management Committee of CSFB’s Fixed Income Division and was Head of the Leveraged Capital Services Group, which advised a select group of hedge funds on global market strategy, optimal investment expression and risk management. Prior to transferring to CSFB in 1996, Mr. Weston was Co-Head of Credit Suisse Financial Products in the Americas (CSFP) and a Member of the Executive Board from 1990 to 1995. Before founding CSFP in New York in 1990, Mr. Weston held various senior management positions from 1983 to 1990 at Bankers Trust including Head of the Capital Markets Group in London, Head of the Equity Derivatives business in Europe and Head of the bank’s equity businesses in Asia from Hong Kong. Mr. Weston started his career at JP Morgan in 1978 where he worked in the Funding Services Group in New York and London. Mr. Weston received a Bachelor of Arts in International Studies from Miami University in 1976 and a Master of Arts in International Affairs with Honors in Economics from The Johns Hopkins School of Advanced International Studies
Robert D. Ollwerther was born in 1956. He is Chief Operating Officer for and a Manager of MLAI. He is responsible for Finance, Operations, Technology and Administration for the Fund and other MLAI products which invest in hedge funds. He has over 20 years of experience in the securities industry. He began his career with Coopers & Lybrand, CPAs. Since joining Merrill Lynch in 1981, he has primarily served in finance positions in the U.S. and abroad, including Chief Financial Officer for Europe, the Middle East and Africa, Chief Financial Officer for Latin America and Canada, Chief Financial Officer of Global Equity Markets, Director of Institutional and International Audit and Manager of Merrill Lynch Financial Reporting. He holds a Bachelor of Science in accounting from Fairfield University and a Master of Business Administration from New York University, and is a Certified Public Accountant.
Barbra E. Kocsis was born in 1966. She is Chief Financial Officer for MLAI. She is also a Director within the Merrill Lynch Global Private Client Global Infrastructure Solutions group. Prior to that, she was the Fund
Controller of MLAI. Before coming to MLAI, Ms. Kocsis held various accounting and tax positions at Derivatives Portfolio Management LLC from May 1992 until May 1999, at which time she held the position of accounting director. Prior to that, she was an associate at Coopers & Lybrand in both the audit and tax practices. She graduated cum laude from Monmouth College in 1988 with a Bachelor of Science in Business Administration - Accounting and is a Certified Public Accountant.
Robert M. Alderman was born in 1960. He is Managing Director of Merrill Lynch Global Private Client, and a Vice President and a Manager of MLAI. He is responsible for coordinating a global sales effort and managing the retail product line, which includes hedge funds, private equity opportunities, managed futures funds and exchange funds. Prior to re-joining Merrill Lynch and the International Private Client Group in 1999, he was a partner in the Nashville, Tennessee-based firm of J.C. Bradford & Co. where he was the Director of Marketing, and a National Sales Manager for Prudential Investments. Mr. Alderman first joined Merrill Lynch in 1987 where he worked until 1997. During his tenure at Merrill Lynch, Mr. Alderman has held positions in Financial Planning, Asset Management and High Net Worth Services. He received his Master of Business Administration from the Carroll School of Management, Boston College and a Bachelor of Arts from Clark University.
Andrew B. Weisman was born in 1959. He is Manager of MLAI and is head of HFDMG’s Consolidated Investment Analytics group. Mr. Weisman joined Merrill Lynch in August 2005. From April 2002 to July 2005, Mr. Weisman was a partner and director of research for Stradivarius Capital Management, and from January 1998 until April 2002, he served as Chief Investment Officer of Nikko Securities International. Mr. Weisman holds a Master of International Affairs and a Bachelor of Arts from Columbia University.
As of December 31, 2006, the principals of MLAI had no investment in the Fund, and MLAI's sponsor interest in the Fund was valued at $23,313.
MLAI acts as the sponsor, general partner or manager to eight public futures funds whose units of limited partner or member interests are registered under the Securities Exchange Act of 1934: John W. Henry & Co./Millburn L.P., ML JWH Strategic Allocation L.P., ML Select Futures I L.P., ML APM Global Futures Access LLC, ML Appleton FuturesAccess LLC, ML Aspect FuturesAccess LLC, ML Cornerstone FuturesAccess LLC and the Fund. Because MLAI serves as the 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 Item 10(a) and (b) above.
(f) Involvement in Certain Legal Proceedings:
None.
(g) Promoters and Control Persons:
Not applicable.
Section 16(a) Beneficial Ownership Reporting Compliance:
Not applicable.
Code of Ethics:
MLAI and Merrill Lynch have adopted a code of ethics, as of the end of the period covered by this report, 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 1-877-465-8435.
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 Merrill Lynch in their respective positions. The Fund does not itself have any officers, managers or employees. The Fund pays Brokerage Commissions to an affiliate of MLAI and Sponsor Fees to MLAI. MLAI or its 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, 2006, MLAI owned 19,470 Unit-equivalent member interests, which constituted .00714% of the total Units outstanding, and Winton 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
(a) Transactions between Merrill Lynch and the Fund
All of the service providers to the Fund, other than Winton, are affiliates of Merrill Lynch or have been approved by Merrill Lynch. Merrill Lynch negotiated with Winton over the level of its management fees and performance fees. However, none of the fees paid by the Fund to any Merrill Lynch party were negotiated, and they could be higher than would have been obtained in arms-length bargaining.
The Fund pays Merrill Lynch Brokerage Commissions, Sponsor Fees, and Management fees as well as bid-ask spreads on forward currency trades. The Fund also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions.
Within the Merrill Lynch organization, MLAI is the beneficiary of the revenues received by different Merrill Lynch entities from the Fund. MLAI controls the management of the Fund and serves as its promoter. Although MLAI has not sold any assets, directly or indirectly, to the Fund, MLAI makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI or any of its principals and the Fund.
MLAI pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI is ultimately paid back for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Fund.
In 2006, the Fund expensed: (i) Brokerage Commissions of $1,603,878 to MLPF&S, $4,555,234 in management fees earned by Winton; and (ii) Sponsor Fees of $4,248,731. In addition, MLAI and its affiliates may have derived certain economic benefits from possession of a portion of the Fund’s assets, as well as from foreign exchange and EFP trading.
See Item 1(c), "Narrative Description of Business - Charges" and "- Description of Current Charges" for a discussion of other business dealings between MLAI affiliates and the Fund.
(c) Indebtedness of Management:
(d) Transactions with Promoters:
Not applicable.
Item 14:
Item 14: Principal Accountant Fees and Services
(a) Audit Fees
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Fund’s financial statements as of and for the period ended December 31, 2006 were $48,779. Aggregate fees billed for these services for the period ended December 31, 2005 were $38,500.
(b) Audit-Related Fees
There were no other audit-related fees billed for the period ended December 31, 2006 related to the Fund.
(c) Tax Fees
Aggregate fees billed for professional services rendered by Deloitte Tax LLP, or any member firms
of Deloitte Touche Tohmatsu and their respective affiliates in connection with the tax compliance, advice and preparation of the Fund’s tax returns for the period ended December 31, 2006 were $55,000. Aggregate fees billed for these services for the period ended December 31, 2005 were $55,000
(d) All Other Fees
No fees were billed by Deloitte & Touche LLP, Deloitte Tax LLP, or any member firms of Deloitte Touche Tohamtsu and their respective affiliates during the period ended December 31, 2006 for any other professional services in relation to the Fund.
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 and Financial Statement Schedules
1.
Financial Statements (found in Exhibit 13.01):
Page:
Report of Independent Registered Public Accounting Firm
Statements of Financial Condition as of December 31, 2006 and 2005
Statements of Operations for the year ended December 31, 2006 and for the period February 1, 2005 (commencement of operations) to December 31, 2005
Statements of Changes in Members’ Capital for the year ended December 31, 2006 and for the period February 1, 2005 (commencement of operations) to December 31, 2005
4-5
Financial Data Highlights for the year ended December 31, 2006
Notes to Financial Statements
7-14
2.
Financial Statement Schedules:
Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.
3.
Exhibits:
The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
Designation
Description
3.01
Certificate of Formation of ML Winton FuturesAccess LLC.
Exhibit 3.01:
Is incorporated herein by reference from Exhibit 3.01 contained in the Registration Statement (File No. 000-51084) filed on December 20, 2004 on Form 10 under the Securities Exchange Act of 1934 (the “Registrant’s Registration Statement”).
3.02
Limited Liability Company Operating Agreement of ML Winton Futures Access LLC.
Exhibit 3.02:
Is incorporated by reference from Exhibit 3.02 contained in the Registration Statement.
10.01
Customer Agreement between ML Winton FuturesAccess LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Exhibit 10.01:
Is incorporated herein by reference from Exhibit 10.01 contained in the Registrant’s Registration Statement.
10.02
Advisory Agreement by and among ML Winton FuturesAccess LLC, Winton FuturesAccess Ltd., Winton Capital Management Ltd., and Merrill Lynch Alternative Investments LLC.
Exhibit 10.02:
Is incorporated hereby by reference from Exhibit 10.02 contained in the Registrant’s Registration Statement.
13.01
2006 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 30, 2007 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Date
/s/Benjamin C. Weston
Chief Executive Officer and President
March 30, 2007
Benjamin C. Weston
(Principal Executive Officer)
/s/Robert D. Ollwerther
Chief Operating Officer and Manager
March 30, 2007
Robert D. Ollwerther
/s/Barbra E. Kocsis
Chief Financial Officer
March 30, 2007
Barbra E. Kocsis
(Principal Financial and Accounting Officer)
/s/Robert M. Alderman
Vice President and Manager
March 30, 2007
Robert M. Alderman
/s/Andrew B. Weisman
Manager
March 30, 2007
Andrew B. Weisman
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
ML WINTON FUTURESACCESS LLC
2006 FORM 10-K
INDEX TO EXHIBITS
Exhibit
Exhibit 13.01 2006 Annual Report and Report of Independent Registered Public Accounting Firm