Item 1: Business
(a) General Development of Business:
ML Trend-Following Futures Fund L.P. (the “Partnership”), a FuturesAccessSM Program (“FuturesAccess”) fund, which is an investment company as defined by Accounting Standards Codification (“ASC”) guidance, was organized under the Delaware Revised Uniform Limited Partnership Act on December 11, 1995 and commenced operations on July 15, 1996. The Partnership operates as a “fund of funds”, allocating and reallocating its capital, under the direction of Merrill Lynch Alternative Investments LLC (“MLAI” or “General Partner” or “Sponsor”), the sponsor and general partner of the Partnership, among underlying FuturesAccess Funds (each a “Portfolio Fund”, and collectively the “Portfolio Funds”). Presently there are five Portfolio Funds. MLAI is the sponsor and manager of the Portfolio Funds.
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 Portfolio Funds. MLAI may select other parties as clearing broker(s). Merrill Lynch International (“MLI”) is the primary foreign exchange (“F/X”) forward prime broker for the Portfolio Funds. MLAI 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 for the Portfolio Funds participating in FuturesAccess employs different technical, fundamental, systematic and/or discretionary trading strategies.
The Portfolio Funds in which the Partnership presently invests are specified below and may change from time to time based on the investment of discretion of MLAI. Each Portfolio Fund implements a systematic-based managed futures strategy under the direction of a trading advisor unaffiliated with MLAI (each a “Trading Advisor”). The Trading Advisors primarily employ systematic trading strategies, which seek to identify market and price trends and take positions in the direction of these trends. The Trading Advisors may also implement a variety of other pattern recognition and price movement trading systems. See “Portfolio Funds’ Trading Programs,” below. MLAI has full discretion over the selection of, and allocation and reallocation of Partnership capital among the Portfolio Funds, see “Portfolio Funds-Selection and Allocations,” below.
Unless the context requires otherwise, references herein to the trading activities, cash management, expenses and portfolio of the Partnership refer to the Partnership’s indirect activities engaged in, cash management, expenses incurred and portfolio held through each Portfolio Fund, and reference to the Trading Advisors herein include each Trading Advisor. The term “Trading Program” includes the Partnership’s overall approach as well as each Trading Advisor’s strategy, as applicable.
The Partnership issues units of limited partnership company interest (“Units”) which are privately offered pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).
The Partnership calculates the Net Asset Value per Units as of the last calendar day of each month and as of any other dates MLAI may determine in its discretion (each, a “Calculation Date”). The Partnership’s “Net Asset Value” as of any calculation date generally equals the value of the Partnership’s investments in the Portfolio funds as of that date, plus any other assets held by the Partnership, minus accrued wrap fees and all other liabilities of the Partnership. MLAI or its delegates are authorized to make all Net Asset Value determinations.
As of December 31, 2014, the aggregate Net Asset Value of the Partnership was $59,440,422 and the Net Asset Value per Unit, originally $100 as of July 15, 1996, had risen to $182.0166.
Through December 31, 2014, the highest month-end Net Asset Value per Unit was $272.23 (May 31, 2003) and the lowest $98.89 (August 31, 1996).
The Net Asset Value of the Partnership is generally calculated in accordance with generally accepted accounting principles (“GAAP”). However, the Partnership’s Limited Partnership Agreement allows the Sponsor to depart from GAAP in calculating the Partnership’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 Partnership’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 Partnership’s Net Asset Value for purposes of subscriptions and redemptions, calculation of fees and other non-financial statement purposes, the Partnership’s audited financial statements will continue to be determined in accordance with GAAP.
(b) Financial Information about Segments:
The Partnership’s business constitutes only one segment for financial reporting purposes, i.e., a speculative “commodity pool.” The Partnership does not engage in sales of goods or services.
(c) Narrative Description of Business:
General
The Partnership allocates and reallocates its capital under the direction of MLAI, among a number of different underlying FuturesAccess Funds (each a Portfolio Fund). Each Portfolio Fund implements a systematic-based managed futures strategy under the direction of its Trading Advisor.
Systematic trading generally assumes that a disciplined and automatic trading approach based on quantitative analysis without discretionary decision making can enable a trader to forecast price trends or other market dynamics and to take positions designed to profit from it. These systems can incur substantial losses when the market significantly deviates from its usual historical patterns; e.g., when weather-related catastrophes, international political disruptions, and unanticipated supply/demand imbalances unexpectedly dominate the market.
Systematic trading generally utilizes technical analysis. Technical analysis relies on information intrinsic to the market itself to determine trades, such as prices, price patterns, volume and volatility, unlike fundamental analysis, which 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.
Systematic technical trading systems share basic similarities, although the models which they apply to historical price data differ. These similarities imply that there will be certain market conditions which are likely to be adverse to all or substantially all of the underlying FuturesAccess Funds in the Partnership’s portfolio.
Systematic trading strategies are speculative and involve substantial risk. By operating the Partnership as a “fund of funds” and investing in a number of different underlying FuturesAccess Funds, MLAI attempts to mitigate the volatility and certain other risks of investing in a single FuturesAccess Fund. While diversifying among different trading advisors involves the risk of one manager’s loss frequently offsetting another’s profits, this same diversifying effect also
typically reduces overall performance volatility, potentially producing a risk/return profile for the Partnership that may be more consistent with the portfolio objectives of investors than investing in a single FuturesAccess Fund.
Portfolio Funds - Selection and Allocations
MLAI is responsible for identifying and selecting the underlying FuturesAccess Funds as Portfolio Funds in which the Partnership invests, as well as for allocating and rebalancing Partnership capital among the Portfolio Funds in an effort to maintain target allocations established by MLAI.
MLAI may use quantitative performance criteria, analytical and statistical techniques, market experience, qualitative due diligence and the subjective judgment of MLAI personnel in reviewing and selecting prospective FuturesAccess Funds as Portfolio Funds for the Partnership. Selecting FuturesAccess Funds for inclusion in the Partnership’s portfolio ultimately involves the subjective evaluation of both quantitative and qualitative factors by MLAI’s personnel. In evaluating a trading advisor of a FuturesAccess Fund for possible inclusion in the Partnership’s portfolio, MLAI considers a number of factors, which may include, but are not limited to, certain of the following factors: (i) the type of systematic-based trading strategy implemented and the time frames over which the systems operate; (ii) business acumen, organizational infrastructure and internal controls; (iii) assets under management and track record; (iv) quantitative performance analysis; (v) risk management controls and procedures; (vi) business terms; (vii) conflicts of interest; (viii) the professional background, reputation and experience of a trading advisor’s principals and key personnel; (ix) commitment of the personal assets of a trading advisor’s principals and key personnel to their trading program; (x) the diversification potential of including the FuturesAccess Fund together with the other FuturesAccess Funds in the Partnership’s portfolio; and (xi) the sophistication and depth of resources committed to ongoing research effort. MLAI may consider a variety of factors in allocating and reallocating the Partnership’s capital among underlying FuturesAccess Funds, and the list above is illustrative only.
MLAI is limited in its trading advisor selections to the FuturesAccess Funds. There are currently only a limited number of FuturesAccess Funds available for investment by the Partnership.
MLAI determines the target allocations and relative weightings among the FuturesAccess Funds selected for the Partnership’s portfolio. MLAI makes allocation decisions based on a combination of factors, with emphasis on MLAI’s assessment of the long-term return and risk forecasts of the various Portfolio Funds. The relative allocation of Partnership capital among the Portfolio Funds will vary over time due to target allocation levels, market appreciation/depreciation and other factors. In addition to assigning target allocations, MLAI may establish an allocation range for certain or all Portfolio Funds, which affects when, and the manner in which, MLAI rebalances the Partnership’s portfolio.
MLAI periodically reviews Portfolio Fund performance as well as changes in market conditions to determine whether to terminate existing or to add new underlying FuturesAccess Funds, and/or to adjust its target allocations and relative weightings among the existing Portfolio Funds. MLAI has complete flexibility in allocating and reallocating capital in any manner that it may deem appropriate and in adding or removing new underlying FuturesAccess Funds in which the Partnership will invest.
During the fiscal year ended December 31, 2014, MLAI terminated one of the Trading Advisors. Effective as of April 30, 2014, the Partnership redeemed all of its assets from Man AHL FuturesAccess LLC and effective as of May 1, 2014 MLAI reallocated the redemption proceeds to Lynx FuturesAccess LLC.
Portfolio Funds and Trading Advisors
(a) The Partnership currently invests in the following underlying Portfolio Funds which are advised, respectively, by the Trading Advisors as indicated below:
* This Trading Advisor is registered under the Investment Advisers Act of 1940.
**BlueCrest Capital Management LLP was the trading advisor for the BlueTrend Fund at the beginning of 2014. Effective as of July 1, 2014 BlueCrest Capital Management LLP was restructured from an English-incorporated limited liability partnership to a Guernsey-domiciled company, BlueCrest Capital Management Limited. Effective as of January 1, 2015 Systematica Investments Limited replaced BlueCrest Capital Management Limited as the trading advisor for the BlueTrend Fund.
(b) The allocation percentages of the Partnership’s investment in the underlying Portfolio Funds as of December 31, 2014 are as follows:
(c) Each of the Portfolio Funds is managed by MLAI. Each Trading Advisor has entered into an Advisory Agreement with the relevant Portfolio Fund and MLAI that govern the advisory services that each Trading Advisor provides to a Portfolio Fund. After the initial term of an Advisory Agreement, the Advisory Agreement generally will be automatically renewed for successive periods, on the same terms, unless terminated by either the Trading Advisor or the Portfolio Fund upon written notice to the other party in accordance with the Advisory Agreement. In addition, the Advisory Agreements may be terminated at any time upon the occurrence of certain events, such as the aggregate capitalization of a Portfolio Fund falling below a specified level or as a result of a material breach of an Advisory Agreement by any of the parties. An Advisory Agreement also will terminate immediately if the applicable Portfolio Fund is terminated and dissolved as determined by MLAI. The trading strategies and investment objectives of each of the Portfolio Funds are outlined in “Portfolio Funds’ Trading Programs,” below.
Portfolio Funds’ Trading Programs
Aspect Fund
Aspect trades its Diversified Program for the Aspect Fund (the “Aspect Trading Program”). The Aspect 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. Aspect does not engage in retail, off-exchange foreign currency investment pursuant to
the Aspect Trading Program. By maintaining comparatively small exposure to any individual market and maintaining positions in a variety of contracts, Aspect aims to achieve long-term diversification.
The Aspect 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 Aspect 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 Aspect 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 Aspect Trading Program are to: (i) produce strong medium-term capital growth; (ii) seek and exploit profit opportunities in both rising and falling markets using a quantitative and systematic investment process; (iii) seek long-term diversification away from overall movements in traditional bond and stock markets; and (iv) 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 Aspect Trading Program is not applied by Aspect 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 Aspect’s discretion.
With respect to market and liquidity risk, Aspect employs a value-at-risk methodology and other risk management procedures to monitor the exposure of the Aspect Trading Program to this risk within pre-defined guidelines. If risk exceeds the maximum prescribed level, risk reducing investments will be entered into. Additionally, Aspect has developed mechanisms designed to provide that risk is controlled at both an individual market and portfolio level. In seeking to control the risks of the Aspect Trading Program, Aspect may intervene in the risk management framework in extreme market situations where Aspect believes that an intervention is in the best interests of its clients. Aspect has an Operational Risk Committee, chaired by Aspect’s Chief Risk Officer, which is responsible for managing all operational risk affecting Aspect. 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 Aspect, the risk of breaches of intellectual property security and the risk of breaches of law or regulation.
BlueTrend Fund
Systematica trades its BlueTrend Program for the BlueTrend Fund (the “BlueTrend Trading Program”). The BlueTrend Trading Program is a systematic trend follower, but its decision-making inputs are technical. Systematica aims to apply scientific techniques to the analysis and modeling of markets. The BlueTrend Fund trades daily futures and liquid OTC instruments across 150+ markets in equity indexes, fixed income, F/X, energy, metals, agriculturals and soft commodities.
The BlueTrend Trading Program’s systematic trading team combines research, model development, implementation and execution functions. The BlueTrend Fund’s portfolio construction is regularly reviewed.
The trading strategy utilized by the BlueTrend Fund is a systematic trading model. Capital allocation decisions between the models, between the markets within a model and individual buy and sell decisions within such markets are made on a systematic basis using quantitative analysis.
Lynx Fund
Lynx trades its Lynx Program for the Lynx Fund (the “Lynx Trading Program”). The Lynx Trading Program trades futures contracts on the global futures markets. The Lynx Trading Program is managed by applying a process that includes a focus on risk management. Lynx uses systematic futures trading programs or models to produce trading signals on a largely automated basis to trade futures contracts in the equity, fixed income, commodity and F/X asset classes.
One of the most important aspects of Lynx’s management process is model development. Lynx believes that as financial markets are constantly developing, it is important to be continually improving the models used in the management of the program and developing new ones. Lynx has created databases containing historical price information for a wide variety of different financial instruments, in which the data series often go back thirty years or more. Ideas about how to improve the models in current use are tested on historical data using software developed by Lynx. Another important activity is to attempt to improve the portfolio structure by developing methods for allocating risk between different models and different markets.
The aim is for the models used in the management of the Lynx Trading Program to complement each other and contribute to greater diversification and a more uniform return. The models complement each other in terms of structure as well as the time horizons within which they operate. In the very short-term models, the average duration of the positions typically is only a couple of hours, while in the models with the longest time horizon, the average life of a holding generally is several months.
Risk management is an integrated feature in the investment process and Lynx focuses on diversification and portfolio construction. Around 70 futures markets are traded across four sectors: equity indices, fixed income, currencies and commodities. Position sizes are determined based on correlations with other markets. The models operate independently and the portfolio is built “bottom-up” based on the signals from each model. Tools designed to minimize each investment’s loss are integrated in the design of the models, e.g., by using automated stop-loss mechanisms. As a result the risk utilization in the program changes over time, which is intended to limit drawdowns. VaR is used to limit position concentration and risk levels.
Transtrend Fund
Transtrend trades its Diversified Trend Program (the “Transtrend Trading Program”) for the Transtrend Fund.
The Diversified Trading Program has two risk profiles: the Standard Risk Profile and the Enhanced Risk Profile, investable in various currencies. The Enhanced Risk Profile is approximately 1.5 times the leverage of the Standard Risk Profile. Transtrend will trade the Diversified Trading Program - Enhanced Risk Profile (USD) for the Transtrend Fund.
Transtrend trades the following instruments on U.S. and non-U.S. exchanges and markets: futures, options, options on futures, swaps, swaps on futures, and forward contracts on F/X, interest rates, interest rate instruments, commodities, equity-related indices and instruments, and other indices, in all cases traded on exchanges and/or OTC markets. The underlying values of these instruments traded may also include other economic variables which are now or may become the subject of organized futures, options, options on futures, swap, swaps on futures, and forward trading. The instruments that Transtrend trades may also include other derivative, margined instruments, traded on exchanges and/or OTC markets. The Transtrend Program does not currently trade OTC F/X and derivatives on individual stocks for the Fund.
The applied principles of risk management play a dominant role in Transtrend’s trading methodology. The Transtrend Trading Program is designed to pursue capital growth within the limits of a defined risk tolerance. The Transtrend Trading Program is essentially based on quantitative analysis of signaled price behavior of instruments traded and therefore not on fundamental analysis. The Transtrend Trading Program is systematic by nature and requires a consistent application. Discretionary inputs are not essential to the effectiveness of the program.
The applied market approach does not forecast markets or price levels but participates in a systematic and dynamic way in signaled price patterns. The trading systems of the Transtrend Trading Program are designed to profit from recurring, non-random characteristics of price behavior in markets. In the trading systems there are elements which identify and respect the dominant market direction. The trading systems exploit directional price movement of single instruments and of intra-market and inter-market combinations, or “synthetics,” of instruments.
While Transtrend generally will not use discretionary inputs in trading client accounts, in the event of exceptional market circumstances Transtrend may use discretion in an attempt to limit risk to a position or an account. The use of discretion by Transtrend may have a positive or negative impact on the performance of the Transtrend Fund.
The Transtrend Trading Program may hold positions in different instruments with one or more trading systems. The simultaneous application of diverging trading systems, each with a positive profit expectancy over the course of time, can contribute to a different timing of both purchase and sale transactions, thus enhancing smoother performance characteristics when compared to a single trading system. However, the profitability of trading systems, individually or in combination, cannot be guaranteed and the Transtrend Fund may incur substantial losses.
Once the acceptable portfolio components have been defined for an account, Transtrend determines the relative proportions of all components within the portfolio on the basis of signaled correlation over the course of time, which is re-computed from time to time. Correlation analysis contributes to the estimation of the risk of coinciding trended reversals at a portfolio level.
The allocation to instruments, i.e., the determination of portfolio components and their relative proportions, varies over the course of time, because, among other reasons, of changes to the list of instruments traded in the Transtrend Trading Program and because of observed changes in price behavior, correlation and market liquidity. Transtrend reserves the right to expand or contract the instruments it trades.
Risk management plays a role in Transtrend’s trading methodology. The Transtrend Trading Program is designed to pursue capital growth within the limits of a defined risk tolerance. Specific risk provisions are computed for each market exposure. Risk assessments are determined on the basis of a regular or continuous evaluation of daily price behavior possibly leading to regular adjustments during the life of exposures.
The entry/exit tools used by Transtrend may contain both proprietary trend-following and contra-trend elements and include techniques of dynamic profit targets and dynamic stop levels for individual trades. Transtrend may change its trading techniques at any time without prior notice to or approval from the Transtrend Fund. The trading systems act at specific times or time intervals and upon specific price levels during a market session or during the day.
Winton Fund
Winton trades its Diversified Program (the “Winton Trading Program”) for the Winton Fund.
Winton follows a disciplined investment process that is based on scientific analysis of past data. The initial stage of the process involves collecting, cleaning and organizing large amounts of data. Winton uses a wide variety of data inputs including factors that are intrinsic to markets, such as price, volume and open interest; and those that are external to markets, such as economic statistics, industrial and commodity data and public company financial data. Winton conducts scientific research into the data in an attempt to quantify the probability of particular markets rising or falling, conditional on a variety of quantifiable factors. Winton’s research is used to develop mathematical models that attempt to forecast market returns, the variability or volatility associated with such returns (often described as “risk”), correlation between markets and transaction costs. These forecasts are used in investment strategies that determine what positions should be held to maximize profit within a certain range of risk. Generally, if rising prices are forecast, a long position will be established or maintained and if falling prices are forecast, a short position will be established or maintained.
Historically, Winton’s research was focused on developing trend-following strategies that invest in futures contracts (based on data that is intrinsic to markets). However, in recent years, Winton has increased its use of non-trend-following strategies (generally based on data that is external to markets).
Winton’s investment strategies are operated as an automated, computer-based system. This investment system is modified over time as Winton monitors its operation and undertakes further research. Changes to the system occur as a result of, amongst other things, the discovery of new relationships, changes in market liquidity, the availability of new data or the reinterpretation of existing data.
Winton generally expects the holding periods for the Winton Trading Program portfolio to be long-term with the average holding period across all instruments expected to be 3-8 months.
The Winton Trading Program currently invests in a diversified portfolio of over 100 futures markets, currency forwards and related instruments.
Most of Winton’s investments are made strictly in accordance with the output of Winton’s system. However Winton may, on occasion (such as the occurrence of exceptional events that fall outside the parameters of the research on which the system is based), make investment decisions based on other factors and take action to override the output of the system to seek to protect the interests of clients. For example, if there is a market crash or if trading is suspended on a market or exchange, Winton may attempt to reduce the risk by decreasing leverage or liquidating or hedging positions in certain markets.
Employees
The Partnership has no employees.
Use of Proceeds and Cash Management Income
Subscription Proceeds
The Partnership’s cash is used as security for and to pay the Partnership’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 Portfolio Funds to trade on a speculative basis in a wide range of commodities on behalf of the Partnership (through the Portfolio Funds). While being used for this purpose, the Partnership’s assets are also generally available for cash management, as described below under “Cash Management and Interest”.
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, as calculated by 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 a trader’s 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 a trader’s “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 likewise has “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 Portfolio 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 Portfolio 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. Portfolio Fund assets not committed to margin will be held in cash or cash equivalents and will earn interest as described below.
Custody of Assets
The Portfolio Fund’s financial assets consist primarily of cash, futures and OTC FX forward and spot positions. In addition, the Portfolio 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 Portfolio Fund’s financial assets, if any are traded at all.
Futures and OTC forwards and other instruments typically constitute a predominant amount of the Portfolio Fund’s investment risk, but the notional value of these instruments is not included on the Portfolio Fund’s balance sheet.
The vast majority of the net assets of the Portfolio Fund is, and has historically been, held in the form of cash. The Portfolio 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 Portfolio 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 Portfolio Fund’s assets are held in segregated or secured accounts with MLPF&S. In general, approximately 10% to 30% of each Portfolio Fund’s assets are expected to be required as margin or collateral at any one time. Approximately 90% of the Portfolio 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 will vary among Portfolio Funds and 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 Portfolio 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 Partnership and the Portfolio Funds, 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 Portfolio Fund. Other affiliates may from time to time be involved in the clearing, custody or investment of the Portfolio Fund’s assets, including as prime brokers. However, the vast majority of the Portfolio 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 Portfolio 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 Partnership’s and Portfolio 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 Portfolio Fund’s cash has historically been held in futures brokerage accounts with affiliates. To a smaller degree, the Portfolio Fund’s cash assets may be held with the Portfolio 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 Portfolio Fund’s cash assets to the Portfolio Fund’s custodial bank accounts or other bank accounts or by retaining an asset management firm to invest the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio Fund’s account and is posted to the Portfolio 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 Portfolio 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 Portfolio Fund, will have use of Portfolio
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 Partnership for the years ended 2014, 2013 and 2012.
The Partnership’s average month-end Net Assets during 2014, 2013 and 2012 equaled $61,300,479, $97,355,563 and $147,341,659, respectively.
The foregoing table does not reflect: (i) the bid-ask spreads paid by the Portfolio Funds on their forward trading, (ii) brokerage commissions, (iii) the benefits which may be derived by BAC from the deposit of certain of the Portfolio Fund’s U.S. dollar assets maintained at MLPF&S, or (iv) sales commissions payable in connection with the sales of Units of the Partnership. Bid-ask spreads and brokerage commissions are components of the trading profit or loss of the Portfolio 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 Portfolio Fund’s assets at MLPF&S are neither a direct expense of the Portfolio Fund nor readily quantifiable. Aggregate sales commissions are not included in the table of charges because they are not an expense of the Partnership, but rather are paid to MLPF&S out of an investor’s subscription proceeds and therefore reduce the amount invested in the Partnership by the investor.
Management fees and performance fees are not included in the above table of charges, because the Partnership does not charge management fees or performance fees, but instead charges a “wrap fee” which is set forth in the table. While the Trading Advisors to the Portfolio Funds in which the Partnership invests do charge management fees and performance fees, these are not included in the table since such fees are not Partnership expenses. However, such management fees and performance fees reduce the Net Asset Value of the Partnership’s underlying investment in each Portfolio Fund.
Each Portfolio Fund pays the relevant Trading Advisor applicable performance fees and management fees. As an investor in the Portfolio Funds, the Partnership’s investment in the Portfolio Funds is therefore reduced by the performance fees and management fees paid by the Portfolio Fund to the Trading Advisor. As a result, the Partnership’s returns are decreased by the performance and management fees paid by the Portfolio Funds. The Portfolio Funds generally pay the performance fees and management fees out of the cash held by them, although such fees can be paid by liquidating Portfolio Fund assets. The performance fees and management fees are not charged directly to the Partnership or its limited partners.
Description of Current Charges
The Partnership is subject to the following charges:
classes of units subject to the same rate of performance fees (“Class Group”), rather than on the performance of the Portfolio Fund as a whole or of specific units of a particular class. The performance fee is also paid on net redemptions. The performance fee is based on New Trading Profits. “New Trading Profits” equal any increase in the net asset value, prior to reduction for any accrued performance fee or sponsor fees, as of the current performance fee calculation date over the High Water Mark in respect of the Class Group. The “High Water Mark” equals the highest net asset value after reduction for the performance fee then paid, as of any preceding performance fee calculation date. Net asset value for purposes of calculating the performance fee does not include any interest income earned by the Portfolio Fund.
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 Advisors 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 Partnership. 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 Partnership or Trading Advisors is not necessarily indicative of how the Partnership or the Trading Advisors may perform in the future. There can be no assurance that the Partnership will achieve its investment objectives or avoid substantial or total loss. The Partnership may sustain losses in the future under market conditions in which it achieved gains in the past.
Portfolio Limited to Underlying FuturesAccess Funds
The Partnership will invest in underlying FuturesAccess Funds and in cash. Only trading advisors which are willing to share their advisory fees with MLAI are included in FuturesAccess. Consequently, even though the Trading Advisors do not share with MLAI portions of their management and performance fees related to the invested capital of the Partnership, the universe of trading advisors is inherently limited - correspondingly limiting the diversification of the Partnership’s portfolio.
Concentration of Underlying Trading Advisors
The Partnership is a “single-strategy” fund of funds that invests exclusively in trend-following managed futures trading strategies via FuturesAccess Funds. The concentration of the Partnership’s portfolio may cause its performance to be more volatile than that of a fund implementing a “multi-strategy” approach.
Systematic trend-following systems may differ materially from each other, but all of these systems are based on the principle that historical market prices and other technical market data can be used to identify price trends in the market on a systematic basis. The basic similarities of these systems may tend to cause many of them to incur losses at or about the same time.
There are certain market conditions in which most systematic trading systems will incur major losses. This is particularly true in trendless “sideways” markets and “whipsaw” markets in which numerous apparent price trends develop and then quickly reverse.
The Trading Advisors generally anticipate that most of the trades indicated by their systems can be expected to be unprofitable and look to generate profits from the occasional major price trends which generate substantial profits. In the absence of these price trends, material losses result.
Even if a Trading Advisor correctly identifies price trends before or as they occur, the Trading Advisor may nevertheless incur material losses if its system is unable to close out a position as a price trend is ending or reversing. Developing a systematic means of taking profits as well as identifying trends has proved to be extremely difficult for otherwise successful systematic trading systems.
No Formal Investment Restrictions or Allocation Limits
In constructing the Partnership’s portfolio, MLAI is not subject to any formal diversification requirements or restrictions, other than the restrictions that only FuturesAccess Funds be included in the portfolio. There are no limitations on the minimum or maximum number of underlying FuturesAccess Funds, or on the absolute or relative percentage of Partnership capital, which may be allocated to any underlying FuturesAccess Fund. Certain FuturesAccess Funds selected by MLAI may be allocated substantially larger portions of Partnership capital than others. In addition, the relative allocation among the underlying FuturesAccess Funds will vary, perhaps materially, over time due to market appreciation/depreciation and other factors, including the MLAI’s decision to modify any one or more underlying FuturesAccess Funds’ target allocations and relative weightings.
Due to the limited number of available FuturesAccess Funds, the Partnership necessarily allocates a significant percentage of its capital to certain of the FuturesAccess Funds.
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 Advisors 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 Advisors can predict or control overall market or economic conditions. These conditions, however, can be expected to have a material effect on the performance of a Trading Advisor’s Trading Program.
The Partnership 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 Partnership from its banks, dealers and other counterparties is typically reduced in disrupted markets, which may result in substantial losses to the Partnership. Market disruptions may from time to time cause dramatic losses for the Partnership and can result in the Trading Advisors’ strategies 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 Partnership may trade currencies in the F/X Markets, in addition to its trading in the futures markets, including by trading in F/X forward contracts. Prospective investors must recognize that F/X forward trading takes place in unregulated markets, rather than on futures exchanges or swap execution facilities, and may, but does not now, take place through “retail” F/X Markets subject to the jurisdiction of the CFTC or other regulatory bodies. The responsibility for performing under a particular forward transaction currently rests solely with the counterparties to that transaction, not with any exchange or clearinghouse. As a result, the Partnership 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 Partnership 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 Partnership remains obligated to perform. The Partnership 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 Partnership’s net assets and certain “key person” events. Any premature termination of the Partnership’s currency forward trades could result in significant losses for the Partnership, because the Partnership 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 Partnership, including transactions through which the Partnership 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 Partnership’s Operations” in this section below.
Dodd-Frank amended the definition of “eligible contract participant,” and the Partnership expects to meet the amended definition so long as its total assets exceed $10 million. If the Partnership does not meet the definition of “eligible contract participant,” it could lead to the Partnership’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 Partnership may be required to trade could be significantly weaker than the creditworthiness of MLI and the currency forward counterparties with which the Partnership would otherwise engage for its currency forward transactions.
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 Partnership.
Derivatives Risks Generally
The Trading Advisor uses derivative instruments, primarily futures and OTC F/X forwards, in implementing its 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 Partnership trades exchange listed futures contracts. A listed futures contract is a firm commitment to buy or sell a standardized quantity of an underlying asset over a specified duration. The Partnership buys and sells contracts based on indices of financial assets such as stocks, domestic and global stock indices, as well as contracts on various physical commodities. Prices paid or received on these contracts are determined by the ask or bid provided by the exchanges on which they are traded. Contracts may be settled in physical form or cash settled depending upon the contract. Upon the execution of a trade, margin requirements determine the amount of cash that must be on deposit to secure the transaction. These amounts are considered restricted cash on the Partnership’s Statements of Financial Condition. Contracts are priced daily by the Partnership and the profit or loss based on the daily mark to market are recorded as unrealized profits. When the contract is closed, the Partnership records a realized profit or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. The Partnership also trades futures contracts on the London Metals Exchange (LME). The valuation pricing for LME contracts is based on action of a committee that incorporates prices from the most liquid trading sessions of the day and can also rely on other inputs such as supply and demand factors and bid and asks from open outcry sessions.
The Partnership’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 Partnership. 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 Partnership 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 Partnership may invest and trade in currencies for speculative and/or hedging purposes. In addition, the Units are denominated, and the Partnership values its assets, in U.S. dollars and the Partnership 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 Partnership 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 Portfolio Funds rely on the integrity of interest rates and other benchmarks. If the level of these benchmarks is artificially influenced by market participants, the Portfolio 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. None of the Trading Advisors have agreed to limit the amount of additional equity which they may manage and may be at or near their 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 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 Partnership 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 Partnership and may result in liquidation of the Partnership which, if made at an inopportune time, may result in losses for the Partnership.
Trading Advisor Risk
The Partnership is subject to the risk of the bad judgment, negligence or misconduct of one or more of the Trading Advisors. 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 advised by the Trading Advisors may be able to redeem their investments more frequently or on less prior notice than investors in the Partnership. Redemptions by investors in these funds or withdrawals from accounts that have less restrictive redemption terms could have a material adverse impact on the Partnership’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 Partnership 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 Portfolio Funds may become illiquid, preventing a Trading Advisor from acquiring positions otherwise indicated by its 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 Portfolio Fund from promptly liquidating unfavorable positions and subject the Partnership 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 Partnership, 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 Partnership 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 Partnership to liquidate profitable positions, result in a tracking error between the Partnership’s portfolio and the Trading Advisor’s standard trading program and cause the Partnership 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 Partnership 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 Partnership, 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 Partnership’s case, the Trading Advisor may not be able to implement the Trading Program for the Partnership in the same manner as for its other clients, causing the Partnership to underperform other accounts utilizing the Trading Program, or the Partnership may have to liquidate trading positions when the Trading Advisor would otherwise not advise doing so, resulting in losses to the Partnership.
Any of the regulations discussed above could adversely affect the Partnership in certain circumstances.
Trading on Non-U.S. Exchanges
The Trading Advisors may trade on futures exchanges outside the United States on behalf of the Partnership. 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 Partnership has entered into a futures contract and not of any exchange or clearinghouse. In these cases, the Partnership will be subject to the risk of the inability or refusal to perform with respect to the individual member with whom the Partnership 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 Partnership’s trading activities. The Partnership could incur substantial losses trading on non-U.S. exchanges to which it would not have been subject had the Trading Advisors limited their 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 Partnership 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 Partnership trade on futures exchanges outside the United States or otherwise invest in non-U.S. markets, these controls may effectively prevent Partnership 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 Partnership. The imposition of currency controls by a non-U.S. government may negatively affect performance and liquidity in the Partnership as capital becomes trapped in that country.
Risk of Loss Due to the Bankruptcy or Failure of Counterparties, Custodians, Brokers and Exchanges
The Partnership is exposed to the risk that the bankruptcy or insolvency of its trading counterparties and other entities holding Partnership 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 Partnership’s assets being lost permanently or impounded for a matter of years pending the final disposition of legal
proceedings. A bankruptcy or insolvency of this kind, or the threat of one, may cause MLAI to decide to liquidate the Partnership or suspend, limit or otherwise alter trading, perhaps causing the Partnership to miss significant profit opportunities.
MLAI 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 Partnership 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.
MLAI’s policy that the Trading Advisor use MLPF&S and MLI may increase the risks of insolvency described above by preventing the diversification of brokers and counterparties used by the Partnership.
MLAI may have limited control over the selection of counterparties by the Portfolio Funds. The Portfolio Funds 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 the MLI, MLAI may have limited ability to assess the extent to which the Trading Advisor maintains the Partnership’s assets in unregulated accounts subject to the bankruptcy of the counterparties holding such assets.
The following paragraphs discuss the various uses of the Partnership’s assets and the risks of loss - in addition to losses from trading - associated with each use.
Margin for Commodities Trading. Although MLAI believes that MLPF&S is appropriately capitalized to function as the Partnership’s FCM, cash posted as margin for commodities trading with MLPF&S is nevertheless subject to the risk of insolvency of MLPF&S. The Partnership 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 Partnership might not be fully protected. Even given proper segregation, the Partnership 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 Partnership, which would typically result from BAC providing seed capital to the Partnership to help ensure that the Partnership has enough capital to commence trading activities, the Partnership’s account at MLPF&S would be considered a “proprietary account” under CFTC regulations and the Partnership’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 Partnership’s assets on deposit with MLPF&S were not considered customer funds, the Partnership 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 Partnership 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 Partnership, the Partnership’s assets will not be protected as “customer funds.”
If the Partnership 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 Partnership could be a general creditor of the entity even with regard to property specifically traceable to the Partnership’s account. As a result, the Partnership’s claim would be paid along with the claims of other general creditors and the Partnership would be subject to the loss of its entire deposit with the party.
To the extent the Partnership enters into cleared swap transactions, the Partnership 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 Partnership, 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 Partnership in a securities brokerage account would far exceed the limit.
Direct Investments. Partnership investments in U.S. government securities are backed by the full faith and credit of the U.S. government. To the extent the Partnership 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 Partnership 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 Partnership is subject to the risk of failures or inaccuracies in the trading systems of the Trading Advisors. Trades for the Portfolio Funds 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 Advisors trade on behalf of the Portfolio Funds 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 Partnership is subject to the risk of the unavailability or failure of the computer systems of the exchanges on which the Trading Advisors trade. Any such errors or failures could subject the Partnership 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 Partnership 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 Partnership from banks, dealers and other counterparties are typically reduced in disrupted markets. Any reduction may result in substantial losses to the Partnership. Market disruptions may from time to time cause dramatic losses for the Partnership and these events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
Regulatory Changes Could Restrict the Partnership’s Operations
The Partnership 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 Partnerships 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 Partnership 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 Partnership.
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 Partnership, if any, to be centrally cleared or traded on a regulated market. This may subject the Partnership, the Trading Advisor, the Sponsor and/or the Partnership’s counterparties to additional regulatory requirements. Certain of these regulatory requirements could affect the Partnership, the Trading Advisor or the Sponsor directly, while others could impact the Partnership, the Trading Advisor or the Sponsor indirectly due to the impact of the requirements on the Partnership’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 Partnership 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 securities, 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 Partnerships, including the Partnership, to enter into highly tailored or customized transactions. They may also render certain strategies in which the Partnership 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 Partnership 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 Partnership 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 Partnership 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 Partnership 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 Partnership’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 Partnership in an aggregate amount such that BAC may be deemed to control the Partnership for purposes of the BHCA, or if BAC is otherwise deemed to control the Partnership for purposes of the BHCA, the Partnership 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 Partnership invests and the strategies of the
Partnership; and (y) BAC. Such measures could have a material and adverse effect on the Partnership, 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 Partnership and thereby the Partnership’s financial condition and liquidity. The ultimate impact on global markets and the Partnership 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 Partnership.
Item 1B:
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2:
Item 2: Properties
The Partnership and the Portfolio Funds do not use any physical properties in the conduct of their business.
The Partnership’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 Partnership 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 Partnership generally may redeem or exchange any or all of their Units at Net Asset Value, in whole or fractional Units, effective as of the last day of any calendar month (each a “Redemption Date”), upon providing notice at least ten calendar days prior to the proposed Redemption Date. 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 requests and the applicable Redemption Date.
(b) Holders:
As of December 31, 2014, there were 2,745 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.
(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.
(1) Beginning of the month Net Asset Value
The Units are subject to sales commissions paid to MLPF&S of 0.5%. Sales commissions are directly deducted from subscription amounts.
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 Partnership.
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 Partnership.
MONTH-END NET ASSET VALUE PER INITIAL UNIT
ML TREND FOLLOWING FUTURES FUND L.P.
December 31, 2014
Type of Pool: Single-Advisor/Publicly-Offered/Not “Principal Protected”(1)
Inception of Trading: July 15, 1996
Aggregate Subscriptions: $1,717,588,407
Current Capitalization: $59,440,422
Worst Monthly Drawdown:(2) (13.89)% (January 2005)
Worst Peak-to-Valley Drawdown:(3) (47.47)% (June 2003 - December 2014)
Monthly Rates of Return (4)
(1) Certain Partnerships are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the amount initially invested) as of a date certain after the date of investment. The CFTC refers to such Partnerships as “principal protected.” The Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced by the Partnership since January 1, 2003; 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 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 experienced by the Partnership since January 1, 2003. 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 Partnership during the month of determination (including interest income and after all expenses accrued or paid) divided by the total equity of the Partnership as of the beginning of such month, inclusive of subscription activity.
Item 7:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The Partnership’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.
Operational Overview
The following table is an allocation by sector as a percentage of net unrealized profits and losses on open positions for the Partnership as a whole taking into account the positions at the Portfolio Fund level and the allocation to each underlying Portfolio Fund.
December 31, 2014
Results of Operations/Performance Summary
This performance summary is an outline description of how the Partnership 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 Partnership experienced a net trading profit for the year ended December 31, 2014 of $10,785,565.
References herein to the Partnership’s trading and portfolio refer to such trading conducted, and portfolio held, through the Partnership’s Portfolio Funds. References herein to the trading and portfolio of the Portfolio Funds refer to such trading and portfolios generally.
In equity indices, the Portfolio Funds came into the first quarter with long exposure, given the strong rally in global equity prices during 2013. Positioning was greatest in U.S. and European indices. The upward trend in equities did not continue in the first quarter. Markets quickly reversed in January, rallied back in February, then showed some v-shaped moves in March. They generally ended the quarter not far from where they began, but the reversals and choppiness proved costly to trend followers, making equity indices the worst performing asset class.
Commodities also performed poorly in the first quarter. The Portfolio Funds had long positions in energies and industrial metals, but short positions in grains and precious metals coming into the first quarter. Commodities fell in January, rallied in February, and then fell again in March, exhibiting reversals and several directional shifts along the way. The largest losses were incurred in the energy sector. In currencies, the Portfolio Funds had mixed positioning coming into the first quarter. Long positions in European currencies like the euro, British pound and Swiss franc were balanced against short positions in the Japanese yen, Canadian dollar and Australian dollar. The downward trend in the Japanese yen continued for part of the quarter and the Portfolio Funds made money, but there were reversals in the remaining major currency positions, leading to small losses. In fixed income, the Portfolio Funds had long positioning in both interest rates and bonds. Fixed income proved to be the only profitable asset class. Yields generally moved lower over the course of the first quarter. The moves were not very large, but they benefited long positions. In summary, the first quarter saw reversals in several asset classes. Trends in equity indices, commodities and many currency markets were interrupted. With market moves going against positioning, the Portfolio Funds saw losses in those asset classes. Gains in fixed income markets only partially made up for the losses.
The Partnership gained 4.7% in the second quarter. Returns were positive for most of the Portfolio Funds during the second quarter. Continuing trends in equity indices and fixed income drove performance. Choppiness and some reversals in currencies and commodities minimally offset those gains. In equity indices, the Portfolio Funds came into the second quarter with long exposure, with positions across geographies. While the first quarter had not necessarily seen the strong upward trends in global equity prices continue, there had not been any significant reversals either. As such, trend followers generally kept their positioning from year end. Exposures were greatest in U.S. and European indices. The upward trend in equities resumed to some extent in the second quarter with many markets rising in late April. These moves were beneficial to long positions. The asset class had losses in April, but was profitable in both May and June as markets rose. In fixed income, the Portfolio Funds had long positioning within both rates and bonds given falling yields in the first quarter. Yields generally moved lower still in April and May and in several markets in June as well. These moves benefited long positions held by trend followers. Fixed income proved to be the most profitable asset class for the second quarter, generating gains in all three months. In currencies, the Portfolio Funds lost money. The U.S. dollar exhibited somewhat choppy moves, falling in April, rising in May and falling again in June. The Portfolio Funds were profitable trading the British pound, but lost money in their yen and euro exposures. Losses in April and May were somewhat made up for by gains in June. Commodity trading was difficult and generally contributed to losses. Oil markets were down initially before
recovering in the second half of the second quarter on heightened concerns over the disruption of supply in Iraq. Long positions generally made money. Natural gas saw a reversal later in the quarter, falling as stock levels and the weather outlook improved, resulting in some losses. Larger losses came from the agricultural sector and especially grains. With several negative supply effects such as drought conditions and tensions in Ukraine dissipating, these markets reversed and fell, leading to losses on long positions. Metal markets also shifted direction several times, depending on strength in the Chinese economy, production levels and safe-haven demand, leading to additional losses. In summary, equity and fixed income trends continued in the second quarter. Energy markets were also profitable. On the other hand, there was some choppiness in currencies and several commodity sectors such as grains and metals suffered mild reversals which detracted from performance. Overall, the gains outweighed losses and the quarter was profitable for the Partnership.
In equity indices, the Portfolio Funds came into the third quarter with long exposure, with positions across geographies. The largest exposures were in U.S. and European indices. These positions were due to the upward trend in the asset class which had generally continued during the second quarter. During the third quarter, this trend weakened, with global growth concerns starting to weigh on markets. September was a down month for many equity indices and gains from earlier in the quarter were given back. The sector ended with small losses for the Partnership. In fixed income, the Portfolio Funds had long positioning with both rates and bonds having generally falling yields. The moves were especially large in August, resulting in profits for the Portfolio Funds. Yields rose slightly in September, leading to a small give back of earlier gains, but fixed income ended up being a strong driver of performance for the Portfolio Funds in the quarter overall. Currencies also performed strongly. Diverging economic performance and central bank policies were important factors in driving currencies during the third quarter. A decently performing U.S. economy relative to much of the rest of the world meant that the U.S. dollar strengthened against most foreign currencies. The Portfolio Funds generally adopted a long U.S. dollar bias and made profits being short currencies like the euro and yen which weakened consistently through the third quarter. Commodities were another bright spot for the Portfolio Funds. The strength in the U.S. dollar and the slow weakening of the global economy were among the factors that led to many commodities falling over the course of the third quarter. Supply and demand factors such as dissipating tensions around the Ukraine situation, higher global oil production and reports of strong harvests in many grain markets also played a role. The Portfolio Funds were generally long commodity markets coming into July, but moved to a short stance by the end of August with minimal losses. As the downward trends in the asset class accelerated in September, the Portfolio Funds were well positioned to benefit from them. Falling prices in oil markets, precious metals, grains and softs all contributed positively to performance. In summary, fixed income trends generally continued in the third quarter. The Portfolio Funds also took advantage of relatively newer downward trends in currencies and commodities. Slight reversals in equity indices mildly detracted from performance. Overall, the third quarter was profitable for the Partnership.
In the fourth quarter, managed futures and trend following strategies had very strong performance. Returns were positive in all three months. Continuing trends in energies, fixed income and currencies drove performance. Equity indices were a detractor. Trend-Following Futures returned 10.3% for the quarter. In equity indices, the Portfolio Funds came into the third quarter with long exposure, with positions across geographies. The largest exposures were in U.S. and European indices. While the upward trend in equity indices was not especially strong, there had not been any big reversals in the space either; as such, the Portfolio Funds generally maintained their long exposure. The last quarter of the year saw more choppiness in the space. The first half of October saw a sharp selloff, driven by general worries over global growth, concerns of recession and potential deflation in Europe, weakening Chinese demand and approaching rate hikes in the U.S. Markets did recover in the second half of October and showed some continued strength in November, but only to see another mild reversal in December due to similar factors. The back and forth with several directional shifts hurt the Portfolio Funds who were reducing and adding to exposures at the wrong time, all the while maintaining a long posture. They lost money in October, made some of it back in November, but lost again in December. The asset class had negative attribution for the quarter. In agriculture, metals and interest rate asset classes, the Portfolio Funds made money in all three months, illustrating the continuation of major trends. Fixed income was the most profitable as the same concerns causing equities to show choppiness led to much lower yields in bonds. The Portfolio Funds made very strong gains being long markets, especially in Europe where yields fell. In currencies, the divergence between the economies of the U.S. on one hand and Europe and Japan on the other was clearly apparent. The U.S. dollar appreciated strongly against both the euro and yen, along with most other foreign currencies. The Portfolio Funds were generally short these currencies and benefited from the continuing trends. Commodities also proved profitable, with energy markets driving performance. During the third quarter, the Portfolio Funds had gotten short oil and oil product markets as the price of oil fell sharply due to
supply/demand imbalances. The moves accelerated in the fourth quarter as OPEC refused to cut production. WTI crude oil was down over -40% in the three months. The Portfolio Funds were positioned to take advantage of this continuing trend. Moves in metals and agriculturals were much milder and attribution from those two sectors was muted. In summary, in three important sectors (fixed income, energies and FX), continuing trends led to strong gains. There were relatively few significant reversals elsewhere. As a result, the fourth quarter was-profitable for trend followers.
The Partnership experienced a net trading loss for the year ended December 31, 2013 of $2,756,626.
The Partnership started the first quarter with a long bias in both risk assets and fixed income. The only meaningful short exposures were in the Japanese yen, natural gas, grains and soft commodities. This posture shifted partially over the course of the first quarter. The biggest changes took place in currencies and commodities. These two asset classes were most affected by rising risk aversion in February and March. The Portfolio Funds got short many foreign currencies as well as metals and livestock. The only market where the shift went the other way was natural gas, as the Portfolio Funds adopted a long posture as prices rose sharply in March. Equity indices drove performance. The Portfolio Funds came into the first quarter with long positions across geographies given that stock prices have generally been rising since the summer of 2012. With the fiscal cliff issue resolved early in the first quarter, markets continued to rise, even picking up some momentum. Gains came from diverse positions during January. In February and March, there was some divergence in markets, with U.S. and Japanese equities continuing to rise while those in Europe and China saw some downward moves due to inconclusive elections in Italy, a banking crisis in Cyprus and signs of slowing growth in China. Despite this divergence, the asset class was positive each month of the first quarter. Currencies also contributed positively to performance over the first quarter. At the start of the 2013, the Portfolio Funds had long positions in most foreign currencies, balanced by significant short exposure in the Japanese yen. This positioning performed positively in January given a pro-risk investment environment. In February, risk aversion returned to markets to some extent. A contracting euro-zone economy coupled with Italian elections where no single group of parties won enough votes to form a coalition government disrupted the stability for the continent. Many foreign currencies depreciated against the U.S. dollar and the Portfolio Funds generally adopted a short posture. The general trend of a strong U.S. dollar continued into March. At this point, the Portfolio Funds were decidedly long the U.S. dollar and generally made back the February losses. Overall, the asset class was positive for the first quarter. Short yen positions performed best, generating gains each month of the first quarter. In fixed income, the Portfolio Funds had long positions throughout the first quarter resulting in losses. In January, these positions lost money. Risk assets were rallying while fixed income was selling off. Many even questioned whether a new period of rising interest rates was already upon us. These worries turned out to be premature as problems in Europe led to a renewed push into fixed income. Yields came back down and the Portfolio Funds made back some, though not all, of their January losses during February and March. Commodities also performed poorly. Coming into the first quarter, the Portfolio Funds had long exposure in the oil complex and metals coupled with short exposure in natural gas and agricultural markets. Many commodities initially rallied, generating some gains. That changed in February as markets generally fell due to slowing growth and the potential for less demand from China as well as from a contracting Europe. These moves hurt the Portfolio Funds. The Portfolio Funds generally adopted a short posture in all sectors except for oil.
In fixed income, the Portfolio Funds came into the second quarter positioned long across most markets they traded given the downward trend in yields. Their positioning performed well in April as the economic outlook was not especially strong and central banks seemed committed to quantitative easing. This changed abruptly in May and June as markets were concerned by comments made by U.S. Federal Reserve officials and yields rose. Profits made in April were
given back and the asset class ended the quarter with losses. The losses were especially severe in May given that the Portfolio Funds had large positions. As yields rose, they significantly cut long exposure through the end of the second quarter. The Portfolio Funds were also long equity indices at the start of the second quarter. As global equity markets had generally been rising since late summer of 2012, with increased momentum in the first quarter of 2013, the Portfolio Funds had large long positions, with concentrations in U.S., European and Japanese equity indices. These positions generally made money in April and May, but suffered offsetting losses in June when markets reversed due to the possible withdrawal of monetary stimulus sooner than expected. Most trend followers were able to finish the quarter with small profits in the asset class. In currencies, choppiness took a toll on returns. Some big reversals (in the Australian dollar, for example) and a lack of clear direction in many other currencies resulted in the Portfolio Funds losing money each month during the second quarter. In April, European currencies rallied against short positions held in the Portfolio Funds; this happened even as poor economic numbers indicated further deterioration in the eurozone economy, but expectations of additional stimulus from the European Central Bank boosted many currencies. The Portfolio Funds tried to adapt by shifting direction and getting long these currencies, only to see the U.S. dollar rally. In June, it was the Japanese yen’s turn to reverse, ending multiple months of declines against the U.S. dollar and other currencies and hurting short positions. Currencies were the second worst performing asset class in the second quarter after fixed income. Performance in commodities was mixed. The gains came primarily from metals. After some declines in the first quarter, the Portfolio Funds came into the second quarter positioned short both industrial and precious metals. As prices fell sharply over the course of the second quarter, the Portfolio Funds were able to book profits in markets like gold, silver and copper. Trends were not as strong in the energy and agricultural markets. The Portfolio Funds saw muted gains and losses that generally canceled each other out. Due to the big trends in metals, commodities were the best performing asset class for most Portfolio Funds. In summary, big reversals in fixed income starting in May resulted in losses for the second quarter. In currencies, some choppiness and more mild reversals also led to negative performance. There were small gains in equity indices due to the continuing rally in April and May. Commodities performed well as a result of the downward trend in metals which the Portfolio Funds took advantage of well.
In fixed income, the Portfolio Funds came into the third quarter positioned short bonds and neutral rates. With the U.S. Federal Reserve hinting at tapering, fixed income markets had abruptly reversed in May and June, ending a prolonged period where falling yields had been the norm. With yields rising sharply during May and June, trend followers had gotten short many markets. The reversals in rates had been less severe and most Portfolio Funds had a neutral and balanced posture in that sector. Given the recent reversals, risk taking was generally minimal in the asset class. The uncertainty regarding tapering introduced volatility into markets. Central bank officials generally were able to calm markets in July and yields came back down some, only to rise further in August as the next Federal Open Market Committee meeting approached and then fall again in September when the U.S. Federal Reserve decided not to taper its bond purchases. This environment proved too choppy for most medium and longer term trend followers. Losses were sustained as the Trading Advisors tried to maneuver their portfolios based on the frequently shifting market direction. Given relatively low exposures, the losses were not too severe. The Portfolio Funds were long equity indices at the start of the third quarter. The downward moves in markets in June had not been large enough to force the Portfolio Funds to get short. The Portfolio Funds continued to maintain a long bias with respect to global equity indices. July was a positive month for the asset class. With fewer near-term policy worries, equity markets recovered from their June losses when fears of tapering had led to downward moves. In August, concerns over Syria made headlines and markets tumbled as the possibility of military intervention grew. These concerns eased in early September and the U.S. Federal Reserve’s decision not to taper buoyed markets. Despite these mixed moves, equities finished the third quarter higher and long positions held by trend follower’s generated profits. Equity indices were the only profitable asset class for the Portfolio Funds. Currencies continued to prove difficult to trade. The Portfolio Funds had a long U.S. dollar bias at the start of the third quarter. This positioning lost money in July and August. At first, dovish reassurances by central bankers pushed back market expectations on tapering and pointed towards policy remaining accommodative. This led to the U.S. dollar losing value, but only to strengthen again in August as a more risk averse-environment took hold. Finally, at quarter end, the U.S. dollar weakened after the U.S. Federal Reserve’s non-tapering decision. Thus, the direction in currency markets changed each month during the third quarter too frequently for medium term trend followers to navigate. Losses were felt across all Portfolio Funds. Commodities were the worst performing asset class, generating the bulk of losses. The Portfolio Funds came into the third quarter with a short bias in metals, energies and agriculturals but significant whipsawing resulted in poor performance. First, metals reversed, rising against the trend in what could be deemed a relief rally. Large short positions held by trend followers saw losses. The new upward trend lasted only a few months and precious metals saw sharp down
moves in September just as the Portfolio Funds were getting long. At the same time, oil markets were seeing appreciation early in the third quarter as geopolitical tensions rose in the Middle East, first in Egypt and then in Syria. The Portfolio Funds saw some losses initially but repositioned their portfolios to be long oil and oil product markets by the end of August. In September, oil reversed sharply after an apparent diplomatic solution was reached with Syria. This time, losses were felt in long positions. Agricultural markets also failed to produce strong gains. Thus, losses were seen across the commodity spectrum due to big reversals in several sectors. In summary, continuing upward trends in equity indices led to some gains in the third quarter but significant reversals and choppy moves in all other asset classes resulted in losses, overwhelming any profits made in equities. In an environment without sufficient sustained trends, all Portfolio Funds saw losses. Those with larger commodity allocations fared worse. The Portfolio Funds with larger equity allocations and those with longer time horizons performed slightly better.
In equities, the Portfolio Funds came into the fourth quarter positioned long given the upward trend in that market. As markets kept climbing in the final three months, trend-followers added to their long exposure across geographies and made profits in the asset class. Each month of the fourth quarter was profitable, with the best gains coming from U.S. and Japanese indices. Equities were the best-performing asset class for trend-followers in the fourth quarter. Currencies were also profitable, although with less consistency. The Portfolio Funds trend-followers lost money in October, but made back the losses in November and December due to strong downward trends in the Japanese yen and Canadian dollar and upward trends in the British pound and euro. In fixed income and commodities, the Portfolio Funds saw losses. The Portfolio Funds trend-followers were long fixed income coming into the fourth quarter. Yields fell following the U.S. Federal Reserve’s comments over the summer that it would not reduce its stimulus in September. The Portfolio Funds initially made money as yields moved lower, but gave back any gains when yields rose during December with the actual tapering. The Portfolio Funds generally finished the fourth quarter with small losses in the asset class. Commodities had mixed performance; losses were generally due to choppy moves in oil-related energy markets, which stayed range-bound. Industrial metals caused losses as well for similar reasons when sharp falls in November were followed by a swift recovery in December. There were small gains from short positions in precious metals and agricultural markets such as wheat and corn. These markets were generally lower at quarter-end yielding some profits. Overall, commodities finished the fourth quarter with small losses. In summary, the fourth quarter did not see many big reversals. Trends continued for the most part, in areas like equity indices, the Japanese yen, British pound, precious metals and agriculturals, with a relatively small number of markets and sectors showing significant choppiness. In this environment, trend-followers were able to generate positive performance. Strong gains in equity indices and currencies were only slightly offset by smaller losses in commodities and fixed income.
The Partnership experienced a net trading loss for the year ended December 31, 2012 of $5,757,962.
Coming into March, the Partnership continued to be long most markets and asset classes. In equity indices, the year started with a strong rally that spanned several global equity markets. Following strong up moves in both January and February, the Portfolio Funds built up large long equity index positions across several geographies. These positions tended to be the biggest in the U.S. and Europe, with somewhat smaller long positions in Japan and Asia. Commodities represented another significant risk allocation. The Portfolio Funds tended to have large long positions in oil and oil products as well as precious metals and short positions in natural gas. In crops, grains and industrial metals, positions were close to neutral, with longs and short balancing each other. Within currencies, a few large positions
dominated, including shorts in the euro and longs in the Australian dollar. In other currencies, the Portfolio Funds generally had small long exposure. Finally, fixed income exposure was on the long side, in both rates and bonds. This positioning produced negative results in March and the Partnership swung from positive performance in the first two months to being negative for the quarter. March saw reversals in many markets and the Portfolio Funds posted losses as a result. The biggest reversals came mid-month in the bonds sector. With the U.S. Federal Reserve raising its U.S. economic outlook, bonds sold off globally. Given that the Portfolio Funds had large long positions, they suffered losses and moved to cut positions. Currencies also saw losses. Foreign currencies generally depreciated against the U.S. dollar following good economic numbers in the U.S. The euro, where the Portfolio Funds were short, which ended March slightly higher, adding to losses and profits in equity indices. The Portfolio Funds had large long positions in U.S. and Asian indices which proved profitable. European indices generally fell in March due to the negative impact from the debt crisis and recessions, offsetting some profits and commodities generally proved profitable. Short natural gas positions made money when the price of natural gas fell over -20%. There were some profits in industrial metals and agricultural markets from short positions.
The Partnership started the second quarter long risk assets and long fixed income. April and May were positive months, thanks to strong gains in fixed income, small gains in currencies and relatively smaller losses in equity indices and commodities. The Portfolio Funds repositioned their portfolios during these two months to match the prevailing investment environment, shorting risk assets and increasing long positions in fixed income. June saw reversals in every asset class causing significant losses across asset classes that erased the gains from April and May. In fixed income, the Portfolio Funds started the second quarter long most markets. As the economic outlook began to deteriorate in April, yields started to head lower. In response, Portfolio Funds pushed their bets by adding to their long positions, resulting in strong gains as yields continued to make new lows. Gains were especially strong in May, as many fixed income markets reached new lows in yields. June saw a slight give back of these profits as yields backed-up due to improving sentiment. As a result of strong upward trends in the first quarter, the Portfolio Funds were positioned long equities in several geographies. In April, global equity indices were down, driven by growing debt related concerns in Europe as well as signs of slowing in various economies. These downward moves continued during May, accelerating in many markets. As the Portfolio Funds posted losses, they started to reduce their long positions. Given that most trend-followers in the Partnership use medium- to long-term signals, their reaction to reversals is not immediate and it takes some time to fully switch direction. It was not until late May that most Portfolio Funds had finally exited most of their losing long positions and to go short. In June, equities recovered some, just as the Portfolio Funds had established short positioning, adding to losses in this asset class. Commodities suffered losses as well and followed a similar path as equity indices. The Portfolio Funds started the second quarter with a long bias. The big reversals in May caused losses and the Portfolio Funds spent the month repositioning for a new bearish environment. As the markets recovered in June, the Portfolio Funds sustained further losses on the newly initiated short positions. The biggest losses came in May from long positions in oil, metals and agricultural markets. Smaller losses were sustained in June in a choppy market environment. Foreign exchange trading was also unprofitable. Starting the quarter, exposure to currencies was relatively low. In May, as the U.S. dollar rallied in a safe-haven play, Portfolio Funds adopted a long bias. Initially, this served the Portfolio Funds well in May as several currencies depreciated against the U.S. dollar. However, June saw a reversal as the European Union moved in a positive direction. As risk seeking returned to markets, the euro rallied against the U.S. dollar. The Portfolio Funds had accumulated sizeable euro shorts in May, as it had exhibited a strong downward trend. With most currencies rallying against the U.S. dollar in June, losses were sustained. The asset class as a whole ended the quarter with negative performance, primarily due to euro losses.
The Partnership started the third quarter with a bearish, risk-off posture. Overall exposure levels were moderate and the largest exposures were in long fixed income positions. In foreign exchange, short positions in the euro were the dominant exposure. Other foreign exchange exposure included small shorts in the Canadian dollar, British pound, and Swiss franc and small long positions in the Japanese yen and Australian dollar. Equity exposure was short biased. Net long positions in the U.S. were offset by net short positions in Europe and Asia. Commodity exposure was short biased in most sectors except grains. Fixed income was the largest exposure and best performing asset class during the third quarter. Within fixed income, the most common exposures and largest contributors to performance were long positions. In July, long positions in both bonds and shorter term interest rates were profitable. As yields backed-up later in the third quarter, long bond positions resulted in losses in both August and September. On the whole, gains in this sector were still greater than losses, but the retracement in August and September were costly. The Partnership remained long biased throughout the quarter, but the size of positions was reduced as reversals made this a more challenging sector to trade.
Equities, on the other hand, offered a very different exposure and return profile. The Partnership came into the quarter with limited equity exposure and a net short bias. While fixed income exposure was reduced over the course of the quarter, equity exposure increased in response to accommodative Central Bank policy. The Portfolio Funds moved to a net long bias over the third quarter and equities generated gains in September. Foreign exchange was another positive contributor to performance early in the quarter that suffered losses on the heels of reversals later in the quarter. Within foreign exchange, the most common trade was short positions in the euro. These trades were positive contributors in July, but incurred losses in August in connection with European Central Bank President Draghi’s comment “to do whatever it takes to preserve the euro” propelled the single currency higher. Short euro positions were one of the largest detractors in August. By the third quarter’s end, short euro positions still remained in the portfolio, but they had been significantly reduced. Commodity trading positively contributed to performance in July, but the sector had the greatest impact on the Partnership in September. During that month a series of reversals resulted in sizeable losses. While long positions in precious metals generated gains as the U.S. Fed’s QE3 and the European Central Bank’s Outright Monetary Transactions program fueled currency debasement concerns, the Partnership experienced losses in other sectors. Long positions in oil were hurt by September’s sell-off. Conversely, short positions in natural gas were hurt by rising prices in that sector. Short positions in industrial metals suffered losses as accommodative central bank policy diminished global growth concerns. Finally, long positions in grains which had been profitable earlier in the quarter were hurt as signs that the U.S. harvest might be better than originally expected resulted in a steep retracement.
The Partnership started the fourth quarter positioned long most markets and asset classes. Choppiness in fixed income and commodities resulted in losses and those positions were reduced. The Portfolio Funds continue to be long fixed income, but in smaller size. In commodities, the Portfolio Funds were still net long metals and oil markets, but have switched to a net short posture in grains, crops and natural gas. Positions are smaller across the board. Since equities and FX were the winning asset classes in the fourth quarter, the Portfolio Fund increased their long exposures to both. The Japanese yen is the exception, where the Portfolio Funds are short the Japanese yen coming into 2013. Coming into October, the Partnership was positioned long in most sectors and markets. Many markets trended lower as the International Monetary Fund (IMF) cut its growth forecasts for most developed economies. In addition, the U.S. Federal Reserve’s (Fed) comment on the strains in the world economy as well as disappointing third-quarter corporate earnings in the U.S. added to the negative sentiment. Even as risk assets sold off and the dollar strengthened, there was no significant flight to safety. Risk appetite rebounded in November, but erratic price action in commodities caused losses. In December, commodities were still choppy, but gains from rising equities and currencies generated sufficient profits for a positive month. Commodities were the worst-performing asset class as a poor trading environment caused losses in each month during the quarter. Small-scale reversals in grains, energy markets such as oil and natural gas, precious metals and industrial metals all caused losses where no sector was profitable. In response to the difficult trading environment, managers reduced risk over the course of the quarter. In fixed income, the Portfolio Funds were positioned long almost all markets. Yields generally bottomed mid-summer and have moved sideways in the second half of the year. Since yields moved in tight range, it resulted in mixed performance with some months showing gains and some months showing losses. There had not been a big reversal so the Portfolio Funds had not yet shifted direction, but they have reduced risk and position sizes given the choppiness. In the fourth quarter, yields were up initially, then down, then up again to generally end the quarter higher. As a result, long positions saw losses and fixed income was a negative contributor to performance. Despite the choppiness seen in commodities and fixed income, the fourth quarter was generally characterized by risk seeking. In this environment, equity indices rallied while the U.S. dollar weakened, especially toward year end. In addition, political and policy developments in Japan led to a declining yen and sharply higher equity prices. The Portfolio Funds generally made money by being long equity indices and foreign currencies against the U.S. dollar, with the exception of the yen where many Portfolio Funds had profitable short positions. Overall, the losses in commodities, and to a lesser extent fixed income, dominated the attribution profile of trend-followers in the fourth quarter. Gains in equity indices and currencies were insufficient to make up for these losses.
Variables Affecting Performance
The principal variables that determine the net performance of the Partnership and the Portfolio Funds are gross profitability from the Partnership’s and the Portfolio Funds’ trading activities and interest income.
The Partnership 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 Partnership performance.
During the periods set forth above in “Selected Financial Data”, the interest rates in many countries were at unusually low levels. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Partnership’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 Partnership may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Partnership’s wrap fees are a constant percentage of the Partnership’s assets.
Unlike many investment fields, there is no meaningful distinction in the operation of the Partnership between realized and unrealized profits. Most of the contracts traded by the Portfolio Funds 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 Partnership.
Liquidity; Capital Resources
The Partnership and the Portfolio Funds borrow only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Partnership’s and the Portfolio Funds’ U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Inflation by itself does not affect profitability, but it can cause price movements that do so.
The Partnership’s and the Portfolio Funds’ assets and open positions are generally highly liquid.
The Partnership and the Portfolio Funds changes its positions and market focus frequently. Consequently, the fact that the Partnership and the Portfolio Funds realized gains or incurred losses in certain markets (gold, stock indices, currencies, etc.) in the past is not necessarily indicative of whether the Partnership and the Portfolio Funds will do so in the future.
Investors in the Partnership generally may redeem any or all of their Units at Net Asset Value, effective as of the last day of any calendar month, upon providing notice at least 10 calendar days prior to month-end.
As a commodity pool, the Partnership maintains an extremely large percentage of its assets in cash at the underlying Portfolio Funds, which they must have available to post initial and variation margin on futures contracts. This cash is also used to fund redemptions. While the Portfolio 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 Portfolio Fund, has the ability to override decisions of the Trading Advisor to fund redemptions if necessary, but in practice the respective Trading Advisors would determine, in its discretion which investments should be liquidated.
(The Portfolio Funds and the Partnership have 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 are discussed in Exhibit 13.01.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Portfolio Funds are speculative commodity pools. The market sensitive instruments held by the Portfolio Funds are acquired for speculative trading purposes and all or substantially all of the Portfolio Funds’ 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 Portfolio Funds’ main line of business.
Market movements result in frequent changes in the fair market value of the Portfolio Funds’ open positions and, consequently, in its earnings and cash flow. The Portfolio Funds’ 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 Portfolio Funds’ open positions and the liquidity of the markets in which it trades.
The Portfolio Funds, under the direction of their respective Trading Advisors rapidly acquire and liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a possible future market scenario will affect performance, and the Partnership’s and the Portfolio Funds’ past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership and the Portfolio Funds could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s and the Portfolio Funds’ speculative trading and the recurrence in the markets traded by the Partnership and the Portfolio Funds of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s and the Portfolio Funds’ 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 inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership’s and the Portfolio Funds’ losses in any market sector will be limited to Value at Risk or by the Partnership’s and the Portfolio Funds’ attempts to manage its market risk.
Quantifying the Partnership’s Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act 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 Partnership’s risk exposure in the various market sectors traded by the Portfolio Funds is quantified below in terms of Value at Risk. Due to the Portfolio Funds’ fair value accounting, any loss in the fair value of the Portfolio Funds’ open positions is directly reflected in the Portfolio Funds’ 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 Portfolio Funds as the measure of their 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% to 99% of the one-day time periods included in the historical sample (approximately one year, generally) 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 Portfolio Funds), 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 (which would reduce the Value at Risk estimates) resulting from the fact that the Portfolio Funds’ positions are rarely, if ever, 100% positively correlated have not been reflected.
The Partnership’s Trading Value at Risk in Different Market Sectors
The following information with respect to Value at Risk (“VaR”) is set forth in respect of Portfolio Funds separately, rather than for the Partnership basis.
Aspect Class DT (1)
(1) Average capitalization of Aspect Class DT is $12,132,912.
Aspect Class DT (1)
(1) Average Capitalization of Aspect Class DT is $19,605,347.
BlueTrend Class DT (2)
(2) Average capitalization of BlueTrend Class DT is $12,171,071.
BlueTrend Class DT (2)
(2) Average capitalization of BlueTrend Class DT is $19,361,769.
Transtrend Class DT (3)
(3) Average capitalization of Transtrend Class DT is $12,178,083.
Transtrend Class DT (3)
(3) Average capitalization of Transtrend Class DT is $19,613,252.
Winton Class DT (4)
(4) Average capitalization of Winton Class DT is $12,207,701.
Winton Class DT (4)
(4) Average capitalization of Winton Class DT is $19,663,337.
Lynx Class DT* (5)
(5) Average capitalization of Lynx Class DT is $11,659,516.
*Added to the Portfolio May 1, 2014.
Man AHL LLC Class DT** (6)
(6) Average capitalization of Man AHL LLC Class DT is $19,401,784.
**Liquidated as of April 30, 2014.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership and the Portfolio Funds are typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership and the Portfolio Funds. The magnitude of the Partnership’s and the Portfolio Funds’ open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of their positions, certain market conditions - unusual, but historically recurring from time to time - could cause the Partnership and the Portfolio Funds to incur severe losses over a short period of time. Even comparatively minor losses could cause MLAI to further deleverage or terminate the Partnership’s and the Portfolio Funds’ trading. The foregoing Value at Risk table - as well as the past performance of the Partnership and the Portfolio Funds - gives no indication of this “risk of ruin.”
Non-Trading Risk
Foreign Currency Balances; Cash on Deposit with MLPF&S
The Portfolio Funds have non-trading market risk on its foreign cash balances not needed for margin. These balances (as well as the market risk they represent) are generally immaterial.
The Portfolio Funds also have 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 Partnership’s market risk exposures through the Portfolio Funds after the change in structure- except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures as well as the strategies used and to be used by MLAI and the Trading Advisors of the Portfolio Funds for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the risk controls for the Partnership and for the trading conducted through Portfolio Funds 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 Partnership. There can be no assurance that the Partnership’s 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 value of their investment in the Partnership.
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 Partnership’s market exposure MLAI may urge the Portfolio Funds to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual. Except in cases in which it appears that the Portfolio Funds has begun to deviate from past practice and trading policies or to be trading erratically, MLAI basic risk control procedures consist of the ongoing process of monitoring the Portfolio Funds with the market risk controls being applied by the Portfolio Funds.
Risk Management
MLAI has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Portfolio Funds, calculating the Net Asset Value of the Fund and the Portfolio Funds as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLAI does not intervene in the markets to hedge or diversify the Portfolio Funds’ market exposure, MLAI may urge the respective Trading Advisors to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are expected to be unusual. It is expected that MLAI’s basic risk control procedures will consist of the ongoing process of monitoring the Trading Advisors, with the market risk controls being applied by the respective Trading Advisors.
Non-Trading Risk
The Partnership and the Portfolio Funds control the non-trading exchange rate risk by regularly converting foreign currency balances back into U.S. dollars at least once per week and more frequently if a particular foreign currency balance becomes unusually high.
The Partnership and the Portfolio Funds have cash flow interest rate risk on its cash on deposit with MLPF&S and in that declining interest rates would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the Partnership in order to facilitate margin payments and pay expenses and redemptions. MLAI does not take any steps to limit the cash flow risk on the cash held on deposit at MLPF&S.
Item 8:
Item 8: Financial Statements and Supplementary Data
(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 Chief Financial Officer, on behalf of the Partnership, have evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act) with respect to the Partnership as of and for the year 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 Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Partnership’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 Partnership 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 Partnership.
· 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 Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Partnership’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 Partnership’s management assessed the effectiveness of the Partnership’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 Partnership’s management concluded that at December 31, 2014, the Partnership’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 Partnership’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 partnership, the Partnership has no officers or directors and is managed by MLAI. Trading decisions are made by the Trading Advisors on behalf of the Portfolio Funds.
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.
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.
As of December 31, 2014, the directors and executive officers of MLAI had no investment in the Partnership, and MLAI’s general partner interest in the Partnership was valued at $1,638.
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 Partnership’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 Partnership’s (MLAI’s) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Partnership. 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 Partnership nor MLAI has a nominating committee.)
Audit Committee: Audit Committee Financial Expert:
Not applicable. (Neither the Partnership nor MLAI has an audit committee.) There are no listed shares of the Partnership or MLAI.
Item 11:
Item 11: Executive Compensation
The managers and officers of MLAI are remunerated by BAC in their respective positions. The Partnership does not have any officers, managers or employees. The Partnership pays wrap fees to MLAI. The Portfolio Funds pay brokerage commissions to MLPF&S, which is a BAC affiliate of MLAI. MLAI also receives a portion of the management fees from the Trading Advisors or Portfolio Funds (although not in respect of the Partnership’s investment in the Portfolio Funds). MLAI or BAC affiliates may also receive certain economic benefits from possession of the Portfolio Fund’s U.S. dollar assets. The managers and officers receive no “other compensation” from the Partnership, 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 Partnership 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 partnership interests. The Partnership is managed by its general partner, MLAI).
(b) Security Ownership of Management:
As of December 31, 2014, MLAI owned 9 Unit-equivalent general partner interest, which was less than 1% of the total Units outstanding, and 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 Partnership for professional services rendered by the principal accountant, PricewaterhouseCoopers LLP, for audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’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, other than as set forth in the preceding paragraph (a).
(e) Neither the Partnership 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
Page
1.
Financial Statements:
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 Partners’ 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:
(a) Financial Statements of Aspect FuturesAccess LLC
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
(b) Financial Statements of ML BlueTrend FuturesAccess LLC
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
(c) Financial Statements of Lynx FuturesAccess LLC
INDEPENDENT AUDITOR’S REPORT
FINANCIAL STATEMENTS:
Statements of Financial Condition as of December 31, 2014 and 2013
Statements of Operations for the year ended December 31, 2014 and 2013
Statements of Changes in Members’ Capital for the year ended December 31, 2014, 2013 and for the period July 1, 2012 (commencement of operations) to December 31, 2012
Financial Data Highlights for the year ended December 31, 2014, 2013 and for the period July 1, 2012 (commencement of operations) to December 31, 2012
Notes to Financial Statements
(d) Financial Statements of ML Transtrend DTP Enhanced FuturesAccess LLC
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
(e) Financial Statements of ML Winton FuturesAccess LLC
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
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 Limited Partnership of ML Trend-Following Futures Fund L.P.
Exhibit 3.01:
Is incorporated herein by reference from Exhibit 3.01(i) contained in the registrant’s Report on Form 8-K filed on August 13, 2007.
3.02
Tenth Amended and Restated Limited Partnership Agreement of ML Trend-Following Futures Fund L.P.
Exhibit 3.02:
Is incorporated by reference from Exhibit 3.02 contained in the registrant’s Report on Form 8-K filed on May 4, 2012.
3.03
Amendment to the Tenth Amended and Restated Limited Partnership Agreement of ML Trend-Following Futures Fund L.P.
Exhibit 3.03:
Is incorporated by reference from Exhibit 3.02(i) contained in the registrant’s Report on Form 8-K filed on November 11, 2013.
13.01
2014 Annual Report and Report of Independent Registered Public Accounting Firm.
13.02
Financial Statements of Aspect FuturesAccess LLC
13.03
Financial Statements of ML BlueTrend FuturesAccess LLC
13.04
Financial Statements of Lynx FuturesAccess LLC
13.05
Financial Statements of ML Transtrend DTP Enhanced FuturesAccess LLC
13.06
Financial Statements of ML Winton FuturesAccess LLC
Exhibit 13.01, Exhibit 13.02, Exhibit 13.03,
Exhibit 13.04and
Exhibit 13.05:
Are filed herewith.
31.01 and 31.02
Rule 13a-14(a)/15d-14(a) Certifications.
Exhibits 31.01 and 31.02:
Are filed herewith.
32.01 and 32.02
Section 1350 Certifications.
Exhibits 32.01 and 32.02:
Are filed herewith.
99.1
Amended and Restated Selling Agreement effective as of July 8, 2011 between Merrill Lynch Alternative Investments LLC (for itself, and as sponsor on behalf of the investment funds listed therein) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (as selling agent).
Exhibit 99.1:
Is incorporated by reference from Exhibit 99.1 contained in the registrant’s Report on Form 8-K filed on July 11, 2011.
The following materials from the Partnership’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 Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ML TREND-FOLLOWING FUTURES FUND L.P.
By: MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC, GENERAL PARTNER
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 on the dates indicated.
Signature
Title
Date
/s/Keith Glenfield
Chief Executive Officer, President and Manager
March 20, 2015
Keith Glenfield
(Principal Executive Officer)
/s/ Barbra E. Kocsis
Chief Financial Officer and Vice President
March 20, 2015
Barbra E. Kocsis
(Principal Financial Officer)
/s/Spencer Boggess
Vice President and Manager
March 20, 2015
Spencer Boggess
/s/James D. Bowden
Vice President and Manager
March 20, 2015
James D. Bowden
/s/Dominick A. Carlino
Vice President and Manager
March 20, 2015
Dominick A. Carlino
/s/James L. Costabile
Vice President and Manager
March 20, 2015
James L. Costabile
/s/Nancy Fahmy
Vice President and Manager
March 20, 2015
Nancy Fahmy
/s/Ninon Marapachi
Vice President and Manager
March 20, 2015
Ninon Marapachi
/s/Jeff McGoey
Vice President and Manager
March 20, 2015
Jeff McGoey
/s/ Greg Parets
Vice President and Manager
March 20, 2015
Greg Parets
/s/Steven L. Suss
Vice President and Manager
March 20, 2015
Steven L. Suss
ML TREND-FOLLOWING FUTURES FUND L.P.
2014 FORM 10-K
INDEX TO EXHIBITS