MILLBURN MULTI-MARKETS FUND L.P. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to Item 1, "Financial Statements." The information contained therein is essential to, and should be read in connection with, the following analysis.
OPERATIONAL OVERVIEW
The Partnership invests substantially all of its assets in the Master Fund. Due to the nature of the Master Fund's business, its results of operations depend on the General Partner's ability to recognize and capitalize on trends and other profit opportunities in different sectors of the global capital and commodity markets. The General Partner's investment and trading methods are confidential so that substantially the only information that can be furnished regarding the Master Fund's results of operations is contained in the performance record of its trading. Unlike operating businesses, general economic or seasonal conditions do not directly affect the profit potential of the Master Fund, and its past performance is not necessarily indicative of future results. The General Partner believes, however, that there are certain market conditions, for example, markets with strong price trends, in which the Master Fund has a better likelihood of being profitable than in others.
LIQUIDITY AND CAPITAL RESOURCES
Units may be offered for sale as of the beginning, and may be redeemed as of the end, of each month.
The amount of capital raised for the Partnership should not have a significant impact on its operations, as the Partnership and the Master Fund have no significant capital expenditure or working capital requirements other than for monies to pay trading losses, brokerage commissions and charges. Within broad ranges of capitalization, the General Partner's trading positions should increase or decrease in approximate proportion to the size of the Master Fund (in which the Partnership participates).
The Partnership raises additional capital only through the sale of Units and capital is increased through trading profits (if any). Neither the Partnership nor the Master Fund engages in borrowing.
The Master Fund trades futures and forward contracts, and may trade swap, spot and options contracts, on interest rates, commodities, currencies, metals, energy and stock indices. Risk arises from changes in the value of these contracts (market risk) and the potential inability of counterparties or brokers to perform under the terms of their contracts (credit risk). Market risk is generally to be measured by the face amount of the futures positions acquired and the volatility of the markets traded. The credit risk from counterparty non-performance associated with these instruments is the net unrealized gain, if any, on these positions plus the value of the margin or collateral held by the counterparty. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with OTC transactions because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In most OTC transactions, on the other hand, traders must rely (typically but not universally) solely on the credit of their respective individual counterparties. Margins which may be subject to loss in the event of a default are generally required in exchange trading and counterparties may require margin or collateral in the OTC markets.
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The General Partner has procedures in place to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures primarily focus on (1) real time monitoring of open positions; (2) diversifying positions among various markets; (3) limiting the assets committed as margin or collateral, generally within a range of 5% to 35% of an account's net assets at exchange, though the amount may at any time be substantially higher; and (4) prohibiting pyramiding (that is, using unrealized profits in a particular market as margin for additional positions in the same market). The General Partner attempts to control credit risk by causing the Partnership to deal exclusively with large, well-capitalized financial institutions as brokers and counterparties.
The financial instruments traded by the Master Fund contain varying degrees of off-balance sheet risk whereby changes in the market values of the futures, forward and spot contracts or the Master Fund's satisfaction of the obligations may exceed the amount recognized in the Statements of Financial Condition of the Master Fund.
Due to the nature of the Master Fund's business, substantially all its assets are represented by cash, cash equivalents and U.S. government obligations, while the Master Fund maintains its market exposure through open futures, forward and spot contract positions.
The Master Fund's futures contracts are settled by offset and are cleared by the exchange clearinghouse function. Open futures positions are marked-to-market each trading day and the Master Fund's trading accounts are debited or credited accordingly. Options on futures contracts are settled either by offset or by exercise. If an option on a future is exercised, the Master Fund is assigned a position in the underlying future which is then settled by offset. The Master Fund's spot and forward currency transactions conducted in the interbank market are settled by netting offsetting positions or payment obligations and by cash payments.
The value of the Master Fund's cash and financial instruments is not materially affected by inflation. Changes in interest rates, which are often associated with inflation, could cause the value of certain of the Master Fund's debt securities to decline, but only to a limited extent. More importantly, changes in interest rates could cause periods of strong up or down market price trends, during which the Master Fund's profit potential generally increases. However, inflation can also give rise to markets which have numerous short price trends followed by rapid reversals, markets in which the Master Fund is likely to suffer losses.
The Master Fund's assets are generally held as cash or cash equivalents, including U.S. government securities or securities issued by federal agencies, other Commodity Futures Trading Commission-authorized investments or bank held or certain other money market instruments (e.g., bankers acceptances and Eurodollar or other time deposits), which are used to margin the Master Fund's futures, forward and spot currency positions and withdrawn, as necessary, to pay redemptions and expenses. Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Master Fund's futures, forward and spot trading, the Master Fund's assets are highly liquid and are expected to remain so. During its operations through March 31, 2016, the Partnership, through its investment in the Master Fund, experienced no meaningful periods of illiquidity in any of the numerous markets traded by the General Partner.
CRITICAL ACCOUNTING ESTIMATES
The Master Fund records its transactions in futures, forward and spot contracts, including related income and expenses, on a trade date basis. Open futures contracts traded on an exchange are valued at fair value, which is based on the closing settlement price on the exchange where the futures contract is traded by the Master Fund on the day with respect to which net assets are being determined. Spot currency contracts are valued based on current market prices ("Spot Price"). Forward currency contracts are valued based on pricing models that consider the Spot Price plus the financing cost or benefit ("Forward Point"). Forward Points from the quotation service providers are generally in periods of one month, two months, three months, six months, nine months and twelve months forward while the contractual forward delivery dates for the forward currency contracts traded by the Master Fund may be in between these periods. The General Partner's policy to determine fair value for forward currency contracts involves first calculating the number of months from the date the forward currency contract is being valued to its maturity date ("Months to Maturity"), then identifying the forward currency contracts for the two forward months that are closest to the Months to Maturity ("Forward Month Contracts"). Linear interpolation is then performed between the dates of these two Forward Month Contracts to calculate the interpolated Forward Point. Model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, such as accrual of expenses, that affect the amounts and disclosures reported in the financial statements. Based on the nature of the business and operations of the Partnership, the General Partner believes that the estimates utilized in preparing the Partnership's financial statements are appropriate and reasonable, however actual results could differ from these estimates. The estimates used do not provide a range of possible results that would require the exercise of subjective judgment. The General Partner further believes that, based on the nature of the business and operations of the Partnership, no other reasonable assumptions relating to the application of the Partnership's critical accounting estimates other than those currently used would likely result in materially different amounts from those reported.
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RESULTS OF OPERATIONS
Due to the nature of the Partnership's trading, through its investment in the
Master Fund, the results of operations for the interim periods presented should
not be considered indicative of the results that may be expected for the entire
year.
Period ended March 31, 2016
Total
Partners'
Capital of the
Month Ending: Partnership
March 31, 2016 $ 131,426,405
December 31, 2015 122,195,232
Three Months
Change in Partners' Capital $ 9,231,173
Percent Change 7.55 %
THREE MONTHS ENDED MARCH 31, 2016
The increase in the Partnership's net assets of $9,231,173 was attributable to net income after profit share through its investment in the Master Fund of $9,531,054 and contributions of $2,233,000 which were partially offset by withdrawals of $2,532,881.
Management fees, through the Partnership's investment in the Master Fund, are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Management fees, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2016 increased $39,674 relative to the corresponding period in 2015. The increase was due to an increase in the average net asset value of the Partnership during the three months ended March 31, 2016, relative to the corresponding period in 2015.
The Partnership, through its investment in the Master Fund, bears all trade-related commission and clearing charges due to third-party brokers. Brokerage commissions, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2016 increased $10,898 relative to the corresponding period in 2015. The increase was due mainly to an increase in trading volume at the Master Fund, relative to the corresponding period in 2015.
Selling commissions and platform fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Selling commissions and platform fees for the three months ended March 31, 2016 increased $31,452 relative to the corresponding period in 2015. The increase was due to an increase in the average net asset value of commission paying investors of the Partnership during the three months ended March 31, 2016, relative to the corresponding period in 2015.
The Partnership, through its investment in the Master Fund, pays administrative expenses for legal, audit and accounting services. Administrative expenses, net of amounts borne by the General Partner, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2016 increased $10,077 relative to the corresponding period in 2015. The increase was due mainly to an increase in the Partnership's average net asset value during the three months ended March 31, 2016, relative to the corresponding period in 2015.
Interest income, through the Partnership's investment in the Master Fund, is derived from cash and U.S. Treasury instruments held at the Master Fund's brokers and custodian. Interest income, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2016 increased $62,478 relative to the corresponding period in 2015. This increase was due predominantly to an increase in short-term U.S. Treasury yields during the three months ended March 31, 2016 relative to the corresponding period in 2015, and partially due to an increase in average net assets over the same period.
For the three months ended March 31, 2016, the Partnership, through its investment in the Master Fund, achieved net realized and unrealized gains of $12,734,581 from trading operations (including foreign exchange transactions and translations). Management fees of $647,381, brokerage commissions of $92,975, selling commissions and platform fees of $587,436, administrative and operating expenses of $166,052, custody fees and other expenses of $5,520, and profit share of $1,800,842 were paid or accrued. Interest income of $96,679 partially offset the Master Fund expenses allocated to the Partnership resulting in net income after profit share of $9,531,054.
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An analysis of the Master Fund's trading gain (loss) by sector is as follows:
% Gain
Sector (Loss)
Currencies 1.04 %
Energies 0.68 %
Grains 0.22 %
Interest rates 7.37 %
Livestock (0.00 )%
Metals (0.31 )%
Softs (0.49 )%
Stock indices 1.77 %
Trading gain 10.28 %
MANAGEMENT DISCUSSION - 2016
Three months ended March 31, 2016
During a quarter of extreme market volatility, the Fund registered a strong performance led by gains on long interest rate futures positions. Trading of equity futures and foreign exchange forwards were also profitable. Meanwhile, commodity futures were marginally negative as a gain from trading energy futures was outweighed by fractional losses from trading metal and agricultural futures.
Concerns about global growth that International Monetary Fund Managing Director Christine Lagarde described as '…too low, too fragile and facing increased risks to its durability…", combined with doubts about policy makers' competence and capabilities, generated strong demand for government securities for most of the quarter. The demand for this debt was underpinned when: the Bank of Japan moved official interest rates into negative territory at the end of January; the Bank of England delayed any potential rate increase; the European Central Bank (the "ECB") and People's Bank of China (the "PBOC") eased monetary policy in March; and a speech by Federal Reserve ("Fed") Chair Janet Yellen squashed expectations for a near term Fed rate increase. Consequently, long positions in U.S., German, French, Italian, British, Japanese, Australian and Canadian notes and bonds were profitable. Long positions in short-term dollar and sterling interest rate futures were also profitable.
Equity markets were particularly volatile during the first quarter of 2016, tracing out a classic V-shaped path. The tumultuous first half of the period saw many equity indices experiencing multiyear lows before rebounding impressively over the second half of the quarter. Early on, weak economic data out of China and concerns about official policy decisions generated a renewed rout in Chinese equities and the yuan. These events, combined with a further collapse in energy prices; worries that Fed interest rate increases and a stronger dollar might impede global growth; and a halt in corporate profit growth, produced a broad, sharp equity selloff. Later, equity prices recovered as energy prices rebounded, the ECB, PBOC and Fed displayed easier policy tendencies, the U.S. dollar eased and growth concerns moderated. On balance, short positions in Chinese, Hong Kong, Japanese, Singaporean, Indian, and Spanish futures were profitable. Trading of U.S. and Canadian stock index futures also posted gains. On the other hand, short positions in Dutch and South African futures, a long U.K stock futures position, and trading of the European stoxx future resulted in somewhat offsetting losses.
Foreign exchange trading was also volatile. At the beginning of the year, given the search for safety, declining oil prices and the Fed "relatively hawkish" policy position, the U.S. dollar strengthened. Thus, during January and February, long dollar trades versus the pound sterling, Canadian dollar, Korean won, Russian Ruble and Mexican peso were profitable. The pound fell precipitously when the possibility of Britain's exit from the EU became more likely and Boris Johnson, the mayor of London, endorsed the move. As the quarter unfolded, however, the PBOC aggressively implemented measures to support the yuan; the G-20 Shanghai Communique in late February signaled a strong stance against currency competition that took some steam out of the dollar; and the likelihood of a near term increase in interest rates by the Fed diminished, prompting a U.S. dollar decline, especially against emerging market currencies where interest rates tend to be higher. A stabilization of commodity prices also helped the commodity producing countries. A series of events abroad further encouraged the U.S. dollar slippage: Mexico's surprise February 50 basis point hike in official interest rates; the increasing likelihood of an ouster of President Dilma Rousseff in Brazil; an increase in official rates in South Africa; and rising oil prices and high interest rates supporting the Russian ruble. Consequently, short dollar positions against the currencies of Australia, Brazil, Canada, Columbia, India, Israel, Mexico, New Zealand, Russia, South Africa, and Turkey were profitable. On the other hand, long dollar trades versus the euro, yen, Swiss franc, Swedish krona, Norwegian kroner, Czech koruna, Polish zloty and Chilean peso were unprofitable.
With the International Energy Agency suggesting that the "…world could drown in [oil] oversupply…"; with crude oil production at or near recent record levels in many countries-e.g., Saudi Arabia, Russia, the U.S., and Iraq; with Iranian exports ramping up; and with global demand still sluggish, crude prices slumped below $30 per barrel in January. Short positions in Brent crude, WTI crude, RBOB gasoline, London gas oil, heating oil and natural gas were profitable. Subsequently, reports that Saudi Arabia, Russia and a number of other producers were discussing plans for a production freeze and would meet in Doha in April sparked an oil price rebound. Indeed, oil prices reached a three month high above $40 per barrel on March 18. Consequently, losses were suffered on these same short crude oil, crude products and natural gas trades, and positions were reduced and/or reversed. Overall, energy trading was fractionally profitable for the quarter due to gains from WTI crude, natural gas, London gas oil and spread trading of crude.
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Industrial metal prices vacillated during the quarter but did move up somewhat in synchrony with energy prices, and short positions in industrial metals were unprofitable. Safe haven demand pushed up gold prices, especially in February, and a small long trade was fractionally profitable, providing a partial offset.
Trading of sugar was unprofitable, as was a long cocoa trade in January, and a
short Arabica coffee position in March. The profits from short corn and wheat
trades fractionally outdistanced the losses from trading soybeans and soybean
meal.
Period ended March 31, 2015
Total
Partners'
Capital of the
Month Ending: Partnership
March 31, 2015 $ 128,136,795
December 31, 2014 118,612,480
Three Months
Change in Partners' Capital $ 9,524,315
Percent Change 8.03 %
THREE MONTHS ENDED MARCH 31, 2015
The increase in the Partnership's net assets of $9,524,315 was attributable to net income after profit share through its investment in the Master Fund of $7,445,547 and contributions of $4,056,600 which were partially offset by withdrawals of $1,977,832.
Management fees, through the Partnership's investment in the Master Fund, are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Management fees, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2015 decreased $18,857 relative to the corresponding period in 2014. The decrease was due to a decrease in the average net asset value of the Partnership during the three months ended March 31, 2015, relative to the corresponding period in 2014.
The Partnership, through its investment in the Master Fund, bears all trade-related commission and clearing charges due to third-party brokers. Brokerage commissions, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2015 decreased $58,816 relative to the corresponding period in 2014. The decrease was due mainly to a decrease in trading volume at the Master Fund, relative to the corresponding period in 2014.
Selling commissions and platform fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Selling commissions and platform fees for the three months ended March 31, 2015 decreased $4,521 relative to the corresponding period in 2014. The decrease was due to a decrease in the average net asset value of commission paying investors of the Partnership during the three months ended March 31, 2015, relative to the corresponding period in 2014.
The Partnership, through its investment in the Master Fund, pays administrative expenses for legal, audit and accounting services. Administrative expenses, net of amounts borne by the General Partner, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2015 decreased $13,578 relative to the corresponding period in 2014. The decrease was due mainly to a decrease in the Partnership's average net asset value during the three months ended March 31, 2015, relative to the corresponding period in 2014.
Interest income, through the Partnership's investment in the Master Fund, is derived from cash and U.S. Treasury instruments held at the Master Fund's brokers and custodian. Interest income, through the Partnership's investment in the Master Fund, for the three months ended March 31, 2015 decreased $4,058 relative to the corresponding period in 2014. This decrease was due primarily to a decrease in the Partnership's average net asset value during the three months ended March 31, 2015 relative to the corresponding period in 2014.
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For the three months ended March 31, 2015, the Partnership, through its investment in the Master Fund, achieved net realized and unrealized gains of $8,896,256 from trading operations (including foreign exchange transactions and translations). Management fees of $607,707, brokerage commissions of $82,077, selling commissions and platform fees of $555,984, administrative and operating expenses of $155,975, custody fees and other expenses of $5,444, and profit share of $77,723 were paid or accrued. Interest income of $34,201 partially offset the Master Fund expenses allocated to the Partnership resulting in net income after profit share of $7,445,547.
An analysis of the Master Fund's trading gain (loss) by sector is as follows:
% Gain
Sector (Loss)
Currencies 1.22 %
Energies 0.01 %
Grains (0.37 )%
Interest rates 3.28 %
Livestock 0.20 %
Metals 0.12 %
Softs 0.22 %
Stock indices 2.72 %
Trading gain 7.40 %
MANAGEMENT DISCUSSION - 2015
Three months ended March 31, 2015
Solid first quarter performance was led by gains from trading of financial markets-interest rate and equity futures, and currency forwards. Commodity futures trading was nearly flat as losses from trading grain futures were countered by gains from trading soft, metal and livestock futures.
The European Central Bank's historic Quantitative easing announcement, several easing moves by the People's Bank of China and more than 20 other official interest rate reductions led to sharp gains on long positions in U.S. interest rate futures across the yield curve. Long positions in German, Italian, French, Canadian and Australian notes and bonds also registered profits. A long position in short-term sterling rates was profitable as events suggested that any tightening of U.K. monetary policy would be delayed.
The more accommodative monetary policy environment and some improvement in growth indicators for Europe led to gains on long positions in Continental European, Chinese, Hong Kong, Japanese and Australian equity futures. On the other hand, a short Korean kospi futures trade was unprofitable. Meanwhile, U.S. equity futures, after reaching record levels, stagnated in the wake of the stronger dollar, disappointing earnings reports, and a first quarter growth slowdown.
Currency markets were volatile during the quarter, although a solid U.S. economic outlook, generally higher relative interest rates, and some safe haven cachet underpinned the U.S. dollar. Still, a tentative Russia/ Ukraine ceasefire and temporary bouts of sanity around the Greek crisis periodically took some steam out of the dollar. Overall, long dollar positions versus the euro, Czech koruna, Swedish krona, Turkish lira, Brazilian real and Canadian dollar were profitable. On the other hand, a long dollar/short Swiss franc trade sustained a large loss when, on January 15, the Swiss National Bank unexpectedly ended the franc's peg to the euro and the franc soared 15%. Long dollar trades against the South African, Norwegian and New Zealand currencies produced small losses.
Grain prices recovered a bit after the USDA projected a reduction in planting acreage for the current crop year. Consequently, short wheat positions, and to a lesser extent trading of corn, soybeans, soybean meal and bean oil produced minor losses. Coffee and sugar prices continued to fall and short positions in both were profitable. Meanwhile, trading of cocoa, a short cotton position, and a long crude palm oil trade were unprofitable. A short hog trade was marginally positive.
Energy trading was flat as the gains from short WTI crude and U.S. natural gas positions offset the losses from short Brent crude, heating oil and London gas oil trades. Metal trading was marginally profitable with gains from short aluminum, silver and nickel positions and trading of gold outpacing the losses from short copper, zinc and platinum positions and trading of palladium.
OFF-BALANCE SHEET ARRANGEMENTS
Neither the Partnership nor the Master Fund engages in off-balance sheet arrangements with other entities.
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CONTRACTUAL OBLIGATIONS
Neither the Partnership nor the Master Fund enters into any contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company or that would affect its liquidity or capital resources. The Partnership's sole business, through its investment in the Master Fund, is trading futures, forward currency, spot and swap contracts, both long (contracts to buy) and short (contacts to sell). The Partnership, through its investment in the Master Fund, may also engage in trading swaps. All such contracts are settled by offset, not delivery. Substantially all such contracts are for settlement within four months of the trade date and substantially all such contracts are held by the Master Fund for less than four months before being offset or rolled over into new contracts with similar maturities. The financial statements of the Master Fund present a condensed schedule of investments setting forth open futures, forward and other contracts at March 31, 2016 and December 31, 2015.
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