ML WINTON FUTURESACCESS LLC - 10-K - : Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
The Fund's critical accounting policies are as follows:
† Preparation of financial statements in conformity with
U.S.
GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates and such differences could be material.
† The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
† The fair value amounts of, and the net profits and losses on, derivative instruments is disclosed in the Statements of Financial Condition and Statements of Operations, respectively.
† Realized profits (losses) and changes in unrealized profits (losses) on open positions are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Operations.
Results of Operations
General
The Trading Program employs what is traditionally known as a "systematic" approach to trading financial instruments. In this context the term "systematic" implies that the vast majority of the trading decisions are executed, without discretion, either electronically or by a team for the placement of orders, based upon the instructions generated by a computer-based system. The Trading Program currently invests globally in exchange-traded futures and forwards, and currency forwards traded OTC.
Performance Summary
This performance summary is an outline description of how the Fund performed in
the past, not necessarily any indication of how it will perform in the future.
In addition, the general causes to which certain price movements are attributed
may or may not have caused such movements, but simply occurred at or about the
same time.
Total Trading
Year ended December 31, 2015 Profit (Loss)
Interest Rates $ 17,080,347
Agricultural 3,186,283
Currencies (8,966,092 )
Energy 36,538,775
Metals 8,631,611
Stock Indices (26,141,465 )
Subtotal 30,329,459
Brokerage Commissions (1,114,645 )
Total $ 29,214,814
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The Fund experienced a net trading profit of $30,329,459 before brokerage commissions and related fees for the year ended December 31, 2015. The Fund's profits were primarily attributable to the energy, interest rates, metals and agriculture sectors. The currency and stock indices sectors posted losses.
The energy sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Crude oil continued to fall. This benefited the Fund's short futures positions in the energy sector and also assisted the cash equity systems, which continue to be net short energies. Losses were posted to the Fund in the middle of the first quarter as the Fund made small losses on its short energy positions. Profits were posted to the Fund at the end of the first quarter due to the Fund's short positions in energies. Losses were posted to the Fund at the beginning of the second quarter due to the Fund's short energy positions. Losses were posted to the Fund in the middle of the second quarter as the prices of oil stabilized. Profits were posted to the Fund at the end of the second quarter due to the Fund's short positions in energies. Profits were posted to the Fund at the beginning of the third quarter. Strong performance from the Fund's energy positions overturned the sector's year-to-date losses. Losses were posted to the Fund in the middle of the third quarter. Profits were posted to the Fund at the end of the third quarter. Energy markets continued to be big contributors to movements in the Fund, with short exposure to crude oil prices leading the energy sector to deliver profits. Profits were posted to the Fund at the beginning through the middle of the fourth quarter due to the Fund's short energy positions. Profits were posted to the Fund at the end of the fourth quarter in connection with declining oil prices.
The interest rate sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter as long positions in European bonds benefited from the quantitative easing announced by the European Central Bank.
U.S.
government bonds also closed January higher. Losses were posted to the Fund in the middle of the first quarter. Encouraging
U.S.
employment data and speculation of a rate hike later this year saw a sell-off in
U.S.
fixed income securities during the first half of February. Fed Chair
Janet Yellen's testimony to
Congress at the end of February reversed this somewhat, but not enough for the Fund's long fixed income positions to have avoided losses. Profits were posted to the Fund at the end of the first quarter. The Fund made gains in fixed income markets, with notable contributions from Bunds and Eurodollars. Losses were posted to the Fund at the beginning of the second quarter. Losses were posted to the Fund in the middle of the second quarter. Responsive monetary policy action from central banks, including the implementation of quantitative easing in
Europe
, apparently reduced concerns of further downside risks to inflation, contributing to some sharp moves lower for bond prices. Losses were posted to the Fund at the end of the second quarter. An increase in
U.S.
non-farm payrolls and positive economic data contributed to
U.S
government bond higher yields. Fixed income positions suffered, particularly short term interest rates. Profits were posted to the Fund at the beginning of the third quarter. In July, gains came from short term interest rates. Profits were posted to the Fund in the middle of the third quarter as the Fund's losses in stock indices and currencies were offset by gains in bonds. Profits were posted to the Fund at the end of the third quarter due to the Fund's retracement of stock markets which was accompanied by a rise in fixed income. This meant the Fund's long exposure to government bonds and short-term rates was the main driver of September's profits. Losses were posted to the Fund at the beginning of the fourth quarter. In
Europe
, comments from the
European Central Bank president, Mario Draghi, left markets expecting more accommodative policy. This led to European short-term interest rate futures moving firmly into negative-rate territory. Losses were posted to the Fund in the middle of the fourth quarter. The prospect of a rise in
U.S.
interest rates did not positively impact the Fund's fixed income positions, which were slightly negative. Losses were posted to the Fund at the end of the fourth quarter. The Fund's trading in government bond futures ended the year down as the longer dated
U.S.
maturities made the largest losses.
The metals sector posted profits to the Fund. Losses were posted to the Fund at the beginning through the middle of the first quarter. Losses were posted to the Fund at the end of the quarter. The Fund's short position in copper made losses after cooper rallied with news of the world's second largest copper mine halting production over labor protests. Losses were posted to the Fund at the beginning through the middle of the second quarter. Profits were posted to the Fund at the end of the second quarter due to the Fund's short positions in gold. Profits were posted to the Fund at the beginning of the third quarter due to the Fund's short positions in gold, which benefitted from the metal's slide. Losses were posted to the Fund in the middle of the third quarter due to the Fund's position in precious metals. Profits were posted to the Fund at the end of the third quarter. Losses were posted to the Fund at the beginning of the fourth quarter due to a rise in gold. Profits were posted to the Fund in the middle of the fourth quarter due to the Fund's short positions in base metals. Losses were posted to the Fund at the end of the fourth quarter.
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The agriculture sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter only to be reversed in the middle of the quarter. Profits were posted to the Fund at the end of the first quarter. Losses were posted to the Fund at the beginning of the second quarter. Profits were posted to the Fund in the middle of the second quarter. Coffee and sugar prices continued to decline, further profiting the Fund's short positions. Losses were posted to the Fund at the end of the second quarter as heavy rains in the
U.S.
Midwest hampered crop prospects, adversely affecting the Fund's short grain positions. Profits were posted to the Fund at the beginning through the middle of the third quarter. Losses were posted to the Fund at the end of the quarter. Both corn and wheat rallied in September, as the Fund's recently enlarged short positions made losses. Losses were posted to the Fund at the beginning of the fourth quarter. Profits were posted to the Fund in the middle of the fourth quarter due to the Fund's short positions in crops and livestock. Losses were posted to the Fund at the end of the fourth quarter.
The currency sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. The Swiss Central Bank announced the decision to remove the cap on the strength of the Swiss franc against the Euro. Intertwined with this was the European Central Bank affirming their commitment to quantitative easing, followed by the election of an anti-austerity government in
Greece
. The net effect on the Fund's currency positions was a loss in the CHF-USD position being offset by a gain in the EUR-USD position. Losses were posted to the Fund in the middle of the first quarter as the British pound rallied against the
U.S
dollar, returning to where it started the year and causing the Fund's short position to make a loss. Profits were posted to the Fund at the end of the first quarter. The short position on the Euro against the
U.S.
dollar made a significant positive contribution. Losses were posted to the Fund at the beginning of the second quarter due to the Fund's long
U.S.
dollar exposure. Profits were posted to the Fund in the middle of the second quarter due to the Fund's short Japanese yen position, which was trading at a weak level relative to the
U.S.
dollar. Losses were posted to the Fund at the end of the second quarter due the Fund's short Euro position. Profits were posted to the Fund at the beginning of the third quarter. Losses were posted to the Fund in the middle of the third quarter. Currencies were one of the worst performing sectors driven mainly by the Euro and Chinese renminbi. Losses were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning through the middle of the fourth quarter. Currency and emerging markets were two further inter-twined themes for 2015. The
U.S.
Dollar Index ended higher than a year ago, in part as a result of the much anticipated interest rate rise. The Fund made profits trading developed markets, with the falling Euro driving profits and contributing to performance for the year. In addition, the Fund avoided any meaningful effect from the unpegging of the Swiss franc from the Euro in January 2015. However, there were losses in the Fund's emerging market currency positions. The view that growth in emerging market economies was slowing led to some impressive currency moves during 2015. The two main detractors in this space were the Fund's long positions in the Brazilian real and the Chinese renminbi both of which were the result of exposure to carry trading in these markets.
The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Profits were posted to the Fund in the middle of the first quarter. The Fund made gains in its long stock index positions. Losses were posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter. Stock index positions gave up some of their earlier gains in the selloff, but still managed to post an overall profit at the end of April. Profits were posted to the Fund in the middle of the second quarter as the Nikkei had a strong month of May. Losses were posted to the Fund at the end of the second quarter. Losses were posted to the Fund at the beginning of the third quarter. Losses were posted to the Fund in the middle of the third quarter as the indices were one of the worst performing sectors driven mainly by the S&P500. Profits were posted to the Fund at the end of the third quarter. Losses were posted to the Fund at the beginning of the fourth quarter. Stock indices rallied at the beginning of October, causing the Fund to lose money as a result of the Trading Program's short positions. Losses were posted to the Fund in the middle through the end of the fourth quarter.
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Total Trading
Year ended December 31, 2014 Profit (Loss)
Interest Rates $ 112,341,985
Agricultural (10,831,497 )
Currencies 23,750,878
Energy 48,093,717
Metals (1,188,085 )
Stock Indices (2,148,455 )
Subtotal 170,018,543
Brokerage Commissions (1,182,808 )
Total $ 168,835,735
The Fund experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2014 of $170,018,543. The Fund's profits were primarily attributable to the interest rates, energy and currency sectors posting profits. The metal, stock indices and agriculture sectors posted losses.
The interest rate sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter as government bond markets rallied, providing positive performance contributions. Profits were posted to the Fund in the middle of the first quarter only to be reversed at the end of the quarter. Markets were further destabilized in March when the
U.S.
Federal Open Market Committee revised their projected targets, signaling more rapid monetary policy tightening. At the end of the first quarter, the Fund suffered losses in the
U.S.
fixed income positions. Profits were posted to the Fund at the beginning of the second quarter. In April the
European Central Bank opened the door to potential large-scale unsterilized asset purchases in an effort to battle below target inflation. While policymakers stressed that markets should not expect immediate action, European bond prices rallied and yield eager investors helped
Greece
and
Portugal
to successfully return to the sovereign debt market after prolonged absences. Long fixed income positions profited where bunds provided the most significant contribution to the Fund. Profits were posted to the Fund in the middle of the second quarter due to the Fund's long exposure to German Bunds. Profits were posted to the Fund at the end of the second quarter as the
Bank of England made a surprise announcement signaling that interest rates in the
United Kingdom
could be on the rise sooner than expected. Losses were posted to the Fund at the beginning of the third quarter. At the end of July, a strong GDP number was announced in the
U.S
and fixed income markets responded with a sharp fall. Profits were posted to the Fund in the middle of the third quarter. Combined with ongoing stresses in the relationship between
Russia
and
Ukraine
and continued concerns over European growth (or lack thereof), many fixed income markets reached yearly highs. Losses were posted to the Fund at the end of the third quarter as the prospect of higher
U.S.
interest rates weighed on bond prices, contributing to losses in this sector. Profits were posted to the Fund at the beginning of the fourth quarter due to the upwards spike in US bond futures in October. Profits were posted to the Fund in the middle of the fourth quarter. Bond yields remained subdued and further declines were experienced in
Europe
where market participants attempted to interpret communication from the
European Central Bank with respect to the possibility of more extensive deflation fighting programs being initiated. As a result, the Trading Program's long bond positions, particularly bunds, delivered positive performance. Profits were posted to the Fund at the end of the fourth quarter. Japanese Prime Minister
Shinzo Abe was re-elected but poor activity data confirmed the challenges he faces in pulling the world's third largest economy, which has slipped into recession, sustainably out of deflation; domestic bond prices continued to rally and the yen sold off in December in anticipation of further stimulus as part of the "Abenomics" policy.
The energy sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. Energy markets rose in January due to demand for heating fuels in
North America
, benefitting the Fund's long natural gas position in particular. Losses were posted to the Fund in the middle through the end of the first quarter due to market volatility. Profits were posted to the Fund at the beginning of the second quarter as natural gas prices and the value of long positions continued to rise in April. Losses were posted to the Fund in the middle of the second quarter. Profits were posted to the Fund at the end of the second quarter. In June conflicts in
Iraq
threatened refinery output which supported oil prices and benefitted the Fund's crude holdings. Losses were posted to the Fund at the beginning of the third quarter. Mild summer weather in the
U.S.
, which was forecasted to continue, had limited energy consumption and subsequently saw storage rise, which eroded the value of Fund's natural gas contracts. Crude oil prices and the Fund's
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long position also fell in July where low levels of demand appear to have outweighed the possibility of supply disruptions, which may be caused by escalating conflicts in the
Middle East
and additional international sanctions against
Russia
following the MH17 tragedy. Profits were posted to the Fund in the middle and the end of the third quarter. Profits were posted to the Fund at the beginning of the fourth quarter due to the
$10 a barrel fall in crude prices. Profits were posted to the Fund in the middle of the fourth quarter. The anticipated
OPEC meeting towards the end of November failed to deliver a meaningful output cut pushing prices lower and benefiting short positions across the energy complex. Profits were posted to the Fund at the end of the fourth quarter. Falling fuel prices profited the Fund's short position.
The currency sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter. In
Canada
, a worsening trade balance, weak growth and a dovish stance from the central bank contributed to the Canadian dollar trading lower, providing some offset to losses in the currency sector. Profits were posted to the Fund in the middle of the first quarter only to be reversed at the end of the quarter. At the end of the first quarter, the Fund suffered losses across short
U.S.
dollar positions. The currency sector posted profits to the Fund at the beginning of the second quarter. Losses were posted to the Fund in the middle of the second quarter due to the Fund's long Euro positions. Profits were posted to the Fund at the end of the second quarter as sterling reached its highest exchange value against the dollar for over five years profiting the Fund's long S&P, bund and pound positions in particular. Losses were posted to the Fund at the beginning of the third quarter. Concerns about the financial strength of a major Portuguese lender provided a reminder that the
Eurozone debt crisis is still being resolved. The
IMF provided reassurance that risks are isolated in an effort to avoid contagion and also prevent a wider reassessment of the recovering, but still potentially fragile banking system. With the
European Central Bank struggling to stem a deflationary tide while
U.S.
economic activity improved, events emphasized a widening transatlantic divergence through July. Profits were posted to the Fund in the middle of the third quarter due to the gains achieved being positioned short euros. Profits were posted to the Fund at the end of the third quarter due to strong performance for the Trading Program being positioned long euros. Profits were posted to the Fund at the beginning of the fourth quarter. Movements in the Euro against the dollar meant that the currency sector also earned profits in October. Profits were posted to the Fund in the middle of the fourth quarter due to the significant yen depreciation. Profits were posted to the Fund at the end of the fourth quarter. International sanctions against
Russia
caused for a weak ruble in December. An emergency rate hike took
Russia's
key interest rate higher; however this move only briefly halted the currency depreciation against the
U.S.
dollar this quarter.
The metals sector posted losses to the Fund. Losses were posted to the Fund at the beginning through the middle of the first quarter only to be reversed at the end of the quarter. Profits were posted to the Fund at the end of the first quarter due to the Fund's short positions in silver. Profits were posted to the Fund at the beginning through the middle of the second quarter only to be reversed at the end of the quarter. Losses were posted to the Fund at the end of the second quarter due to regional instability in
Iraq
which contributed to rising precious metal values and subsequent losses for Fund's short positions in this sector. Profits were posted to the Fund at the beginning of the third quarter. Base metal systems contributed positive performance; particularly aluminum and zinc where a series of production cuts by global smelters and mine closures resulted in deteriorating inventories and supply deficits. Profits were posted to the Fund in the middle and the end of the third quarter. Profits were posted to the Fund at the beginning of the fourth quarter due to the declining gold market. Profits were posted to the Fund in the middle of the fourth quarter. Losses were posted to the Fund at the end of the fourth quarter.
The stock indices sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Escalating political tension, notably in
Ukraine
,
Turkey
and
Thailand
, further increased pressure on emerging markets which experienced a broad flight to quality through January. Losses were suffered in the Fund's global equity indices which declined towards the end of January. Profits were posted to the Fund in the middle of the first quarter as global equity markets rallied through February, reversing losses experienced in January. Losses were posted to the Fund at the end of the first quarter. The resultant threat of international sanctions against
Russia
and the simmering geopolitical tension led to a volatile March for global markets. Profits were posted to the Fund at the beginning of the second quarter. Profits were posted to the Fund in the middle of the second quarter. Profits were posted to the Fund at the end of the second quarter. In June the
Eurozone tried to stem deflation by cutting key interest rates including the bold move of negative deposit rates. These actions provided a catalyst for a number of
U.S.
equity indices to climb higher. Losses were posted to the Fund at the beginning of the third quarter. Throughout July, equity markets tried to climb higher, but fell sharply at the end of the month following a very strong GDP number in the
U.S.
Profits were posted to the Fund in the middle of the third quarter.
U.S.
equities climbed as investors focused on strong corporate earnings and a healthier domestic micro environment in favor of macro headwinds. Losses were posted to the Fund at the end of the
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third quarter. The prospect of higher
U.S.
interest rates weighed on equity prices, contributing to losses in this sector. Losses were posted to the Fund at the beginning of the fourth quarter due to the global stock markets downward move. Profits were posted to the Fund in the middle of the fourth quarter. The announcement of a broad large monetary stimulus package from the Bank of Japan set the tone for a strong performance in November for global equities. Indices continued to be supported by falling oil prices where slower economic growth in
China
and
Europe
, coupled with the
U.S.
shale gas boom extended forecasts of oversupply. Losses were posted to the Fund at the end of the fourth quarter due to the poor performance for European equity indices.
The agriculture sector posted losses to the Fund. Profits were posted to the Fund at the beginning of the first quarter. In February, drought in
Brazil
damaged coffee crops and Arabica prices increased. The Fund's short positions in coffee suffered losses. Excess rain in the soybean producing regions of
Brazil
reduced the quality of maturing crops and profited the Fund's long position as prices rose which was not enough to offset losses posted to the Fund in the middle of the first quarter. Profits were posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter. In April the agriculture sector had positive performance, in particular the Fund's soybean holding which benefitted from reports showing increasing international demand for
U.S.
crop and little sign of a seasonal decline in shipments from
Brazil
as the end of its harvest approached. The Fund suffered losses in the middle of the second quarter. In May improving weather conditions in the
U.S.
and
Russia
led to double digit declines in the price of wheat and corn, which adversely affected the Fund's performance. Corn price declines were further impacted by Chinese import curbs against
U.S.
genetically modified supplies containing presence of MIR 162, an insect-resistant genetic trait. Losses were posted to the Fund at the end of the second quarter. In June corn prices continued to fall with high inventory levels and anticipation of large harvests in the
U.S.
adding to bearish sentiment and reducing the value of the Fund's contracts. Losses were posted to the Fund at the beginning of the third quarter. Losses were posted to the Fund in the middle of the third quarter as
Vladimir Putin banned imports of agricultural produce from those countries which imposed sanctions on
Russia
for its actions in the
Ukraine
crisis. Losses were posted to the Fund at the end of the third quarter as soybean prices and the value of contracts continued to fall in September, trading lower as
U.S.
farmers began to harvest a strong crop and
China
suspended import approval for two genetically modified traits. Profits were posted to the Fund at the beginning of the fourth quarter as a grain markets rallied in October. Losses were posted to the Fund in the middle of the fourth quarter. Profits were posted to the Fund at the end of the fourth quarter.
Total Trading
Year ended December 31, 2013 Profit (Loss)
Interest Rates $ (54,443,134 )
Agricultural 18,252,148
Currencies 22,068,047
Energy (19,454,292 )
Metals 21,130,440
Stock Indices 116,458,686
Subtotal 104,011,895
Brokerage Commissions (1,310,913 )
Total $ 102,700,982
The Fund experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2013 of $104,011,895. The Fund's profits were primarily attributable to the stock indices, currency, agriculture, and metal sectors posting profits. The energy and interest rate sectors posted losses.
The stock indices posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter due to the markets in
Europe
and
Japan
rising along with the
U.S.
markets. Losses were posted to the Fund in the middle of the first quarter. February was a turbulent month for asset prices with plenty of impacting events. These included a
UK
downgrade, the Bank of Japan searching for a new governor and the
U.S.
Federal Open Market Committee (FOMC) discussing how they will unwind their quantitative easing. These events interrupted the January stock market rally which left the value of the Fund's equity positions down in February. Profits were posed to the Fund at
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the end of the first quarter. Despite the "sequestration"
U.S.
budget cuts coming into effect at the beginning of March,
U.S.
equity markets resumed their rally. Promising employment data complemented the positive market mood, pushing the
Dow Jones higher and producing strong returns for the Fund's equity index. Profits were posted to the Fund at the beginning through the middle of the second quarter resulting from the Trading Program's long and short positions. Losses were posted to the Fund at the end of the second quarter due to the Trading Program's long positions in the equity markets. Profits were posted to the Fund at the beginning of the third quarter.
U.S.
and European equity indices recovered some of their June losses in July, which was to the benefit of the Fund's portfolio which remained net long in this sector. Losses were posted to the Fund in the middle of the third quarter. Attention shifted through the course of August from the prospect of
U.S.
domestic monetary policy tightening to rapidly escalating geopolitical tensions. Both themes weighed on sentiment and developments in
Syria
apparently accelerated a sell-off in "risky" assets. As part of this sell-off equity prices fell, causing losses in the Trading Program's stock index positions. Profits were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning of the fourth quarter as world stock markets closed October higher. Profits were posted to the Fund in the middle through the end of the fourth quarter due to the Trading Program's American and Japanese stock positions.
The currency sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter. In
Asia
, the new Japanese government initiating a yen stimulus package helped the Trading Program's short position in the Japanese yen. Long euro positions produced profits for the Fund. Losses were posted to the Fund in the middle of the first quarter. The strong upward moves in the
U.S.
dollar left the value of the Trading Program's currency positions down in February. Profits were posted to the Fund at the end of the first quarter.
Governor Kuroda used his first press conference as leader of the Bank of Japan to reiterate his desire to end deflation. This contributed to the Trading Program's profits in the Japanese yen. Profits were posted to the Fund at the beginning of the second quarter resulting from the Trading Program's short positions in the Japanese yen. Losses were posted to the Fund in the middle of the second quarter as currencies weakened as the differential between core and peripheral yields narrowed, negatively impacting the Trading Program's long holding of Turkish lira and Chilean peso. Losses were posted to the Fund at the end of the second quarter resulting from the Trading Program's holdings of Turkish lira and Russian rouble. Losses were posted to the Fund at the beginning of the third quarter as the euro rallied to erase its recent losses, but these gains were offset by losses in the Trading Program's short Japanese yen position. Losses were posted to the Fund in the middle of the third quarter due to a rise in energy prices which contributed to a weakening in currencies of oil importing nations, most notably
India
. Profits were posted to the Fund at the end of the third quarter with the
U.S.
dollar losing some interest rate support. Long positions in euros, sterling and emerging market currencies including the rouble and rand rallied. Profits were posted to the Fund at the beginning of the fourth quarter from the Trading Programs long positions in the euro. Profits were posted to the Fund in the middle through the end of the fourth quarter as the Trading Program's short positions in Japanese yen contributed to performance.
The agriculture sector posted profits to the Fund. Losses were posted to the Fund at the beginning of the first quarter which was reversed in the middle of the quarter. Profits were posted to the Fund in the middle of the first quarter. Rain in the
U.S.
, most notably over the plains, reduced concerns of drought conditions worsening. This weather contributed to crop prices falling, benefitting the Trading Program's short wheat and corn positions. Profits were posted to the Fund at the end of the first quarter. Losses were posted to the Fund at the beginning of the second quarter. Profits were posted to the Fund in the middle through the end of the second quarter. Losses were posted to the Fund at the beginning of the third quarter. Profits were posted to the Fund in the middle of the third quarter. Crops provided the strongest performance as dry conditions in the Midwest threatened new crop yields and strong demand from
China
helped soybean futures post gains. Losses were posted to the Fund at the end of the third quarter. Profits were posted to the Fund at the beginning through the middle of the fourth quarter. The soy complex traded strongly in November reacting positively to export data and profiting the Fund's soybean and soymeal holdings. Crop markets, coffee, the soybean complex, wheat and sugar all made positive contributions ending the year with profits being posted to the Fund
The metals sector posted profits to the Fund. Profits were posted to the Fund at the beginning of the first quarter only to be reversed in the middle of quarter. Position liquidation and interrupted demand contributed to market falls with the result that the Trading Program's silver holding positions incurred losses. Profits were posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter. Metal prices sold off and struggled to recover in April increasing the value of the Trading Program's short holdings in gold, copper and to a lesser extent, silver. Profits were posted to the Fund in the middle of the second quarter resulting from precious metals losses, benefitting the Trading Program's short gold position. Profits were posted to the Fund at the end of the
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second quarter from the Trading Program's short positions in the precious and base metal sectors. Losses were posted to the Fund at the beginning of the third quarter as metal markets experienced a relief rally in July contributing losses to the Trading Program's short gold and copper positions. Losses were posted to the Fund in the middle of the third quarter as precious metal prices rallied leading to further losses in short gold and silver positions. Profits were posted to the Fund at the end of the third quarter due to the Trading Program's short gold and silver positions. Losses were posted to the Fund at the beginning of the fourth quarter only to be reversed in the middle of the fourth quarter. Profits were posted to the Fund in the middle of the fourth quarter due to the Trading Program's short positions in gold and silver. Profits were posted to the Fund at the end of the fourth quarter as gold continued to fall.
The energy sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. Energy prices increased during January with a negative impact on the Trading Program's short oil and natural gas positions. Losses were posted to the Fund in the middle of the first quarter. Profits were posted to the Fund at the end of the first quarter. Extended cold weather eroded natural gas storage levels, pushing prices higher resulting in the energy sector posting profits. Profits were posted to the Fund at the beginning of the second quarter only to be reversed in the middle through the end of the second quarter. Losses were posted to the Fund at the beginning of the third quarter. The energy complex witnessed a broad rally in the first half of July driven by encouraging economic data in the
U.S.
and reducing the value of short positions held in heating and crude oil. Losses were posted to the Fund in the middle of the third quarter as energy prices rose towards the end of August in connection with the possibility of supply disruption. Losses were posted to the Fund at the end of the third quarter as the Trading Program reduced the value of crude holdings. Losses were posted to the Fund at the beginning of the fourth quarter. Profits were posted to the Fund in the middle of the fourth quarter. Losses were posted to the Fund at the end of the fourth quarter.
The interest rate sector posted losses to the Fund. Losses were posted to the Fund at the beginning of the first quarter. There were indications of early repayments of European Central Bank loans. A consequence of positive sentiment was increased focus on if, and when, monetary policy will slow and liquidity removal will start. This attention pushed interest rates higher and reduced the value of Trading Program's fixed income positions, particularly in
Europe
. Profits were posted to the Fund in the middle of the first quarter with higher moves in bond and fixed income prices. Profits were posted to the Fund at the end of the first quarter. Profits were posted to the Fund at the beginning of the second quarter. Financial markets extended their rally through April, with the global search for yield overshadowing potential stumbling blocks surrounding European politics. The combination of central bank balance sheet expansion and a generally bullish earnings season helped deliver positive performance from the fixed income portfolio. Losses were posted to the Fund in the middle of the second quarter. Yields pushed higher as fixed income positions unwound, reducing the value of the Trading Program's long holdings in
Europe
and the
U.S.
Losses were posted to the Fund at the end of the second quarter. June proved to be a volatile four weeks for the Fund as it recovered from being down mid-month. The markets continued to feel panicked with the rise in
U.S.
yields that started in May continuing at an accelerated pace despite attempts from
Federal Reserve officials to reassure market participants. This momentum was not helped by generally positive
U.S.
economic data and the resulting sell off in asset prices suggests that many market participants were rapidly unwinding their positions. The Trading Program's long positions in the fixed income markets fell in value. Profits were posted to the Fund at the beginning of the third quarter as monetary policy was a dominant influence on global financial markets throughout July. Some central banks, including those in the
UK
,
Europe
and
Australia
appeared to distance themselves from the discussions of "tapering" in the
U.S.
by providing guidance towards policy remaining accommodative. Losses were posted to the Fund in the middle of the third quarter. August performance was disappointing, as the Trading Program was not well positioned to weather the sell-off. Profits were posted to the Fund at the end of the third quarter as sentiment was boosted in September when the
U.S.
Federal Reserve did not start "tapering". Profits were posted to the Fund at the beginning of the fourth quarter. Events in
Washington
dominated the attention of the financial markets during October. The
U.S.
political impasse saw an actual shutdown of a number of federal government activities, borrowing levels moving towards the debt ceiling and speculation mounting of a "technical" default on paying bond holders. By mid-October
President Obama signed in a temporary extension to the debt ceiling.
U.S.
government bonds were seemingly unaffected by events, closing the month of October up resulting in profits posted to the Fund. Profits were posted to the Fund in the middle of the fourth quarter as short term interest rates in the
U.S.
continued the gentle ascent that began back in September, resulting in a further positive contribution to the Fund. Losses were posted to the Fund at the end of the fourth quarter.
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Variables Affecting Performance
The principal variables that determine the net performance of the Fund are gross profitability from the Fund's trading activities and interest income.
The Fund currently earns interest based on the prevailing Fed Funds rate plus a spread for short cash positions and minus a spread for long cash positions. The current short term interest rates have remained extremely low when compared with historical rates and thus has contributed negligible amounts to overall Fund performance.
During 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 Fund's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Fund's management fees and Sponsor fees are a constant percentage of Fund's assets. Brokerage commissions, which are not based on a percentage of the Fund's assets, are based on actual round turns. The performance fees payable to the Trading Advisor are based on increase in the aggregate Net Asset Value of Classes of Units subject to the same rate of performance fees in excess of the High Water Mark, excluding interest and prior to reduction for Sponsor fees.
Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time.
Except in unusual circumstances, factors-regulatory approvals, cost of goods sold, employee relations and the like-which often materially affect an operating business, have no material impact on the Fund.
Liquidity; Capital Resources
The Fund borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-
U.S.
dollar denominated trading positions pending the conversion of the Fund's
U.S.
dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Fund's assets are held in cash with the brokers. Changes in interest rates could cause periods of strong up or down price trends, during which the Fund's profit or loss potential might increase. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow. The Fund should be able to close out its open trading positions and liquidate its holdings relatively quickly and at market prices, except in unusual circumstances. This typically permits the Fund to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so.
As a commodity pool, the Fund maintains an extremely large percentage of its assets in cash, which it must have available to post initial and variation margin on futures contracts. This cash is also used to fund redemptions. While the Fund has the ability to fund redemption proceeds from liquidating positions, as a practical matter positions are not liquidated to fund redemptions. In the event that positions were liquidated to fund redemptions, MLAI, as the Manager of the Fund, has the ability to override decisions of the Trading Advisor to fund redemptions if necessary, but in practice the Trading Advisor would determine in its discretion which investments should be liquidated.
The Fund has no applicable off-balance sheet arrangements or tabular disclosure of contractual obligations of the type described in Items 303(a)(4) and 303(a)(5) of Regulation S-K.
Recent Accounting Developments
Recent accounting developments, if any, are discussed in the notes to the financial statements, which are included in Exhibit 13.01.
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