Item 1: Business
(a) General Development of Business:
ML Select Futures I L.P. (the “Partnership”) was organized under the Delaware Revised Uniform Limited Partnership Act on August 4, 1995 under the name ML Chesapeake L.P. The Partnership began trading on April 16, 1996 and trades in the international futures and forward markets applying proprietary trading strategies under the direction of Sunrise Capital Partners, LLC (“Sunrise”). The Partnership’s objective is to achieve, through speculative trading, substantial capital appreciation over time.
Merrill Lynch Alternative Investments LLC (“MLAI”), the sponsor (“Sponsor”) and general partner of the Partnership, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (“Merrill Lynch”). Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is the Partnership’s commodity broker. As used herein, the capitalized term “MLAI” also refers to the general partner at times when its name was MLIM Alternative Strategies LLC, as applicable. On September 15, 2008, Merrill Lynch (or the “Company”) entered into an Agreement and Plan of Merger (as amended by Amendment No. 1 dated as of October 21, 2008, the “Merger Agreement”) with Bank of America Corporation (“Bank of America”). Pursuant to the Merger Agreement, on January 1, 2009, a wholly-owned subsidiary of Bank of America (“Merger Sub”) merged with and into Merrill Lynch, with Merrill Lynch continuing as the surviving corporation and a subsidiary of Bank of America (the “Merger”).
The proceeds of the Partnership’s units of limited partnership interest (the “Units”) were initially allocated to the Partnership’s initial trading adviser, Chesapeake Capital Corporation (“Chesapeake”). On July 1, 1998, Sunrise replaced Chesapeake as the Partnership’s sole trading advisor (“Trading Advisor”).
The Partnership calculates the Net Asset Value per Unit as of the close of business on the last business day of each calendar month and such other dates as MLAI may determine in its discretion. The Partnership’s Net Asset Value will generally equal the value of the Partnership’s account under the management of its Trading Advisor as of such date, plus any other assets held by the Partnership, minus accrued brokerage commissions, administrative fees, profit shares, and other liabilities of the Partnership. MLAI is authorized to make all net asset value determinations.
As of December 31, 2009, the capitalization of the Partnership was $192,965,299 and the Net Asset Value per Unit, originally $100 as of April 1, 1996, had risen to $320.48
The highest month-end Net Asset Value per Unit since Sunrise began trading the Partnership was $326.49 (November 30, 2009) and the lowest was $127.01 (July 31, 1998).
(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 trades in U.S. and the international futures and forward markets with the objective of achieving substantial capital appreciation.
The Partnership has entered into an advisory agreement with Sunrise whereby Sunrise trades the Partnership’s assets through a managed account using its Expanded Diversified Program (the “Program”). In the Expanded Diversified Program, Sunrise applies its trend-following systems to a broadly-diversified portfolio of futures and forward markets on underlying interests, including, but not limited to, precious and industrial metals,
grains, petroleum products, soft commodities, domestic and foreign interest rate futures, domestic and foreign stock indices, currencies and their cross rates, and minor currencies. One of the aims of the Partnership is to provide diversification to a limited portion of the risk segment of the Limited Partners’ portfolios into an investment field that has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings.
Employees
The Partnership has no employees.
Sunrise and its Expanded Diversified Program
Sunrise currently offers five trading programs, one of which, the Expanded Diversified Trading Program, is used in managing the Partnership’s assets. In the Expanded Diversified Trading Program, Sunrise applies its trend-following systems to a broadly-diversified portfolio of futures and forward markets, including, but not limited to, precious and industrial metals, grains, petroleum products, soft commodities, domestic and foreign interest rate futures, domestic and foreign stock indices (including S&P 500, DAX and Nikkei 225), currencies and their cross rates, and minor currency markets (collectively, “Commodity Interests”). Sunrise may trade these Commodity Interests on any U.S. or non-U.S. exchange or over the counter. Sunrise may also trade options for the Partnership in the future; in the event that it does, these options will be considered Commodity Interests. As of December 31, 2009, Sunrise was managing approximately $1.125 billion (excluding “notional” funds) in the futures and forward markets.
Sunrise’s Programs Are Technical and Trend-Following Systems
The mathematical models used by Sunrise’s programs are technical systems, generating trading signals on the basis of statistical research into past market prices. Sunrise does not attempt to predict or forecast changes in price through fundamental economic analysis. The trading methodologies employed by Sunrise are based on programs analyzing a large number of interrelated mathematical and statistical formulas and techniques, which are quantitative and proprietary in nature.
As a trend-following advisor, Sunrise’s objective is to participate in major price trends-sustained price movements either up or down. Such price trends may be relatively infrequent. Some trend-following advisors have anticipated that over half of their positions will be unprofitable. Their strategy is based on making sufficiently large profits from the trends which they identify and follow to generate overall profits despite the more numerous but, hopefully, smaller losses incurred on the majority of their positions.
Long-Term, Trend-Following Methodology
Sunrise’s long-term, trend-following program attempts to detect a trend, or lack of a trend, with respect to a particular Commodity Interest by analyzing price movement and volatility over time. This program consists of multiple, independent and parallel systems, each designed and tested to seek out and extract different market inefficiencies on different time horizons. These systems will generate a signal to sell a “short” contract or purchase a “long” contract based upon their identification of a price trend in the particular Commodity Interest. If the systems do not detect a price trend, a “neutral” trading signal will be generated. While this neutral signal is designed to filter out high-risk “whipsaw” markets, it is successful on only a limited basis. Successful speculative commodity trading employing trend-following techniques, such as Sunrise’s system, depends to a large degree upon not trading in non-directional markets. Accordingly, to the extent that this “neutral” trading signal is not generated during a non-trending market, trading would likely be unprofitable.
Long-term, trend-following trading systems, such as those employed by Sunrise, will seldom effect market entry or exit at the most favorable price in the particular market trend. Rather, this type of trading system seeks to close out losing positions quickly and to hold portions of profitable positions for as long as the trading system determines that the particular market trend continues to offer reasonable profit potential. The number of losing transactions may exceed substantially the number of profitable transactions. However, if Sunrise’s approach is successful, these losses should be more than offset by gains. In using this trading methodology, it is anticipated
that Sunrise will commit to margin between 5% and 30% of assets managed. Margin requirements may from time to time exceed this range.
While Sunrise relies on mechanical technical trading systems in making investment decisions using the methodology described, the overall strategy does include the latitude to depart from this approach if market conditions are such that, in the opinion of Sunrise, execution of trades recommended by the mechanical systems would be difficult or unusually risky to an account.
There may occur the rare instance in which Sunrise will override the trading system to decrease market exposure. Any modification of trading instructions could adversely affect the profitability of an account. Among the possible consequences of such a modification would be (1) the entrance of a trade at a price significantly worse than a system’s signal price, (2) the complete negation of a signal which subsequently would have produced a profitable trade or (3) the premature termination of an existing trade. Sunrise is under no obligation to notify MLAI of this type of deviation from its mechanical systems, since it is an integral part of its overall trading method.
A technical trading system consists of a series of fixed rules applied systematically. However, the system still requires that Sunrise make certain subjective judgments. For example, Sunrise must select the markets it will follow and Commodity Interests it will actively trade, along with the contract months in which it will maintain positions. Sunrise must also subjectively determine when to liquidate positions in a contract month which is about to expire and initiate a position in a more distant contract month.
All trades which Sunrise initiates with the Partnership’s FCMs will be done without any prior consultation with an Investor and the trades will be in such amounts and at such prices as Sunrise, in its sole discretion, may determine.
Sunrise engages in ongoing research which may lead to significant modifications from time to time. Sunrise will notify MLAI if modifications to its trading systems or portfolio structure are material. Changes to commodity markets and/or Commodity Interests traded are not considered material and Investors will not generally receive notice of such changes. However, Sunrise will provide MLAI with a complete list of those Commodity Interests which it may, or intends to, trade for the Partnership.
While the principals of Sunrise have extensive experience in the development of systems and methods for trading in the futures, forward and, to a lesser extent, options markets, no “safe” trading system has ever been devised and that no one can guarantee profit or freedom from loss in Commodity Interest trading.
Sunrise employs the long-term, trend-following methodology described above in implementing the Expanded Diversified Program. The Sunrise Expanded Diversified Program may follow numerous different markets. These markets may include, but are not limited to, precious and industrial metals, grains, energy products, soft commodities, domestic and foreign interest rate futures, domestic and foreign stock indices, minor currencies, major currencies and their cross rates.
The Markets Traded by Sunrise for the Partnership
The Partnership trades on a variety of United States and non-United States futures exchanges. Applicable exchange rules differ significantly among different countries and exchanges. The Partnership’s entire off-exchange trading takes place substantially in the highly liquid, institutionally based currency forward markets. The forward markets are generally unregulated, and in its forward trading the Partnership deposits margin with respect to its positions. Spot and forward currency contracts currently are the only non-exchange traded instruments held by the Partnership. Forward currency contracts currently are the only non-exchange traded instruments held by the Partnership.
To date, approximately 30% to 40% of the Partnership’s trades by volume have been in forward currency contracts, but from time to time the percentage of the Partnership’s trading represented by forward currency trades may fall substantially outside this range. Because the Partnership deposits margin in connection with its forward trading, the Partnership is subject to the risk of the insolvency of its counterparties, such as broker-dealers, futures commission merchants (“FCMs”), banks or other financial institutions, exchanges or clearinghouses.
As in the case of its market sector allocations, the Partnership’s commitments to different types of markets - U.S. and non-U.S., regulated and unregulated - differ substantially from time to time as well as over time. The Partnership has no policy restricting its relative commitment to any of these different types of markets, although generally the bulk of the Partnership’s trading takes place on regulated exchanges.
The Partnership’s financial statements contain information relating to the types of market sectors in which the Partnership trades. There can, however, be no assurance as to which market sectors the Partnership may trade or in which market sectors the Partnership’s trading may be concentrated at any one time or over time.
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 Sunrise to trade on a speculative basis in a wide range of different futures and forwards markets on behalf of the Partnership. While being used for this purpose, the Partnership’s assets are also generally available for cash management, as more fully described below under “Available Assets”.
Market Sectors
In the Expanded Diversified Program, Sunrise applies its trend-following systems to a broadly diversified portfolio of futures and forward markets. Commodity interests currently included in the Expanded Diversified Program are: currencies (majors, minors, and crossrates), metals (gold, silver, copper, aluminum, nickel, and zinc), indices (S&P 500, DAX, and Nikkei 225), interest rates (T-bonds, T-Notes, Eurodollars, Euro-Bund, three-month Euro Futures, Euro BOBL, Japanese Government Bond, Euroyen, 90-day Australian Bank Accepted Bill (“Aussie Bill”) and three-month Canadian Bankers’ Acceptance Note), energy (crude oil and natural gas) and agriculturals (soybeans, soymeal, corn, wheat, coffee and sugar and cotton).
Market Types
The Partnership trades on a variety of United States and foreign futures exchanges. Substantially all of the Partnership’s off-exchange trading takes place in the highly liquid, institutionally based currency forward markets.
Many of the Partnership’s currency trades are executed in the spot and forward foreign exchange markets (the “FX Markets”) where there are no direct execution costs. Instead, the participants, banks and dealers in the FX Markets take a “spread” between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Partnership.
As in the case of its market sector allocations, the Partnership’s commitments to different types of markets - U.S. and non-U.S. regulated and non-regulated differ substantially from time to time, as well as over time. The Partnership has no policy restricting its relative commitment to any of these different types of markets.
Custody of Assets
Substantially all of the Partnership’s trading assets are currently held in Commodity Futures Trading Commission (“CFTC”) regulated customer accounts at MLPF&S.
Available Assets
The Partnership earns income, as described below, on its “Available Assets”, which can be generally described as the cash actually held by the Partnership. Available Assets are held primarily in U.S. dollars and are comprised of the Partnership’s cash balances held in the offset accounts (as described below) - which include “open trade equity” (unrealized gain and loss on open positions) on United States futures contracts, which is paid into or out of the Partnership’s account on a daily basis; the Partnership’s cash balance in foreign currencies derived from its trading in non-U.S. dollar denominated futures and options contracts, which includes open trade equity on those exchanges which settle gains and losses on open positions in such contracts prior to closing out such positions. Available Assets do not
include and the Partnership does not earn interest income on the Partnership’s unrealized gains or losses on its open forward, commodity option and certain foreign futures positions since such gains and losses are not collected or paid until such positions are closed out.
The Partnership’s Available Assets may be greater than, less than or equal to the Partnership’s Net Asset Value (on which the redemption value of the Units is based) primarily because Net Asset Value reflects all gains and losses on open positions as well as accrued but unpaid expenses.
Interest Earned on the Partnership’s U.S. Dollar Available Assets
The Partnership’s U.S. dollar Available Assets are held in cash in offset accounts.
Offset accounts are non-interest bearing demand deposit accounts maintained with banks unaffiliated with Merrill Lynch. An integral feature of the offset arrangements is that the participating banks specifically acknowledge that the offset accounts are MLPF&S customer accounts, not subject to any Merrill Lynch liability.
MLPF&S credits the Partnership, as of the end of each month, with interest at the effective daily 91-day Treasury bill rate on the average daily U.S. dollar Available Assets held in the offset accounts during such month.
The use of the offset account arrangements for the Partnership’s U.S. dollar Available Assets may be discontinued by Merrill Lynch at any time. If Merrill Lynch were to terminate the offset arrangements, it would attempt to invest all of the Partnership’s U.S. dollar Available Assets to the maximum practicable extent in short-term Treasury bills. All interest earned on the U.S. dollar Available Assets so invested would be paid to the Partnership but MLAI would expect the amount of such interest to be less than that available to the Partnership under the offset account arrangements. The remaining U.S. dollar Available Assets of the Partnership would be kept in cash to meet variation margin payments and pay expenses, but would not earn interest for the Partnership.
The banks at which the offset accounts are maintained make available to Merrill Lynch interest-free overnight credits, loans or overdrafts in the amount of the Partnership’s U.S. dollar Available Assets held in the offset accounts, charging Merrill Lynch a small fee for this service. The economic benefits derived by Merrill Lynch - net of the interest credits paid to the Partnership and the fee paid to the offset banks - from the offset accounts have not exceeded 0.75% per annum of the Partnership’s average daily U.S. dollar Available Assets held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Administrative Fees paid by the Partnership to MLPF&S and MLAI, respectively.
Interest Paid by Merrill Lynch on the Partnership’s Non-U.S. Dollar Available Assets
Under the single currency margining system implemented for the Partnership, the Partnership does not deposit foreign currencies to margin trading in non-U.S. dollar denominated futures contracts and options, if any. MLPF&S provides the necessary margin, permitting the Partnership to retain the monies which would otherwise be required for such margin as part of the Partnership’s U.S. dollar Available Assets. The Partnership does not earn interest on foreign margin deposits provided by MLPF&S. The Partnership does, however, earn interest on its non-U.S. dollar Available Assets. Specifically, the Partnership is credited by Merrill Lynch with interest at prevailing short-term local rates on assets and net gains on non-U.S. dollar denominated positions for such gains actually held in cash by the Partnership. Merrill Lynch charges the Partnership Merrill Lynch’s cost of financing realized and unrealized losses on such positions.
The Partnership holds foreign currency gains and finances foreign currency losses on an interim basis until converted into U.S. dollars and either paid into or out of the Partnership’s U.S. dollar Available Assets. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Partnership while held in foreign currencies are subject to exchange rate risk.
Charges
The following table summarizes the charges incurred by the Partnership during 2009, 2008, and 2007.
The foregoing table does not reflect the bid-ask spreads paid by the Partnership on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposits of certain of the Partnership’s U.S. dollar assets maintained at MLPF&S.
Each Unit is subject to the same charges. The Partnership’s average month-end Net Assets during 2009, 2008 and 2007 equaled $196,776,157, $224,567,351 and $288,689,351 respectively.
During 2009, 2008 and 2007 the Partnership earned $326,337, $3,585,936 and $13,248,150 in interest income, or approximately 0.17%, 1.60% and 4.59% of the Partnership’s average month-end Net Assets.
Description of Current Charges
Regulation
The CFTC has delegated to the National Futures Association 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 requires commodity pool operators such as MLAI, commodity trading advisors such as the Trading Advisor and commodity brokers or futures commission merchants (“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 currently subject to regulation by any U.S. government agency.
Other than in respect of the registration requirements pertaining to the Partnership’s securities under Section 12(g) of the Securities Exchange Act of 1934, the Partnership is generally not subject to regulation by the Securities and Exchange Commission (the “SEC”). However, MLAI itself is registered as an “investment adviser” under the Investment Advisers Act of 1940. MLPF&S is also regulated by the SEC and the Financial Industry Regulatory Authority (the “FINRA”).
(d) Financial Information about Geographic Areas
The Partnership does not engage in material operations in foreign countries, nor is a material portion of the Partnership’s revenue derived from customers in foreign countries. The Partnership trades on a number of foreign commodity exchanges. The Partnership does not engage in the sales of goods or services.
Item 1A:
Item 1A: Risk Factors
The Large Size of the Partnership’s Trading Positions Increases the Risk of Sudden, Major Losses
The Partnership takes positions with values up to approximately 15 times its total equity. Consequently, even small price movements can cause major losses.
Not Necessarily Indicative of Future Results
Sunrise’s past performance may not be representative of how it may trade in the future for the Partnership.
Volatile Markets; Highly Leveraged Trading
Futures and forward trading is highly leveraged, and market price levels are volatile and materially affected by unpredictable factors such as weather and governmental intervention. The combination of leverage and volatility creates a high degree of risk.
Importance of General Market Conditions
Overall market or economic conditions which neither MLAI nor Sunrise can predict or control have a material effect on the performance of any managed futures strategy.
Possibility of Additional Government or Market Regulation
Market disruptions and the dramatic increase in the capital allocated to alternative investment strategies during recent years have led to increased governmental as well as self-regulatory scrutiny of the alternative investment funds industry in general. In addition, certain legislation proposing greater regulation of the industry periodically is considered by the U.S. Congress, as well as the governing bodies of foreign jurisdictions. It is impossible to predict what, if any, changes in the regulations applicable to the Partnership, its general partner (MLAI), the markets in which they trade and invest or the counterparties with which they do business may be instituted in the future. Any such regulation could have a material adverse impact on the profit potential of the Partnership, as well as require increased transparency as to the identity of the Partnership’s limited partners.
Forward Trading
The Partnership will trade in forward markets in addition to trading in futures markets. The forward markets are over-the-counter, non-exchange traded markets, and in trading in these markets, the Partnership will be dependent on the credit standing of the counterparties with which they trade, without the financial support of any clearinghouse system. In addition, the prices offered for the same forward contract may vary significantly among different forward market participants. Forward markets 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.
Effects of Speculative Position Limits
The CFTC and the 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 contracts traded on U.S. commodities exchanges. For example, the CFTC currently imposes speculative position limits on a number of agricultural commodities (e.g., corn, oats, wheat, soybeans and cotton). All commodity accounts controlled by the Trading Advisor and its principals and their affiliates are combined for speculative position limit purposes. The Trading Advisor could be required to liquidate positions held for the Partnership, or may not be able to fully implement trading instructions generated by its trading models, in order to comply with such limits. Any such liquidation or limited implementation could result in substantial costs to the Partnership.
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. Sunrise has not agreed to limit the amount of additional equity which it may manage.
Trading Advisor Risk
The Partnership is subject to the risk of the bad judgment, negligence or misconduct of its Advisor. There have been a number of instances in recent years in which private investment funds have incurred substantial losses due to Trading Advisor misconduct.
Changes in Trading Strategy
Sunrise may make material changes in its trading strategies without the knowledge or seeking the approval of MLAI.
Illiquid Markets
Certain positions held by the Partnership may become illiquid, preventing Sunrise from acquiring positions otherwise indicated by its strategy or making it impossible for the Trading Advisor to close out positions against which the market is moving.
Certain futures markets are subject to “daily price limits,” restricting the maximum amount by which the price of a particular contract can change during any given trading day. Once a contract’s price has moved “the limit,” it may be impossible or economically non-viable to execute trades in such contract. From time to time, prices have moved “the limit” for a number of consecutive days, making it impossible for traders against whose positions the market was moving to prevent large losses.
Trading on Non-U.S. Exchanges
Sunrise may trade extensively on non-U.S. exchanges. These exchanges are not regulated by any United States governmental agency. The Partnership could incur substantial losses trading on foreign exchanges to which it would not have been subject had its Trading Advisor limited its trading to U.S. markets.
The profits and losses derived from trading foreign futures and forwards will generally be denominated in foreign currencies; consequently, the Partnership will be subject to a certain degree of exchange-rate risk in trading such contracts.
The Partnership Could Lose Assets and Have Its Trading Disrupted Due to the Bankruptcy of One of the Parties
The Partnership is subject to the risk of insolvency of a counterparty, an exchange, a clearinghouse or MLPF&S. The Partnership assets could be lost or impounded during lengthy bankruptcy proceedings. Were a substantial portion of the Partnership’s capital tied up in a bankruptcy, MLAI might suspend or limit trading, perhaps causing the Partnership to miss significant profit opportunities. There are increased risks in dealing with unregulated trading counterparties including the risk that assets may not benefit from the protection afforded to “customer funds” deposited with regulated dealers and brokers.
Item 1B:
Item 1B: Unresolved Staff Comments
MLAI is currently responding to the SEC comment letter dated February 4, 2010.
Item 2:
Item 2: Properties
The Partnership does not use any physical properties in the conduct of its business.
The Partnership’s offices are the administrative offices of MLAI (Merrill Lynch Alternative Investments LLC, Four World Financial Center, 6th Floor, 250 Vesey Street, 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: Reserved.
PART II
Item 5:
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 5(a)
(a) Market Information:
There is no established public trading market for the Units, and none is likely to develop. Limited Partners may redeem Units on ten days written notice to MLAI as of the last day of each month at their Net Asset Value, subject to certain early redemption charges.
(b) Holders:
As of December 31, 2009, there were 1,820 holders of Units, including MLAI, none of whom owed 5% or more of the Funds Units.
(c) Dividends:
MLAI has not made and does not contemplate making any distributions on the Units.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
(e) Recent Sales of Unregistered Securities:
Issuance to accredited investors pursuant to Regulation D and Section 4(6) under the Securities Act. The selling agent of the following Class of Units was MLPF&S.
During 2009, the Partnership issued Units as set forth in the following chart.
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 audited financial statements of the Partnership.
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and report performance to investors throughout the year is the most valuable information to the Limited Partner’s of the Partnership.
MONTH-END NET ASSET VALUE PER INITIAL UNIT
ML SELECT FUTURES I L.P.
December 31, 2009
Type of Pool: Single Advisor/Publicly-Offered/Non-”Principal Protected”(1)
Inception of Trading: April 1996
Aggregate Subscriptions: $596,614,404
Current Capitalization: $192,965,299
Worst Monthly Drawdown(2): (14.94)% (08/07)
Worst Peak-to-Valley Drawdown(3): (19.86)% (07/07-08/07)
Net Asset Value per Unit, December 31, 2009: $320.48
Monthly Rates of Return(4)
(1) Certain funds are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as “principal protected”.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 2003 by the Partnership; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 2003 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Partnership during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Partnership as of the beginning of such month.
Item 7:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General
Sunrise has been the Partnership’s sole Trading Advisor since July 1, 1998. Sunrise is a trend-following trader, whose program does not attempt to predict price movements. Sunrise’s long-term Program attempts to detect a trend, or lack of a trend, with respect to a particular Commodity Interest by analyzing price movements and volatility over time. However, there are frequent periods during which fundamental factors external to the market dominate prices.
There are so many influences on the markets that the same general type of economic event may lead to a price trend in some cases but not in others. The analysis is further complicated in that the Program might recognize only certain types of trends and to apply only certain criteria of when a trend has begun. Consequently, even though significant price trends may occur, if these trends are not comprised of the type of intra-period price movements, which its program is designed to identify, Sunrise may miss the trend altogether.
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.
Sunrise is unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses, as well as gains.
While there can be no assurance that Sunrise will be profitable under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Partnership.
Year ended December 31, 2009
The Partnership experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2009 of $16,061,392. Profits were primarily attributable to the Partnership’s trading in metals, stock indices, energy, agriculture and losses to currencies and interest rates.
The metals sector posted profits for the Partnership. Losses were posted to the Partnership at the beginning of the first quarter as most markets in the metals sectors had negative returns. The Program initiated a long position in gold in the middle of the first quarter as demand was rising and the price reached $1,000 per ounce. The market was not able to sustain that level and ended the month lower which caused losses for the Partnership. Losses continued to be posted to the Partnership at the end of the first quarter as markets in general lacked clear direction in an environment of uncertainty over the global economic outlook. The Program took advantage of new developing trends in metals and initiated new long positions in the metals sector resulting in profits being posted to the Partnership throughout the
second quarter. Profits continued to be posted to the Partnership at the beginning through the middle of the third quarter due to base metals of aluminum and in copper which more than doubled in price for the year in August. However, the metals sector moved lower at the end of September resulting in losses being posted to the Partnership. Profits were posted to the Partnership at the beginning through the middle of the fourth quarter as gold was the best performing market as prices rose to record levels. In reaction to the sharp increase in the U.S. dollar, commodity prices initially fell across the board at the beginning of December. Losses were recorded in precious metals while base metals posted profits which were not enough to offset the losses to the Partnership as the year ended.
The stock indices posted profits for the Partnership. Losses were posted to the Partnership at the beginning of the first quarter as markets remained volatile and generally failed to show any meaningful price direction. Profits were posted to the Partnership and trading in equity futures was profitable, as the bear market began to accelerate and stock fell to their lowest level since 1997 in February. The governments plan to rescue the banking system sent stock markets to their highest levels not seen in more than a month. As a result, the majority of the Partnership’s short positions were liquidated with losses being posted for the Partnership as the first quarter ended. Losses were posted to the Partnership at the beginning of the second quarter in reaction to the United States Federal Reserve’s assessment that the United States economy began to show a slower rate of decline, while the equity markets grew stronger and triggered a liquidation of the program’s remaining short positions. Equity prices were somewhat volatile in the middle of the quarter due to continued uncertainty over the global economy. Long positions resulted in profits being posted to the Partnership with foreign equities more profitable than domestic equities. Profits continued to be posted to the Partnership at the end of the second quarter as equity prices moved higher as the market focuses on positive economic reports, improved consumer confidence and other signs of stabilization. The stock indices posted profits for the Partnership throughout the third quarter. Equity markets reached new highs in July as all positions in equity were profitable with the largest gains coming from Eurostox and NASDAQ. Profits continued to be posted to the Partnership in August and September due to the United States and European equity markets as they moved to new highs for the year. Most global equity markets initially extended their gains from previous months and reached their highest point of the year in mid October and finished the month lower, thus producing losses for the Partnership. While most major United States and European equity markets ended the month of November higher resulting in profits for the Partnership, Japanese stock index futures incurred small losses. The Program’s long positions in equities resulted in profits being posted to the Partnership as the year ended.
The energy sector posted profits for the Partnership. Losses were posted to the Partnership at the beginning of the first quarter as markets remain volatile and fail to show price direction. Short positions in crude oil futures generated losses in the middle of the first quarter due to oil prices rising after the U.S. data showed declining inventories. The first quarter ended with losses being posted to the Partnership as trading was difficult in a volatile market. Profits were posted to the Partnership at the beginning through the middle of the second quarter as crude oil rose to a six month high on expectations of higher demand in a recovering economy. The quarter ended with profits being posted to the Partnership due to long positions in the energy sector as oil prices made new highs for the year as the outlook for global demand continued to show signs of strengthening. The energy sector posted losses for the Partnership throughout the third quarter. Oil prices were volatile with oil finishing the month of August below the $70 level. Speculations about the extent and speed of a global economic recovery dominated the markets in September, resulting in a difficult trading environment. Profits were posted to the Partnership at the beginning through the middle of the fourth quarter. Crude oil finished higher despite a major pullback in prices at the end of October. Performance from the energy sector was slightly profitable as the markets failed to make new highs in November and moved in a wide price range. Losses were posted to the Partnership in energies as the year ended in reaction to the sharp increase in the U.S. dollar.
The agriculture sector posted profits for the Partnership. Losses were posted for the Partnership throughout the first quarter due to the volatility in global markets. Profits were posted to the Partnership at the beginning through the middle of the second quarter as the Program initiated new long positions due the developing trends in the agriculture commodities. Losses were posted to the Partnership at the end of the second quarter due to reversals in the Program’s long agricultural positions (wheat, corn and soy meal) which contributed negatively to returns. Long positions were systematically reduced during the month of June. Profits were posted to the Partnership at the beginning through the middle of the third quarter as sugar prices rose in July on expectations for a smaller harvest and prices rallied to new highs in August. The wheat market continued its downturn in August, which led to solid profits for the Program’s short positions. The third quarter ended with losses posted to the Partnership as speculations about the extent and speed of a global economic recovery dominated the markets in
September, resulting in a difficult trading environment for a technical model. Losses were posted to the Partnership at the beginning of the fourth quarter. The potential for a smaller harvest in grains appeared to push prices higher against the Program’s short positions. Sugar was the worst performing market in October. The Program’s long trades were liquidated after a sharp reversal in price. Trading systems generated solid profits across all programs in November. The Program was able to capitalize on several recurring trends, including rising commodity prices. In reaction to the sharp increase in the U.S. dollar, commodity prices initially fell almost across the board. Some of them stabilized during the second half of December and resumed the direction of their original trend. The year ended with profits posted to the Partnership.
The currency sector posted losses for the Partnership. The markets were thinner than in normal economic conditions at the beginning of the first quarter and there were no strong technical signals for a new price trend. The U.S. dollar benefited from its status as the world’s reserve currency and managed to strengthen against other European currencies. The Partnership’s exposure in the currency sector was light resulting in slightly negative returns. Losses continued to be posted to the Partnership in the middle of the first quarter as the currency sector was hurt by a major reversal in Japanese yen. The Japanese yen rose about 30% between August 2008 and the start of February 2009, then switched direction against the U.S. dollar and other major currencies. Trading in currencies at the end of the first quarter generated losses being posted for the Partnership. The U.S. dollar weakened against a wide range of currencies as worries about inflation intensified and the U.S. dollar’s status as the world’s reserve currency gained increased coverage. Currencies posted losses to the Partnership at the beginning of the second quarter as the U.S. dollar initially strengthened then moved lower against other currencies. Profits were posted to the Partnership in the middle of the second quarter due to an uptrend in the Australian dollar, New Zealand dollar and the South African rand and the U.S. dollar weakened against other major and minor currencies due to rising concerns about the country’s credit ratings. Profits in the currency markets were led by the strength of the British pound against other currencies especially the U.S. dollar plus minor currency positions resulting in profits being posted to the Partnership at the end of the second quarter. Profits were posted to the Partnership at the beginning of the third quarter as the U.S. dollar remained weak and the Program’s short U.S. dollar trades generated profits for the Partnership. All major currency markets traded in a range bound fashion in August resulting in losses being posted to the Partnership. Gains in minor currencies such as the Australian dollar and the New Zealand dollar were not large enough to offset losses in major currencies. The U.S. dollar declined to a twelve month low versus the Euro and an eight month low versus the Japanese yen, which prompted readjustments in the Program’s major currency positions. Commodity-linked currencies such as the New Zealand dollar and the Australian dollar benefited from expectations of revived economic growth and rose to their strongest level in more than a year resulting in profits being posted to the Partnership at the end of the third quarter. The U.S. dollar fell to a fourteen month low against the Euro and then bounced back strongly. The currency sector produced profits for the Partnership in October resulting from the short U.S. dollar positions against minor currencies, such as the Australian dollar and the Singapore dollar. The U.S. dollar resumed its fall against most major and minor currencies and hit new lows for the year in November as profits were posted to the Partnership resulting from the Program’s short U.S. dollar positions. The U.S. dollar experienced a relatively large correction, compared to moves in other markets. It rallied against other major and minor currencies, reaching the highest level against the Japanese yen the Euro since September. The year ended with losses being posted to the Partnership.
The interest rate sector posted losses for the Partnership. Interest rate futures were subjected to price reversals at the beginning of the first quarter as yields on government securities moved higher causing this sector to produce small losses. Profits were posted to the Partnership in the middle of the first quarter as the Program was able to identify trading opportunities in the long-term price trends. The first quarter ended with losses being posted to the Partnership as global markets lacked any clear direction in an environment of uncertainty over the global economic outlook. Losses were posted to the Partnership at the beginning of the second quarter due to the swine flu outbreak generating concerns which resulted in higher volatility levels across all market levels. It created a new challenge for the markets with its negative implications on the global economy. Treasury prices fell and yields rose on concerns about increasing supplies of government debt resulting in profits being posted to the Partnership in the middle of the second quarter. A significant drop in the U.S. treasury prices early in June triggered a decrease in overall exposure to interest rate products. An improved U.S. employment report sent the yield on two year U.S. Treasury notes surging to the highest level since November 2008 before retreating towards the end of the June resulting in losses being posted to the Partnership. Losses were posted to the Partnership at the beginning of the third quarter as the price action was missing significant directional movement and was not beneficial to the Program’s positions. Profits were posted to the Partnership in the middle to the end of the third quarter as the Program maintained a very low exposure in this sector. At the beginning of the fourth quarter losses were posted to the Partnership as performance was flat as the program’s exposure was very low. Profits were posted to the Partnership in November due the
Program’s long positions profiting from an increase in prices. Apparent growing demand for the safety of United States Government bonds led to a further decline in the U.S. yields.
Year ended December 31, 2008
The Partnership experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2008 of $78,290.225. Profits were primarily attributable to the Partnership’s trading in energy, stock indices, currencies, interest rates, metals and agriculture.
The energy sector posted profits for the Partnership. Oil prices eased back from the record high hit on January 3, 2008 of more than $100 per barrel and posted moderate losses for the Partnership. Profits were posted to the Partnership in the middle of the quarter continuing to the end of the first quarter as crude oil reached an unprecedented $110 a barrel. Profits were posted to the Partnership at the beginning of the second quarter as prices continued to move higher as worries about supply disruptions sent crude oil futures to a record of $120 a barrel. Profits continued to be posted to the Partnership in the middle of the quarter due to the long energy positions led by crude oil futures, which reached record levels above $135 a barrel as prices advanced to new historical highs. The second quarter ended with profits being posted to the Partnership as crude oil continued to make record highs, closing the month at $140 a barrel. Losses were posted to the Partnership at the beginning of the third quarter as oil prices reached a record high of $147.90 a barrel on July 11, 2008 and then declined more than $25 on prospects of lower demand. Losses continued to be posted to the Partnership from the middle of the third quarter to the end of the quarter due to volatility in the market. Profits were posted to the Partnership throughout the fourth quarter. Trading in energies produced significant returns for the Partnership despite October being among the most volatile months in market history. As the world’s economic outlook continued to deteriorate, the energy markets moved lower and posted profits to the Partnership in November. Short positions in energies were among the most profitable for the Partnership at the end of the year. Oil prices ended the year significantly lower than the July record high price due to concerns about weak global demand.
The stock indices sector posted profits for the Partnership. Trading in stocks was profitable for the Partnership as global stocks experienced a steep decline and finished lower for the month of January. Profits continued to be posted to the Partnership during the middle of the first quarter. The first quarter ended with profits being generated due to the Partnership’s short positions in the Japanese Nikkei and Topix. Trading in global equities was unprofitable for the Partnership with positions in both domestic and foreign equity markets contributing to the negative performance as losses were posted to the Partnership through the second quarter. Profits were posted to the Partnership at the beginning of the third quarter in lieu of the stock market declines during the first half of July. The Program was able to quickly take profits on its short positions before the prices reversed and moved higher during the second half of July. Losses were posted to the Partnership during the middle of the quarter due to market volatility. Profits were posted to the Partnership at the end of the third quarter due to the risk exposure controls maintaining low levels of exposure in the market. Profits were posted to the Partnership at the beginning of the fourth quarter. The Partnership was able to benefit from trading opportunities that emerged during the period of global financial crises with relatively low risk. Losses were posted to the Partnership from the middle of the quarter to the end of the fourth quarter as global markets remain very volatile.
The currency sector posted profits for the Partnership. The U.S. dollar weakened against the Euro and experienced volatile performance against other major currencies at the beginning of the first quarter. Profits were posted for the Partnership due to gains in the British pound positions versus the Swiss franc and the Euro. The currency sector
also generated solid profits for the Partnership as the U.S. dollar continued to fall in the middle of the quarter as the U.S. dollar marked new lifetime lows against the Euro and a series of multiyear lows against other currencies, ranging form the Swiss franc to the Australian dollar. The U.S. dollar’s weakness stemmed from a number of factors, including soft U.S. economic data and prospects for more interest rate cuts. Profits continued to be posted to the Partnership as the U.S. dollar continued its decline in March, setting new lows against the Euro and the Swiss franc, and reaching its weakest level against the Japanese yen since 1995. As the U.S. economic outlook continued to deteriorate and the interest rate differential widened at the expense of the U.S. dollar, its position as a low yielding currency remained the main factor behind its declining value. Losses were posted to the Partnership at the beginning of the second quarter due to the U. S. dollar initially dropping to another record low against the Euro, only to rebound later in the month of April causing the Partnership to liquidate some of its short U.S. dollar positions. Trading in currencies produced small losses in the middle of the quarter for the Partnership as the environment turned more favorable for the U.S. dollar as the price action was mostly range bound when compared to the high volatility of previous months. The U.S. dollar’s link to oil prices was one of the factors that kept it in a relatively tight price range against other major currencies. Negative economic news was prevalent throughout the month of June, starting with an employment report in the United Sates that showed the largest month to month increase in the jobless rate since February 1986. The Partnership posted profits as the second quarter ended due to profits from a stronger Swiss franc and the U.S. dollar losing value. Losses were posted to the Partnership at the beginning of the third quarter as the U. S. dollar moved up against the Partnership’s short positions. The U.S. dollar continued to gain against other major currencies especially the British pound. Although the Partnership’s long U.S. dollar positions against the British pound, the Japanese yen, and the New Zealand dollar generated profits, they were not enough to offset the losses sustained from the Partnership’s short U.S. dollar trades against the Euro, the Swiss Franc and the Australian dollar posting losses to the Partnership in the middle of the quarter. Losses were posted to the Partnership at the end of the third quarter as market volatility reached record levels. Profits were posted to the Partnership at the beginning through the middle of the fourth quarter. Trading conditions in currencies were exceptionally thin and the markets were therefore prone to volatile moves. The U.S. dollar turned weaker at the end of the year which contributed to losses being posted for the Partnership.
The interest rate sector posted profits to the Partnership. Unprecedented actions by the U.S. Federal Reserve appeared to be driving the markets in January. Concerns about the housing and credit markets as well as deteriorating economic fundamentals prompted the U.S. Federal Reserve to cut interest rates. The decline in U.S. interest rates was the major source of profits being posted to the Partnership at the beginning of the quarter. Both domestic and foreign interest rate markets moved in favor of the Partnership’s positions posting profits for the Partnership in the middle of the quarter. Losses were posted to the Partnership at the end of the quarter as the markets switched direction and moved against the Partnership’s long positions. Losses were posted to the Partnership at the beginning of the second quarter. The key highlight among the numerous economic reports and developments was the U.S. Federal Open Market Committee’s rate decision to leave interest rates on hold. In reaction to news that the U.S. Federal Reserve might leave interest rates on hold for some time, a number of key markets experienced volatile price actions and reversals. Profits were posted to the Partnership in the middle of the quarter due to the Program’s positions were either liquidated (majority of domestic interest rate futures) or switched direction (short-term foreign interest rates.). Profits continued to be posted at the end of the second quarter. Losses were posted to the Partnership at the beginning of the third quarter as trading was negative for this sector. Futures prices in the foreign interest rate sector ended higher in the middle of the quarter, producing moderate losses for the Partnership. Market volatility reached record levels reflecting anxiety over the intensifying credit crisis in the U.S. financial market. Prospects for slower economic growth, tighter credit conditions and lower demand put pressure on both the financial and commodity markets. After the United States House of Representatives voted down a financial rescue package the markets responded negatively and tumbled, causing losses to be posted to the Partnership at the end of the third quarter. Profits were posted to the Partnership at the beginning of the fourth quarter. The interest rate market rallied in November as investors moved from falling stocks to government debt. Yields on the 2, 5, 10 and 30 U.S. bonds touched historic lows during the month. Growing demand for government securities in general was based on expectations that central banks would cut interest rates further. The year ended with the interest rate sector posting profits for the Partnership due to the U.S. Federal Reserve’s zero interest policy.
The metals sector posted profits to the Partnership. Gold prices rallied at the beginning of the year setting a record of $936.30 an ounce which was not enough to offset the losses posted to the Partnership early in the first quarter. The metals sector rallied in the middle of the quarter posting profits for the Partnership. Commodity prices rose to unprecedented levels during the month of March with crude oil reaching $110 a barrel and gold reaching $1,000 per
ounce for the first time. There was an aggressive sell-off in the commodity complex later in March, which erased gains that were achieved earlier in the month. Gold and crude oil experienced their biggest one-day price correction in years. As a result, the Partnership’s exposure in the commodity sector was reduced considerably. Losses were posted to the Partnership at the beginning of the second quarter through the middle due to a volatile market. The second quarter ended with profits posted to the Partnership due to the long positions in copper and aluminum. Trading in metals was unprofitable for the Partnership as demand slowed around the world, prices for base metals fell which contributed to the losses posted to the Partnership throughout the third quarter. Trading in metals produced profits being posted to the Partnership at the beginning of the fourth quarter due to the Partnership participating in many pronounced price trends. Losses were posted to the Partnership in the middle of the quarter due to the volatility in the global markets. The year ended with profits posted to the Partnership despite the most difficult trading conditions and unprecedented volatility that defined the markets for most of the year.
The agriculture sector posted profits to the Partnership. Profits were posted to the Partnership at the beginning through the middle of the first quarter due to a powerful rally in grains. The end of the first quarter generated losses for the Partnership due to increased volatility and trend reversals. Profits were posted to the Partnership at the beginning through the middle of the second quarter. However, heavy flooding in the Midwest section of the United States contributed to losses being posted to the Partnership at the end of the second quarter as the price of grains were driven up. Soybean meal traded near all time high however, these gains were offset by losses in cotton and sugar. The Partnership exited their short positions in these markets as prices bounced upward. Losses were posted to the Partnership at the beginning of the third quarter due to the volatility in the market. Profits were posted to the Partnership from the middle through the end of the third quarter as cotton was the best performing market as prices moved in favor of the Partnership’s short positions. Profits were posted to the Partnership at the beginning through the middle part of the fourth quarter in lieu of market volatility. Losses were posted to the Partnership as the year ended due to extreme volatility in the markets.
Year ended December 31, 2007
The Partnership experienced a net trading profit before brokerage commissions and related fees for the year ended December 31, 2007 of $11,892,285. Profits were primarily attributable to the Partnership’s trading in energy, currency, agriculture, and interest rate sectors while the stock indices and metal sectors sustained losses.
The energy sector posted profits for the Partnership. The year began with profits posted to the Partnership due to the United States crude futures falling to a twenty month low. Declining energy prices reached profit target levels resulting in a partial liquidation of the Partnership’s short energy positions. Rising inventories and warm weather were the primary drivers of the downward move. Despite initial weakness, the oil complex moved upward beginning mid-quarter and remained volatile with crude oil reaching a two-month high when the price rose above $60.00 a barrel. This move contributed heavily to the sector losses suffered by the Partnership’s short energy positions. Crude oil initially weakened and then rallied due to uncertainty over the hostage situation between the United Kingdom and Iran. Due to the volatility of the markets trading was difficult and relatively flat throughout the second quarter. The third quarter was profitable for the Partnership due to oil prices moving to record highs. The cut in interest rates, rising energy demands and forecasts for continued declines in U.S. inventories were among the major factors behind the rally. The year ended as prices continued to move higher. Crude oil approached $100.00 per barrel after the United States crude
inventories fell more than expected. News of the assassination of the former Pakistani Prime Minister also contributed to the rise.
The currency sector posted profits for the Partnership. There were gains at the beginning of the year due to long positions in the British pound against the Swiss franc, the Euro and the Japanese yen. The British pound continued to strengthen against most major currencies due to rising United Kingdom interest rates reaching a two year high against the Euro and an eight year high against the Japanese yen. Profits continued to be posted through the second quarter as the U. S. dollar dropped to an all time low against the Euro and hit multiyear lows against other major and minor currencies. Sentiment towards the U.S. dollar remained negative in reaction to the disappointing United States economic data. Therefore, long positions in the Euro, British pound, Australian dollar, and New Zealand dollar generated solid gains against the U.S. dollar. Volatility and uncertainty returned to the currency market at the beginning of the third quarter as declines in global equity markets prompted position liquidation in the currency sector. Sunrise Expanded Diversified Program (“SEDP”) short positions in the Japanese yen suffered losses when the currency moved higher against its major counterparts. Losses continued to be posted to the Partnership during the mid third quarter in reaction to developments in the global financial system as the Japanese yen rallied while the British pound, Euro, Australian dollar and the New Zealand dollar weakened sharply as investors reduced their exposure to high yielding carry trades. As a result, SEDP liquidated a large portion of its short Japanese yen crosses and a large portion of its long positions in minor currencies. The U.S. dollar hit a series of new record lows against the Euro after the Federal Reserve cut its short-term lending rate by half point on September 18, 2007. The interest rate adjustment was a result of developments in the financial markets. It was negative for the U.S. dollar, with an outlook for less favorable interest rate differentials. Higher yielding currencies, like the Euro, Australian dollar, and the New Zealand dollar, showed gains after the Federal Reserves announcement. The trend of the lower U.S dollar and stronger commodity prices enabled SEDP to post profits for the Partnership at the end of the third quarter. The year ended with the British pound trading very close to all-time lows versus the Euro, which made SEDP’s short positions in the British pound versus the Euro the most profitable for the currency sector.
The agriculture sector posted profits for the Partnership. Trading in sugar was profitable at the beginning of the year as prices continued to decline. Soybeans and soybean meal futures rallied due to new contract highs on the possibility of planting and weather problems. However, the first quarter ended with losses posted to the Partnership due to weakened commodities prices causing the Partnership to exit most of SEDP’s long positions. Soybeans, wheat and cotton soared at the beginning of the second quarter due to the acreage and stock reports as well as weather forecasts. However, this could not offset the losses incurred mid through the end of the second quarter as price action in agricultural commodities remained very choppy. Wheat generated profits for the Partnership third quarter as the market climbed to an all-time high due to global production problems, a pre-existing tight inventory, and technical strength. Grains continued to rally at the end of the third quarter mainly due to demand from the growing economies of Asia and Latin America posting profits for the Partnership. Profits continued to be posted for the Partnership as the year ended in response to a growing global demand.
The interest rate sector posted profits for the Partnership. Performance in the interest rate markets were mixed at the beginning of the year due to yields rising in most major markets, except Japan with moderate profits being generated in European interest rates futures. Losses were also incurred at the end of the first quarter as investors fled to safer alternatives and drove the market higher, against the Partnership’s short positions. Performance in the interest rate markets were mixed at the beginning of the second quarter due to domestic interest rate futures posting losses as the United States Federal Reserve was still on hold since last summer regarding interest rate adjustments. A number of equity markets reached new historic highs during the second quarter. In reaction to continued global expansion and strong economic growth, the European Central Bank raised interest rates to curb inflationary pressures resulting in the price of European debt instruments to move down, in favor of the SEDP’s short positions. The trends of rising stocks and interest rates switched sharply at the beginning of the third quarter forcing SEDP out of some profitable positions. The interest rate market rallied as investors moved into the traditional safety of government bonds, which generated losses for SEDP. Trading in interest rate futures also produced losses mid-quarter as investors moved from stocks to less risky government securities and pushed prices higher against the against SEDP’s short positions. These short positions were quickly liquidated and long positions were initiated for some shorter-term systems. The third quarter ended with interest rate sector posting profits to the Partnership as prices moved higher in favor of SEDP’s long positions. The interest rate sector faced a volatile market producing losses in December. Treasury prices moved lower during the first half of December
2007 and finished the year higher, ultimately supported by economic data.
The metals sector posted losses for the Partnership. Due to the volatility of the markets trading was difficult at the beginning of the year. There were no positions in the metal markets due to a lack of trends and/or unacceptable volatility which continued through the second quarter. Base and precious metals posted losses as prices declined across the board. Weakness in metals was a reflection of rising inventories which triggered heavy position liquidation resulting in losses being posted to the Partnership. Profits were posted to the Partnership at the beginning of the third quarter in spite of the volatile markets and a difficult trading environment. Global growth remained strong as demand for commodities that are priced in dollars grew as gold prices moved higher posting solid profits. Gold extended its upward trend and traded above $800.00 an ounce in at the beginning of the fourth quarter. The upward trend in gold continued at the end of the year as strong demand helped drive prices higher. Industrial metals moved in favor of SEDP’s short positions which generated profits for the Partnership as the year ended.
Stock indices posted losses for the Partnership. Equity markets performed well at beginning of the year due to soft inflation and solid economic growth creating a positive environment for equities as long trades in both domestic and foreign stock indices recorded profits. However, mid-quarter generated losses due to most major stock indices had been at their long-term high and the Partnership had to liquidate a small portion of its long position on profit targets and continued to decline to the end of the first quarter. The beginning of the second quarter trading was profitable in the global stock market indices as favorable reports on economic growth abroad and corporate profits helped drive stock markets into record territory. The market experienced sharp up and down moves as the second quarter ended producing losses for the Partnership that were offset by gains from foreign stock index futures. The steepest losses were recorded at the beginning of the third quarter in global stock indices as stock prices fell sharply just days after setting record highs. Various pieces of unfavorable economic news sent the stock market down: concerns about the state of the U.S. credit and housing markets, corporate borrowing and mixed corporate results. Losses continued to be posted to the Partnership through the end of the third quarter due to dramatic price reversals as well as major position adjustments in the financial sector around the world. Developments in the credit markets and worries about the financial system negatively impacted the stock market and the Partnership recorded losses as the market suffered a major price correction as the year ended.
Variables Affecting Performance
The principal variables that determine the net performance of the Partnership are gross profitability from the Partnership’s trading activities and interest income.
The partnership receives an interest based on the 90 day t-bill rate on their U.S. dollar deposits. Other rates exist for the non U.S. dollar deposits, however, most of the Partnership’s cash is held in U.S. dollars. 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 all periods set forth above in “Selected Financial Data”, the interest rates in many countries were at unusually low levels. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the 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 Brokerage Commissions and Administrative Fees are a constant percentage of the Partnership costs, other than the insignificant currency trading costs which are not based on a percentage of the Partnership’s assets allocated to trading or total. The Profit Shares payable to the Advisor are based on the new Trading Profits generated by the Partnership excluding interest and after reduction for a portion of the Brokerage Commissions.
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 Partnership 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 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 Partnership’s U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Partnership’s assets are held in cash. The Net Asset Value of the Partnership’s cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Partnership’s profit potential generally increases. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow.
Because substantially all of the Partnership’s assets are held in cash, the Partnership should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices, except in very unusual circumstances. This permits the Partnership to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there is a readily available market value for the Partnership’s positions and assets, the Partnership’s monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units.
As a commodity pool, the Partnership 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 Partnership 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 General Partner of the Partnership, 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 Partnership has no applicable off-balance sheet arrangements or tabular disclosure of contractual obligations of the type described in Items 3.03(a)(4) and 3.03(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 Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes and all or substantially all of the Partnership’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.
Market movements result in frequent changes in the fair market value of the Partnership’s open positions and, consequently, in its earnings and cash flow. The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which it trades.
The Partnership, under the direction of Sunrise, rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership 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 experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s 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 statement” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Partnership’s risk exposure in the various market sectors traded by the Advisor is quantified below in terms of Value at Risk. Due to the Partnership’s fair value accounting, any loss in the fair value of the Partnership’s open positions is directly reflected in the Partnership’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95%-99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership’s 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 table indicates the average, highest and lowest trading Value at Risk associated with the Partnership’s open positions by market category for the fiscal years 2009, 2008 and 2007. During the fiscal year 2009, the Partnership’s average capitalization was $196,776,157. During the fiscal year 2008, the Partnership’s average capitalization was $224,567,351. During the fiscal year 2007, the Partnership’s average capitalization was $288,689,351.
December 31, 2009
December 31, 2008
December 31, 2007
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions - unusual, but historically recurring from time to time - could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table - as well as the past performance of the Partnership - gives no indication of this “risk of ruin.”
Non-Trading Risk
Foreign Currency Balances; Cash on Deposit with MLPF&S
The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial.
The Partnership also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLPF&S or BlackRock. 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 - 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 Sunrise for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, and an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. There can be no assurance that the Partnership’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as of December 31, 2009, by market sector.
Interest Rates.
Interest rate movements directly affect the price of derivative sovereign bond positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Partnership also takes positions in the government debt of smaller nations e.g., Australia. The Partnership anticipates that G-7 interest rates will remain the primary market exposure of the Partnership for the foreseeable future.
Currencies.
The Partnership trades in a number of currencies. However, the Partnership’s major exposures have typically been in the U.S. dollar/Japanese yen, U.S. dollar/Euro, and U.S. dollar/Australian dollar and U.S. dollar/Swiss franc positions. The Partnership does not anticipate that the risk profile of the Partnership’s currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk of maintaining Value at Risk in a functional currency other than U.S. dollars.
Stock Indices.
The Partnership’s primary equity exposure is to S&P 500, Nikkei and German DAX equity index price movements. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices.
Metals.
The Partnership’s metals market exposure is to fluctuations in both the price of precious and non-precious metals.
Agricultural Commodities
The Partnership’s primary agricultural commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Soybeans, grains, cotton and sugar accounted for the substantial bulk of the Partnership’s agricultural commodities exposure as of December 31, 2007. However, it is anticipated that Sunrise will maintain an emphasis on cotton, grains and sugar, in which the Partnership has historically taken its largest positions.
Energy.
The Partnership’s primary energy market exposure is to natural gas and crude oil price movements, often resulting from political developments in the Middle East. Oil prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership as of December 31, 2009.
Foreign Currency Balances.
The Partnership’s primary foreign currency balances are in Japanese Yen, Australian dollar, Swiss franc and Euros.
U.S. Dollar Cash Balance.
The Partnership holds U.S. dollars only in cash at MLPF&S or BlackRock. The Partnership has immaterial cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
Trading Risk
MLAI has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisor, calculating the Net Asset Value of the Partnership account managed by the Advisor as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLAI does not itself intervene in the markets to hedge or diversify the Partnership’s market exposure, MLAI may urge the Advisor to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual. Sunrise applies its own risk management policies to its trading.
Sunrise Risk Management
Sunrise attempts to control risk through the utilization of proprietary risk management techniques, which are applied at all stages of the trading process. These techniques are designed to control all aspects of portfolio, market, and execution risk, with the stated goal of maintaining Sunrise’s historical rates of returns without increased volatility.
The basis for Sunrise’s risk management system is its scientific approach and historical research. This process attempts to measure the correlation and performance characteristics associated with various weightings assigned to different markets and sectors. Sunrise allocates equity risk to each market and market sector in an effort to minimize the possibility that any one market or sector has a disproportionate influence on the portfolio. Overall, portfolio exposure, drawdown and recovery periods are carefully studied.
Sunrise uses filters that attempt to avoid taking trades with poor risk/reward characteristics. In addition, once a trade is taken, an array of exit strategies are employed that attempt to protect open profits while exiting positions that fail to trend in the expected direction. Initial money stops are strictly followed and factors that would make it difficult to execute trades, such as reduced liquidity or extreme market developments, are also incorporated in the trading decision and risk management processes.
Other risk factors such as foreign currency risk when trading in non-U.S. markets, custodian risk, and counterparty risk when trading in the over-the counter markets are taken into account and play an important part of Sunrise’s overall risk management process. Sunrise uses only counterparties and brokers to execute trades that it and the market generally perceive as creditworthy. The majority of trades are done with institutions with which Sunrise has long-term relationships.
Non-Trading Risk
The Partnership controls the non-trading exchange rate risk by regularly converting foreign balances back into U.S. dollars at least once per week, and more frequently if a particular foreign currency balance becomes unusually high.
The Partnership has cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the 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 its cash held on deposit at MLPF&S and in the BlackRock sponsored money market mutual fund.
Item 8:
Item 8: Financial Statements and Supplementary Data
Net Income by Quarter
Eight Quarters through December 31, 2009
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
The Board of Managers of MLAI dismissed Deloitte & Touche as the independent registered public accounting firm for the Partnership effective April 20, 2009. The Board of Managers of the Partnership approved the engagement of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Partnership, effective April 20, 2009.
There were no disagreements with the respective independent registered public accounting firms on accounting and financial disclosure.
Item 9A(T):
Item 9A(T): Controls and Procedures
MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Partnership, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of and for the year which ended December 31, 2009, and, based on its evaluation, has concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonable likely to materially affect, the Partnership’s internal control, over financial reporting.
Management’s 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, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework”.
Based on its assessment the Partnership’s management concluded that at December 31, 2009, the Partnership’s internal control over financial reporting was effective.
This annual report does not include an attestation report of the Partnership’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Partnership’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only management’s report for this annual report.
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 its general partner MLAI. Trading decisions are made by Sunrise on behalf of the Partnership.
The managers and executive officers of MLAI and their respective business backgrounds are as follows:
Justin C. Ferri
Chief Executive Officer, President and Manager
Barbra E. Kocsis
Chief Financial Officer
Deann Morgan
Vice President and Manager
Justin C. Ferri is the Chief Executive Officer, President and Manager of MLAI. Mr. Ferri, 34 years old, has been the Chief Executive Officer and President of MLAI since August 2009. Mr. Ferri has been a Manager of MLAI and has been listed as a principal of MLAI since July 29, 2008. He has been registered with NFA as an associated person of MLAI since September 11, 2009. He also serves as Managing Director within the Merrill Lynch Global Wealth & Investment Management group and the Global Investments Solutions group (“GWIM” and “GIS,” respectively), responsible for heading GWIM’s Alternative Investments business. In addition, Mr. Ferri serves as Vice President of IQ Investment Advisors LLC (“IQ”), an indirect, wholly-owned investment adviser subsidiary of Merrill Lynch & Co., and serves as President of each of IQ’s publicly traded closed-end mutual fund companies. Prior to his role in GIS, Mr. Ferri was a Director in the MLPF&S Global Private Client Market Investments & Origination group, and before that, he served as a Vice President and head of the MLPF&S Global Private Client Rampart Equity Derivatives team. Prior to joining Merrill Lynch in 2002, Mr. Ferri was a Vice President within the Quantitative Development group of mPower Advisors LLC from 1999 to 2002, and prior to that, he worked in the Private Client division of J.P. Morgan & Co. He holds a B.A. degree from Loyola College in Maryland.
Barbra E. Kocsis is the Chief Financial Officer for MLAI. Ms. Kocsis, 43 years old, has been the Chief Financial Officer of MLAI since October 2006. Ms. Kocsis has been listed with the NFA as a principal of MLAI since May 21, 2007 and is a Director within the Merrill Lynch Global Wealth Management Investment Services group, positions she has held since October 2006. Prior to serving in her current roles, she was the Fund Controller of MLAI from May 1999 to September 2006. Before joining MLAI, Ms. Kocsis held various accounting and tax positions at Derivatives Portfolio Management LLC from May 1992 until May 1999, at which time she held the position of accounting director. Prior to that, she was an associate at Coopers & Lybrand in both the audit and tax practices from September 1988 to February 1992. She graduated cum laude from Monmouth College with a Bachelor of Science in Business Administration - Accounting.
Deann Morgan is a Vice President and Manager of MLAI. Ms. Morgan, 40 years old, has been a Vice President of MLAI and Managing Director of GIS since March 2008. As Managing Director of GIS, Ms. Morgan heads Alternative Investments Origination. From April 2006 until March 2008, Ms. Morgan was a Director for Merrill Lynch’s Investments, Wealth Management & Insurance group, where she was responsible for origination of private equity and listed alternative investments. Between August 2004 and April 2006, Ms. Morgan worked for Merrill Lynch’s Investment Banking Group covering Asian corporate clients. She received her M.B.A. from University of Chicago and her B.B.A. from University of Michigan. Ms. Morgan has been registered with NFA as an associated person and listed as a principal of MLAI since August 21, 2009. Ms. Morgan has also been registered with NFA as an associated person of MLPF&S since April 13, 2009.
As of December 31, 2009, the principals of MLAI had no investment in the Partnership, and MLAI’s general partner interest in the Partnership was valued at $4,459,788.
MLAI acts as the sponsor, general partner or manager to seven public futures funds whose units of limited partner or member interests are registered under the Securities Exchange Act of 1934: ML Aspect Futures Access LLC, ML BlueTrend FuturesAccess LLC, ML Select Futures I L.P., ML 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 Item 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:
Not applicable.
Code of Ethics:
MLAI and Merrill Lynch 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 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 Merrill Lynch in their respective positions. The Partnership does not have any officers, managers or employees. The Partnership pays Brokerage Commissions to an affiliate of MLAI and Administrative Fees to MLAI. MLAI or its affiliates may also receive certain economic benefits from possession of the Partnership’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 MLAI, its general partner).
(b) Security Ownership of Management:
As of December 31, 2009, MLAI owned 13,916 Unit-equivalent general partnership interests, which constituted 2.31% of the total Units outstanding, the principals of MLAI did not own any Units, and the Trading Advisor 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
(a) Transactions between Merrill Lynch and the Partnership
Some of the service providers to the Partnership are affiliates of Merrill Lynch. However, none of the fees paid by the Partnership to such Merrill Lynch affiliates were negotiated and such fees charged to the Partnership might be higher than would have been obtained in arms-length negotiations.
The Partnership pays MLAI, MLPF&S and Merrill Lynch affiliates substantial Brokerage Commissions and Administrative Fees as well as bid-ask spreads on forward currency trades. The Partnership also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions.
Within the Merrill Lynch organization, MLAI is the beneficiary of the revenues received by different Merrill Lynch entities from the Partnership. MLAI controls the management of the Partnership and serves as its promoter. Although MLAI has not sold any assets, directly or indirectly, to the Partnership, MLAI makes substantial profits from the Partnership due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI or any of its principals and the Partnership.
MLAI pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI is ultimately paid back for these expenditures from the revenues it receives from the Partnership.
(b) Certain Business Relationships:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Partnership.
In 2009, the Partnership expensed: (i) Brokerage Commissions of $10,958,446 to MLPF&S, which included $1,984,559 in consulting fees earned by Sunrise; and (ii) Administrative Fees of $498,111 to MLAI. In addition, MLAI and its affiliates may have derived certain economic benefits from possession of a portion of the Partnership’s assets, as well as from foreign exchange and EFP trading.
See Item 1(c), “Narrative Description of Business - Charges” and “- Description of Current Charges” for a discussion of other business dealings between MLAI affiliates and the Partnership.
(c) Indebtedness of Management:
The Partnership is prohibited from making any loans, to management or otherwise.
(d) Transactions with Promoters:
Not applicable.
(e) Director Independence
No person who served as a manager of MLAI during 2009 would be considered an independent (based on the definition of an independent director under the NASDAQ rules).
Item 14:
Item 14: Principal Accountant Fees and Services
(a) Audit Fees
Aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP in connection with the audit of the Partnership’s financial statements for the year ended December 31, 2009 was $48,000.
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Partnership’s financial statements for the year ended December 31, 2008 was $48,000.
(b) Audit-Related Fees
There were no other audit-related fees billed for the years ended December 31, 2009 or 2008 related to the Partnership.
(c) Tax Fees
No fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers and their respective affiliates for the year ended December 31, 2009 for professional services rendered to the Partnership in connection with tax compliance, tax advice and tax planning.
Aggregate fees billed for professional services rendered by Deloitte Tax LLP or any member firms of Deloitte Touche Tohmatsu and their respective affiliates in connection with the tax compliance, tax advice and preparation of the Partnership’s tax returns for the year ended December 31, 2009 was $61,200.
Aggregate fees billed for professional services rendered by Deloitte Tax LLP or any member firms of Deloitte Touche Tohmatsu and their respective affiliates in connection with the tax compliance, advice and preparation of the Partnership’s tax returns for the years ended December 31, 2008 was $72,000.
(d) All Other Fees
No fees were billed by PricewaterhouseCoopers LLP or any member firms of PricewaterhouseCoopers LLP and their affiliates for the year ended December 31, 2009 and for any other professional services in relation to the Partnership.
No fees were billed by Deloitte & Touche LLP, Deloitte Tax LLP or any member firms of Deloitte Touche Tohmatsu and their respective affiliates for the year ended December 31, 2008 for any other professional services in relation to the Partnership.
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 and Financial Statement Schedules
Page:
1.
Financial Statements (found in Exhibit 13.01):
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
Statements of Financial Condition as of December 31, 2009 and 2008
For the years ended December 31, 2009, 2008 and 2007:
Statements of Operations
Statements of Changes in Partners’ Capital
Financial Data Highlights for the years ended December 31, 2009, 2008 and 2007
Notes to Financial Statements
2. Financial Statement Schedules:
Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.
3. Exhibits:
The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
Designation
Description
3.01
Amended and Restated Certificate of ML Select Futures I L.P.
Exhibit 3.01:
Is incorporated herein by reference from Exhibit 3.01 contained in the Registrant’s Registration Statement on Form 10 (File No. 000-50269) under the Securities Exchange Act of 1934, filed on April 30, 2003 (the “Initial Registration Statement”).
3.02
ML Select Futures I L.P. Eleventh Amendment and Restated Limited Partnership Agreement.
Exhibit 3.02
Is incorporated by reference from Exhibit 3.02(a) contained in Amendment No. 2 to the Registrant’s Registration Statement on Form 10 (File No. 000-50269) under the Securities Exchange Act of 1934, filed on October 11, 2007.
10.01
Advisory Agreement among ML Select Futures I L.P., Merrill Lynch Investment Partners Inc. and Sunrise Capital Partners LLC.
Exhibit 10.01:
Is incorporated by reference from Exhibit 10.03 contained in the Initial Registrant’s Registration Statement
10.02
Customer Agreement between ML Select Futures I L.P. and Merrill Lynch Futures Inc.
Exhibit 10.03:
Is incorporated hereby by reference from Exhibit 10.02 contained in the Initial Registration Statement.
13.01
2009 Annual Report and Report of Independent Registered Public Accounting Firm.
Exhibit 13.01:
Is filed herewith.
31.01 and 31.02
Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 31.01 and 31.02:
Are filed herewith.
32.01 and 32.02
Section 1350 Certifications
Exhibit 32.01 and 32.02:
Are filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ML SELECT FUTURES I L.P.
By: MERRILL LYNCH ALTERNATIVE INVESTMENTS GENERAL PARTNER
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 31, 2010 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Date
/s/ Justin C. Ferri
Chief Executive Officer, President and Manager
March 31,
Justin C. Ferri
/s/ Barbra E. Kocsis
Chief Financial Officer
March 31,
Barbra E. Kocsis
(Principal Financial and Accounting Officer)
/s/ Deann Morgan
Vice President and Manager
March 31,
Deann Morgan
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
ML SELECT FUTURES LIMITED PARTNERSHIP
2009 FORM 10-K
INDEX TO EXHIBITS
Exhibit
Exhibit 13.01
2009 Annual Report and Report of Independent Registered Public Accounting Firm
Exhibit 31.01 and 31.02
Rule 13a - 14(a) / 15d - 14(a) Certifications
Exhibit 32.01 and 32.02
Sections 1350 Certifications