Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
The Millburn World Resource Trust (the "Trust") is a business trust organized June 7, 1995 pursuant to a Declaration of Trust and Trust Agreement (the "Trust Agreement"), under the Delaware Business Trust Act. Between July 12, 1995 and September 11, 1995 (the "Initial Offering"), units of beneficial interest in the Trust (the "Units") were publicly offered at an initial price of $1,000 per Unit. The proceeds of the Initial Offering and interest thereon were held in escrow until September 13, 1995 at which time an aggregate of $15,141,664 was turned over to the Trust and the Trust commenced operations. As of December 31, 2001, Units were being offered on a monthly basis at Net Asset Value per unit. The offering is registered under the Securities Act of 1933, as amended. UBS PaineWebber Inc. acts as principal selling agent on a best efforts basis. A total of $98,000,336 of Units have been sold to the public as of December 31, 2001.
The Trust engages in speculative trading in the futures, options and forward markets.
Millburn Ridgefield Corporation (the "Managing Owner"), a Delaware corporation, is the managing owner and the commodity trading advisor for the Trust. The Managing Owner invested $400 in the Trust as an initial capital contribution to the Trust and $155,005 in the Trust at the outset of trading and subsequently has contributed an additional $417,000 as of December 31, 2001. After reflecting a net loss of $41,680 and profit share of $0, this investment totaled (after deductions for redemptions) $900,516, as of December 31, 2001.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Partnership's business constitutes only one segment, i.e., a speculative commodity pool. The Partnership does not engage in sales of goods and services.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Trust engages in the speculative trading of futures, options on futures and forward contracts. The Trust's sole trading advisor is the Managing Owner. The Managing Owner trades the Trust's assets in the agricultural, metals, energy, interest rate and stock indices futures and futures options markets and in the currency markets, trading primarily forward contracts in the interbank market. Pursuant to the Trust Agreement, the Managing Owner receives a flat-rate monthly brokerage fee equal to 0.75 of 1% of the month-end Net Assets (a 9.0% annual rate). The Managing Owner retains the right to charge less than the annual brokerage rate of 9% to those subscribers who either invest $1,000,000 or more in the Units or subscribe without incurring the selling commission paid by the Managing Owner. The Managing Owner also receives a profit share equal to 17.5% of any new trading profit as defined, determined as of the end of each calendar quarter. The quarterly profit share is calculated net of brokerage fees and administrative expenses and excluding interest income.
Prudential Securities Incorporated and UBS PaineWebber Inc. (the "Brokers") act as the primary futures brokers for the Trust. The Trust executes currency forward trades with Prudential Securities Incorporated. The Trust pays "bid asked" spreads on its forward trades, as such spreads are incorporated into the pricing of forward contracts. The Managing Owner monitors the Trust's trades to ensure that the prices it receives are competitive.
The Trust's organizational and initial offering costs, $600,000, were advanced by the Managing Owner, for which it was reimbursed by the Trust in 24 equal monthly installments. The reimbursement of these costs was completed in the year ended December 31, 1997. The Trust will pay any extraordinary expenses which it may incur.
The Trust is open-ended and may offer Units at net asset value as of the first day of each month. Unitholders may redeem any or all of their Units upon 10 business days' written notice to the Managing Owner at their net asset value as of the last day of any month. Units redeemed on or prior to the end of the first and second successive six-month periods after their sale will pay a redemption charge of 4% and 3%, respectively, of the net
asset value at which they are redeemed (3% and 2%, respectively, in the case of subscriptions for $1,000,000 or more). These redemption charges are paid to the Managing Owner. Requests for redemption will be honored and payment will be made, except in the event of highly unusual market disruptions, within 15 business days of the effective date of redemption.
The Trust's assets not deposited as margin are maintained, unless applicable foreign regulations require otherwise, only in instruments authorized by the CFTC for the investment of "customer segregated funds."
REGULATION
Under the Commodity Exchange Act, as amended (the "CEA"), commodity exchanges and futures trading are subject to regulation by the Commodity Futures Trading Commission (the "CFTC"). National Futures Association ("NFA"), a "registered futures association" under the CEA, is the only non-exchange self-regulatory organization for futures industry professionals. The CFTC has delegated to NFA responsibility for the registration of "commodity trading advisors," "commodity pool operators," "futures commission merchants," "introducing brokers" and their respective associated persons and "floor brokers" and "floor traders." The CEA requires commodity pool operators and commodity trading advisors, such as the Managing Owner, and commodity brokers or futures commission merchants, such as the Brokers and the Managing Owner, to be registered and to comply with various reporting and record keeping requirements. The CFTC may suspend a commodity pool operator's or trading advisor's registration if it finds that its trading practices tend to disrupt orderly market conditions or in certain other situations. In the event that the registration of the Managing Owner as a commodity pool operator or a commodity trading advisor were terminated or suspended, the Managing Owner would be unable to continue to manage the business of the Trust. Should the Managing Owner's registration be suspended, termination of the Trust might result.
As members of NFA, the Managing Owner and the Brokers are subject to NFA standards relating to fair trade practices, financial condition and customer protection. As the self-regulatory body of the futures industry, NFA promulgates rules governing the conduct of futures industry professionals and disciplines those professionals which do not comply with such standards.
In addition to such registration requirements, the CFTC and certain commodity exchanges have established limits on the maximum net long or net short position which any person may hold or control in particular commodities. The CFTC has adopted a rule requiring all domestic commodity exchanges to submit for approval speculative position limits for all futures contracts traded on such exchanges. Most exchanges also limit the changes in futures contract prices that may occur during a single trading day. Currency forward contracts are not subject to regulation by any United States Government agency.
(i) through (xii) - not applicable.
(xiii) the Trust has no employees.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Trust does not engage in material operations in foreign countries (although it does trade in foreign currency forward contracts), nor is a material portion of its revenues derived from foreign customers.
Item 2.
Item 2. PROPERTIES
The Trust does not own or use any physical properties in the conduct of its business. The Managing Owner or an affiliate perform all administrative services for the Trust from their offices.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Managing Owner is not aware of any pending legal proceedings to which either the Trust is a party or to which any of its assets are subject. In addition there are no pending material legal proceedings involving the Managing Owner.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
There is no trading market for the Units, and none is likely to develop. Units may be redeemed upon business 10 days' written notice to the Managing Owner at their net asset value as of the last day of any month, subject to certain early redemption charges.
(b) Holders.
As of December 31, 2001, there were 1284 holders of Units.
(c) Dividends.
No distributions or dividends have been made on the Units, and the Managing Owner has no present intention to make any.
(d) Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities.
Registrant has made no sales of unregistered securities within the past three years.
REG. S-K ITEM 701(F)
(1) The use of proceeds information is being disclosed for Registration Statement No. 33-90756 declared effective on July 12, 1995 and Registration Statement No. 333-50209, filed pursuant to Rule 429 under the Securities Act of 1933, declared effective May 18, 1998.
(4)(iv) For the account of the issuer, the amount of Units sold as of December 31, 2001 is $98,000,336, and the aggregate offering price of the amount sold as of December 31, 2001 is $98,000,336.
(vi) The net offering proceeds to the issuer totaled $98,000,336.
(vii) From the effective date of the Registration Statements to December 31, 2001, the amount of net offering proceeds to the issuer for commodity futures and forward trading totaled $98,000,336.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following is a summary of operations for the fiscal years 2001, 2000, 1999, 1998 and 1997, and total assets of the Trust at December 31, 2001, 2000, 1999, 1998 and 1997. The Partnership commenced trading operations on September 13, 1995.
* From trading of futures and forward contracts, foreign exchange transactions and translations and U.S. Treasury obligations
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Item 6. SELECTED FINANCIAL DATA" and "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The information contained therein is essential to, and should be read in conjunction with, the following analysis.
CAPITAL RESOURCES
Units may be offered for sale as of the beginning, and may be redeemed as of the end, of each month.
The amount of capital raised for the Trust should not have a significant impact on its operations, as the Trust has no significant capital expenditure or working capital requirements other than for monies to pay trading losses, brokerage commissions and charges. Within broad ranges of capitalization, the Managing Owner's trading positions should increase or decrease in approximate proportion to the size of the Trust.
The Trust raises additional capital only through the sale of Units and trading profits (if any) and does not engage in borrowing.
The Trust trades futures, options and forward contracts on interest rates, commodities, currencies, metals, energy and stock indices. Risk arises from changes in the value of these contracts (market risk) and the potential inability of counterparties or brokers to perform under the terms of their contracts (credit risk). Market risk is generally to be measured by the face amount of the futures positions acquired and the volatility of the markets traded. The credit risk from counterparty non-performance associated with these instruments is the net unrealized gain, if any, on these positions. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with over-the-counter transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the-counter markets.
The Managing Owner has procedures in place to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures primarily focus on (1) limiting trading to markets which the Managing Owner believes are sufficiently liquid in respect of the amount of trading contemplated; (2) diversifying positions among various markets; (3) limiting the assets committed as margin, generally within a range of 15% to 35% of an account's Net Assets at exchange minimum margins, (including imputed margins on forward positions) although the amount committed to margin at any time may be substantially higher; (4) prohibiting pyramiding (that is, using unrealized profits in a particular market as margin for additional positions in the same market); and (5) changing the equity utilized for trading by an account solely on a controlled periodic basis rather than as an automatic consequence of an increase in equity resulting from trading profits. The Trust controls credit risk by dealing exclusively with large, well capitalized financial institutions, such as the Brokers, as brokers and counterparties.
Due to the nature of the Trust's business, substantially all its assets are represented by cash, United States government obligations and short-term foreign sovereign debt obligations, while the Trust maintains its market exposure through open futures and forward contract positions.
The Trust's futures contracts are settled by offset and are cleared by the exchange clearinghouse function. Open futures positions are marked to market each trading day and the Trust's trading accounts are debited or credited accordingly. Options on futures contracts are settled either by offset or by exercise. If an option on a future is exercised, the Trust is assigned a position in the underlying future which is then settled by offset. The Trust's spot and forward currency transactions conducted in the interbank market are settled by netting offsetting positions held with the same counterparty; net positions are then settled by entering into offsetting positions and by cash payments.
LIQUIDITY
The Trust's assets are generally held as cash or cash equivalents which are used to margin the Trust's futures positions and withdrawn, as necessary, to pay redemptions and expenses. Other than potential market-imposed limitations on liquidity, due, for example, to daily price fluctuation limits, which are inherent in the Trust's futures and forward trading, the Trust's assets are highly liquid and are expected to remain so. During its operations through December 31, 2001, the Trust experienced no meaningful periods of illiquidity in any of the numerous markets traded by the Managing Owner.
RESULTS OF OPERATIONS
PERFORMANCE SUMMARY
The Trust's success depends on the Managing Owner's ability to recognize and capitalize on trends and other profit opportunities in different sectors of the world economy. The Managing Owner's trading methods are confidential, so that substantially the only information that can be furnished regarding the Trust's results of operations is its performance record. Unlike most operating businesses, general economic or seasonal conditions have no direct effect on the profit potential of the Trust, while, at the same time, its past performance is not necessarily indicative of future results. Because of the speculative nature of its trading, operational or economic trends have little relevance to the Trust's results. The Managing Owner believes, however, that there are certain market conditions -- for example, markets with strong price trends -- in which the Trust has a better opportunity of being profitable than in others.
During 2001, the Trust suffered net trading losses of $2,112,095. Brokerage fees of $2,629,963 were paid or accrued. The Trust paid no profit share. Interest income of $1,467,711 partially offset the Trust's expenses resulting in a net loss (inclusive of administrative expenses) of $3,565,934 and a 12.10% decrease in the Net Asset Value per Unit.
Energy prices were highly volatile throughout the year, buffeted by the conflicting influences of slowing worldwide growth on the one hand, and OPEC's effort to support oil prices and Middle-East turmoil on the other. Consequently, the Trust suffered losses on both long and short positions in crude oil trading most particularly, but also from trading of heating oil, London gas oil, unleaded gasoline, and natural gas. Volatility also characterized price action in soft and agricultural commodities, resulting in losses from sugar, corn, wheat, and coffee trading. In contrast, a short cotton trade produced a sizable gain.
A long position in short-term eurodollar interest rates futures that persisted throughout the year was highly profitable in response to the continuous easing of monetary policy by the Federal Reserve. A long position in 10-year German bond futures was also profitable for most of 2001. These gains were partially offset by losses sustained trading with both long and short positions in Japanese government bond futures, which were volatile without trend. In currency trading, a long U.S. dollar position against the Japanese yen was very profitable. Meanwhile, trading of the dollar/euro and dollar/Canadian dollar exchange rates generated losses. Also, trading the euro versus the British pound and Norwegian krona produced losses. Short German and Japanese stock index futures positions were quite profitable during the past year. In addition, both long and short positions in Hong Kong equity index futures were profitable. Finally, in metals, gains from trading aluminum, copper and zinc futures were only partially offset by losses from trading gold futures.
During 2000, the Trust achieved gross trading gains of $895,015. Brokerage fees of $3,298,836 were paid or accrued. The Trust paid no profit share. Interest income of $2,037,153 partially offset the Trust's expenses resulting in a net loss (inclusive of administrative expenses) of $538,015. However, due to the timing of redemptions of the Trust's Units in relation to the fluctuating values of the Trust's investments, the Net Asset Value of a Unit increased $25.80 or 2.3%.
The trading environment in all market segments, with the sole exception of energy, was extremely difficult for the first three-quarters of 2000. In the fourth quarter, however, the market environment improved significantly, and five market sectors were profitable, two sectors had a zero result for the quarter, and the other two sectors had only fractional losses. On balance, a persistent uptrend in energy prices during 2000 generated profits across the board, with gains accruing from trading of crude oil, heating oil, London gas oil, natural gas and unleaded gasoline. Interest rate trading was also profitable thanks to a strong fourth quarter uptrend in futures prices. Gains from U.S. and German interest rate positions led the way, while losses resulted from trading Japanese and U.K. instruments. Currency trading was also profitable due to a fourth quarter rebound. Long dollar positions versus the Euro and Thai Bhat were the leading gainers for 2000, while trading of the Euro versus the Yen, Norwegian Krona, and pound sterling generated losses. Persistent non-directional volatility plagued equity, metals and agricultural futures trading. In the equity sector, Hong Kong and Japanese futures produced the largest losses. Trading in copper, aluminum, zinc and gold resulted in losses. Profits from sugar trading were overwhelmed by losses from cotton and wheat trading, in particular.
During 1999, the Trust suffered trading losses of $3,450,194. Brokerage fees of $5,496,697 were paid or accrued. The Trust paid no Profit Shares. Interest income of $3,026,673 partially offset the Trust's losses and expenses resulting in a net loss (inclusive of administrative expenses) of $6,342,696 and a 10.1% decrease in the Net Asset Value per Unit.
1999 was a difficult year for managed futures traders and the Trust posted a sizable loss. The one bright spot was the energy sector where a broad uptrend provided significant profit opportunities in crude oil and oil products. Sill, extreme volatility in natural gas prices resulted in losses that reduced the positive impact from this sector. Similarly, in currency trading, solid profits from short Euro positions vis-a-vis the dollar, yen, and Eastern European currencies were largely offset by losses from trading yen, Swiss franc and Norwegian krone. Mixed results also occurred in stock indices where gains from trading the Hang Seng, Topix and S&P indices were largely offset by losses in Nikkei index positions. Interest rates too produced mixed results, with losses from Japanese and U.S. interest rate futures overwhelming gains from European futures trading. Metals trading showed a similar pattern. Profits from gold and aluminum trading were greatly offset by losses from zinc and copper. Meanwhile, trading of grains (corn, soybeans, wheat) was modestly unprofitable. Finally, with extreme price volatility affecting coffee and sugar trading throughout 1999, the softs sector was highly unprofitable for the year.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE
The Trust is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Trust's main line of business.
Market movements result in frequent changes in the fair market value of the Trust's open positions and, consequently, in its earnings and cash flow. The Trust'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 Trust's open positions and the liquidity of the markets in which it trades.
The Trust can rapidly acquire and/or liquidate 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 Trust's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Trust could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Trust's speculative trading and the recurrence in the markets traded by the Trust of market movements far exceeding expectations could result in actual trading or
non-trading losses far beyond the indicated Value at Risk or the Trust'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 inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Trust's losses in any market sector will be limited to Value at Risk or by the Trust's attempts to manage its market risk.
QUANTIFYING THE TRUST'S TRADING VALUE AT RISK
QUANTITATIVE FORWARD-LOOKING STATEMENTS
THE FOLLOWING QUANTITATIVE DISCLOSURES REGARDING THE TRUST'S MARKET RISK EXPOSURES CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SAFE HARBOR FROM CIVIL LIABILITY PROVIDED FOR SUCH STATEMENTS BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (SET FORTH IN SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT 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 Trust's risk exposure in the various market sectors traded by the Managing Owner is quantified below in terms of Value at Risk. Due to the Trust's mark-to-market accounting, any loss in the fair value of the Trust's open positions is directly reflected in the Trust'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 Trust as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95 99% of the maximum one-day losses in the fair value of any given contract incurred during the time period over which historical price fluctuations are 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 Trust), dealers' margins have been used as Value at Risk.
The fair value of the Trust's futures and forward positions does not have any optionality component. However, the Managing Owner may also trade commodity options on behalf of the Trust. The Value at Risk associated with options is reflected in the following table as the margin requirement attributable to the instrument underlying each option.
In quantifying the Trust's Value at Risk, 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 simply been aggregated to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Trust's positions are rarely, if ever, 100% positively correlated have not been reflected.
THE TRUST'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the average, highest and lowest amounts of trading Value at Risk associated with the Trust's open positions by market category for fiscal years 2001 and 2000. During fiscal year 2001, the Trust's average total capitalization was approximately $29,808,079. During fiscal year 2000, the Trust's average total capitalization was approximately $37,866,363.
FISCAL YEAR 2001
FISCAL YEAR 2000
Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts for each calendar quarter-end during the fiscal year. Average Capitalization is the average of the Trust's capitalization at the end of each calendar quarter of fiscal years 2001 and 2000. Dollar amounts represent millions of dollars.
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Trust 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 Trust. The magnitude of the Trust'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 Trust to incur severe losses over a short period of time. The foregoing Value at Risk table -- as well as the past performance of the Trust -- give no indication of this "risk of ruin."
NON-TRADING RISK
The Trust has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.
The Trust also has non-trading cash flow risk as a result of holding a substantial portion (approximately 89%) of its net assets in short-term U.S. Treasury instruments and other short-term debt instruments (as well as any market risk they represent) for margin and cash management purposes. Although the Managing Owner does not anticipate that, even in the case of major interest rate movements, the Trust would sustain a material mark-to-market loss on its securities positions, if short-term interest rates decline so will the Trust's cash management income. The
Trust also maintains a portion (approximately 3% of its assets in cash in interest-bearing bank accounts. These cash balances are also subject (as well as any market risk they represent) to cash flow risk, which is not material.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
THE FOLLOWING QUALITATIVE DISCLOSURES REGARDING THE TRUST'S MARKET RISK EXPOSURES -- EXCEPT FOR (i) THOSE DISCLOSURES THAT ARE STATEMENTS OF HISTORICAL FACT AND (ii) THE DESCRIPTIONS OF HOW THE MANAGING OWNER MANAGES THE TRUST'S 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 TRUST'S PRIMARY MARKET RISK EXPOSURES AS WELL AS THE STRATEGIES USED AND TO BE USED BY THE MANAGING OWNER FOR MANAGING SUCH EXPOSURES ARE SUBJECT TO NUMEROUS UNCERTAINTIES, CONTINGENCIES AND RISKS, ANY ONE OF WHICH COULD CAUSE THE ACTUAL RESULTS OF THE TRUST'S RISK CONTROLS TO DIFFER MATERIALLY FROM THE OBJECTIVES OF SUCH STRATEGIES. GOVERNMENT INTERVENTIONS, DEFAULTS AND EXPROPRIATIONS, ILLIQUID MARKETS, THE EMERGENCE OF DOMINANT FUNDAMENTAL FACTORS, POLITICAL UPHEAVALS, CHANGES IN HISTORICAL PRICE RELATIONSHIPS, AN INFLUX OF NEW MARKET PARTICIPANTS, INCREASED REGULATION AND MANY OTHER FACTORS COULD RESULT IN MATERIAL LOSSES AS WELL AS IN MATERIAL CHANGES TO THE RISK EXPOSURES AND THE RISK MANAGEMENT STRATEGIES OF THE TRUST. THERE CAN BE NO ASSURANCE THAT THE TRUST'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 THEIR INVESTMENT IN THE TRUST.
The following were the primary trading risk exposures of the Trust as of December 31, 2001, by market sector.
INTEREST RATES. Interest rate risk is the principal market exposure of the Trust. Interest rate movements directly affect the price of the sovereign bond positions held by the Trust 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 Trust's profitability. The Trust's primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Trust also takes positions in futures contracts on the government debt of smaller nations -- e.g., Spain. The Managing Owner anticipates that G-7 interest rates will remain the primary market exposure of the Trust for the foreseeable future. The changes in interest rates which have the most effect on the Trust are changes in long-term, as opposed to short-term, rates. Most of the speculative positions held by the Trust are in medium- to long-term instruments. Consequently, even a material change in short-term rates would have little effect on the Trust were the medium- to long-term rates to remain steady.
CURRENCIES. The Trust's currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Trust trades in a large number of currencies, including cross-rates -- i.e., positions between two currencies other than the U.S. dollar. However, the Trust's major exposures have typically been in the dollar/yen, dollar/euro and dollar/pound positions. The Managing Owner does not anticipate that the risk profile of the Trust's currency sector will change significantly in the future.
STOCK INDICES. The Trust's primary equity exposure is to equity price risk in the G-7 countries. The stock index futures traded by the Trust are by law limited to futures on broadly based indices. As of December 31, 2001, the Trust's primary exposures were in the Simex (Singapore), Nikkei (Japan) and Hang Sang (Hong Kong) stock indices. The Trust is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices. (Static markets would not cause major market changes but would make it difficult for the Trust to avoid numerous small losses.)
METALS. The World Resource program used for the Trust trades precious and base metals. The Trust's primary metals market exposure is to fluctuations in the price of gold aluminum, copper and zinc.
COMMODITIES. The Trust's primary commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Grains, coffee, sugar, cotton and cocoa accounted for the substantial bulk of the Trust's commodities exposure as of December 31, 2001. In the past, the Trust has had material market exposure to live cattle, orange juice and the soybean complex and may do so again in
the future. However, the Trust will maintain an emphasis on grains, coffee, sugar, cotton and cocoa, in which the Trust has historically taken its largest commodity positions.
ENERGY. The Trust's primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East. Although the Managing Owner trades natural gas, oil is the dominant energy market exposure of the Trust. Oil prices are 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 Trust as of December 31, 2001.
FOREIGN CURRENCY BALANCES. The Trust's primary foreign currency balances are in Japanese yen, euro, British pounds and Canadian and Hong Kong dollars. The Trust controls the non-trading risk of these balances by regularly converting these balances back into dollars (no less frequently than twice a month).
SECURITIES POSITIONS. The Trust's only market exposure in instruments held other than for trading is in its securities portfolio. The Trust holds only cash or interest-bearing, credit risk-free, short-term paper -- typically U.S. Treasury instruments with durations no longer than 1 year. Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on the Trust's securities, although substantially all of these short-term instruments are held to maturity.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
The Managing Owner attempts to control risk through the systematic application of its trading method, which includes a multi-system approach to price trend recognition, an analysis of market volatility, the application of certain money management principles, which may be revised from time to time, and adjusting leverage or portfolio size. In addition, the Managing Owner limits its trading to markets which it believes are sufficiently liquid in respect of the amount of trading it contemplates conducting.
The Managing Owner develops trading systems using various classes of quantitative models and data such as price, volume and interest rates, and tests those systems in numerous markets against historical data to simulate trading results. the Managing Owner then analyses the profitability of the systems looking at such features as the percentage of profitable trades, the worst losses experienced, the average giveback of maximum profits on profitable trades and risk adjusted returns. The performance of all systems in the market are then ranked, and a number of systems (typically, five to eight) are selected which make decisions in different ways at different times. This multi-system approach ensures that the total risk intended to be taken in a market is spread over several different strategies.
The Managing Owner also attempts to assess market volatility as a means of monitoring and evaluating risk. In doing so, the Managing Owner uses a volatility overlay system which measures the risk in a portfolio's position in a market and signals a decrease in position size when risk increases and an increase in position size when risk decreases. The Managing Owner's volatility overlay maintains overall portfolio risk and distribution of risk across markets within designated ranges.
The Managing Owner's risk management also focuses on money management principles applicable to a portfolio as a whole rather than to individual markets. The first principle is reducing overall portfolio volatility through diversification among markets. The Managing Owner seeks a portfolio in which returns from trading in different markets are not highly correlated, that is, in which returns are not all positive or negative at the same time. Additional money management principles include limiting the assets committed as margin or collateral, generally within a range of 15% to 35% of an account's net assets; avoiding the use of unrealized profits in a particular market as margin for additional positions in the same market; and changing the equity used for trading an account solely on a controlled periodic basis, not automatically due to an increase in equity from trading profits.
Another important risk management function is the careful control of leverage or portfolio size. Leverage levels are determined by simulating the entire portfolio over the past five or ten years to determine the worst case experienced by the portfolio in the simulation period. The worst case or peak-to-trough drawdown is measured from a daily high in portfolio assets to the subsequent daily low whether that occurs days, weeks or months after the daily high. If the Managing Owner considers the drawdown too severe, it reduces the leverage or portfolio size.
The Managing Owner determines asset allocation among markets on the basis of a systematic portfolio allocation algorithm. From time to time the Managing Owner may adjust the size of a position, long or short, in any given market. This exercise of discretion generally occurs only in response to unusual market conditions that may not have been factored into the design of the trading systems and is generally intended to reduce risk exposure. Decisions to make such adjustments require the exercise of judgment and may include consideration of the volatility of the particular market; the pattern of price movements, both inter-day and intra-day; open interest; volume of trading; changes in spread relationships between various forward contracts; and overall portfolio balance and risk exposure.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item are included as Exhibit 13.01 to this report.
The following summarized quarterly financial information presents the results of operations for the three month periods ended March 31, June 30, September 30 and December 31, 2001 and 2000. This information has not been audited.
There were no extraordinary, unusual or infrequently occurring items recognized in any quarter within the two most recent fiscal years, and the Trust has not disposed of any segments of its business. There have been no year-end adjustments that are material to the results of any fiscal quarter reported above.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosure.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a,b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Trust has no directors or executive officers. The Trust is controlled and managed by the Managing Owner under a delegation of authority by the Trust's Trustee, Wilmington Trust Company.
Millburn Ridgefield Corporation, the Managing Owner, is a Delaware corporation organized in May 1982 to manage discretionary accounts in futures and forward markets. It is the corporate successor to a futures trading and advisory organization which has been continuously managing assets in the currency and futures markets using quantitative, systematic techniques since 1971.
The principals and senior officers of Millburn Ridgefield Corporation as of December 31, 2001 are as follows:
Harvey Beker, age 48. Mr. Beker is Co-Chief Executive Officer and Co-Chairman of Millburn Ridgefield and The Millburn Corporation, and a partner of ShareInVest Research L.P. He received a Bachelor of Arts degree in economics from New York University in 1974 and a Master of Business Administration degree in finance from NYU in 1975. From June 1975 to July 1977, Mr. Beker was employed by Loeb Rhoades, Inc. where he developed and traded silver arbitrage strategies. From July 1977 to June 1978, Mr. Beker was a futures trader at Clayton Brokerage Co. of St. Louis. Mr. Beker has been employed by The Millburn Corporation since June 1978. During his tenure at Millburn, he has been instrumental in the development of the research, trading and operations areas. Mr. Beker became a principal of the firm in 1982.
George E. Crapple, age 57. Mr. Crapple is Co-Chief Executive Officer and a Co-Chairman of Millburn Ridgefield and a Director of The Millburn Corporation and a partner of ShareInVest Research L.P. In 1966 he graduated with honors from the University of Wisconsin where his field of concentration was economics and he was elected to Phi Beta Kappa. In 1969 he graduated from Harvard Law School, MAGNA CUM LAUDE, where he was a member of the Harvard Law Review. He was a lawyer with Sidley & Austin, Chicago, Illinois, from 1969 until April 1, 1983, as a partner since 1975, specializing in commodities, securities, corporate and tax law. He was first associated with Millburn Ridgefield in 1976 and joined Millburn Ridgefield Corporation on April 1, 1983 on a full-time basis. Mr. Crapple is a director and member of the Executive Committee, Chairman of the Appeals Committee and a former Chairman of the Eastern Regional Business Conduct Committee of the NFA, past Chairman of the Managed Funds Association and a member of the Technology Advisory Committee of the CFTC.
Gregg R. Buckbinder, age 43. Mr. Buckbinder is Senior Vice President and Chief Operating Officer of Millburn Ridgefield and The Millburn Corporation. He graduated CUM LAUDE from Pace University in 1980 with a B.B.A. in accounting and received an M.S. in taxation from Pace in 1988. He joined Millburn in January 1998 from Odyssey Partners, L.P. where he was responsible for the operation, administration and accounting of the firm's merchant banking and managed account businesses. Mr. Buckbinder was employed by Tucker Anthony, a securities broker and dealer, from 1985 to 1990 where he was First Vice President and Controller, and from 1983 to 1984 where he designed and implemented various operations and accounting systems. He was with the public accounting firm of Ernst & Whinney from 1984 to 1985 as a manager in the tax department and from 1980 to 1983 as a senior auditor, with an emphasis on clients in the financial services business. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Mark B. Fitzsimmons, age 54 Mr. Fitzsimmons is a Senior Vice-President of The Managing Owner and The Millburn Corporation and a partner of ShareInVest Research L.P. His responsibilities include both marketing and investment strategy. He graduated SUMMA CUM LAUDE from the University of Bridgeport, Connecticut in 1970 with a B.S. in economics. His graduate work was done at the University of Virginia, where he received a certificate of candidacy for a Ph.D. in economics in 1973. He joined The Managing Owner in January 1990 from Morgan Stanley & Co. Incorporated where he was a Principal and Manager of institutional foreign exchange sales and was involved in strategic trading for the firm. From 1977 to 1987 he was with Chemical Bank New York Corporation, first as a Senior Economist in Chemical's Foreign Exchange Advisory Service and later as a Vice-President and Manager of Chemical's Corporate Trading Group. While at Chemical he also traded both foreign exchange and fixed income products. From 1973 to 1977 Mr. Fitzsimmons was employed by the Federal Reserve Bank of New York, dividing his time between the International Research Department and the Foreign Exchange Department.
Barry Goodman, age 44. Mr. Goodman is an Executive Vice-President, Director of Trading and Co-Director of Research of The Managing Owner and The Millburn Corporation and a partner of ShareInVest Research
L.P. His responsibilities include overseeing the firm's trading operation and managing its trading relationships, as well as the design and implementation of trading systems. He graduated MAGNA CUM LAUDE from Harpur College of the State University of New York in 1979 with a B.A. in economics. From 1980 through late 1982 he was a commodity trader for E. F. Hutton & Co., Inc. At Hutton he also designed and maintained various technical indicators and coordinated research projects pertaining to the futures markets. He joined The Managing Owner in 1982 as Assistant Director of Trading.
Dennis B. Newton, age 50. Mr. Newton is a Senior Vice-President of The Managing Owner and The Millburn Corporation. His primary responsibilities are in administration and marketing. Prior to joining The Managing Owner in September 1991, Mr. Newton was President of Phoenix Asset Management, Inc., a registered commodity pool operator from April 1990 to August 1991. Prior to his employment with Phoenix, Mr. Newton was a Director of Managed Futures with Prudential-Bache Securities Inc. from September 1987 to March 1990. Mr. Newton joined Prudential-Bache from Heinold Asset Management, Inc. where he was a member of the senior management team. Heinold was a pioneer and one of the largest sponsors of funds utilizing futures and currency forward trading.
Grant N. Smith, age 50. Mr. Smith is an Executive Vice-President and Co-Director of Research of The Managing Owner and The Millburn Corporation and a partner of ShareInVest Research L.P. He is responsible for the design, testing and implementation of quantitative trading strategies, as well as for planning and overseeing the computerized decision-support systems of the firm. He received a B.S. degree from the Massachusetts Institute of Technology in 1974 and an M.S. degree from M.I.T. in 1975. While at M.I.T. he held several teaching and research positions in the computer science field and participated in various projects relating to database management. He joined The Managing Owner in 1975.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None.
(d) FAMILY RELATIONSHIPS
None.
(e) BUSINESS EXPERIENCE
See Item 10 (a,b) above.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
(g) PROMOTERS AND CONTROL PERSONS
The Managing Owner is the sole promoter and control person of the Trust.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The Trust has no directors or officers. None of the directors or officers of the Managing Owner receive "other compensation" from the Trust. The Managing Owner makes all trading decisions on behalf of the Trust. The Managing Owner receives monthly brokerage commissions of 0.75 of 1% of the Net Assets (which is reduced to 0.58 of 1% of Net Assets for Unitholders who invest more than $1 million in the Trust) and a quarterly profit share of 17.5% of any new trading profit as defined.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Trust knows of no person who owns beneficially more than 5% of the Units. All of the Trust's managing owner interest is held by the Managing Owner.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Under the terms of the Trust Agreement, the Trust's affairs are managed by the Managing Owner, which has discretionary authority over the Trust's trading. The Managing Owner's managing owner interest was valued at $900,516 as of December 31, 2001, 3.50% of the Partnership's total equity, the equivalent of 902.12 Units.
(c) CHANGES IN CONTROL
None.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11. EXECUTIVE COMPENSATION" and "Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The Trust allocated to the Managing Owner $2,629,963 in brokerage fees and $0 in profit share for the year ended December 31, 2001. The Managing Owners' managing owner interest showed an allocation of loss of $41,680 for the year ended December 31, 2001. The Trust is prohibited from making any loans.
PART IV
Item 14
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following are included with the 2001 Report of Independent Accountants, a copy of which is filed hereto as Exhibit 13.01.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All Schedules are omitted for the reason that they are not required or are not applicable because equivalent information has been included in the financial statements or the notes thereto.
(a)(3) EXHIBITS AS REQUIRED BY ITEM 601 OF REGULATION S-K
The following exhibits are included herewith.
DESIGNATION DESCRIPTION
13.01 2001 Report of Independent Accountants
The following exhibits are incorporated by reference from Amendment No. 1 to the Registration Statement (File No. 33-90756) filed on June 27, 1995 on Form S-1 under the Securities Act of 1933.
3.02 Certificate of Trust of the Trust.
10.01 Form of Subscription Agreement and Power of Attorney.
The following exhibits are incorporated by reference from Post-Effective Amendment No. 1 to the Registration Statement (File No. 33-90756) filed on March 1, 1996 on Form S-1 under the Securities Act of 1933.
10.02 Selling Agreement among the Trust, the Managing Owner and the Principal Selling Agents (includes a form of Additional Selling Agent and Correspondent Selling Agent Agreement).
10.03(a) Customer Agreement among the Trust, the Managing Owner and a Principal Selling Agent in its capacity as a futures commission merchant.
10.03(b) Customer Agreement among the Trust, the Managing Owner and a Principal Selling Agent in its capacity as a futures commission merchant.
10.04 Escrow Agreement between the Trust and Chemical Bank, N.A.
The following exhibit is incorporated by reference from Post-Effective Amendment No. 5 to the Registration Statement (File No. 33-90756) filed February 18, 1997 on Form S-1 under the Securities Act of 1933.
3.01 Amended and Restated Declaration of Trust and Trust Agreement
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Partnership during the quarter ended December 31, 2001.
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, in the City of Greenwich and State of Connecticut on the 28th day of March, 2002.
THE MILLBURN WORLD RESOURCE TRUST
By: The Managing Owner Corporation, Managing Owner
By /s/ Harvey Beker Harvey Beker President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Managing Owner of the Registrant in the capacities and on the date indicated.
(Being the principal executive officer, the principal financial and accounting officer, and a majority of the directors of Millburn Ridgefield Corporation)
Millburn Ridgefield Corporation Managing Owner of Registrant March 28, 2002
By /s/ Harvey Beker - ------------------- Harvey Beker Co-CEO