Item 1: Business
(a) General Development of Business:
ML Cornerstone FuturesAccess LLC (the “Fund”) was organized under the Delaware Limited Liability Company Act on May 17, 2004 and commenced trading activities on February 1, 2005. The Fund issues new units of limited liability company interest (“Units”) at Net Asset Value per Unit (see Item 6 for discussion of net asset value and net asset value per unit for subscriptions and redemptions purposes hereinafter referred to as Net Asset Value and Net Asset Value per Unit for all other purposes) as of the beginning of each calendar month. The Fund engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Cornerstone Quantitative Investment Group (“Cornerstone”) is the trading advisor of the Fund.
Merrill Lynch Alternative Investments LLC (“MLAI”), is the sponsor and manager of the Fund. MLAI 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 Fund’s commodity broker.
In February 2008, Cornerstone advised the Fund that it was discontinuing its business operations as a Commodity Trading Advisor. Effective February 29, 2008, the formal liquidation of the Fund began. In accordance with the offering memorandum, the Members redeemed their capital upon the liquidation of the Fund. MLAI has agreed to waive payment for any remaining unreimbursed costs related to the initial offering of the units.
As of December 31, 2007, the Net Asset Value of the Fund for all other purposes was $75,896,797 and the Net Asset Value per Unit for all other purposes, originally $1.00 as of February 1, 2005 for Class A, C and I and April 1, 2005 for Class D had fallen to $0.8078 for Class A, $0.7832 for Class C, $0.8978 for Class D and $0.8172 for Class I. The Net Asset Value and Net Asset Value per Unit for financial reporting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) were $75,828,422 and $0.8069 for Class A, $0.7825 for Class C, $0.8976 for Class D and $0.8165 for Class I.
The highest month-end Net Asset Value per Unit for all other purposes for Class A since Cornerstone began trading the Fund was $1.0737 (May 31, 2006) and the lowest was $0.8078 (December 31, 2007). The highest month-end Net Asset Value per Unit for all other purposes for Class C since Cornerstone began trading the Fund was $1.0574 (May 31, 2006) and the lowest was $0.7832 (December 31, 2007). The highest month-end Net Asset Value per Unit for all other purposes for Class D since Cornerstone began trading the Fund was $1.1780 (May 31, 2006) and the lowest was $0.8978 (December 31, 2007). The highest month-end Net Asset Value per Unit for all other purposes for Class I since Cornerstone began trading the Fund was $1.0798 (May 31, 2006) and the lowest was $0.8172 (December 31, 2007).
(b) Financial Information about Segments:
The Fund’s business constitutes only one segment for financial reporting purposes, i.e., a speculative “commodity pool”. The Fund does not engage in sales of goods or services.
(c) Narrative Description of Business:
Trading Advisor’s Trading Model
The Fund and Cornerstone have entered into an advisory agreement. Cornerstone attempts to achieve for the Fund the objective of its trading model, the International Value Program (the “Trading Model”), which is a combination of different strategies. Methods employed include asset allocation models, a fundamental and technical approach to trading real commodities, a model-based approach to spread trading, and technical analysis.
Cornerstone attempts to achieve appreciation of the assets of the Fund through speculative trading in the commodity and currency markets; however, Cornerstone will exercise its discretion in interpreting the signals generated by its trading programs. Commodity, financial and currency traders often rely on one of the two types of analysis - “technical” or “fundamental” - for their trading decisions. Technical analysis is based on the theory that a study of the markets will provide a means of anticipating the external factors that affect the supply and demand of a particular commodity in order to predict future prices. Fundamental analysis relies on a study of those external factors. Cornerstone typically uses both a systematic analysis of fundamental factors and technical analysis to make trading decisions.
The Trading Model is a combination of different strategies. Methods employed include asset allocation models, a fundamental and technical approach to trading real commodities, a model-based approach to spread trading, and technical analysis.
A significant component of the Trading Model is Cornerstone’s proprietary asset allocation models. These are econometric models that use a variety of market-based and fundamental data to forecast excess returns of members of an asset class. A portfolio of long and short positions is then formed that maximizes returns for a predetermined amount of risk. The three asset classes are bonds, foreign exchange, and short-term interest rates. A commodity analysis component employs fundamental and market data to forecast price changes in commodity markets. Another component is a grouping of smaller systematic strategies.
Employees
The Fund has no employees.
Use of Proceeds and Cash Management Income
Subscription Proceeds
The Fund’s cash is used as security for and to pay the Fund’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 Cornerstone to trade on a speculative basis in a wide range of different futures and forwards markets on behalf of the Fund. While being used for this purpose, the Fund’s assets are also generally available for cash management, as more fully described below under “Cash Assets”.
Market Sectors
In addition to its OTC trading, the Trading Model currently places trades on the following exchanges: CBOT, CME, EUREX, IME, LME, LIFFE, MATIF, ME, MEFF, NYMEX, NZFOE, SFE, SIMEX, TIFFE, TSE and may expand to include trading in other markets.
The Fund’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 Fund has no policy restricting its relative commitment to any of these different types of markets.
Market Types
The Fund trades on a variety of United States and foreign futures exchanges. Substantially all of the Fund’s off-exchange trading takes place in the highly liquid, institutionally-based currency forward markets.
Many of the Fund’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 Fund.
Custody of Assets
All of the Fund’s assets are currently held in Commodity Futures Trading Commission (“CFTC”) regulated customer accounts at MLPF&S.
Cash Assets
The Fund will generally earn interest, as described below, on its “Cash Assets”, which can be generally described as the cash actually held by the Fund plus its “open trade equity” (unrealized gain and loss marked to market daily on open positions). Cash Assets are held primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are comprised of the Fund’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 Fund’s account on a daily basis; the Fund’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. Cash Assets do not include and the Fund does not earn interest income on the Fund’s 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 Fund’s Cash Assets may be greater than, less than or equal to the Fund’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 Fund’s U.S. Dollar Cash Assets
The Fund’s U.S. dollar Cash Assets are held in cash at MLPF&S, which utilizes 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 Fund with interest at the most favorable rate payable by MLPF&S to accounts of Merrill Lynch affiliates but not less than 75% of such prevailing rate. The Fund is credited with interest on any of its assets and net gains actually held by MLPF&S non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest, which Merrill Lynch pays to the Fund, from possession of such assets.
The use of the offset account arrangements for the Fund’s U.S. dollar Cash 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 Fund’s U.S. dollar Cash Assets to the maximum practicable extent in short-term U.S. Treasury bills. All interest earned on the U.S. dollar Cash Assets so invested would be paid to the Fund but MLAI would expect the amount of such interest to be less than that cash to the Fund under the offset account arrangements. The remaining U.S. dollar Cash Assets of the Fund would be kept in cash to meet variation margin payments and pay expenses, but would not earn interest for the Fund.
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 Fund’s U.S. dollar Cash 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 Fund and the fee paid to the offset banks - from the offset accounts have not exceeded 0.75% per annum of the Fund’s average daily U.S. dollar Cash Assets held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Sponsor Fees paid by the Fund to MLPF&S and MLAI, respectively.
Interest Paid by Merrill Lynch on the Fund’s Non-U.S. Dollar Cash Assets
Under the single currency margining system implemented for the Fund, the Fund itself 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 Fund to retain the monies which would otherwise be required for such margin as part of the Fund’s U.S. dollar Cash Assets. The Fund does not earn interest on foreign margin deposits provided by MLPF&S. The Fund does, however, earn interest on its non-U.S. dollar Cash Assets. Specifically, the Fund 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 Fund. Merrill Lynch charges the Fund Merrill Lynch’s cost of financing realized and unrealized losses on such positions.
The Fund 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 Fund’s U.S. dollar Cash Assets. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Fund while held in foreign currencies are subject to exchange rate risk.
Charges
The following table summarizes the charges incurred by the Fund for the years ended December 31, 2007 and 2006 and for the period February 1, 2005 (Commencement of Operations) to December 31, 2005.
(1) net of reimbursement of $6,032 in 2005
The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund’s U.S. dollar assets maintained at MLPF&S.
The Fund’s average month-end Net Assets, for all other purposes during, 2007, 2006 and 2005 equaled $130,485,054, $99,705,497 and $30,633,140, respectively.
During 2007, 2006 and 2005, the Fund earned $6,925,024, $5,011,351 and $984,674, respectively, in interest income, or approximately 5.31%, 5.03% and 3.21%, respectively, of the Fund’s average month-end Net Assets for all other purposes.
Description of Current Charges
Regulation
MLAI, Cornerstone and MLPF&S are each subject to regulation by the CFTC and the National Futures Association (‘NFA”). Other than in respect of the registration requirements pertaining to the Fund’s securities under Section 12(g) of the Securities Exchange Act of 1934, the Fund 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 Advisory (“FINRA”).
(d) Financial Information about Geographic Areas
The Fund does not engage in material operations in foreign countries, nor is a material portion of the Fund’s revenue derived from customers in foreign countries.
The Fund trades on a number of foreign commodity exchanges. The Fund does not engage in the sales of goods or services.
Item 1A:
Item 1A: Risk Factors
Past Performance Not Necessarily Indicative of Future Results
Past performance is not necessarily indicative of future results. The trading advisor’s past performance may not be representative of how it may trade in the future for the Fund.
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 the trading advisor can predict or control - have a material effect on the performance of any managed futures strategy.
Forward Trading
The Fund will trade currencies in the forward in addition to in the futures markets. The forward markets are over-the-counter, not exchange, markets, and in trading in these markets, the Fund 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 market counterparties are under no obligation to enter into forward transactions with a Fund, including transactions through which the Fund is attempting to liquidate open positions.
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. The trading advisor has not agreed to limit the amount of additional equity which it may manage.
Trading Advisor Risk
The Fund is subject to the risk of the bad judgment, negligence or misconduct of its trading advisor. There have been a number of instances in recent years in which private investment funds have incurred substantial losses due to manager misconduct.
Changes in Trading Strategy
The trading advisor may make material changes in its trading strategies without the knowledge of MLAI.
Illiquid Markets
Certain positions held by the Fund may become illiquid, preventing the Fund’s trading advisor 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
The trading advisor may trade extensively on non-U.S. exchanges. These exchanges are not regulated by any United States governmental agency. The Fund 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 options will generally be denominated in foreign currencies; consequently, the Fund will be subject to a certain degree of exchange-rate risk in trading such contracts.
The Fund could lose Assets and have its trading disrupted due to the bankruptcy of one of the parties.
The Fund is subject to the risk of insolvency of counterparty, a clearinghouse or MLPF&S. Fund asset could be lost or impounded during lengthy bankruptcy proceedings. Were a substantial portion of the Fund’s capital tied up in a bankruptcy, MLAI might suspend or limit trading, perhaps causing the Fund 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
Not applicable.
Item 2:
Item 2: Properties
The Fund does not use any physical properties in the conduct of its business.
The Fund’s sponsor offices are the administrative offices of MLAI (Merrill Lynch Alternative Investments LLC, Hopewell Corporate Campus, Building No. 2, 1200 Merrill Lynch Drive, First Floor, Pennington New Jersey 08534). MLAI performs administrative services for the Fund from MLAI’s offices.
Item 3:
Item 3: Legal Proceedings
None.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
None.
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. Members 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, 2007, there were 2,683 holders of Units including MLAI.
(c) Dividends:
MLAI has not made and does not contemplate making any distributions on the Units.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
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.
CLASS A
CLASS C
CLASS D
CLASS I
(1) Net Asset Value for all other purposes
(1) Net Asset Value per unit for all other purposes.
Class A Units are subject to a sales commission paid to Merrill Lynch ranging from 1.0% to 2.5%. Class D and Class I Units are subject to sales commissions up to 0.5%. The rate assessed to a given subscription is based upon the subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units are not subject to any sales commissions
Item 5(b)
Not applicable.
Item 5(c)
Not applicable.
Item 6:
Item 6: Selected Financial Data
The following selected financial data has been derived from the financial statements of the Fund.
(1) Commencement of operations
For financial reporting purposes, in conformity with U.S. GAAP, the Fund deducted the total initial offering costs payable to MLAI at inception from Members’ Capital for purposes of determining Net Asset Value. For all other purposes, including computing Net Asset Value for purposes of member subscription and redemption activity, such payment is amortized over 60 months. Consequently, as of December 31, 2007 and 2006, the Net Asset Value and Net Asset Value per Unit of the different Classes for financial reporting purposes and for all other purposes are as follows:
December 31, 2007
December 31, 2006
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 Members of the Fund. Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for “all other purposes”.
MONTH-END NET ASSET VALUE PER INITIAL UNIT - CLASS A
MONTH-END NET ASSET VALUE PER INITIAL UNIT - CLASS C
MONTH-END NET ASSET VALUE PER INITIAL UNIT - CLASS D
MONTH-END NET ASSET VALUE PER INITIAL UNIT - CLASS I
Pursuant to CFTC policy, monthly performance is presented from February 1, 2005 (commencement of operations).
ML CORNERSTONE FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-”Principal Protected”(1)
Inception of Trading: February 1, 2005
Aggregate Subscriptions: $23,112,373
Current Capitalization: $10,295,540
Worst Monthly Drawdown(2): (6.98)% (November 2007)
Worst Peak-to-Valley Drawdown(3): (24.76)% (June 2006-December 2007)
Net Asset Value per Unit for Class A, December 31, 2007: $0.8078
(1) Certain Funds, including Funds sponsored by MLAI, 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”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 2005 by the Fund; 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 February 1, 2005 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 Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The inception to date total return based on U.S. GAAP is -19.31%.
ML CORNERSTONE FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 1, 2005
Aggregate Subscriptions: $133,492,458
Current Capitalization: $54,049,135
Worst Monthly Drawdown(2): (7.06)% (November 2007)
Worst Peak-to-Valley Drawdown(3): (25.92)% (June 2006-December 2007)
Net Asset Value per Unit for Class C, December 31, 2007: $0.7832
(1) Certain Funds, including Funds sponsored by MLAI, 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”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 2005 by the Fund; 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 February 1, 2005 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 Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The inception to date total return based on U.S. GAAP is -21.75%.
ML CORNERSTONE FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 1, 2005
Aggregate Subscriptions: $18,242,238
Current Capitalization: $2,054,341
Worst Monthly Drawdown(2): (6.87)% (November 2007)
Worst Peak-to-Valley Drawdown(3): (23.78)% (June 2006-December 2007)
Net Asset Value per Unit for Class D, December 31, 2007: $0.8978
(1) Certain Funds, including Funds sponsored by MLAI, 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”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 2005 by the Fund; 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 February 1, 2005 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 Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The inception to date total return based on U.S. GAAP is -10.24%.
ML CORNERSTONE FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: February 1, 2005
Aggregate Subscriptions: $21,727,391
Current Capitalization: $9,497,781
Worst Monthly Drawdown(2): (6.95)% (November 2007)
Worst Peak-to-Valley Drawdown(3): (24.32)% (June 2006-December 2007)
Net Asset Value per Unit for Class I, December 31, 2007: $0.8172
(1) Certain Funds, including Funds sponsored by MLAI, 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”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since February 1, 2005 by the Fund; 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 February 1, 2005 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 Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The inception to date total return based on U.S. GAAP is -18.35%.
Item 7:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operational Overview
This performance summary is an outline description of how the Fund performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time.
Cornerstone 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 Cornerstone 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 Fund.
Performance Summary
This performance summary is an outline description of how the Fund performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time.
December 31,
The Fund posted an overall loss for the year with the stock indices sector posting gains while the energy, metals, agriculture, currency and the interest rate sectors posted losses.
Stock indices posted profits to the Fund. The markets were choppy and exposures changed continuously at the beginning of the year as losses were posted to the Fund mid-quarter only to be offset by gains by the end of the first quarter. Profits continued to be posted to the Fund throughout the second quarter due to the Fund’s long positions in the United States, Canadian and United Kingdom stock markets all posting gains. Equity indices were generally down globally at the beginning of the third quarter through the middle due to losses incurred in the Japanese, British, and German markets. However, gains were posted to the Fund at the end of the third quarter due to the Fund’s equity index strategy continuing its long positions in the world equity indices. The year ended with the value based equity portfolio long positions in the United Kingdom and Canadian markets posting profits for the Fund.
The energy sector posted losses for the Fund. Losses were posted for the Fund at the beginning of the year due to the fact the energy sector had mixed positions. Long positions in natural gas and unleaded gasoline produced profits being posted to the Fund at the beginning of the second quarter. Crude oil was the worst performer due to its
recent range bound nature and switching of trend signals resulting in a series of poorly timed trades posting losses for the Fund. Losses continued to be posted to the Fund at the end of the second quarter as long positions in natural gas and the cash natural gas prices dropped 15% despite unchanged or stronger prices in the petroleum complex. The energy sector posted overall losses in the third quarter with all of the losses accounted for by the long positions in natural gas. However, the year ended with profits being posted to the Fund at the beginning and end of the fourth quarter as the Fund continues its long positions.
The metals sector posted losses for the Fund. Profits were generated at the beginning of the year as long positions were held in metals continuing through the beginning of the second quarter. Profits were driven by a number of factors including supply disruptions and robust Chinese growth which drove metal prices higher with copper approaching its May 2006 peak. However, profits were offset by losses being posted to the Fund mid-quarter through the end of the second quarter as the Fund traded long in metals. Long positions in copper and zinc produced profits for the Fund at the beginning of the third quarter only to have the metals markets suffer reversals mid-quarter particularly in the long positions in aluminum. Profits were posted to the Fund at the end of the third quarter as the Fund continued its long positions in the metals markets. The strength of industrial production in the emerging markets is typically one of the Fund’s major bullish factors. Therefore, the year ended with profits being posted to the Fund.
The agricultural sector posted losses for the Fund. Gains were posted at the beginning of the year only to reverse with losses being posted to the Fund mid-quarter due to the warm winter the U.S. had been experiencing ended abruptly with longer term forecasts indicating temperatures below normal which caused the Fund to reverse its position and went from short to long. However, the first quarter ended with the Fund reversing its positions in grains as the United States Department of Agriculture released its prospective plantings report for the 2007 planting season indicating an anticipated increase in corn production. The market reaction was to send corn limit down along with other grains. Gains were posted to the Fund at the beginning of the second quarter only to be offset with small losses mid-quarter. Losses were small but widespread with thirteen of the sixteen positions losing money. The best performing contract at the end of the second quarter was corn, but it could not pull the agricultural sector positive. The agriculture market was generally soft which attributed to the difficult trading environment resulting in the sector posting losses for the third quarter of the Fund. The year ended with losses as value factors were driving expected returns and hence positions. In the grain models the Fund did poorly because of factors that related to the expected ending inventories on the farm price.
The currency sector posted losses for the Fund. Losses were posted to the Fund at the beginning of the year due to the Fund’s short positions held in the U.S. dollar, Eurodollar and German bund. The second quarter produced profits being posted to the Fund due to the strength in both the euro and the British sterling currencies. Offsetting these gains were losses in long positions in the Norwegian krone and the Japanese yen. International value had a difficult second quarter end with the short rate asset allocation model, the model with the biggest weight, posting the worst performance. This model has been hurt over the last several months by unexpected Bank of England rate hikes in response to persistently high core inflation in the United Kingdom. The market moves generated by concerns over the financial side of the U.S. housing market adversely affected international value, which was down about 4.6% at the beginning of the third quarter as losses were incurred in short positions in the U.S. dollar and the Euro. Losses continued to be posted to the Fund mid-quarter, only to be reversed at the end of the third quarter. The year ended with losses being posted to the Fund due the volatility in the financial markets.
The interest rate sector was the least profitable for the Fund. Interest rate related positions posted losses at the beginning of the year due to the Fund’s positioning for world rates to increase, however, the rates decreased. Profits were posted to the Fund at the beginning of the second quarter with an unwind of short positions in the German bunds and Japanese Government Bonds. Profits continued to be posted during the third quarter due to the international market and the fixed income markets. In particular, the short positions in the U.S. dollar and Eurodollar did very well, as did the short positions in German bunds. Government bond trading did well at the end of the third quarter relative to its modest risk allocation. The year ended with losses being posted to the Fund which is attributed to the volatile trading environment.
December 31,
The Fund posted an overall loss for the year with energy, metals and the stock indices sectors posting gains while interest rates, agriculture and currencies sectors posted losses.
The energy sector posted the highest profits for the Fund. Profits were posted for the Fund in short positions in natural gas which was due to a mild winter in the U.S. which contributed to lower prices. Profits were also posted mid-year for the Fund during a very volatile period on the Iran/U.S./Europe “nuclear standoff”. Profits continued to be posted in the third quarter due to long positions in natural gas as the heat wave in the U.S drove energy demand for cooling usage. The quarter ended with near term supplies being ample for all the energies and thus putting downward pressure on the markets. In addition, the natural gas market was priced for a major weather event which was uneventful. The year ended with profits continued to be posted with long positions in natural gas over the summer and short position the fall and winter.
The metals sector posted the second highest profits for the Fund. Profits were generated at the beginning of the year in a volatile climate. As the metal prices increased mid-year the Fund’s strategy to cut positions to keep a constant U.S. dollar exposure worked out well due to the fact it was done when prices were near their peaks. Base metal markets contributed a great deal of volatility as long-standing in the copper market was down 15% however towards the end of the year effect on the returns was small. Zinc was added to the metal portfolio near the end of the year while the Fund held constant U.S. dollar exposure in the base metal sector with long positions in all the metals (copper, aluminum, and zinc) as profits continued through the end of the year.
The stock indices sector also posted profits for the Fund. Profits were posted for the Fund as trading began the end of the third quarter and continued posting profits through the end of the year despite computerized trading of Nikkei futures responsible for almost all the net losses in the financial contracts.
The interest rate sector posted losses for the Fund. Although the Fund was generally net short the beginning of the year the best performer in short rate asset allocation was a long position in the Canadian BA Futures. In addition, the Fund was modestly profitable in a short position in U.S. Eurodollar futures. Other major short term interest rate position, short Euribor (Euro denominated three month interest rate) futures, was modestly profitable as well as the consensus shifted to expect still stronger economic growth in Europe. Interest rates went up mid-year and the strategy was short fixed income. In particular the Fund was short and did well in German bunds, Euro denominated short term interest rates (Euribor), and U.S. Eurodollars. The bond asset allocation posted profits for the Fund due to short positions in German bunds. German bunds decreased in price as the European Central Bank continued to ruminate about the possibility of inflation rates above levels the bank is comfortable with. However, long-term bonds posted losses for the Fund which was attributed to short positions in the German bund. Interest rate related positions posted losses at the end of the year due to the Fund’s positioning for world rates to increase however, they decreased in both the U.S. and Japan, on a perceived decrease in rate hike prospects.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the Fund posting losses for this sector.
The currency sector was the least profitable for the Fund. Currency asset allocation continued to struggle at the beginning of the year posting losses in short positions in the Australian dollar. The Fund also closed out all currency positions and did not re-enter until the U.S. dollar shifted to negative momentum. The currency asset allocation portfolio, in U.S. dollar terms, was long British pounds and Japanese yen and short Australian dollars, with a net U.S. dollar short. This position was profitable mid-year as the U.S. dollar declined against the major currencies. The strategy with long position in the British pound produced most of the gains offsetting losses in the Australian dollar. International value had difficulty in the currency markets in the long Japanese yen/short U.S. dollar position that reversed May’s gains. The two strategies with the biggest allocation did poorly in 2006. The short rate asset allocation strategy spent most of the year net short, primarily in the Eurodollar futures, but also in the Euribor. These positions were quite profitable in the first half of the year, but more than gave up the early gains as the U.S. Federal Reserve ended its tightening and the market quickly discounted easing in the futures.
December 31,
The Fund posted an overall gain for the year with interest rates, energy, and metal sectors posting gains while agriculture and currencies sectors posted losses. The Fund began trading at the beginning of the February 2005.
The interest rate sector was the most profitable for the Fund. At the middle of the first quarter, the Fund adjusted its net short positions and continued to adjust the short interest rate position more often than was typical for their trading program. In the second quarter, the short rate asset allocation model benefited from the rally at the front end of the U.S. yield curve. The short rate model was profitable as long positions in the United States, United Kingdom, and Canada did well. Eurodollars recovered completely and the Fund took long positions in the short end of the yield curve, primarily in the U.S. profits generated in the third quarter were contributed from the Short Rate model. In September, Europe and Japan showed more growth and as a result interest rates went up worldwide. The program was short in fixed income across the board and benefited from the increase in interest rates. The year ended with profits owing to short positions in European short-term interest rate contracts. In particular, Euribor contracts dropped in price as market sentiment shifted to a view that European Central Bank would raise rates.
The energy sector posted a modest profit for the Fund. Cornerstone added additional fundamental information to the crude oil trading program that it had long included in the trend analysis component of international value. The Fund continued to trade this market with a systematic or model based, approach but the importance of the technical component decreased. Cornerstone then focused its research on real commodities. It continued to move the non-financials it traded over to fundamental models, most recently natural gas. The research continued with the goal of moving more energy contracts to this mixed fundamental and technical framework. Third quarter was volatile as concerns about growth in Europe caused the market to rally prior to Hurricane Katrina causing oil prices to increase and cutting expectations for U.S. growth. The beginning of the fourth quarter was profitable for the Fund as the short positions in the energy market due to the initial pessimism about the market’s ability to meet this winter’s heating requirements abated. The fundamental short positions in the energy markets
continued to post profits for the Fund. However, the year ended with volatility due to the fact the Fund had to increase its long positions in natural gas causing the Fund to fall back 35% from its intra month peak.
The metals sector posted profits for the Fund. Profits were generated in the metals sector even through a volatile climate. The year ended with the bullish speculative environment fueling long term trends.
The agricultural sector posted losses for the Fund. The agricultural market was soft which attributed to the difficult trading environment resulting in the Fund posting losses for this sector.
The currency sector was the least profitable for the Fund. The currency markets were dominated by the strengthening U.S. dollar and the Euro falling to a seven month low after the French rejected the European constitution. The third quarter was a very volatile period as the U.S. dollar weakened against the Japanese yen and the British pound. The Japanese yen, which has been weakening against the U.S. dollar for much of 2005, suddenly rallied as December’s Federal Reserve comments led to suggestions of an end to interest rate hikes in the very near future. Elsewhere, high yielding currencies suffered reversals as the sustainability of their corresponding interest rate cycles appeared to be coming to an end.
Variables Affecting Performance
The principal variables that determine the net performance of the Fund are gross profitability from the Fund’s trading activities and interest income.
During all periods set forth above “Selected Financial Data”, the interest rates in many countries were at unusually low levels. The low interest rates in the United States (although higher than in many other countries) negatively impacted revenues because interest income is typically a major component of the Fund’s profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund’s profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Fund’s Management fees and Sponsor Fees are a constant percentage of the Fund’s costs. Brokerage Commissions, which are not based on a percentage of the Fund’s assets, are based on actual round turns. The performance fees payable to Cornerstone are based on the new Trading Profits generated by the Fund excluding interest and after reduction of the Brokerage Commissions.
Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time.
Except in unusual circumstances, factors-regulatory approvals, cost of goods sold, employee relations and the like-which often materially affect an operating business have virtually no impact on the Fund.
Liquidity; Capital Resources
The Fund borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Fund’s U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Fund’s assets are held in cash. The Net Asset Value of the Fund’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 Funds profit potential generally increases. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow.
Because substantially all of the Fund’s assets are held in cash, the Fund 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 Cornerstone 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 Fund’s positions and assets, the Fund’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.
(The Fund has no applicable off-balance sheet arrangements and tabular disclosure or contractual obligations of the type described in Items 3.03(a)(4) and 3.03(a)(5) of Regulation S-K.)
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Fund 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 Fund’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 Fund’s main line of business.
Market movements result in frequent changes in the fair market value of the Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’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 Fund’s open positions and the liquidity of the markets in which it trades.
The Fund, under the direction of Cornerstone, rapidly acquires and liquidates both long and short positions in currency markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Fund’s past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund’s speculative trading and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund’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 Fund’s losses in any market sector will be limited to Value at Risk or by the Fund’s attempts to manage its market risk.
Quantifying The Fund’s Trading Value At Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s market risk exposures contain “forward-looking statement” within the meaning of the safe harbor form 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 Fund’s risk exposure in the various market sectors traded by Cornerstone is quantified below in terms of Value at Risk. Due to the Fund’s mark-to-market accounting, any loss in the fair value of the Fund’s open positions is directly reflected in the Fund’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 Fund 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 Fund), 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 Fund’s positions are rarely, if ever, 100% positively correlated have not been reflected.
The Fund’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 Fund’s open positions by market category for the fiscal period. During the years ended December 31, 2007 and 2006, the Fund’s average month-end Net Asset Value for all other purposes was approximately $130,485,054 and $99,705,497, respectively.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Fund 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 Fund. The magnitude of the Fund’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 Fund to incur severe losses over a short period of time. The foregoing Value at Risk table - as well as the past performance of the Fund - gives no indication of this “risk of ruin.”
Non-Trading Risk
Foreign Currency Balances; Cash on Deposit with MLPF&S
The Fund 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 Fund also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLPF&S. The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies. This cash flow risk is immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Fund’s market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Fund 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 Fund’s primary market risk exposures as well as the strategies used and to be used by MLAI and Cornerstone for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Fund’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 Fund. There can be no assurance that the Fund’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 Fund.
The following were the primary trading risk exposures of the Fund as of December 31, 2007, by market sector.
Interest Rates.
Interest rate risk is the principal market exposure of the Fund. Interest rate movements directly affect the price of derivative sovereign bond positions held by the Fund 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 Fund’s profitability. The Fund’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Fund also takes positions in the government debt of smaller nations e.g., Australia. MLAI anticipates that G-7 interest rates will remain the primary market exposure of the Fund for the foreseeable future.
Currencies.
The Fund trades in a number of currencies. However, the Fund’s major exposures have typically been in the U.S. dollar/Japanese yen, U.S. dollar/Euro and U.S. dollar/Swiss franc positions. The Fund does not anticipate that the risk profile of the Fund’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.
Metals.
The Fund’s metals market exposure is to fluctuations in the price of non-precious metals.
Agricultural Commodities
The Fund’s primary agricultural commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Soybeans, grains, and livestock accounted for the substantial bulk of the Fund’s agricultural commodities exposure as of December 31, 2007. However, it is anticipated that Cornerstone will maintain an emphasis on cotton, grains and sugar, in which the Fund has historically taken its largest positions.
Energy.
The Fund’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 Fund as of December 31, 2007.
Foreign Currency Balances.
The Fund’s primary foreign currency balances are in Japanese yen, British pounds and Euros.
U.S. Dollar Cash Balance.
The Fund holds U.S. dollars only in cash at MLPF&S. The Fund 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. While MLAI does not itself intervene in the markets to hedge or diversify the Fund’s market exposure, MLAI may urge Cornerstone to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual except in cases in which it appears that Cornerstone has begun to deviate from past practice and trading policies or to be trading erratically, MLAI’s basic control procedures consist of simply of the ongoing process of monitoring Cornerstone with the market risk controls being applied by Cornerstone itself.
Risk Management
Cornerstone attempts to control risk in all aspects of the investment process - from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. Cornerstone double checks the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, Cornerstone seeks to control overall risk as well as the risk of any one position, and Cornerstone trades only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. Cornerstone factors the point of exit into the decision to enter (stop loss). The size of Cornerstone’s positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.
To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the Cornerstone investment strategies. Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts for a program, or a change in position size in relation to account equity. The weighting of capital committed to various markets in the investment programs is dynamic, and Cornerstone may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant.
Cornerstone may determine that risks arise when markets are illiquid or erratic, which may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events. In such cases, Cornerstone at its sole discretion may override computer-generated signals and may at times use discretion in the application of its quantitative models, which may affect performance positively or negatively.
Adjustments in position size in relation to account equity have been and continue to be an integral part of Cornerstone’s investment strategy. At its discretion, Cornerstone may adjust the size of a position in relation
to equity in certain markets or entire programs. Such adjustments may be made at certain times for some programs but not for others. Factors which may affect the decision to adjust the size of a position in relation to account equity include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions.
Non-Trading Risk
The Fund 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 Fund 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 Fund 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.
Item 8:
Item 8: Financial Statements and Supplementary Data
Net Income (Loss) by Quarter
Eight Quarters through December 31, 2007
(a) The Net Income (Loss) per Unit is based on the weighted average of the total units for each quarter.
The financial statements required by this Item are included in Exhibit 13.01.
The supplementary financial information (“information about oil and gas producing activities”) specified by Item 302 of Regulation S-K is not applicable.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with the Fund’s independent registered public accounting firm 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 Fund, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Fund as of and for the year which ended December 31, 2007, and, based on its evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Fund’s internal controls over financial reporting which materially affect such internal control.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act ) occurred during the year ended December 31, 2007 that has materially affected, or is reasonable likely to materially affect, the Fund’s internal control, over financial reporting.
Management’s Report on Internal Control over Financial Reporting:
The Fund’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Fund’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 Fund 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 Fund.
· 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 Fund are being made only in accordance with authorizations of management and directors of the Fund; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Fund’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can only 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 Fund’s management assessed the effectiveness of the Funds’ internal control over financial reporting as December 31, 2007. 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 Fund’s management concluded that at December 31, 2007, the Fund’s internal control over financial report was effective.
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:
The managers and executive officers of MLAI and their respective business backgrounds are as follows:
Paul Morton
Chief Executive Officer, President and Manager
Barbra E. Kocsis
Chief Financial Officer
Steven B. Olgin
Vice President and Manager
Thomas W. Lee
Vice President and Manager
Shawn T. Wells
Vice President
Paul Morton is the Chief Executive Officer, President and Manager of MLAI, and also serves as the COO for the Global Investment and Insurance Solutions (GIIS) group for Merrill Lynch. As COO of GIIS, Mr. Morton leads the market investments business within the group, which includes secondary equity, debt, listed options, futures and FX for Merrill Lynch’s Global Wealth Management division. Prior to serving as COO of GIIS, Mr. Morton worked in the equity and debt trading management of Merrill Lynch. Prior to joining Merrill Lynch in 1996, Mr. Morton worked in the equity derivatives at Paine Webber. From 1988-1993, Mr. Morton served as an officer in the US Army for five years. Mr. Morton holds a BS (Aerospace Engineering) from the United States Military Academy at West Point (1988) and a MBA (Finance) from the Wharton School at the University of Pennsylvania (1995).
Barbra E. Kocsis is the Chief Financial Officer for MLAI. She is also a Director within the Merrill Lynch Global Private Client Global Infrastructure Solutions group. Prior to that, she was the Fund Controller of MLAI. Before coming to 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. She graduated cum laude from Monmouth College in 1988 with a Bachelor of Science in Business Administration - Accounting and is a Certified Public Accountant.
Steven B. Olgin is a Vice President and a Manager of the Manager, is registered with NFA as a principal of the Manager and is a Managing Director of Merrill Lynch Global Private Client (“GPC”). Before joining the Manager in 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin, from 1986 until 1994. Mr. Olgin graduated from The American University with a Bachelor of Science in Business Administration and a Bachelor of Arts in Economics, and received his Juris Doctor from The John Marshall Law School. Mr. Olgin was a member of the Managed Funds Association’s Government Relations Committee and has served as an arbitrator for NFA.
Thomas W. Lee is a Managing Director in Merrill Lynch’s Market Investments and Origination Group, responsible for Global Private Client’s equity and debt new issue businesses, and is a Vice President and Manager of the Manager, and his registration as a principal of the Manager is pending with NFA. Prior to joining Merrill Lynch in 1998, Mr. Lee was a corporate securities attorney at the law firm of Brown & Wood. Mr. Lee received his J.D. from Emory University School of Law and a B.S. from Cornell University.
Shawn Wells is a Vice President of the Manager and the General Counsel, a position he has held since October 2005. Prior to that time, Mr. Wells served as Senior Associate General Counsel at Franklin Templeton Investments, serving as Chief Counsel of the firm’s International and Alternative Strategies divisions from October 1996 to December 1997 and again from September 1998 to October 2005. Mr. Wells is a Certified Public Accountant, and received a BBA in Finance and Accounting from the University of Texas at Austin, and his JD from Southern Methodist University, where he was an editor of the SMU Law Review.
As of December 31, 2007, the principals of MLAI had no investment in the Fund, and MLAI’s sponsor interest in the Fund was valued at $16,904.
MLAI acts as the sponsor, general partner or manager to ten public futures funds whose units of limited partner or member interests are registered under the Securities Exchange Act of 1934: ML Trend-Following Futures L.P., ML Select Futures I L.P., ML Appleton FuturesAccess LLC, ML Aspect FuturesAccess LLC, ML Winton FuturesAccess LLC, ML APM Global Future Access LLC, ML Chesapeake Futures Access LLC, ML Systematic Momentum Furtures Access LLC, ML Transtrend DTP Enhanced FuturesAccess LLC, and the Fund. Because MLAI serves as the 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.
Section 16(a) Beneficial Ownership Reporting Compliance:
Not applicable.
Code of Ethics:
MLAI and Merrill Lynch have adopted a code of ethics, as of the end of the period covered by this report, which applies to the Fund’s (MLAI’s) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Fund. 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 fund nor MLAI has a nominating committee)
Audit Committee: Audit Committee Financial Expert:
Not applicable. (Neither the fund nor MLAI has an audit committee. There are no listed shares of the Fund or MLAI.)
Item 11:
Item 11: Executive Compensation
The managers and officers of MLAI are remunerated by Merrill Lynch in their respective positions. The Fund does not have any officers, managers or employees. The Fund pays Brokerage Commissions to an affiliate of MLAI and Sponsor Fees to MLAI. MLAI or its affiliates may also receive certain economic benefits from possession of the Fund’s U.S. dollar assets. The managers and officers receive no “other compensation” from the Fund, 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 Fund 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:
None.
(b) Security Ownership of Management:
As of December 31, 2007, MLAI owned 21,248 Unit-equivalent member interests, which constituted 0.022% of the total Units outstanding, the principals of MLAI did not own any Units, and Cornerstone did not own any Units.
(c) Changes in Control:
None.
Item 13:
Item 13: Certain Relationships and Related Transactions
(a) Transactions between Merrill Lynch and the Fund
All of the service providers to the Fund, other than Cornerstone, are affiliates of Merrill Lynch or have been approved by Merrill Lynch. Merrill Lynch negotiated with Cornerstone over the level of its management fees and performance fees. However, none of the fees paid by the Fund to any Merrill Lynch party were negotiated, and they could be higher than would have been obtained in arms-length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions and Sponsor Fees as well as bid-ask spreads on forward currency trades. The Fund 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 Fund. MLAI controls the management of the Fund and serves as its promoter. Although MLAI has not sold any assets, directly or indirectly, to the Fund, MLAI makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI or any of its principals and the Fund.
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 Fund.
(b) Certain Business Relationships:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Fund.
In 2007, the Fund expensed: (i) Brokerage Commissions of $565,950 to MLPF&S and management fees of $2,050,951 earned by Cornerstone and $683,650 earned by MLAI; and (ii) Sponsor Fees of $2,174,724. In addition, MLAI and its affiliates may have derived certain economic benefits from possession of a portion of the Fund’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 Fund.
(c) Indebtedness of Management:
None.
(d) Transactions with Promoters:
Not applicable.
Item 14:
Item 14: Principal Accountant Fees and Services
(a) Audit Fees
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Fund’s financial statements as of and for the year ended December 31, 2007 were $48,000.
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Fund’s financial statements as of and for the year ended December 31, 2006 were $48,779.
(b) Audit-Related Fees
There were no other audit-related fees billed for the year ended December 31, 2007 and 2006, related to the Fund.
(c) Tax Fees
Aggregate fees billed for professional services rendered by Deloitte Tax LLP in connection with the tax compliance, advice and preparation of the Fund’s tax returns for the year ended December 31, 2007 were $64,000.
Aggregate fees billed for these services for the period ended December 31, 2006 were $55,000.
(d) All Other Fees
No fees were paid to Deloitte & Touche LLP, Deloitte Tax LLP, or any member firms of Deloitte Touche Tohmatsu and their respective affiliates during the years ended December 31, 2007 and 2006 for any other professional services in relation to the Fund.
Neither the Fund 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
Designation
Description
3.01
Certificate of Formation of ML Cornerstone FuturesAccess LLC.
Exhibit 3.01:
Is incorporated herein by reference from Exhibit 3.01 contained in the Registration Statement on Form 10 (File No. 000-51086) under the Securities Exchange Act of 1934, filed on December 20, 2004 (the “Registrant’s Initial Registration Statement”).
3.02
Limited Liability Company Operating Agreement of ML Cornerstone FuturesAccess LLC.
Exhibit 3.02
Is incorporated by reference from Exhibit 3.02 contained in the Registrant’s Initial Registration Statement
10.01
Futures Customer Agreement among ML Cornerstone Futures Access LLC, ML Appleton FuturesAccess LLC, ML Aspect FuturesAccess LLC, Winton FuturesAccess LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Exhibit 10.01:
Is incorporated herein by reference from Exhibit 10.01 contained in Admendment No. 1 to the Registration Statement on Form 10 (File No. 000-51086) under the Securities Exchange Act of 1934, filed on February 2, 2008.
10.02
Advisory Agreement by and among ML Cornerstone Futures Access LLC, ML Cornerstone Futures Access Ltd., Cornerstone Capital management, Inc. and Merrill Lynch Alternative Investments LLC.
Exhibit 10.02:
Is incorporated hereby by reference from Exhibit 10.02 contained in the Registrant’s Initial Registration Statement.
13.01
2007 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 CORNERSTONE FUTURESACCESS LLC
By:
MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC, Manager
By:
/s/ Paul Morton
Paul Morton
Chief Executive Officer, President and Manager
(Principal Executive Officer)
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, 2008 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Date
/s/ Paul Morton
Chief Executive Officer, President and Manager
March 31,
Paul Morton
/s/ Barbra E. Kocsis
Chief Financial Officer
March 31,
Barbra E. Kocsis
/s/ Steven B. Olgin
Vice President and Manager
March 31,
Steven B. Olgin
/s/ Thomas W. Lee
Vice President and Manager
March 31,
Thomas W. Lee
/s/ Shawn T. Wells
Vice President
March 31,
Shawn T. Wells
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
ML CORNERSTONE FUTURESACCESS LLC
2007 FORM 10-K
INDEX TO EXHIBITS
Exhibit
Exhibit 13.01
2007 Annual Report and Report of Independent Registered Public Accounting Firm
31.01 and 31.02
Rule 13a-14(a)/15d-14(a) Certifications
32.01 and 32.02
Section 1350 Certifications