Graham Alternative Investment Fund II Earnings 2018-12-31
GAIFB 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-53965
GRAHAM ALTERNATIVE INVESTMENT FUND II LLC
BLENDED STRATEGIES PORTFOLIO
(Exact name of registrant as specified in its charter)
| DELAWARE | 20-4897149 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
c/o GRAHAM CAPITAL MANAGEMENT, L.P.
40 Highland Avenue
Rowayton, CT 06853
(Address of principal executive offices) (zip code)
Brian Douglas
Graham Capital Management, L.P.
40 Highland Avenue
Rowayton, CT 06853
(203) 899-3400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Christopher Wells
Proskauer Rose LLP
11 Times Square
New York, NY 10036
| Securities to be registered pursuant to Section 12(b) of the Act: | None |
| Securities to be registered pursuant to Section 12(g) of the Act: | Blended Strategies Portfolio: Units of Interests |
| (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K ☑.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☑ | Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☑
Units of the Blended Strategies Portfolio with an aggregate value of $35,044,762 were outstanding and held by non-affiliates as of June 30, 2018.
As of March 1, 2019, 237,712.446 Units of the Blended Strategies Portfolio were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
| Item 1: | BUSINESS |
GRAHAM ALTERNATIVE INVESTMENT FUND II LLC
General Development of Business
Graham Alternative Investment Fund II LLC (“GAIF II”) is a Delaware Series Limited Liability Company established through an amendment to the certificate of formation, effective March 28, 2013. Prior to March 28, 2013, GAIF II was organized as a Delaware Limited Liability Company which was formed on May 16, 2006. GAIF II was formed to enable U.S. tax-exempt investors to achieve long-term capital appreciation through professionally managed trading in both U.S. and foreign markets, primarily in futures contracts, forward currency and metals contracts, spot currency contracts and associated derivative instruments such as options and swaps. GAIF II commenced operations on August 1, 2006.
Investors in GAIF II may invest in either or both of two different portfolios, the Blended Strategies Portfolio or the Systematic Strategies Portfolio. The Blended Strategies Portfolio uses a systematic trading program and a discretionary trading program. The Systematic Strategies Portfolio uses solely a systematic program. The Blended Strategies Portfolio units of interest (the “Units”) are the only units of GAIF II registered under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and the financial information and statements contained herein are solely with respect to that Portfolio.
GAIF II invests in Graham Alternative Investment Ltd., a British Virgin Islands business company (the “Offshore Feeder”). The Offshore Feeder is designed to prevent investors in the Fund that are not subject to U.S. federal income tax from realizing “unrelated debt-financed income” or “unrelated business taxable income,” as each term is defined in the Internal Revenue Code of 1986, as amended, with respect to the investor’s investment in the Fund. Assets invested in the Blended Strategies Portfolio will be invested by the Offshore Feeder in Graham Alternative Investment Trading LLC (“GAIT”) and assets invested in the Systematic Strategies Portfolio will be invested by the Offshore Feeder in Graham Alternative Investment Trading II LLC (“GAIT II”), each of which is a Delaware limited liability company (“the Feeder Funds”). Trading on behalf of the Fund will be conducted in separate master funds (in a “master-feeder” fund structure) managed by the Manager (as defined below), with the exception of the Systematic Strategies Portfolio in which trading is conducted in Graham Alternative Investment Trading II LLC. For the purposes of this report, the term “Fund” shall include each of GAIF II, the Feeder Funds and the master funds in which they invest, unless the context implies otherwise. Graham Capital Management, L.P. (the “Manager”) is the Fund’s manager and the investment advisor to the Fund. The Manager’s website is www.grahamcapital.com.
The investment objective of each portfolio of the Fund is to achieve long-term capital appreciation through professionally managed trading in both U.S. and foreign markets, primarily in futures contracts, forwards contracts, spot currency contracts and associated derivative instruments such as options and swaps. The Fund seeks profit opportunities in the global financial markets, including interest rates, foreign exchange, global stock indices and energy, metals and agricultural futures, as a professionally managed multi-strategy investment vehicle.
Each portfolio of the Fund consists of multiple trading strategies of the Manager, which the Manager has combined in an effort to diversify the investment exposure of each portfolio and to make the performance returns of each portfolio less volatile and more consistently profitable. The Manager seeks to combine in each portfolio investment strategies that trade in different markets and display relatively low correlation to each other. Through such composition, the Manager aims to provide each portfolio with the potential to make profits and have strong risk-adjusted returns in both rising and falling markets and during both expanding and recessionary economic cycles. In discretionary programs, a trader determines trades subjectively based on his personal assessment of trading data and trading experience, while in systematic programs, trades are based almost entirely on computerized mathematical models. The Fund, at all times, will look primarily to commodity interests as its principal intended source of gains and anticipates that at all times commodity interests will present the Fund’s primary risk of loss, and the Fund will not acquire any financial instrument or enter into any financial transaction if to do so would cause the Fund to look to securities as its principal intended source of gains or anticipate that securities will present the Fund’s primary risk of loss. Examples of the types of instruments that the Fund may trade by market include, but are not limited to:
3
Global fixed income: U.S. Treasury futures, Eurodollar futures and Japanese government bond futures
Global stock indices: futures contracts on the Russell 2000, S&P 500 and TOPIX
Foreign exchange: forward contracts on the British pound, euro, Japanese yen and Swiss franc
Energy: futures contracts on heating oil, natural gas and crude oil
Agriculture and Softs: futures contracts on cotton, feeder cattle, lean hogs and soybeans
Metals: futures or forward contracts on aluminum, copper and gold
The Manager believes strongly in the importance of its ongoing research activities, particularly in the development of new trading programs, and expects to develop additional trading systems for the Fund and to modify the systems currently in use for the Fund over time. The Manager also seeks to add new trading strategies to its discretionary programs and to modify such strategies over time. There is no maximum number of trading programs that the Manager may see fit to include in either the Blended Strategies Portfolio or the Systematic Strategies Portfolio, and the Manager may increase or decrease the number of programs included in each portfolio over time. The Manager continually updates and modifies its trading programs, and may make such additions or deletions of trading programs to either the Blended Strategies Portfolio or the Systematic Strategies Portfolio at any time– such as changes in the leverage of, or in the asset allocations to, any of the Fund’s trading programs – in its sole discretion. The Fund is not required to provide prior, or any, notice of any such changes to investors.
Under the Limited Liability Company Agreement of GAIF II (the “Company Agreement”), the Manager has complete and exclusive responsibility for management and administration of the affairs of GAIF II. The Manager is currently registered as a commodity pool operator (“CPO”) and commodity trading advisor (“CTA”) with the Commodity Futures Trading Commission (“CFTC”), and as an investment adviser with the Securities and Exchange Commission (“SEC”), and is a member of the National Futures Association (“NFA”). GAIF II is not required to be, and is not, registered under the Investment Company Act of 1940, as amended. Investors purchasing units of interests (the “Units”) in GAIF II have no rights to participate in the management of the Fund. Units are sold through dealers that are not affiliated with the Fund or the Manager.
Pursuant to the Company Agreement, GAIF II’s term will end upon the first to occur of the following:
| · | December 31, 2050; |
| · | the withdrawal (voluntary or involuntary), bankruptcy or an assignment for the benefit of creditors or dissolution of the Manager; or |
| · | any date prior to December 31, 2050 on which the Manager elects to dissolve GAIF II. |
GAIF II’s business constitutes only one segment for financial reporting purposes (i.e., a speculative commodity pool). GAIF II does not engage in sales of goods or services.
As of February 28, 2018, the aggregate Net Asset Value (as defined below under “Allocation of Profit and Loss”) of the Units in GAIF II was $37,773,438. GAIF II operates on a calendar fiscal year.
Narrative Description of Business
| (i) | General |
GAIF II offers four classes (each a “Class”) of Units, being Class 0 Units and Class 2 Units of the Blended Strategies Portfolio and Class 0 Units and Class 2 Units of the Systematic Strategies Portfolio. As further described below under “Fees,” Class 0 and Class 2 Units of each portfolio differ only as to their applicable fees. Subscriptions for Units of any Class may be accepted by GAIF II as of the first business day of each month upon written notice of at least three business days prior to the last business day of the preceding month, and on such other notice and dates as the Manager may permit in its sole and absolute discretion.
4
Units of each Class of each portfolio are offered at their Net Asset Value per Unit as of the end of each month. The minimum initial investment for Class 0 Units is $10,000 (this Class is primarily for “wrap fee programs”) and the minimum additional investment is $5,000. Wrap fee programs bundle the various services provided to a client by a broker or financial advisor in a single fee arrangement rather than charging the client fees for specific transactions. The minimum initial investment for Class 2 Units is $10,000 and the minimum additional investment is $5,000. GAIF II will be continuously offered and has no limit on the maximum aggregate amount of subscriptions that may be contributed to it.
Capital contributions by a single subscriber for any Class of Units, upon acceptance of the subscriber as a member, represent a single interest in GAIF II for that subscriber’s respective Class of Units. A Unit of each Class reflects a member’s interest in GAIF II’s member’s capital with respect to the Class of Units owned by the member. Although separate Classes of Units in a portfolio are offered, all capital contributions to a particular portfolio are pooled by GAIF II and invested in GAIT or GAIT II as applicable. Units may be purchased only by investors who qualify as accredited investors under Regulation D of the Securities Act of 1933 (“Securities Act”). The principal differences among the separate Classes of Units within the same portfolio are their fees. Holders of Units, regardless of which Class of a portfolio they hold, participate pro rata in the profits and losses of that portfolio in proportion to the Net Asset Value of the Class and have identical rights, as members, under the Company Agreement.
5
6
| (ii) | The Manager |
The Manager was organized in May 1994 as a Delaware limited partnership. The general partner of the Manager is KGT, Inc., a Delaware corporation of which Kenneth G. Tropin is the sole director and sole shareholder. KGT, Inc. became a listed Principal of the Manager effective July 27, 1994. The Manager has been registered as a CPO and CTA under the Commodity Exchange Act (“CEA”) and has been a member of the NFA since July 27, 1994 and has been registered as an investment adviser with the Securities and Exchange Commission since March 20, 2012. As of March 1, 2019, the Manager has approximately 195 personnel and manages assets of over $12.9 billion. The Manager’s principal office is located at 40 Highland Avenue, Rowayton, Connecticut 06853 and its telephone number is (203) 899-3400. The Manager’s advisory services may in part be performed out of its branch office in West Palm Beach, Florida and the office of the Manager’s London affiliate, Graham Capital LLP.
| (iii) | The Trading Program |
The Fund offers two separate portfolios, each representing a different investment program: the Blended Strategies Portfolio and the Systematic Strategies Portfolio. The Manager strives to combine various trading strategies within each portfolio in order to diversify the investment exposure of each portfolio and reduce its dependence on any single trading strategy. The Manager also seeks trading strategies that have low correlation to each other in an effort to make the performance returns of each portfolio, so far as is practicable, less volatile and more consistently profitable. The Manager’s Investment Committee, which is comprised of Kenneth G. Tropin, Pablo Calderini, Robert E. Murray, Brian Douglas, Barry S. Fox, James A. Medeiros, William Pertusi, Timothy Sperry, Isaac Finkle, Ed Tricker, Kelly Tropin, and George Schrade makes decisions with respect to the selection of strategies traded on behalf of the Fund.
Biographical information regarding the members of the Investment Committee is set forth below.
Kenneth G. Tropin, 65, is the Chairman and the founder of the Manager. In May 1994, he founded the Manager and became an Associated Person and Principal effective July 27, 1994. Mr. Tropin developed the firm’s original trading programs and is responsible for the overall management of the organization, including the investment of its proprietary trading capital.
Pablo Calderini, 54, is the President and Chief Investment Officer of the Manager and, among other things, is responsible for the management and oversight of the discretionary and systematic trading businesses at the Manager. He joined the Manager in August 2010 and became an Associated Person and Principal of the Manager effective August 13, 2010. Mr. Calderini received a B.A. in Economics from Universidad Nacional de Rosario in 1987 and a Masters in Economics from Universidad del Cema in 1988, each in Argentina.
Robert E. Murray, 58, is the Vice Chairman of the Manager and serves as a member of the Manager’s executive leadership team responsible for the management of the firm and oversees important business and strategic initiatives of the Manager. He joined the Manager in June 2003 and became an Associated Person and Principal of the Manager effective June 27, 2003. Mr. Murray received a Bachelor’s Degree in Business with a Finance concentration from Geneseo State University in 1983.
James A. Medeiros, 45, is Chief Executive Officer of the Manager responsible for risk management, quantitative trading, investor relations and technology at the Manager. He joined the Manager in July 2009 and became an Associated Person of the Manager effective July 21, 2009 and a Principal on February 7, 2013. Mr. Medeiros received a Bachelor of Science from the Edmund A. Walsh School of Foreign Service at Georgetown University in 1996 and received an M.B.A. from the Wharton School at the University of Pennsylvania in 2003.
Brian Douglas, 45, C.P.A., is the Chief Operating Officer of the Manager and oversees the operation of the trading services, legal, compliance, facilities and administration departments of the Manager. He became an Associated Person of the Manager effective February 1, 2013 and a Principal on April 1, 2013. In July 2004, he joined the Manager as Manager of Financial Reporting and became Director of Financial Reporting in April 2008. Mr. Douglas received a B.A. in accounting from Western Connecticut State University in May 1996.
7
George Schrade, 44, C.P.A., is the Chief Financial Officer of the Manager and is responsible for the finance department of the Manager. He joined the Manager in June 2007 and became an Associated Person of the Manager effective December 21, 2016 and a Principal on February 28, 2019. Mr. Schrade received a B.S in Accounting from Quinnipiac University in May 1996.
Isaac Finkle, 66, is Chief Legal Officer of the Manager. He joined the Manager in May 2003 and became an Associated Person of the Manager effective April 16, 2004 and a Principal on June 5, 2007. Mr. Finkle received a J.D. from New York University School of Law in 1985, a Ph.D. from the University of Pennsylvania in 1998 specializing in sociological theory, and a B.A. with honors in philosophy from Haverford College in 1973.
Barry S. Fox, 55, is Director of Quantitative Research Operations of the Manager. He became an Associated Person of the Manager effective November 10, 2000 and a Principal on November 15, 2007. Mr. Fox joined the Manager in August 2000. Mr. Fox received a B.S. in Business Administration from State University of New York at Buffalo in 1986.
William Pertusi, 58, is the Chief Risk Officer of the Manager, responsible for identifying, monitoring and acting upon financial risks relative to financial returns in the Manager’s diverse trading strategies. He became an Associated Person of the Manager effective July 24, 2006 and a Principal on November 28, 2006. Mr. Pertusi received a B.S. in Electrical Engineering from Lehigh University in 1983, an M.B.A. from Harvard in 1987, and an M.S. in Mathematics from Fairfield University in 2006.
Tim Sperry, 51, is Executive Director and Chief Compliance Officer of the Manager. He joined the Manager in June 2004. He became an Associated Person of the Manager effective October 9, 2012 and a Principal on October 10, 2012. As Chief Compliance Officer, he oversees compliance and regulatory matters related to the firm’s business. Mr. Sperry received a J.D. from New England School of Law in May 1998 and a B.A. in Political Science in 1989 from Boston University.
Edward Tricker, 35, is Chief Investment Officer of Quantitative Strategies of the Manager and is responsible for the management and oversight of the firm’s Quantitative Strategies team, including quantitative operations and execution, research, alpha technology, and data science. He became an Associated Person of the Manager effective February 4, 2013 and a Principal on April 30, 2014. Mr. Tricker received a Ph.D. in Statistics from Imperial College of Science and Technology in London in October 2009 and a B.S. in Mathematics and Statistics from the University of Oxford in June 2005.
Kelly Tropin, 28, is Chief Economist and Senior Managing Director of the Manager and is responsible for leading the firm’s economic research efforts in addition to playing a key role in the management of the firm’s discretionary trading team. She became an Associated Person and Principal of the Manager effective September 6, 2018. Ms. Tropin received a Bachelor of Arts in Government from Dartmouth College in June 2013.
The discretionary traders for any discretionary investment strategy selected to trade on behalf of the Fund make the trading decisions for that discretionary strategy. The Manager has developed sophisticated proprietary software to study optimal portfolio weighting strategies and the effect of specific markets on the performance, risk, correlation and volatility characteristics of each of its trading strategies. As a result, the weighting or leverage that a trading strategy uses in each market may change to address changes in market conditions. With such software, the Manager devotes considerable attention to risk management at the portfolio level in an effort to ensure balance between markets and that the overall leverage used by each portfolio is consistent with the Manager’s overall views on risk. The Manager’s objective in forming the investment program of each portfolio is to provide the portfolio with significant potential for capital appreciation in both rising and falling markets and during expanding or recessionary economic cycles. Currently, 50% of the assets of the Blended Strategies Portfolio are allocated to trading the Manager’s Discretionary Trading Program and 50% of the assets are allocated to trading to the Manager’s K4D-15V Program, but the Manager may alter these allocations at any time within its sole discretion. Currently, 100% of the assets of the Systematic Strategies Portfolio are allocated to the Manager’s K4D-15V Program, but the Manager may over time add other quantitative trading programs to the Systematic Strategies Program.
8
The Fund will trade actively in both U.S. and foreign markets, primarily on major futures exchanges as well as the inter-bank cash currency and swaps markets. The Fund also engages in exchange for physical (EFP) transactions, which involve a privately negotiated and simultaneous exchange of a futures position for a corresponding position in the underlying physical commodity, and the Fund may use other derivatives in addition to swaps. The Manager may also trade other financial instruments as it endeavors to achieve superior results for investors and enhanced portfolio diversification. The Manager reserves the right in extraordinary market conditions to reduce leverage and portfolio risk if it feels in its sole discretion that it is in the potential best interest of the Fund. While such actions are anticipated to occur very infrequently, no assurance can be given that the Manager’s actions will enhance performance or that any efforts by the Manager to achieve portfolio diversification will be successful.
The Manager expects to add additional trading strategies and programs to each portfolio and to modify the strategies currently in use for each portfolio over time and may in the future offer other portfolios. There is no maximum number of strategies and programs that the Manager may see fit to include in the Fund or each portfolio, and the Manager may increase or decrease the number of strategies and programs included in the Fund or each portfolio over time or increase the number of markets or contracts that are traded on behalf of the Fund or each portfolio. The Manager may make such additions or deletions of trading programs to the Fund or each portfolio at any time and may make such additions, deletions or any other changes, such as changes in the leverage of, or in the asset allocations to, any of the Fund’s trading strategies and programs, in its sole discretion and without prior notice to members.
The Manager conducts risk analysis and employs risk management controls at various levels of the Fund, including portfolio risk, strategy risk, market risk and execution risk. The objectives of its risk management approach are to measure a Portfolio’s quantitative and qualitative exposures to the risks identified; formulate appropriate policies and procedures in an effort prudently to manage overall risk; monitor compliance with the Manager’s risk policies and procedures; and report identified and measured risks to the Manager’s Risk Committee.
In constructing a Portfolio, the Manager employs various risk management protocols. Using a proprietary asset allocation model, the Manager’s Investment Committee determines the appropriate strategies for a Portfolio and the weighting of each in the Portfolio. At the individual strategy level, the Manager works closely with each discretionary trader to design an appropriate investment profile, including return objective and volatility level, for each individual trading strategy. Through continuous monitoring and an active dialogue with every discretionary trader, the Manager seeks to identify and minimize any deviations from the investment profile. In addition, the Manager has implemented a uniform set of risk guidelines for all discretionary traders designed to reduce a strategy’s downside risk. The Manager has developed a trade execution and reporting infrastructure designed to minimize the risk of errors. For example, where appropriate, trades are manually checked for accuracy by the Manager’s middle office staff and are subject to additional cross checking using computerized means. Each discretionary trader’s positions must adhere to established risk management guidelines and position limits, which are regularly monitored by the Manager’s risk management team.
Effective testing, reporting and review are critical elements of the Manager’s risk management process. Daily stress testing is performed to evaluate a strategy’s risk exposure. Daily reporting of Value-at-Risk (VaR), plus intraday reporting of net gains or losses for each strategy enables the risk management team and the Investment Committee to observe the strategy’s adherence to its investment profile as well as market exposure. VaR is a probabilistic measure of the amount of loss, often referred to as the threshold, that a portfolio of investments will experience over a specified time period. Finally, each strategy is formally reviewed by the Investment Committee on a monthly basis.
To manage risk the Manager limits the size and structure of positions taken on behalf of the Fund so that they comply with various risk parameters, both those defined by the Manager and those defined by each of the individual discretionary traders for the Fund’s underlying trading strategies.
9
The Manager subjects the trading of all its discretionary traders to a risk monitoring regime that includes a set of defined drawdown limits and a series of risk measurements. Drawdown limits are used as a risk management tool to enforce risk reduction on a discretionary strategy if the discretionary trader is experiencing losses and has not yet reduced overall risk levels. The Manager generally defines a drawdown as losses experienced over a specified period of time, expressed as a percentage of net assets at the beginning of the period. The Manager imposes daily, monthly, and overall drawdown limits for all discretionary traders. There is a daily move that requires a prompt report to the risk manager, a monthly peak to trough drawdown that likely leads to risk reduction, and a total peak to trough drawdown that likely leads to risk reduction. There is also a drawdown limit where the Manager’s Investment Committee would meet to consider closing a given program. Further, the Manager conducts a daily risk process measuring VaR and reviewing stress tests for each Portfolio. The Manager evaluates the validity of VaR as a risk management tool by comparing the number of instances that profit and loss exceeded expected parameters over various time frames. For example, the Manager utilizes a one day 97.5% VaR, which means that in respect of the Portfolio that it is analyzing it expects the Portfolio to experience a loss in excess of VaR on approximately 1 out of every 40 days. In addition, the Manager runs an extensive series of stress tests, including historical scenarios as well as specific foreign exchange, equity and interest rate shocks.
In addition to the risk monitoring procedures employed by the Manager, each discretionary trader trading on behalf of a discretionary program for the Fund has established his own proprietary risk measures and parameters. These generally include measures of first order sensitivities (i.e., the sensitivity of the Portfolio to a change in a parameter of the underlying instruments) to the most relevant risk factors for a given book (for example dollar value of a basis point in the case of interest rate products), measurement of stress loss in extreme market events, or the use of explicit stop loss points. When individual limits on any of these are breached, the discretionary trader likely will reduce risk even if within the Manager’s guidelines.
The Fund currently employs a master-feeder structure for its individual trading programs such that each portfolio’s trading program may, but will not necessarily in all cases, be conducted through one or more master funds. Each of the master funds is managed by one or more employees of the Manager. The master funds were organized by the Manager in order to facilitate the management of various funds and accounts managed by the Manager using in whole or in part the same trading program. The Fund, alternatively, may trade its individual trading programs through one or more managed accounts in the Fund’s name.
Discretionary Trading Program
The Manager has been trading discretionary programs since February 1998. Discretionary programs, unlike systematic programs which are based almost entirely on computerized mathematical models, determine trades subjectively on the basis of a trader’s personal assessment of trading data and trading experience. Although the Manager has had over a decade of experience trading various discretionary programs, Discretionary Trading Program (“DTP”) itself commenced trading as of August 2008. DTP seeks to invest in various global macro markets that are highly liquid. DTP consists of several of the Manager’s leading discretionary strategies traded by employees of the Manager that focus on the global fixed income, stock index, currency, energy, commodity and metals markets, but over time it may participate in any other liquid market that is available as the Manager deems appropriate.
The Manager’s discretionary programs have generally displayed a significant degree of non-correlation with traditional and other alternative investments, including with the Manager’s own quantitative investment programs. In its composition of DTP, the Manager will seek an investment portfolio that continues to offer such non-correlation and that provides diversification to other investments. DTP may take both long and short positions and thus may generate successful performance results in both rising and declining markets. The holding periods of its positions may range, depending on the individual trading strategies, from just a few hours to months, such that DTP may potentially profit in markets that exhibit either short-term moves or long-term trends. As with its systematic investment programs, the Manager may add or delete trading strategies or trading markets in DTP or alter their individual weightings or leverage as it deems appropriate, and no notice will be given to investors of such allocation changes; in addition, discretionary strategies that have previously traded on behalf of the Fund may be included in DTP. The Manager may make such allocation changes based on a proprietary allocation model, its assessment of market conditions or the availability of additional discretionary trading strategies, in its discretion.
10
The descriptions contained herein of DTP should not be understood as in any way limiting its investment activities. In addition, the Fund may engage in investment strategies and programs not described herein that the Manager considers appropriate.
Systematic Trading Program
The Manager’s systematic investment programs employ various quantitatively based systems that are designed to participate selectively in potential profit opportunities that can occur in a diverse number of U.S. and international markets. Such systems generally are based on computerized mathematical models and can rely both on technical (i.e., historic price and volume data) and fundamental (i.e., general economic, interest rate and industrial production data) information as the basis for their trading decisions. The systems establish positions in markets where the price action of a particular market signals the computerized systems used by the Manager that a potential move in prices is occurring. The systems are designed to analyze mathematically the recent trading characteristics of each market and to statistically compare such characteristics to the historical trading patterns of the particular market. The systems also employ proprietary risk management and trade filter strategies that seek to benefit from price moves while reducing risk and volatility exposure.
Each systematic investment program of the Manager incorporates trading strategies developed by the Manager’s research department. While the Manager’s systematic investment programs have employed long-term systematic strategies from their inception, the programs may also include trend systems with varying time horizons.
The Manager believes strongly in the importance of research and development of new trading strategies and expects to develop additional trading systems and strategies and to modify the systems currently in use in its systematic programs over time in its ongoing efforts to keep pace with changing market conditions. The decision to add or subtract systems or strategies from any investment program or to change the leverage of, or the asset allocations to, any of the trading strategies of such investment program shall be at the Manager’s sole discretion. The Manager anticipates that the constellation of trading strategies comprising the K4D-15V program will continue to grow and evolve over time. There is no maximum number of strategies that the Manager may include in the K4D-15V investment program.
In connection with its programs’ systematic trading, the Manager may employ discretion in determining the leverage and timing of trades for new accounts and the market weighting and participation. In unusual or emergency market conditions, the Manager may also utilize discretion in establishing positions or liquidating positions or otherwise reducing portfolio risk where the Manager believes, in its sole discretion, that it is in the potential best interest of the Fund to do so. While such actions are anticipated to occur very infrequently, no assurance can be given that the Manager’s discretionary actions in these programs will enhance performance.
The K4D-15V Program features the first system that the Manager developed, which began trading client accounts in 1995. It utilizes multiple computerized trading models and offers broad diversification in both financial and non-financial markets, trading in approximately 80-90 global markets. The K4D-15V Program’s legacy trend system is primarily long-term in nature, but the program also includes short-term and intermediate trend-following as well as momentum strategies and is intended to generate significant returns over time with an acceptable degree of risk and volatility. The computer models on a daily basis analyze the recent price action, the relative strength and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market.
The investment objectives and methods summarized above represent the Manager’s current intentions. Depending on conditions in the financial and securities markets and the economy in general, the Manager may pursue other objectives, employ other investment techniques or purchase any type of financial instrument that it considers appropriate and in the best interests of the Fund, whether or not described in this section.
11
| (iv) | Use of Proceeds |
Northern Trust International Banking Corporation serves as the Fund’s banker for purposes of receiving subscription funds, disbursing redemption payments and processing cash transactions not directly related to the Fund’s portfolio.
Bank of America, N.A. serves as the Fund’s banker for transactions on behalf of each portfolio. A significant portion of the Fund’s assets may be held by Bank of America, N.A. in addition to the futures clearing brokers utilized on behalf of the Fund as well as OTC counterparties. The Fund may also hold excess funds not required for trading in bank accounts at Bank of America, N.A. or elsewhere. The Manager, in its discretion, may change the brokerage and custodial arrangements described herein without notice to investors.
GAIF II currently has no direct arrangement with any futures commission broker; rather each master fund that trades on behalf of the Fund may have its separate clearing arrangements with a futures broker. At present, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce Fenner & Smith Incorporated (the successor to Bank of America Securities LLC as futures broker after Bank of America’s merger with Merrill Lynch and Co.), and Newedge USA, LLC are the primary futures clearing brokers for the master funds, but neither the Fund nor the master funds are required or under any contractual obligation to continue to employ them as futures clearing brokers (together with additional or replacement clearing brokers the Manager may select from time to time without notice to investors, the “Futures Brokers”). The Manager is authorized to determine the Futures Brokers (or the counterparty, if concerning a foreign currency or swap transaction) to be used for each portfolio transaction for the Fund. The Manager is not affiliated with any futures commission merchant or broker-dealer.
Each Futures Broker will obtain, safe-keep and maintain custody of all of the Fund’s fully paid assets held by it in a customer account identified on the books of the Futures Broker as belonging to the Fund and segregated from the broker’s own proprietary positions. All of the Fund’s assets, funds, securities and other property held by each Futures Broker are held as security or collateral for the Fund’s obligations to the broker. The margin levels required to initiate or maintain open positions are established from time to time by each Futures Broker and applicable regulatory authorities. Each Futures Broker may close out positions, purchase securities, or cancel orders for the Fund’s account at any time it deems necessary for its protection, generally without the consent of or notice to the Fund.
Agreements with Futures Brokers in general provide that the broker will not be liable in connection with the execution, clearing, handling, purchasing, or selling of commodities, or other property, or other action, except for negligence or misconduct on the broker’s part. Such agreements also may provide that the Futures Broker will be indemnified and held harmless by the Fund from and against any loss, claim, or expense (including attorney’s fees) incurred by the broker in connection with it acting or declining to act for the Fund, and that the Fund will fully reimburse the broker for any legal or other expenses (including the cost of any investigation and preparation) which the broker may incur in connection with any claim, action, proceeding, or investigation arising out of or in connection with the agreement or the transactions contemplated thereunder.
12
In addition to trading in the Interbank market for foreign exchange, the Fund currently trades on all the major U.S. futures exchanges and may also trade on, but is not limited to, the following foreign exchanges:
ASX Trade24
Bolsa de Mercadorias and Futuros
Borsa Italiana (IDEM)
Eurex Exchange
EURONEXT/London International Financial Futures and Options Exchange
EURONEXT/Paris MONEP
European Options Exchange
Hong Kong Exchanges and Clearing Ltd.
ICE Futures Canada
Intercontinental Exchange
Korea Futures Exchange
London Metal Exchange Ltd.
Montreal Exchange
OMX Nordic Exchange Stockholm
Osaka Securities Exchange
Singapore Exchange Ltd.
South African Exchange
Stockholm Stock Exchange
Tokyo Commodity Exchange
Tokyo Financial Exchange
Tokyo Stock Exchange
Turkish Derivatives Exchange
In connection with such trading on foreign exchanges, the Fund’s assets may be deposited by the futures brokers with foreign brokers or banks. Although these foreign brokers or banks are subject to local regulation in their jurisdiction, the protections afforded by foreign regulatory bodies and rules may differ significantly from those afforded by United States regulators and rules.
The Fund expects to earn interest on cash not required to be posted as margin for its trading. Cash not required by the Fund’s investment programs for trading is currently invested by the Manager in a separate cash management master fund, Graham Cash Assets LLC (“Cash Assets”), managed by the Manager. The Fund pays the Manager no additional fees for managing the Fund’s assets invested in Cash Assets. It is currently anticipated that on average between 70% and 90% of the assets of each portfolio will be invested in Cash Assets. Various investment funds managed by the Manager and other entities affiliated with the Manager may invest in Cash Assets and each such entity bears its proportional share of the operating expenses of Cash Assets. Cash Assets may pay some third-party fees to unaffiliated custodians or managers in connection with the management of its portfolio, which fees will effectively be borne pro rata by all investment vehicles that invest in Cash Assets. Cash Assets may deposit a portion of its assets in an interest bearing bank account with Bank of America N.A. or other banks or in brokerage accounts, or it may purchase securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States (e.g. U. S. Treasury Bills or Bonds), or other securities issued or guaranteed by corporations in which the United States has a direct or indirect interest (e.g., U.S. government agency securities) which have been designated pursuant to section 3(a)(12) of the Securities Exchange Act of 1934 as exempted securities.
13
In addition to exchange-traded futures contracts and swaps, the Fund trades spot and forward contracts on foreign currencies and, to a lesser degree, OTC swap and derivatives contracts, currently the only non-CFTC regulated instruments the Fund anticipates trading. The Manager estimates that 20-60% of the Fund’s trades for each portfolio may be in forward contracts and 5-15% in swap contracts, but depending on market conditions, the percentage of each portfolio’s trades constituted by forward or swap contracts may fall substantially outside that range. Bank of America, N.A. and Barclays currently serve as the Fund’s primary counterparties for foreign currency forward transactions. All of the Fund’s assets, funds, securities, and other property held by Bank of America, N.A. or Barclays as a Fund counterparty, and any other bank or broker-dealer acting as a foreign currency forward counterparty or OTC swap counterparty of the Fund are held as security or collateral for the Fund’s obligations to such entity. As the forward and OTC swap markets currently are unregulated, the Fund bears additional risks (e.g., the credit risk of trading with counterparties) not present in exchange-traded futures and swaps trading. Under the Dodd–Frank Wall Street Reform and Consumer Protection Act, the CFTC, sometimes together with the SEC, has enacted regulations to govern these contracts and requires many of them to be cleared through an exchange or clearinghouse.
The Manager determines, in its sole and absolute discretion, the amount of distributions, if any, to be made by the Fund. It is expected that dividends ordinarily will not be paid and that all portfolio earnings will be retained for reinvestment (subject to the redemption privilege).
Fees
| (i) | Advisory Fee |
Pursuant to the Company Agreement, each Class of the Blended Strategies Portfolio and Systematic Strategies Portfolio of the Fund paid the Manager an advisory fee (the “Advisory Fee”) at an aggregate annual rate equal to 1.75% of the Net Asset Value of such Class for the period from January 1, 2017 through June 30, 2017. Pursuant to the amended Company Agreement, each Class of the Blended Strategies Portfolio and Systematic Strategies Portfolio of the Fund pays the Manager an advisory fee at an aggregate annual rate equal to 1.50% of the Net Asset Value of such Class commencing on July 1, 2017 through December 31, 2018. For purposes of calculating the Advisory Fee, the Net Asset Value of each Class equals the total fair market value of the assets of the Fund attributable to that Class less the liabilities of the Fund attributable to that Class. Profits and losses are allocated among the Classes in proportion to their respective Net Asset Values (before accrual of the Sponsor Fee and the Incentive Allocation set forth below). The Advisory Fee is payable monthly in arrears calculated as of the last business day of each month (before giving effect to any redemptions as of the last business day of the month and subscriptions as of the beginning of the next business day, and before deduction or accrual of fees payable to the Manager and the Incentive Allocation). A portion of the Advisory Fee may be paid to third parties as compensation for offering or selling activities in connection with the Fund. If the Company Agreement is terminated as of a date other than the last business day of a month, the Advisory Fee will be prorated through the termination date.
| (ii) | Sponsor Fee |
Each Class 0 and Class 2 of the Fund pays the Manager a sponsor fee (the “Sponsor Fee”) at an annual rate of its net Asset Value specified in the table below. The Sponsor Fee, in each case payable monthly in arrears, determined in the same manner as the Advisory Fee.
| Period | Class 0 | Class 2 | ||||||
| For the period from January 1, 2017 through March 31, 2017 | 0.75% | | 2.75% | | ||||
| For the period from April 1, 2017 through June 30, 2017 | 0.75% | | 1.50% | | ||||
| For the period from July 1, 2017 through December 31, 2018 | 0.50% | | 1.25% | | ||||
14
A significant portion of the Sponsor Fees will be paid to third parties as compensation for offering or selling activities in connection with the Fund. The Manager may pay initial service fees as well as on-going service fees to its selling agents. When an initial service fee is paid, the on-going service fee to a selling agent will generally commence the 13th month with respect to which the Fund investor of such selling agent has been invested in the Fund. The service fees paid by the Manager to selling agents range up to 2% of net assets with respect to Class 2 investors.
| (iii) | Incentive Allocation |
Each Class of the Blended Strategies Portfolio and the Systematic Strategies Portfolio of the Fund bears a quarterly Incentive Allocation, payable to the Manager as of the end of each calendar quarter, equal to 20% of the net profits of the Class for the quarter, subject to a “loss carryforward” provision. The loss carryforward provision generally provides that the Manager will not receive an Incentive Allocation in respect of the Class for a calendar quarter to the extent that the Class experiences net loss since the last calendar quarter for which an Incentive Allocation was earned and such loss has not been recouped through subsequent net profits. The Incentive Allocation is calculated and paid as follows: At the end of each calendar quarter, the Incentive Allocation is deducted from the Net Asset Value of each Class and credited to the Capital Account of the Manager in the Feeder Funds, in an amount equal to 20% of New High Net Trading Profits (as defined below) with respect to each class of the Blended Strategies Portfolio and the Systematic Strategies Portfolio for such period. “New High Net Trading Profits” for any Class for any quarter shall mean the Net Capital Appreciation (which includes unrealized gains and losses and interest income and expense, less all accrued debts, liabilities and obligations of the Class (but before any accrual for the Incentive Allocation) for such period) for the quarter minus the Carryforward Loss (as defined below), if any, as of the beginning of the quarter, for such Class. The “Carryforward Loss” shall be increased as of the end of each calendar quarter by the amount of any Net Capital Depreciation with respect to such Class during the quarter then ended and shall be decreased (but not below zero) as of the end of each calendar quarter by the amount of any Net Capital Appreciation with respect to such Class during the quarter then ended. In addition, the Carryforward Loss for a Class for any calendar quarter shall be proportionately reduced effective as of the date of redemption of any Units of such Class by multiplying (i) the Carryforward Loss for such Class immediately prior to such redemption by (ii) the ratio that the amount of assets redeemed from such Class bears to the Net Assets of such Class immediately prior to such redemption. The Carryforward Loss of a Class must be recouped before any subsequent Incentive Allocation can be made to the Manager. The Incentive Allocation is also accrued and allocable on the date of redemption with respect to any Units that are redeemed on any date not the end of a calendar quarter, as if the date of redemption were the end of a calendar quarter and the Incentive Allocation shall only be deducted with respect to such redeemed Units.
A portion of any of the above fees (including the Incentive Allocation) may be paid by the Manager to third parties as compensation for offering or selling activities in connection with the Fund.
Expenses
Each Class of the Fund will be responsible for its proportionate share of the Fund’s operating, administrative, trading and other direct expenses of the relevant Portfolio, including all trading commissions (including exchange and clearing and regulatory fees relating to its trades), legal expenses, internal and external accounting, audit and tax preparation expenses, fees and expenses of an Administrator, costs of preparing any required regulatory filings, and printing and mailing costs, together with a proportionate share of the costs incurred in connection with the organization of the Fund (including government incorporation charges and professional fees and expenses in connection with the preparation of the Fund’s offering documents and the preparation of the basic corporate and contract documents of the Fund) and the Fund’s continuing offering of Units. The Fund’s operating, administrative and trading expenses are estimated, based on recent experience, to amount to approximately 1.00% of net assets annually for the Blended Strategies Portfolio and 0.50% of net assets annually for the Systematic Strategies Portfolio. These expenses will be calculated and payable monthly in arrears in the same manner as the Advisory Fee.
The Manager provides and pays for its own professional and administrative staff, office space, business equipment and facilities and other general overhead expenses incidental to its advisory services.
15
Taxes, interest and other expenses related to borrowing, extraordinary expenses of the Fund, such as litigation expenses, or any other fees or expenses not described above in the section “Fees,” will also be separately borne by the Fund. All fees and expenses of the Fund (including the Incentive Allocation) will be assessed at the Feeder Fund level.
Each investor should understand that the costs of the Fund’s operating, administrative and operational expenses may vary, and that these costs (including the costs described above) are no longer capped and may be higher than the above estimated amounts. The Fund makes no representation that in the future these expenses may not increase and may not exceed these estimates.
Allocation of Profit and Loss
A separate Capital Account is maintained for each member with respect to each Class of Units held by such member. The initial balance of each Capital Account of each member will equal the net initial contribution to the Fund by such member with respect to the Class to which such Capital Account relates. Each Capital Account of each member is increased by any additional capital contributions by such member with respect to the Class to which such Capital Account relates and decreased by any redemptions of Units of such Class by such member. Net realized and unrealized appreciation or depreciation in the value of assets of each portfolio of the Fund, including investment income and expenses, is allocated at the end of each fiscal period among the Capital Accounts of the members in proportion to the relative values of such Capital Accounts as of the commencement of such fiscal period (in the case of any month end that is not also the end of a calendar quarter, before any accrual for the Incentive Allocation).
On the last day of each fiscal period, an allocation is made of the net profit or net loss attributable to the investments of each portfolio for such fiscal period. The net profit or net loss for a fiscal period is allocated among all the Classes of each portfolio pro rata in the proportion that the Net Asset Value of each Class as of the date of the commencement of such fiscal period bears to the Net Asset Value of the portfolio as of such date.
The Net Asset Value of each Class means the total value of the Fund’s assets, at fair value, attributable to that Class less the liabilities of the Fund attributable to that Class. The Net Asset Value per Unit of any Class is determined as of the close of business on the last business day of the month (a “Valuation Day”) by dividing the Net Asset Value of that Class by the number of outstanding Units of that Class. Such deductions will include an accrual for the Incentive Allocation and the fees to be paid to the Manager.
The net profit or net loss of each Class for a fiscal period in turn is allocated among all holders of Units of that Class pro rata in the proportion that the Net Asset Value of each member’s holding of Units of that Class as of the date of the commencement of such fiscal period (after adjustment for any contributions to the capital of the Fund which are effective on such date) bears to the aggregate Net Asset Value of that Class as of such date.
The Manager is responsible for determining the value of the Fund’s assets. The Fund has appointed SEI Global Services Inc. as the Fund’s independent administrator (“Administrator”), and in connection with that role SEI is responsible, subject to the ultimate supervision of the Manager, for calculating the Net Asset Value of the Fund and the Net Asset Value per Unit of each Class of Units. In determining the Net Asset Value of the Fund and the Net Asset Value per Unit of each Class of Units, the Administrator will follow the valuation policies and procedures adopted by the Fund as set out below. If the Manager is involved in the pricing of any of the Fund’s portfolio assets, the Administrator may accept, use and rely on such prices in determining the Net Asset Value of the Fund and shall not be liable to the Fund, any investor in the Fund, the Manager or any other person in so doing.
16
For all purposes, including subscriptions, redemptions and the calculation of the fees paid to the Manager, the Manager shall determine the fair market value of any investment made by the Fund. In general, investments will be valued as follows:
| a. | The value of unrealized appreciation or depreciation on open futures contracts shall be recorded as the difference between the contract price on the trade date and the closing price reported as of the Valuation Day on the primary exchange on which such contracts are traded. |
| b. | The value of any option listed or traded on any recognized foreign or U.S. exchange shall be the settlement price published by the principal exchange on which it is traded on the relevant Valuation Day. If the recognized foreign or U.S. exchange does not publish a settlement price, the value of any option shall be the last reported sale price on the relevant Valuation Day on the principal exchange on which such option is traded. If no such sale of such option was reported on that date, the market value shall be the average of the last reported bid and asked price. The market value of any over-the-counter option for which representative broker’s quotations are available shall be determined in like manner by reference to the last reported sale price, or, if none is available, to the average of the last reported bid and asked quotation. Premiums for the sale of such options written by the Fund shall be included in the assets of the portfolio, and the market value of such options shall be included as a liability. |
| c. | The value of any U.S. government security shall be the cost of such security plus accrued interest, discount and amortization of premium. |
The fair value of any assets not referred to in clauses (a) through (c) above (or the valuation of any assets referred to therein in the event that the Manager shall determine that there is no active market or that another method of valuation is advisable in the circumstances) shall be determined by or pursuant to the direction of the Manager. Prospective investors should be aware that situations involving uncertainties as to the valuation of portfolio positions could have an adverse effect on Net Asset Value if management’s judgments regarding appropriate valuations should prove incorrect. Absent bad faith or manifest error, the Fund’s Net Asset Value determinations are conclusive and binding on all investors. Net Asset Values are expressed in U.S. dollars, and any items denominated in other currencies are translated at prevailing exchange rates as determined by the Administrator in consultation with the Manager.
The Manager may, in its sole and absolute discretion, permit any other method of valuation to be used if it considers that such method of valuation better reflects fair value and is in accordance with good accounting practice.
Reporting
The Fund is required to furnish audited annual reports to its members containing financial statements examined by the Fund’s independent registered public accounting firm. The Fund is also required to provide members with monthly performance updates and monthly unaudited financial statements.
Regulation
The Manager has been registered as a CPO and CTA under the CEA, and as an investment adviser with the Securities and Exchange Commission and has been a member of the NFA since July 27, 1994. GAIF I is regulated as a commodity pool by the CFTC and NFA.
17
The CFTC may suspend a CPO’s or CTA’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 Manager was terminated or suspended, the Manager would be unable to continue to manage the business of the Fund. Should the Manager’s registration be suspended, termination of GAIF I might result. In addition to such registration requirements, the CFTC and certain commodity exchanges have established limits on the maximum net long or net short positions that any person may hold or control in particular commodities. Most exchanges also limit the changes in futures contract prices that may occur during a single trading day.
All persons who provide services directly to the Fund (as opposed to those persons who provide services through a third-party service provider) are employed by the Manager. The Fund has no employees of its own.
| Item 1A: | RISK FACTORS |
All investments risk the loss of capital. No guarantee or representation is made that either portfolio of the Fund will achieve its investment objective. An investment in the Fund is speculative and involves certain considerations and risk factors that prospective investors should consider before subscribing. The practices of leverage and derivatives trading and other investment techniques, which the Fund expects to employ, can, in certain circumstances, result in significant losses. Under certain circumstances, an investment in the Fund involves the risk of a substantial loss of such investment. Investors should be able to bear the loss of their entire investment in the Fund, and their investment in the Fund should not be their sole significant investment.
Past performance is not necessarily indicative of future results.
Class 0 of the Fund has been operating since August 1, 2006, and Class 2 since November 1, 2007 with respect to its original portfolio, now the Blended Strategies Portfolio. Moreover, DTP became a part of the Blended Strategies Portfolio as of August 2008. The Systematic Strategies Portfolio commenced actual trading as of January 1, 2009. There can be no assurance that any portfolio of the Fund will achieve its investment objective.
Futures and Options Trading Is Speculative and Volatile. Futures and options prices are highly volatile. Such volatility may lead to substantial risks and returns, generally much larger than in the case of equity or fixed-income investments. Price movements for futures are influenced by, among other things: changing supply and demand relationships; weather; agricultural, trade, fiscal, monetary, and exchange control programs and policies of governments; macro political and economic events and policies; changes in national and international interest rates and rates of inflation; currency devaluations and revaluations; and emotions of other market participants. None of these factors can be controlled by the Fund and no assurance can be given that the Manager’s advice will result in profitable trades for a participating customer or that a customer will not incur substantial losses. With respect to the Blended Strategies Portfolio, the master funds included in DTP may purchase and write options. The purchaser of an option is subject to the risk of losing the entire purchase price of the option, while the writer of an option is subject to an unlimited risk of loss, namely the risk of loss resulting from the difference between the premium received for the option and the price of the futures contract or other asset underlying the option which the writer must purchase or deliver upon exercise of the option. Thus, an investment in the Fund is suitable only for those investors with speculative capital who understand the risks of futures and options markets.
The Fund’s Trading Is Highly Leveraged, Which May Result in Substantial Losses for the Fund. The Fund trades futures and options on a leveraged basis due to the low margin deposits normally required for trading. As a result, a relatively small price movement in a contract may result in immediate and substantial gains or losses for the Fund. For example, $3,000 in margin may be required to hold a U.S. Treasury futures contract with a face value of $100,000. If the value of the contract were to decline by 3%, the entire margin deposit would be lost.
18
Market Illiquidity May Cause Less Favorable Trade Prices. Futures trading at times may be illiquid. Most United States commodity exchanges limit price fluctuations in certain commodity interest prices during a single day by means of “daily price fluctuation limits” or “daily limits.” The daily limit, which is set by most exchanges for all but a portion of the expiration month, imposes a floor and a ceiling on the prices at which a trade may be executed, as measured from the last trading day’s close. While these limits were put in place to lessen margin exposure, they may have certain negative consequences for the Fund’s trading. For example, once the price of a particular contract has increased or decreased by an amount equal to the daily limit, thereby producing a “limit-up” or “limit-down” market, positions in the contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Contract prices in various commodities have occasionally moved the daily limit for several consecutive days with little or no trading. Similar occurrences could prevent the Fund from promptly liquidating unfavorable positions, subjecting the Fund to substantial losses.
In Times of Market Stress, the Fund May Not Be Able to Diversify Its Portfolio. Where the markets are subject to exceptional stress, trading strategies and programs may become less diversified and more highly correlated as the stress may cause diverse and otherwise unrelated markets all to act in a similar manner. Efforts by the Manager to diversify the Fund’s trading strategies and investment exposure may not succeed in protecting the Fund from significant losses in the event of severe market disruptions.
The Fund Is Subject to Speculative Position Limits, Which May Limit the Fund’s Ability to Generate Profits or Result in Losses. The CFTC and various exchanges impose speculative position limits on the number of futures positions a person or group may hold or control in particular futures. Most physical delivery and many financial futures and option contracts are subject to speculative position limits. The CFTC has established position limits with respect to contracts for corn, oats, wheat, soybeans, soybean oil, soybean meal, and cotton. In other markets, the relevant exchanges are required to determine whether and to what extent limits should apply. For purposes of complying with speculative position limits, the Fund’s outright futures positions will be required to be aggregated with any futures positions owned or controlled by the Manager or any principal of the Manager. Similar types of limits apply to trading on EU commodity exchanges as a result of EU regulations that came into effect in 2018, albeit in a manner somewhat different to the manner in which limits apply on US commodity exchanges. As a result, the Fund may be unable to take positions in particular futures or may be forced to liquidate positions in particular futures, which could limit the ability of the Fund to earn profits or cause it to experience losses.
Trading on Non-U.S. Exchanges Presents Greater Risks to the Fund than Trading on U.S. Exchanges. Unlike trading on U.S. commodity exchanges, trading on non-U.S. commodity exchanges is not regulated by the CFTC and may be subject to greater risks than trading on U.S. exchanges. For example, some non-U.S. exchanges are “principals’ markets” in which no common clearing facility exists and a trader may look only to the broker for performance of the contract. In addition, unless the Fund hedges against fluctuations in the exchange rate between the U.S. dollar (in which Units are denominated) and other currencies in which trading is done on non-U.S. exchanges, any profits that the Fund might realize in trading could be reduced or eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. Additional costs could also be incurred in connection with international investment activities. Foreign brokerage commissions generally are higher than in the United States. Expenses also may be incurred on currency exchanges when the Fund changes investments from one currency to another. Increased custodian costs as well as administrative difficulties (such as the applicability of foreign laws to foreign custodians in various circumstances, including bankruptcy, ability to recover lost assets, expropriation, nationalization and record access) may be associated with the maintenance of assets in foreign jurisdictions.
The Unregulated Nature of the Over-The-Counter Markets Creates Counterparty Risks that Do Not Exist in Futures Trading on Exchanges. Forward markets, including foreign currency markets, offer less protection against defaults in trading than is available when trading occurs on an exchange. Forward contracts are not guaranteed by an exchange or clearing house, and, therefore, a non-settlement or default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitment to purchase and resale, if any, at the current market price.
19
Additional risks of the forward markets include: (i) the forward markets are generally not regulated by any U.S. or foreign governmental authorities; (ii) there are generally no limitations on daily price moves in forward transactions; (iii) speculative position limits are not applicable to forward transactions although the counterparties with which the Fund may deal may limit the size or duration of positions available as a consequence of credit considerations; (iv) participants in the forward markets are not required to make continuous markets in forward contracts; and (v) the forward markets are “principals’ markets” in which performance with respect to a forward contract is the responsibility only of the counterparty with which the trader has entered into a contract (or its guarantor, if any), and not of any exchange or clearing house. As a result, the Fund will be subject to the risk of inability or refusal to perform with respect to such contracts on the part of the counterparties with which the Fund trades.
The Fund Has Credit Risk with respect to its Futures Brokers. The CEA requires a U.S. broker to segregate all funds received from such broker’s customers in respect of regulated futures transactions from such broker’s proprietary funds. If the broker were not to do so to the full extent required by law, the assets of the Fund might not be fully protected in the event of the bankruptcy of the broker. In the event of the broker’s bankruptcy, the Fund would be limited to recovering only a pro rata share of all available funds segregated on behalf of the broker’s combined customer accounts, even though certain property specifically traceable to the Fund (for example, U.S. Treasury bills deposited by the Fund) was held by the broker. In addition, in the event of bankruptcy or insolvency of an exchange or an affiliated clearing house, the Fund might experience a loss of funds deposited through its broker as margin with an exchange or affiliated clearing house, the loss of unrealized profits on its open positions, and the loss of funds owed to it as realized profits on closed positions. If the Fund retains brokers that are not subject to U.S. regulation, its funds deposited with those brokers might not be segregated.
The Unregulated Nature of the Swaps and Derivatives Markets Creates Counterparty Risks that Do Not Exist in Futures Trading on Exchanges. The Fund may enter into swap contracts and related derivatives agreements with various counterparties. Certain swaps and other forms of derivatives instruments currently are not guaranteed by an exchange or its clearing house or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. The default of a party with which the Fund has entered into an OTC swap or other derivative may result in the loss of unrealized profits and force the Fund to cover its resale commitments, if any, at the then current market price. It may not be possible to dispose of or close out an OTC swap or other derivative position without the consent of the counterparty, and the Fund may not be able to enter into an offsetting contract in order to be able to cover its risk.
The Fund Has Credit and Market Risks With Respect to Its Cash Management. The Fund currently invests all assets not required for trading in Cash Assets, which in turn presently holds deposits in bank accounts or invests broadly in U.S. government or agency securities. With respect to its cash deposited in bank accounts, although the bank accounts themselves may be insured by the United States Federal Deposit Insurance Corporation, the balances in such accounts will be largely uninsured, as the maximum amount of insurance available to such accounts will not be material relative to the balances that are expected to be maintained in the accounts. With respect to its investment in U.S. government or agency securities, Cash Assets currently intends to hold them until they mature. Some of these securities may not mature for a year or longer. If Cash Assets were forced to sell some of its securities in the open market before they mature to meet unanticipated redemption requests (whether from the Fund or other entities affiliated with the Manager), the market value of the securities at such time may be below their principal face amount, causing a loss for Fund investors. In addition, if interest rates rise, the interest rate that Cash Assets pays its investors (including the Fund) will not fully reflect the new rates because its pre-existing investments are still yielding interest at lower rates.
The Fund May Also Borrow Money to Support its Trading, Which Could Increase the Level of Volatility in its Performance and Expose the Fund to Greater Losses. In addition to the leverage implicit in trading futures, the Fund may borrow money from brokers or their affiliates and other lenders. A significant portion of the funds borrowed by the Fund may be obtained from brokerage entities in the form of margin loans collateralized by assets held in the Fund’s brokerage account with such brokerage firms. The Fund does not have any limits on borrowing or leverage.
20
The Fund Relies on Key Individuals. The Fund relies exclusively on the Manager for the management of its investment portfolio, and the Manager relies significantly on the services of its founder, Kenneth G. Tropin. There could be adverse consequences to the Fund in the event that the Manager ceases to be available to devote its services to the Fund. There could be adverse consequences to the Fund if Mr. Tropin ceases to be available to devote his services to the Manager.
The Fund May Be Terminated at Any Time. Unforeseen circumstances, including substantial losses, the retirement or loss of key personnel of the Manager, the withdrawal of the Manager or the decision of the Manager not to continue to manage the Fund, could cause the Fund to terminate prior to its stated termination date of December 31, 2050. Early termination of the Fund could disrupt an investor’s overall investment portfolio plan resulting in the loss of some or all of its investment.
There is no Secondary Market for the Units, Therefore Investors Should Consider Their Investment in the Fund to be Illiquid. It is not anticipated that an active secondary market will develop in the Units. Units are not registered on any exchange, so there is no active secondary market, nor are Units being registered so as to permit a public offering under the securities laws of any jurisdiction. The Units will not be transferable without the consent of the Manager (which may be granted on such terms as it determines or withheld). Moreover, there are limitations on the ability of an investor to require the Fund to redeem Units. Consequently, the Units will be illiquid investments.
The Fund Does Not Anticipate Paying Dividends or Making Distributions, Therefore an Investment in the Fund is Not Appropriate for Investors Seeking Current Income. Since the Fund does not presently intend to pay dividends or other distributions, an investment in the Fund may not be suitable for investors seeking current returns for financial or tax planning purposes.
Taxes Will Be Imposed on You Regardless of Cash Distributions. U.S. taxable investors in the Fund must recognize for federal income tax purposes their pro rata share of the taxable net income of the Fund, regardless of whether such investors requested a partial redemption from the Fund to cover their tax liabilities. An investment in the Fund may generate taxable income for a member even though the value of the member’s interest in the Fund has declined. A member may have to use personal funds to pay the income tax owed on the income or gain allocated to the member. Sufficient information may not be available in time for the member to determine accurately an amount to redeem to pay taxes for a given fiscal year.
Investors Do Not Have the Protections Provided to a Regulated Mutual Fund. Although the Fund may be considered similar to an investment company, it is not required to, and does not intend to, register as such under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Accordingly, certain provisions of the Investment Company Act (which, among other things, require investment companies to have a certain number of disinterested directors and regulate the relationship between the adviser and the investment company) will not be applicable.
Interests in the Fund have not been and will not be registered under the Securities Act, in reliance upon an exemption available under Regulation D under the Securities Act. Accordingly, interests in the Fund will be offered only to investors that, among other requirements, are accredited investors within the meaning of Regulation D.
21
Operational Risks, Including Those Related to Computer Systems and Cybersecurity Threats, May Impact the Fund’s Operations. The Manager is responsible for developing, implementing and operating appropriate systems and procedures to execute all investment transactions and monitor and control operational risk on behalf of the Fund. The Manager relies on its execution, financial, accounting and other data processing systems to trade, clear and settle all transactions, to evaluate and monitor potential and existing portfolio investments, and to generate risk management and other reports that are critical to oversight of client accounts. Certain of the Manager’s operations are dependent upon systems operated by third parties, including the Fund’s administrator, prime brokers, counterparties, electronic exchanges, other execution platforms and their various service providers. The Manager may not be in a position to verify the reliability of such third-party systems or data. Failure of or errors in such systems could result in mistakes or delays in the execution, confirmation or settlement of transactions, or in transactions not being properly booked, evaluated or accounted for. The increasing reliance on internet-based programs and applications to conduct transactions and store data also creates increased security risks. Targeted cyber-attacks, or accidental events, can lead to a breach in computer and data systems and access by unauthorized persons to sensitive transactional or personal information. Data taken in breaches may be used by criminals to commit identity theft, obtain loans or payments under false identities, and other crimes. Cybersecurity breaches at the Manager or its service providers or counterparties may directly or indirectly affect the Fund, and could lead to theft, data corruption, interference with business operations, disruption of operational systems, interference with the Manager’s or the Fund’s ability to execute transactions, direct financial loss or reputational damage, or violations of applicable laws related to data and privacy protection and consumer protection.
Impact of Financial Industry Regulation is Uncertain but May Impact the Fund’s Operations. Legal, tax and regulatory developments could occur. Securities, futures and other financial markets are subject to comprehensive statutes, regulations and margin requirements enforced by SEC, the CFTC and other U.S. and non-U.S. regulators and self-regulatory organizations and exchanges authorized to take extraordinary actions in the event of market emergencies. The regulation of derivatives transactions and funds that engage in such transactions is an evolving area of law and is subject to modification by government and judicial actions. The regulatory environment for private funds is evolving, and changes in the regulation of hedge funds and their trading activities may adversely affect the ability of investors to pursue certain investment strategies, the ability to obtain leverage and financing, and the value of certain investments. The U.S. Congress enacted sweeping financial legislation (the “Dodd-Frank Act”) regarding the operation of banks, private fund managers and other financial institutions, which includes provisions regarding the regulation of swaps and other derivatives. Many provisions of the Dodd-Frank Act are being implemented through regulatory rulemakings and similar processes over a period of time. The impact of the Dodd-Frank Act, and of follow-on regulation, on certain trading strategies and operations is impossible to predict and may be adverse. U.S. and non-U.S. regulators may take additional actions in light of other developments in global financial markets, such as the European debt crisis. In September 2008, for example, the SEC and various non-U.S. regulatory bodies imposed temporary bans on short-selling of a variety of stocks and adopted other regulations that may have the effect of making short-selling more difficult or costly. Additional proposed legislation and regulations are pending in several global markets that may further regulate or limit short-selling activities. These changes may adversely affect the markets in which the Funds invest and may limit or adversely affect the ability of the Manager to use short sales, swaps and other derivatives as part of the investment and hedging strategies used by the Manager.
The Trading Programs Used by Each Portfolio May Be Changed Without Notice to Investors. The Manager continuously updates and changes its trading programs as a result of its ongoing research efforts and in response to changing market conditions. The Manager also expects to develop and implement new trading programs from time to time. The Manager may make additions or deletions of trading programs used by either the Blended Strategies Portfolio or the Systematic Strategies Portfolio at any time, and may make additions, deletions or any other changes to its trading programs used by either portfolio – such as changes in the amount of leverage of, or in the allocations of assets to, any of the trading programs used by either portfolio – at any time as determined by the Manager in its sole discretion. The Manager is not required to provide prior, or any, notice to investors of any such changes. As a result, the descriptions of the trading programs of each portfolio in the Fund’s offering materials may not at any particular time fully or accurately describe the trading programs being used by each portfolio.
22
Conflicts of Interest
Performance Based and other Fund Compensation Could Expose the Fund to Greater Risks. The Manager could receive substantial compensation in the event it generates net profits for the Fund. Such compensation arrangements may provide an incentive for the Manager to effectuate larger and more risky transactions than would be the case in the absence of such arrangements. The Manager may receive compensation with respect to unrealized appreciation of Fund assets as well as with respect to realized gains from the trading of Fund assets. The fees and incentive allocation payable to the Manager were not the subject of arms’ length negotiation. In addition, investors that acquire Units of any Class with a Net Asset Value below a previous high-water mark might benefit at the expense of pre-existing investors where those Units increase in value but are not yet subject to an Incentive Allocation because the Class as a whole still has aggregate carried forward losses.
The Manager Manages Other Accounts.
The Manager acts as general partner or trading manager to investment funds and other managed accounts that have investment objectives and methodologies similar to the Fund. These investment funds and managed accounts employ a systematic trading program identical to, or substantially similar to, that traded for the Fund and a discretionary trading program similar to that traded for the Blended Strategies Portfolios. The Manager may receive higher or lower fees for managing certain of these accounts. The Manager may also offer such accounts greater transparency with respect to their investments or different redemption or other terms than those offered by the Fund. The Manager and its principals may trade for their own accounts in the same markets in which the Fund trades and such accounts may take positions that are opposite, or ahead of, positions taken for the Fund. However, the Manager and its principals will not knowingly or deliberately favor their proprietary accounts over other client accounts in any manner. Fund investors will not be permitted to inspect the records of such proprietary accounts or the written policies related to such trading. The Manager and its principals also may manage other accounts in the future. All of the above accounts may compete with the Fund for the same positions. All of the foregoing accounts may be aggregated for purposes of determining applicable position limits, and may take the same or different positions as the Fund.
With respect to the discretionary strategies traded for the Fund, all of the Manager’s trading is currently conducted through one or more master funds. This structure eliminates the need for trade allocation procedures, which would otherwise be the case if trading for each strategy was conducted for multiple accounts. The Manager closely reviews the capacity levels of each master fund traded for the Fund to ensure that all funds that utilize discretionary trading strategies can invest in the master funds at the levels designated by the Investment Committee. To date, the master funds have not experienced capacity limits that would impact the operation of the funds that invest in them; however, no assurance can be given that in the future one or more master funds will not experience capacity limits, which would require the Manager to limit the participation of one or more funds in the affected master funds.
With respect to the Manager’s systematic trading programs for those accounts that participate in a trade allocation process, the Manager utilizes a Monte Carlo methodology for split fill allocation whereby a large number of hypothetical allocation scenarios are modeled and the scenario with the lowest variance among accounts is systematically selected and utilized for the allocation across applicable accounts. This allocation methodology is designed to satisfy regulatory requirements of objectivity and fairness such that no account or group of accounts receives consistently favorable or unfavorable treatment over time. Allocations made according to this methodology will be deemed equitable even though under certain market conditions the allocation on an individual trade may be more favorable to some accounts than others. In addition, the Manager’s execution of trades is subject to a randomization process that is intended to ensure that no account (whether utilizing separate orders or participating in block orders) receives consistently favorable or unfavorable treatment over any other account. With this randomization process, the order or timing of execution of any trade for any account cannot be determined or predicted in advance.
The Manager may enter into side agreements with specific investors in the Fund providing for different fees, redemption rights, access to information about the Fund’s investments or other matters relating to an investment in the Fund.
23
The Master–Feeder Structure Underlying the Fund’s Trading May Create Operating Inefficiencies for the Fund. All trading attributable to the Fund is currently conducted through the master funds organized and managed by the Manager, through a so-called “master-feeder” fund structure. A portion of the subscription proceeds received from investors ordinarily is invested by the Fund in the master funds, in each case with limited liability to the Fund. A separate master fund then invests in global fixed income, foreign exchange and other markets pursuant to each of the investment programs managed by the Manager.
Other investment funds and managed accounts structured to meet the needs of various U.S. and non-U.S. investors, including various proprietary accounts of the Manager, also may invest in each master fund, including Cash Assets. The units of such investors in any master fund may be in conflict in a number of respects, including, without limitation, as to the tax consequences and capital utilization with regard to any master fund’s transactions. For example, each master fund’s transactions may provide investors subject to U.S. income taxation with different after-tax returns than those of non-U.S. and tax-exempt investors. Also, each master fund may borrow to increase the efficiency of its capital utilization, but in so doing may incur borrowing charges at a rate that exceeds the rate at which the Fund earns interest income on its available cash. Such borrowing, with its attendant additional cost, serves to stabilize the master funds’ financing arrangements and offers various other advantages to their investors. At the same time, such borrowing may disproportionately benefit more leveraged investors in the master funds (including proprietary accounts of the Manager) over less leveraged investors (potentially including the Fund). Investors in the Fund may have conflicting investment, tax, or other interests with respect to their investment. The conflicting interests of individual investors may relate to or arise from, among other things, the nature of investments made by the Fund, the structuring of the acquisition of such investments, or the timing of disposition of investments. In such circumstances, the Manager will consider the investment and other objectives of the Fund and its investors as a whole, and not the investment or other objectives of any investor individually.
The foregoing list of risk factors and conflicts of interest does not purport to be a complete enumeration or explanation of the risks or conflicts involved in an investment in the Fund. Prospective investors should consult with their own advisors before deciding to subscribe for Units.
| Item 1B: | UNRESOLVED STAFF COMMENTS |
Not applicable.
| Item 2: | PROPERTIES |
The Fund does not own or use any physical properties in the conduct of its business. The Manager operates from its principal office in Rowayton, Connecticut as well as its offices in London, UK and West Palm Beach, Florida.
| Item 3: | LEGAL PROCEEDINGS |
There are no material legal proceedings pending, on appeal or concluded to which the Fund is a party or to which any of its assets is subject. There have been no material legal proceedings pending, on appeal or concluded against the Manager or any of its principals, directors or executive officers within the past five years.
| Item 4: | MINE SAFETY DISCLOSURES |
Not applicable.
24
| Item 5: | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
| (a) | Market information |
There is no public market for the Units, and none is likely to develop. Units may be redeemed subject to the conditions of the Company Agreement. Units may not be assigned or otherwise transferred except as permitted under the Company Agreement and as such may not be sold by investors pursuant to Rule 144 of the Securities Act of 1933, as amended.
| (b) | Holders |
As of March 1, 2019, there were 99 holders of Class 0 Units and 178 holders of Class 2 Units of the Blended Strategies Portfolio.
| (c) | Dividends |
The Manager determines, in its sole and absolute discretion, the amount of distributions, if any, to be made by the Fund to its investors. To date no distributions have been paid on the Units and the Manager has no present intention to make any distributions in the future.
| (d) | Securities Authorized for Issuance under Equity Compensation Plans |
None.
| (e) | Performance Graph |
Not applicable.
| (f) | Recent Sales of Unregistered Securities |
For the three months ended December 31, 2018, the Fund did not issue any Units with respect to the Blended Strategies Portfolio, in each case in a transaction that was not registered under the Securities Act. The Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act and Section 506 of Regulation D promulgated thereunder.
The following chart sets forth the purchases of Units of the Fund.
| Month beginning: | Blended Strategies Portfolio Class 0 Number of Units Purchased | Price of Blended Strategies Portfolio Class 0 Units Purchased | Blended Strategies Portfolio Class 2 Number of Units Purchased | Price of Blended Strategies Portfolio Class 2 Units Purchased | ||||||||||||
| October 1, 2018 | - | $ | 142.13 | - | $ | 102.25 | ||||||||||
| November 1, 2018 | - | $ | 138.91 | - | $ | 99.87 | ||||||||||
| December 1, 2018 | - | $ | 135.91 | - | $ | 97.65 | ||||||||||
| Item 6: | SELECTED FINANCIAL DATA |
No disclosure is required hereunder as the Fund is a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K.
25
| Item 7: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| (a) | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Reference is made to “Item 8: Financial Statements”. The information contained therein is essential to, and should be read in conjunction with, the following analysis. The Fund does not engage in the sale of goods or services. The Fund’s capital consists of capital contributions of the members, as increased or decreased by gains and losses from its investments in the Master Funds, interest, expenses and redemptions. Its only assets are its investments in the Master Funds. The Master Funds do not engage in the sale of goods or services. Their assets are comprised of the equity in their accounts with clearing brokers and OTC counterparties, in each case consisting of cash, open trade equity on derivatives and the net option premium paid or received. In the case of Graham Cash Assets LLC, the assets consist of investments in debt obligations guaranteed by the U.S. federal government, as well as cash and cash equivalents.
For the year ended December 31, 2018, the Blended Strategies Portfolio’s members’ capital value decreased by $9,202,706 or -24.8%. This decrease in members’ capital was attributable to redemptions totaling $7,570,182 or -20.4% and a net loss of $1,632,524 or -4.4%, for the year.
For the year ended December 31, 2017, the Blended Strategies Portfolio’s members’ capital value decreased by $26,317,775 or -41.5%. This decrease in members’ capital was attributable to total subscriptions of $599,000 or 0.9% offset by redemptions totaling $24,170,184 or -38.1% and a net loss of $2,746,591 or -4.3%, for the year.
(i) Results of Operations
The Fund’s success depends primarily upon the Manager’s ability to recognize and capitalize on market trends in the different and varied sectors of the global financial markets in which it trades.
Blended Strategies Portfolio
2018 Summary
For the year ended December 31, 2018, the Blended Strategies Portfolio experienced trading losses of $901,451 attributable to the following sectors:
| Agriculture / Softs | $ | (519,886 | ) | |
| Base Metals | (503,342 | ) | ||
| Energy | 306,014 | |||
| Equities | (380,532 | ) | ||
| Foreign Exchange | (463,929 | ) | ||
| Long Term / Intermediate Rates | (358,129 | ) | ||
| Precious Metals | (109,949 | ) | ||
| Short Term Rates | 1,128,302 | |||
| $ | (901,451 | ) |
The Blended Strategies Portfolio recorded a net loss for 2018. The losses resulted primarily in commodities, most notably from positions in metals and agricultural commodities which were partially offset by gains in the energy complex. The portfolio also experienced losses in foreign exchange, primarily from positions in the Japanese yen, Mexican peso and euro versus the U.S. dollar. Smaller losses resulted from positions in fixed income futures as gain on the front end of the curve in the U.S. were more than offset by losses further out on the curve in the U.S. and Europe, as well as from positions in Asian equity index futures.
Advisory and Sponsor Fees are calculated as a percentage of the Fund’s members’ capital value as of the end of each month and are affected by trading performance, interest income, subscriptions into and redemptions out of the Fund. Accordingly, the fluctuations in these amounts are directly correlated to the changes in net asset value which are discussed in detail herein.
26
For the year ended December 31, 2018, Advisory Fees decreased by $299,282 or -36.4%, Sponsor Fees decreased by $209,812 or -43.5%, and Administrator’s Fees decreased by $21,291 or -31.9% in the Blended Strategies Portfolio over the corresponding period of the preceding year. These decreases are all attributable to lower members’ capital of the portfolio during the year resulting from redemptions and a net loss for the year which was partially offset by subscriptions. The decrease in Sponsor Fees is also attributable to a reduction of the Class 2 Sponsor Fee rate from 2.75% in the first quarter of 2017 to 1.50% in the second quarter of 2017 and from 1.50% to 1.25% in the third quarter of 2017. The decrease in Sponsor Fees is also attributable to a reduction of the Class 0 Sponsor Fee rate from 0.75% in the first half of 2017 to 0.50% in the third quarter of 2017. The decrease in Advisory Fees is also attributable to a reduction of the Advisory Fee rate from 1.75% in the first half of 2017 to 1.50% in the third quarter of 2017. During the year ended December 31, 2018, interest income increased by $123,691 or 29.2%. Interest was earned on free cash at an average annualized yield of 1.61% for the year ended December 31, 2018 compared to 0.87% for the year ended December 31, 2017.
The Incentive Allocation is based on the New High Net Trading Profits of the portfolio. For the years ended December 31, 2018 and 2017, the portfolio had not yet recovered previous losses. As a result there was no Incentive Allocation for those years.
The following table illustrates the sector distribution of the Blended Strategies Portfolio’s investments in Master Funds as of December 31, 2018 based on the fair value of the underlying assets and liabilities in each master fund including both long and short positions. Positive percentages represent net assets whereas negative percentages represent net liabilities.
| Agriculture / Softs | (15.9 | )% | ||
| Base Metals | (17.1 | )% | ||
| Energy | 11.3 | % | ||
| Equities | 14.6 | % | ||
| Foreign Exchange | 26.2 | % | ||
| Long Term / Intermediate Rates | 17.4 | % | ||
| Precious Metals | 24.7 | % | ||
| Short Term Rates | 38.8 | % | ||
| 100.0 | % |
2017 Summary
For the year ended December 31, 2017, the Blended Strategies Portfolio experienced trading losses of $1,335,469 attributable to the following sectors:
| Agriculture / Softs | $ | (957,515 | ) | |
| Base Metals | 148,687 | |||
| Energy | (1,374,197 | ) | ||
| Equities | 3,424,368 | |||
| Foreign Exchange | (522,218 | ) | ||
| Long Term / Intermediate Rates | (1,825,549 | ) | ||
| Precious Metals | (372,792 | ) | ||
| Short Term Rates | 143,747 | |||
| $ | (1,335,469 | ) |
The Blended Strategies Portfolio recorded a net trading loss in 2017. The losses resulted primarily from positions in fixed income futures, primarily on the long end of the yield curve in the U.S. Losses also resulted from positions in commodities, most notably in energy and agricultural commodities, as well as from positions in currencies. The portfolio recorded gains from long positions in global equity indices, which offset a portion of the overall losses during the year.
27
Advisory and Sponsor Fees are calculated as a percentage of the Fund’s net asset value as of the end of each month and are affected by trading performance, interest income, subscriptions into and redemptions out of the Fund. Accordingly, the fluctuations in these amounts are directly correlated to the changes in members’ capital value which are discussed in detail herein.
For the year ended December 31, 2017, Advisory Fees decreased by $380,989 or -31.6%, Sponsor Fees decreased by $392,115 or -44.8%, and Administrator’s Fees decreased by $23,063 or -25.7% in the Blended Strategies Portfolio over the corresponding period of the preceding year. These decreases are all attributable to lower members’ capital of the portfolio during the year resulting from redemptions and a net loss for the year which was partially offset by subscriptions. The decrease in Sponsor Fees is also attributable to a reduction of the Class 2 Sponsor Fee rate from 2.75% in 2016 and the first quarter of 2017 to 1.50% in the second quarter of 2017 and from 1.50% to 1.25% in the third quarter of 2017. The decrease in Sponsor Fees is also attributable to a reduction of the Class 0 Sponsor Fee rate from 0.75% in 2016 and the first half of 2017 to 0.50% in the second quarter of 2017. The decrease in Advisory Fees is also attributable to a reduction of the Advisory Fee rate from 1.75% in 2016 to 1.50% in the third quarter of 2017. During the year ended December 31, 2017, interest income increased by $103,955 or 32.6%. Interest was earned on free cash at an average annualized yield of 0.87% for the year ended December 31, 2017 compared to 0.54% for the year ended December 31, 2016.
The Incentive Allocation is based on the New High Net Trading Profits of the portfolio. For the years ended December 31, 2017 and 2016, the portfolio had not yet recovered previous losses. As a result, there was no Incentive Allocation for those years.
The following table illustrates the sector distribution of the Blended Strategies Portfolio’s investments in Master Funds as of December 31, 2017 based on the fair value of the underlying assets and liabilities in each master fund including both long and short positions. Positive percentages represent net assets whereas negative percentages represent net liabilities.
| Agriculture / Softs | 6.0 | % | ||
| Base Metals | 14.8 | % | ||
| Energy | 29.6 | % | ||
| Equities | 11.9 | % | ||
| Foreign Exchange | 22.1 | % | ||
| Long Term / Intermediate Rates | 11.8 | % | ||
| Precious Metals | 2.1 | % | ||
| Short Term Rates | 1.7 | % | ||
| 100.0 | % |
Variables Affecting Performance
The performance of each portfolio of the Fund is affected by net profitability resulting from the trading operations of the master funds, the fees charged by the Fund, and interest income earned on cash and cash equivalents. The master funds acquire and liquidate long and short positions in futures contracts, forward contracts, spot currency contracts and associated derivative instruments such as options and swaps. These instruments are carried at fair value, which is heavily influenced by a wide variety of factors including, but not limited to the level and volatility of exchange rates, interest rates, equity prices, and commodity prices as well as global macro political events. These factors generate market movements affecting the fair value of these instruments and in turn the net gains and losses allocated from the master funds.
Brokerage, advisory and sponsor fees are calculated based on percentage of the net asset value of each portfolio. Changes in the net assets of each portfolio resulting from subscriptions, redemptions, interest and trading profits allocated from the master funds can therefore have a material impact in the fee expense of each portfolio.
A portion of the assets of each portfolio is held in cash and cash equivalents. Changes in the net assets of each portfolio as well as changes in the interest rates earned on these investments can have a material impact on interest income earned.
28
| (ii) | Liquidity |
A portion of the assets of each portfolio is generally held as cash or cash equivalents, which are used to margin the Fund’s investments. It is expected that the average margin the Fund will be required to post to support the Fund’s trading may range between 10% and 30% of the total assets of each portfolio, which will be segregated or secured by the futures brokers in accordance with the CEA and with CFTC regulations or be maintained on deposit with over-the-counter counterparties. In exceptional market conditions, this amount could increase. The master funds are subject to margin calls on a constant daily and intra-day basis, whether in connection with initiating new investment positions or as a result of changes in the value of current investment positions. These margin requirements are met through the posting of additional margin with the applicable futures broker or FX clearing broker, on an almost daily basis. The Manager generally expresses its margin requirements for the portfolios in terms of the aggregate of the margin requirements for the underlying strategies plus the net option premium costs for the underlying strategies. For the years ended December 31, 2018 and December 31, 2017, the margin requirements for the Blended Strategies Portfolio were 9.46% and 9.63%, respectively.
Other than any potential market-imposed limitations on liquidity, the Fund’s assets are highly liquid and are expected to remain so. Market-imposed limitations, when they occur, can be due to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Fund’s futures trading. Through December 31, 2018, the Fund experienced no meaningful periods of illiquidity in any of the markets traded by the Manager on behalf of the Fund.
| (iii) | Capital Resources |
The Fund raises additional capital only through the sale of Units and capital is increased through trading profits (if any) and interest income. The Fund may borrow money from brokers or their affiliates and other lenders. 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 Fund should not have a significant impact on its operations, as the Fund has no significant capital expenditure or working capital requirements other than for monies to pay trading losses, brokerage commissions and expenses.
The Fund participates in the speculative trading of commodity futures contracts, substantially all of which are subject to margin requirements. The minimum amount of margin required for each contract is set from time to time in response to various market factors by the respective exchanges. Further, the Fund’s brokers may require margin in excess of minimum exchange requirements. The Fund bears the risk of financial failure of the brokers through which it clears trades and maintains margin in respect of any such trades and of its counterparties for its foreign exchange and swap trades with whom it also maintains margin.
| (iv) | Critical Accounting Policies |
Use of Estimates – The Fund’s financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all amounts are stated in U.S. dollars. The preparation of the financial statements requires the Manager to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Fund’s significant accounting policies are described in detail in Note 2 of the financial statements.
Fair Value Measurement - The Fund follows U.S. GAAP for fair value measurements, which defines fair value, establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. U.S. GAAP uses a three-level hierarchy for fair value measurement based on the activeness of the market and the transparency and independence of inputs used in the valuation of an asset or liability as of the measurement date. The Fund reports the fair value of its investment-related assets and liabilities in accordance with the hierarchy established under U.S. GAAP.
29
The Fund records its investments in the Feeder Funds at fair value in accordance with U.S. GAAP. In determining its net asset value, each Feeder Fund records its investments in master funds at fair value in accordance with U.S. GAAP. The Fund records its proportionate share of the Feeder Funds’ investment income and loss, expenses, fees, and realized and unrealized gains and losses on a monthly basis. Purchases and sales of units in the Feeder Funds are recorded on a trade date basis.
The master funds record all their financial instruments at fair value, which is derived in accordance with U.S. GAAP. Unrealized appreciation and depreciation from these instruments are recorded based on changes in their fair value. Realized gains and losses are recorded when the positions are closed. All unrealized and realized gains and losses related to derivative financial instruments are included in net gain (loss) on investments in the master funds’ statements of operations.
Cash Assets - The Feeder Funds invest a portion of their excess liquidity in Cash Assets, an entity for which the Manager is also the sole investment advisor. The financial information of Cash Assets is included in the notes to the Financial Statements of the Feeder Funds within Item 8.
Income Taxes - No provision for income taxes has been made in the Fund’s financial statements, as each member is responsible for reporting income or loss based upon the member’s respective share of the Fund’s revenues and expenses for income tax purposes.
U.S. GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Manager has evaluated the Fund’s tax positions and has concluded that there are no significant tax positions requiring recognition, measurement or disclosure in the financial statements. The Manager is not aware of any tax positions or interest/penalties for which it is reasonably possible that the total amounts of unrecognized tax expense will change materially in the next twelve months.
| (v) | Off-Balance Sheet Arrangements |
The Fund does not engage in off-balance sheet arrangements with other entities.
| Item 7A: | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
No disclosure is required hereunder as the Fund is a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K.
30
| Item 8: | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| Consolidated Financial Statements | |
| Graham Alternative Investment Fund II LLC Blended Strategies Portfolio Years ended December 31, 2018 and 2017 with Report of Independent Registered Public Accounting Firm |
31
GRAHAM ALTERNATIVE INVESTMENT FUND II LLC
BLENDED STRATEGIES PORTFOLIO
40 Highland Avenue
Rowayton, CT 06853
The undersigned affirms, on behalf of Graham Alternative Investment Fund II LLC Blended Strategies Portfolio, that to the best of his knowledge and belief, the information contained in the attached audited consolidated financial statements of Graham Alternative Investment Fund II LLC Blended Strategies Portfolio for the years ended December 31, 2018 and 2017 is accurate and complete.
| By: | Graham Capital Management, L.P., as | |||
| Sole Manager | ||||
| By: |  | |||
| George Schrade | ||||
| Chief Financial Officer | ||||
| March 29, 2019 | ||||
32
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Consolidated Financial Statements
Years Ended December 31, 2018 and 2017
Contents
| Report of Independent Registered Public Accounting Firm | 34 |
| Consolidated Statements of Financial Condition | 35 |
| Consolidated Statements of Operations | 36 |
| Consolidated Statements of Changes in Members’ Capital | 37 |
| Consolidated Statements of Cash Flows | 38 |
| Notes to Consolidated Financial Statements | 39 |
Financial Statements – Graham Alternative Investment Trading LLC
33
Report of Independent Registered Public Accounting Firm
To the Members and Manager of
Blended Strategies Portfolio
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Blended Strategies Portfolio (the “Portfolio”) (one of the series constituting Graham Alternative Investment Fund II LLC (the “Fund”)) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in members’ capital and cash flows for each of the two years in the period then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Blended Strategies Portfolio (one of the series constituting Graham Alternative Investment Fund II LLC) at December 31, 2018 and 2017, the results of their operations, changes in their members’ capital and their cash flows for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Portfolio’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of Blended Strategies Portfolio (one of the series constituting Graham Alternative Investment Fund II LLC) since 2006.
Stamford, CT
March 29, 2019
34
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Consolidated Statements of Financial Condition
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Investment in Graham Alternative Investment Trading LLC, at fair value | $ | 27,978,759 | $ | 37,181,465 | ||||
| Redemptions receivable from Graham Alternative Investment Trading LLC | 182,935 | 102,320 | ||||||
| Total assets | $ | 28,161,694 | $ | 37,283,785 | ||||
| Liabilities and members’ capital | ||||||||
| Liabilities: | ||||||||
| Redemptions payable | $ | 182,935 | $ | 102,320 | ||||
| Total liabilities | 182,935 | 102,320 | ||||||
| Members’ capital: | ||||||||
| Class 0 Units (125,660.811 and 164,393.539 units issued and outstanding at $133.70 and $140.90, respectively) | 16,801,362 | 23,163,675 | ||||||
| Class 2 Units (116,424.562 and 137,512.329 units issued and outstanding at $96.01 and $101.94, respectively) | 11,177,397 | 14,017,790 | ||||||
| Total members’ capital | 27,978,759 | 37,181,465 | ||||||
| Total liabilities and members’ capital | $ | 28,161,694 | $ | 37,283,785 | ||||
See accompanying notes and the attached financial statements of Graham Alternative Investment Trading LLC.
35
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Consolidated Statements of Operations
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss allocated from investment in Graham Alternative Investment Trading LLC: | ||||||||
| Net realized loss on investments | $ | (252,193 | ) | $ | (1,468,965 | ) | ||
| Net (decrease) increase in unrealized appreciation on investments | (649,258 | ) | 133,496 | |||||
| Brokerage commissions and fees | (250,932 | ) | (294,788 | ) | ||||
| Net loss allocated from investment in Graham Alternative Investment Trading LLC | (1,152,383 | ) | (1,630,257 | ) | ||||
| Net investment loss allocated from investment in Graham Alternative Investment Trading LLC: | ||||||||
| Investment income: | ||||||||
| Interest income | 546,698 | 423,007 | ||||||
| Expenses: | ||||||||
| Advisory fees | 523,762 | 823,044 | ||||||
| Sponsor fees | 272,976 | 482,788 | ||||||
| Professional fees and other | 184,690 | 166,807 | ||||||
| Administrator’s fees | 45,411 | 66,702 | ||||||
| Incentive allocation | - | - | ||||||
| Total expenses | 1,026,839 | 1,539,341 | ||||||
| Net investment loss allocated from investment in Graham Alternative Investment Trading LLC | (480,141 | ) | (1,116,334 | ) | ||||
| Net loss | $ | (1,632,524 | ) | $ | (2,746,591 | ) | ||
See accompanying notes and the attached financial statements of Graham Alternative Investment Trading LLC.
36
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Consolidated Statements of Changes in Members’ Capital
Years Ended December 31, 2018 and 2017
| Class 0 Units | Class 2 Units | |||||||||||||||||||
| Units | Capital | Units | Capital | Total Members’ Capital | ||||||||||||||||
| Members’ capital, December 31, 2016 | 319,296.990 | $ | 46,912,306 | 154,401.114 | $ | 16,586,934 | $ | 63,499,240 | ||||||||||||
| Subscriptions | 2,144.439 | 309,000 | 2,818.715 | 290,000 | 599,000 | |||||||||||||||
| Redemptions | (157,047.890 | ) | (22,152,384 | ) | (19,707.500 | ) | (2,017,800 | ) | (24,170,184 | ) | ||||||||||
| Net loss | – | (1,905,247 | ) | – | (841,344 | ) | (2,746,591 | ) | ||||||||||||
| Members’ capital, December 31, 2017 | 164,393.539 | 23,163,675 | 137,512.329 | 14,017,790 | 37,181,465 | |||||||||||||||
| Subscriptions | – | – | – | – | – | |||||||||||||||
| Redemptions | (38,732.728 | ) | (5,422,944 | ) | (21,087.767 | ) | (2,147,238 | ) | (7,570,182 | ) | ||||||||||
| Net loss | – | (939,369 | ) | – | (693,155 | ) | (1,632,524 | ) | ||||||||||||
| Members’ capital, December 31, 2018 | 125,660.811 | $ | 16,801,362 | 116,424.562 | $ | 11,177,397 | $ | 27,978,759 | ||||||||||||
See accompanying notes and the attached financial statements of Graham Alternative Investment Trading LLC.
37
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows provided by operating activities | ||||||||
| Net loss | $ | (1,632,524 | ) | $ | (2,746,591 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Net loss allocated from investments in Graham Alternative Investment Trading LLC | 1,632,524 | 2,746,591 | ||||||
| Proceeds from sale of investments in Graham Alternative Investment Trading LLC | 7,489,567 | 24,430,420 | ||||||
| Investments in Graham Alternative Investment Trading LLC | – | (599,000 | ) | |||||
| Net cash provided by operating activities | 7,489,567 | 23,831,420 | ||||||
| Cash flows used in financing activities | ||||||||
| Subscriptions | – | 599,000 | ||||||
| Redemptions | (7,489,567 | ) | (24,430,420 | ) | ||||
| Net cash used in financing activities | (7,489,567 | ) | (23,831,420 | ) | ||||
| Net change in cash and cash equivalents | – | – | ||||||
| Cash and cash equivalents, beginning of year | – | – | ||||||
| Cash and cash equivalents, end of year | $ | – | $ | – | ||||
See accompanying notes and the attached financial statements of Graham Alternative Investment Trading LLC.
38
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements
December 31, 2018
1. Organization and Business
The Blended Strategies Portfolio (the “Fund”) is a series of Graham Alternative Investment Fund II LLC (“GAIF II”), a Delaware Series Limited Liability Company established through an amendment to the certificate of formation, effective March 28, 2013. Prior to March 28, 2013, GAIF II was organized as a Delaware Limited Liability Company which was formed on May 16, 2006 and commenced operations on August 1, 2006. GAIF II has one other active series in addition to the Fund, the Systematic Strategies Portfolio. GAIF II is registered as a commodity pool and as such is subject to the oversight and jurisdiction of the U.S. Commodity Futures Trading Commission (“CFTC”).
As a Series Limited Liability Company each series is legally segregated, and the assets associated with each series are held separately and accounted for in separate and distinct records from the assets of any other series of GAIF II. The debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series are enforceable against the assets of such series only, and not against the assets of GAIF II generally or any other series thereof. Further, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to GAIF II are enforceable against the assets of any other series.
The Fund offers investors Class 0 and Class 2 Units (collectively the “Units”). Graham Alternative Investment Ltd. (“GAI”) is a British Virgin Islands business company which was formed on June 1, 2006 and commenced operations on August 1, 2006. The Fund invests all of its assets dedicated to trading in Graham Alternative Investment Trading LLC (“GAIT”), a Delaware Limited Liability Company which was formed on May 18, 2006 and commenced operations on August 1, 2006, through an investment in GAI’s Blended Strategies Portfolio. GAIT invests in various master trading vehicles (“Master Funds”) and Graham Cash Assets LLC (“Cash Assets”), all of which are managed by Graham Capital Management, L.P. (the “Advisor” or “Manager”). The Fund is the sole owner of GAI’s Blended Strategies Portfolio and GAI’s Blended Strategies Portfolio invests all of its assets into GAIT. The Manager is the director of GAI and the sole investment advisor of GAI, GAIT and the Fund. The Manager is registered as a Commodity Pool Operator and Commodity Trading Advisor with the CFTC and is a member of the National Futures Association. The Manager is also registered with the Securities and Exchange Commission as an investment adviser. The Fund’s Units are registered under Section 12 of the Securities Exchange Act of 1934.
The investment objective of the Fund is to achieve long-term capital appreciation through professionally managed trading in both U.S. and foreign markets primarily in futures contracts, forwards contracts, spot currency contracts, and associated derivative instruments, such as options and swaps, through its investment in GAIT, which in turn invests in various Master Funds. The Master Funds seek to profit from opportunities in the global financial markets, including interest rate futures, foreign exchange, global stock indices and energy, metals and agricultural futures, as professionally managed multi-strategy investment vehicles. Each of the investment programs consists of multiple trading strategies of the Manager, which the Manager has combined in an effort to diversify the Fund’s investment exposure and to make the Fund’s performance returns less volatile and more consistently profitable.
SEI Global Services, Inc. (“SEI”) is the Fund’s independent administrator and transfer agent. SEI is responsible for certain matters pertaining to the administration of the Fund.
The Fund will terminate on December 31, 2050 or at an earlier date if certain conditions occur as outlined in the Limited Liability Company Agreement (“LLC Agreement”).
See attached financial statements of Graham Alternative Investment Trading LLC.
39
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
1. Organization and Business (continued)
The performance of the Fund is directly affected by the performance of GAIT; therefore, these consolidated financial statements should be read in conjunction with the attached financial statements of GAIT, including the condensed schedules of investments.
Duties of the Manager
Subject to the terms and conditions of the LLC Agreement, the Manager has complete and exclusive responsibility for managing and administering the affairs of the Fund and for directing the investment and reinvestment of the assets of the Fund, GAI, and GAIT.
2. Summary of Significant Accounting Policies
These financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all amounts are stated in U.S. dollars. The Fund is an investment company and applies specialized accounting guidance as outlined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services – Investment Companies. The preparation of these consolidated financial statements requires the Manager to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The Fund owns 100% of GAI’s Blended Strategies Portfolio and as such these consolidated financial statements include all the accounts of the Fund and GAI’s Blended Strategies Portfolio. Intercompany transactions and balances have been eliminated in consolidation. Creditors of the Fund have recourse to all assets of the Fund for amounts due to them, while creditors of GAI would have recourse only to the assets of GAI.
Investment in Graham Alternative Investment Trading LLC
The Fund records its investment in GAIT at fair value based upon the Fund’s proportionate share of GAIT’s reported net asset value in accordance with U.S. GAAP. In determining its net asset value, GAIT records its investments in the Master Funds at fair value based upon GAIT’s proportionate share of the Master Funds’ reported net asset value. The Fund records its proportionate share of GAIT’s investment income and loss, expenses, fees, and realized and unrealized gains and losses on a monthly basis and includes them in the consolidated statements of operations. Purchases and sales of units in GAIT are recorded on a trade date basis. The accounting policies of GAIT are described in its attached financial statements.
GAIT charges its investors, including the Fund, an advisory fee, sponsor fee, and incentive allocation, all of which are described in detail in Note 4. The Fund does not charge any additional fees; however, each investor in the Fund indirectly bears a portion of the advisory fee, sponsor fee, and incentive allocation charged by GAIT.
At December 31, 2018 and 2017, the Fund owned 46.31% and 46.14%, respectively of GAIT.
The fair value of the assets and liabilities of the Fund and GAIT, which qualify as financial instruments under U.S. GAAP, approximates the carrying amounts presented in the consolidated statements of financial condition. Changes in these carrying amounts are included in the consolidated statements of operations.
See attached financial statements of Graham Alternative Investment Trading LLC.
40
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Fair Value
The Fund follows U.S. GAAP for fair value measurements, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. The Fund reports the fair value of its investment related assets and liabilities in accordance with the hierarchy established under U.S. GAAP. U.S. GAAP uses a three-level hierarchy for fair value measurement based on the activeness of the market and the transparency and independence of inputs used in the valuation of an asset or liability as of the measurement date.
The fair value hierarchy categorizes asset and liability positions into one of three levels, as summarized below, based on the inputs and assumptions used in deriving fair value.
| · | Level 1 inputs are unadjusted closing or settlement prices for such assets or liabilities as published by the primary exchange upon which they are traded. |
| · | Level 2 inputs include quoted prices for similar assets and liabilities obtained from independent brokers and/or market makers in each security. |
| · | Level 3 inputs are those which are considered unobservable and are significant in arriving at fair value. |
The Fund’s investment in GAIT has been valued at net asset value using the practical expedient. Accordingly, under U.S. GAAP, this investment is excluded from categorization in the fair value hierarchy. There were no Level 3 assets or liabilities held at any point during the years ended December 31, 2018 and 2017 by the Fund, GAIT, the Master Funds or Cash Assets.
Indemnifications
In the normal course of business, the Master Funds, GAIT, Cash Assets, and the Fund enter into contracts that contain a variety of indemnifications. Such contracts may include those by Cash Assets and the Master Funds with their brokers and trading counterparties. The Fund’s maximum exposure under these arrangements is unknown; however, the Fund has not had prior claims or losses with respect to such indemnifications and considers the risk of loss to be remote. At December 31, 2018 and 2017, no accruals have been recorded by the Fund for indemnifications.
Cash and Cash Equivalents
The Fund classifies all highly liquid investments with a maturity of three months or less at the time of purchase as cash equivalents. Cash deposited with a bank is subject to credit risk. In the event of the bank's insolvency, recovery of the Fund's cash would be limited to account insurance or other protection afforded by such deposit. At December 31, 2018 and 2017, the Fund did not have any cash or cash equivalents.
3. Capital Accounts
The Fund offers two classes (each a “Class”) of Units, being Class 0 Units and Class 2 Units. The Fund may issue additional Classes in the future subject to different fees, expenses or other terms, or to invest in other investment programs or combinations of investment programs managed by the Manager.
A separate capital account is maintained for each member with respect to each member’s Class of Units. The initial balance of each member’s capital account is equal to the initial subscription to the Fund by such member with respect to the Class to which such capital account relates. Each member’s capital account is increased by any additional subscription and decreased by any redemption by such member of Units of such Class to which the capital account relates. All income and expenses of the Fund are allocated among the Members’ Capital accounts in proportion to the balance that each capital account bears to the balance of all capital as of the beginning of such fiscal period.
See attached financial statements of Graham Alternative Investment Trading LLC.
41
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
3. Capital Accounts (continued)
Subscriptions
Units may be purchased at a price equal to the Net Asset Value per Unit of the relevant Class as of the immediately preceding Valuation Day, as defined in the LLC Agreement. The minimum initial subscription from each investor in each Class is $10,000. Members may subscribe for additional Units in a minimum amount of not less than $5,000.
Units are available for subscription as of the first business day of each month upon written notice of at least three business days prior to the last business day of the preceding month.
Redemption of Units
Units are not subject to any minimum holding period. Members may redeem Units at the Net Asset Value thereof as of each Valuation Day, as defined in the LLC Agreement, upon not less than three business days’ prior written notice to the administrator. A partial redemption request for an amount less than $10,000 will not be accepted, nor will a redemption request be accepted to the extent that it would result in an investor owning less than $10,000. The redemption proceeds will normally be remitted within 15 days after the Valuation Day, without interest for the period from the Valuation Day to the payment date.
Redemption Fees
Class 0 Units are not subject to a redemption fee. For the period from January 1, 2017 to March 31, 2017, Class 2 Units were subject to a redemption fee equal to 2% of their Members’ Capital if redeemed within six months from their subscription date and a redemption fee equal to 1% of their Members’ Capital if redeemed more than six and less than twelve months from their subscription date. Effective April 1, 2017, Class 2 Units were subject to a redemption fee equal to 0.75% of their Members’ Capital if redeemed within six months from their subscription date and a redemption fee equal to 0.40% of their Members’ Capital if redeemed more than six and less than twelve months from their subscription date. Effective July 1, 2017, Class 2 Units are no longer subject to a redemption fee. Redemption fees were payable to the Manager upon redemption of Units from the proceeds of such redemption. There were no such redemption fees paid to the Manager for the year ended December 31, 2017.
4. Fees and Related Party Transactions
Advisory Fees
Each Class of GAIT other than Class M paid the Manager an advisory fee (the “Advisory Fee”) at an aggregate annual rate of the Members’ Capital of such Class specified for the periods in the table below. The Advisory Fee is payable monthly in arrears calculated as of the last business day of each month and any other date the Manager may permit, in its sole and absolute discretion, as of which any subscription or redemption is affected with respect to Units of such Class during the month. For the years ended December 31, 2018 and 2017, the Advisory Fees allocated to the Fund by each Class of GAIT totaled $523,762 and $823,044, respectively.
| Period | Annual Rate | |||
| For the period from January 1, 2017 through June 30, 2017 | 1.75% | | ||
| For the period from July 1, 2017 through December 31, 2018 | 1.50% | | ||
See attached financial statements of Graham Alternative Investment Trading LLC.
42
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
4. Fees and Related Party Transactions (continued)
Sponsor Fees
Each Class of GAIT other than Class M paid the Manager a sponsor fee (the “Sponsor Fee”) at an annual rate of the Members’ Capital specified in the table below. The Sponsor Fee is payable monthly in arrears calculated as of the last business day of each month in the same manner as the Advisory Fee. For the years ended December 31, 2018 and 2017, the Sponsor Fees allocated to the Fund by each Class of GAIT totaled $272,976 and $482,788, respectively.
| Period | Class 0 | Class 2 | ||||||
| For the period from January 1, 2017 through March 31, 2017 | 0.75% | | 2.75% | | ||||
| For the period from April 1, 2017 through June 30, 2017 | 0.75% | | 1.50% | | ||||
| For the period from July 1, 2017 through December 31, 2018 | 0.50% | | 1.25% | | ||||
Incentive Allocation
At the end of each calendar quarter, Graham Capital LLC, an affiliate of the Manager, will receive a special allocation of net profits (the “Incentive Allocation”) in an amount equal to 20% of the New High Net Trading Profits of each Class of GAIT, as defined in the LLC Agreement. The Incentive Allocation is also accrued and allocable on the date of redemption with respect to any Units that are redeemed prior to the end of a calendar quarter. Additionally, any loss carryforward attributable to any class of GAIT shall be proportionately reduced, effective as of the date of any redemption of any Units of such class, by multiplying the loss carryforward by the ratio that the amount of Members’ Capital redeemed from such class bears to the Members’ Capital of such class immediately prior to such redemption. The loss carryforward of a class must be recouped before any subsequent Incentive Allocation can be made to the Manager. There was no Incentive Allocation allocated to the Fund by GAIT for the years ended December 31, 2018 and 2017.
Any portion of any of the above fees, including the Incentive Allocation, may be paid by the Manager to third parties as compensation for selling activities in connection with the Fund.
Administrator’s Fee
For the years ended December 31, 2018 and 2017, GAIT paid SEI a monthly administrator’s fee based on GAIT’s Members’ Capital, calculated as of the last business day of each month. In addition, GAIT reimbursed SEI for reasonable out-of-pocket expenses incurred on behalf of GAIT. The total administrator’s fees, including out-of-pocket expenses, allocated to the Fund by GAIT for the years ended December 31, 2018 and 2017 were $45,411 and $66,702, respectively.
5. Income Taxes
No provision for income taxes has been made in the accompanying consolidated financial statements, as members are individually responsible for reporting income or loss based upon their respective share of the Fund’s revenues and expenses for income tax purposes.
See attached financial statements of Graham Alternative Investment Trading LLC.
43
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
U.S. GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a “more-likely-than-not” threshold would be recorded as a tax expense in the current year. The Fund identifies its major tax jurisdictions as the U.S. for federal tax purposes and Connecticut for state tax purposes. The Manager has evaluated the Fund’s tax positions and has concluded that there are no significant tax positions requiring recognition, measurement or disclosure in the consolidated financial statements for open tax years 2015 through 2017 or expected to be taken in the Fund’s 2018 tax returns. The Manager is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax expense will change materially in the next twelve months. Tax years which are considered open by the relevant jurisdiction are subject to potential examination. Any assessment for interest or penalties on taxes related to uncertain tax positions, when present, would be included in interest and penalties on tax on the consolidated statements of operations and incentive allocation. No such interest and/or penalties were assessed to the Fund.
6. Financial Highlights
The following is the per Unit operating performance calculation for the years ended December 31, 2018 and 2017:
| Class 0 | Class 2 | |||||||
| Per unit operating performance | ||||||||
| Net asset value per Unit, December 31, 2016 | $ | 146.92 | $ | 107.43 | ||||
| Net loss: | ||||||||
| Net investment loss | (2.78 | ) | (3.04 | ) | ||||
| Net loss on investments | (3.24 | ) | (2.45 | ) | ||||
| Net loss | (6.02 | ) | (5.49 | ) | ||||
| Net asset value per Unit, December 31, 2017 | 140.90 | 101.94 | ||||||
| Net loss: | ||||||||
| Net investment loss | (1.57 | ) | (1.90 | ) | ||||
| Net loss on investments | (5.63 | ) | (4.03 | ) | ||||
| Net loss | (7.20 | ) | (5.93 | ) | ||||
| Net asset value per Unit, December 31, 2018 | $ | 133.70 | $ | 96.01 | ||||
See attached financial statements of Graham Alternative Investment Trading LLC.
44
Graham Alternative Investment Fund II LLC
Blended Strategies Portfolio
Notes to Consolidated Financial Statements (continued)
6. Financial Highlights (continued)
The following represents ratios to average Members’ Capital, excluding the Managing Member, and total return for the years ended December 31, 2018 and 2017:
| Class 0 | Class 2 | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Total return before Incentive Allocation | (5.11 | )% | (4.10 | )% | (5.82 | )% | (5.11 | )% | ||||||||
| Incentive Allocation | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| Total return after Incentive Allocation | (5.11 | )% | (4.10 | )% | (5.82 | )% | (5.11 | )% | ||||||||
| Net investment loss before Incentive Allocation | (1.11 | )% | (1.96 | )% | (1.86 | )% | (2.95 | )% | ||||||||
| Incentive Allocation | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| Net investment loss after Incentive Allocation | (1.11 | )% | (1.96 | )% | (1.86 | )% | (2.95 | )% | ||||||||
| Total expenses before Incentive Allocation | 2.70 | % | 2.81 | % | 3.44 | % | 3.81 | % | ||||||||
| Incentive Allocation | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| Total expenses after Incentive Allocation | 2.70 | % | 2.81 | % | 3.44 | % | 3.81 | % | ||||||||
Total return is calculated for Class 0 and Class 2 Units taken as a whole. Total return is calculated as the change in total Members’ Capital adjusted for subscriptions or redemptions during the year. An individual member’s return may vary from these returns based on the timing of capital transactions. The net investment loss and total expense ratios (including Incentive Allocation) are calculated for Class 0 and Class 2 Units taken as a whole and include net amounts allocated from GAIT. The computation of such ratios is based on the amount of net investment loss, expenses and Incentive Allocation. Net investment loss and total expense ratios are computed based upon the weighted average of Members’ Capital for Class 0 and Class 2 Units of the Fund for the years ended December 31, 2018 and 2017.
7. Subsequent Events
The Fund had subscriptions of approximately $0.3 million and redemptions of approximately $0.7 million from January 1, 2019 through March 29, 2019, the date through which subsequent events were evaluated by management and the consolidated financial statements were available for issuance. These amounts have not been included in the consolidated financial statements.
See attached financial statements of Graham Alternative Investment Trading LLC.
45
| Financial Statements | |
| Graham Alternative Investment Trading LLC Years ended December 31, 2018 and 2017 with Report of Independent Registered Public Accounting Firm |
46
GRAHAM ALTERNATIVE INVESTMENT TRADING LLC
40 Highland Avenue
Rowayton, CT 06853
The undersigned affirms, on behalf of Graham Alternative Investment Trading LLC, that to the best of his knowledge and belief, the information contained in the attached audited financial statements of Graham Alternative Investment Trading LLC for the years ended December 31, 2018 and 2017 is accurate and complete.
| By: | Graham Capital Management, L.P., as | |||
| Sole Manager | ||||
| By: | | |||
| George Schrade | ||||
| Chief Financial Officer | ||||
| March 29, 2019 | ||||
47
Graham Alternative Investment Trading LLC
Financial Statements
Years Ended December 31, 2018 and 2017
Contents
| Report of Independent Registered Public Accounting Firm | 49 |
| Statements of Financial Condition | 50 |
| Condensed Schedules of Investments | 51 |
| Statements of Operations and Incentive Allocation | 52 |
| Statements of Changes in Members’ Capital | 53 |
| Statements of Cash Flows | 54 |
| Notes to Financial Statements | 55 |
48
Report of Independent Registered Public Accounting Firm
To the Members and Manager of
Graham Alternative Investment Trading LLC
Opinion on the Financial Statements
We have audited the accompanying statements of financial condition of Graham Alternative Investment Trading LLC (the “Fund”), including the condensed schedules of investments, as of December 31, 2018 and 2017, and the related statements of operations and incentive allocation, changes in members’ capital and cash flows for each of the two years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Graham Alternative Investment Trading LLC at December 31, 2018 and 2017, the results of its operations, changes in its members’ capital and its cash flows for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of Graham Alternative Investment Trading LLC since 2006.
Stamford, CT
March 29, 2019
49
Graham Alternative Investment Trading LLC
Statements of Financial Condition
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Investments in Master Funds, at fair value | $ | 5,730,163 | $ | 7,809,515 | ||||
| Investment in Graham Cash Assets LLC, at fair value | 55,501,064 | 73,474,604 | ||||||
| Receivable from Master Funds | 43 | 101 | ||||||
| Total assets | $ | 61,231,270 | $ | 81,284,220 | ||||
| Liabilities and members’ capital | ||||||||
| Liabilities: | ||||||||
| Redemptions payable | $ | 520,046 | $ | 367,689 | ||||
| Accrued professional fees | 165,656 | 171,603 | ||||||
| Accrued advisory fees | 76,351 | 101,840 | ||||||
| Accrued sponsor fees | 41,055 | 54,975 | ||||||
| Accrued administrator’s fees | 6,870 | 9,041 | ||||||
| Payable to Master Funds | 68 | - | ||||||
| Total liabilities | 810,046 | 705,148 | ||||||
| Members’ capital: | ||||||||
| Class 0 Units (263,114.613 and 331,577.130 units issued and outstanding at $133.70 and $140.90 per unit, respectively) | 35,179,498 | 46,720,480 | ||||||
| Class 2 Units (251,175.400 and 320,722.151 units issued and outstanding at $96.01 and $101.94 per unit, respectively) | 24,114,225 | 32,693,924 | ||||||
| Class M Units (4,671.470 units issued and outstanding at $241.36 and $249.32 per unit, respectively) | 1,127,501 | 1,164,668 | ||||||
| Total members’ capital | 60,421,224 | 80,579,072 | ||||||
| Total liabilities and members’ capital | $ | 61,231,270 | $ | 81,284,220 | ||||
See accompanying notes.
50
Graham Alternative Investment Trading LLC
Condensed Schedules of Investments
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Description | Fair Value | Percentage of Members’ Capital | Fair Value | Percentage of Members’ Capital | ||||||||||||
| Investments in Master Funds, at fair value | ||||||||||||||||
| Graham Commodity Strategies LLC | $ | 2,439,800 | 4.03 | % | $ | 3,235,547 | 4.01 | % | ||||||||
| Graham K4D Trading Ltd. | 3,290,363 | 5.45 | % | 4,573,968 | 5.68 | % | ||||||||||
| Total investments in Master Funds | $ | 5,730,163 | 9.48 | % | $ | 7,809,515 | 9.69 | % | ||||||||
See accompanying notes.
51
Graham Alternative Investment Trading LLC
Statements of Operations and Incentive Allocation
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss allocated from investments in Master Funds: | ||||||||
| Net realized loss on investments | $ | (503,880 | ) | $ | (3,168,433 | ) | ||
| Net (decrease) increase in unrealized appreciation on investments | (1,345,077 | ) | 287,917 | |||||
| Brokerage commissions and fees | (534,701 | ) | (661,183 | ) | ||||
| Net loss allocated from investments in Master Funds | (2,383,658 | ) | (3,541,699 | ) | ||||
| Net investment income allocated from investments in Master Funds | 106,205 | 87,838 | ||||||
| Investment income: | ||||||||
| Interest income | 1,059,277 | 859,221 | ||||||
| Total investment income | 1,059,277 | 859,221 | ||||||
| Expenses: | ||||||||
| Advisory fees | 1,098,714 | 1,827,525 | ||||||
| Sponsor fees | 594,359 | 1,103,331 | ||||||
| Professional fees and other | 381,833 | 361,672 | ||||||
| Administrator’s fees | 96,803 | 149,581 | ||||||
| Interest expense | 12,287 | 12,217 | ||||||
| Total expenses | 2,183,996 | 3,454,326 | ||||||
| Net investment loss of the Fund | (1,124,719 | ) | (2,595,105 | ) | ||||
| Net loss | (3,402,172 | ) | (6,048,966 | ) | ||||
| Incentive allocation | - | - | ||||||
| Net loss available for pro-rata allocation to all members | $ | (3,402,172 | ) | $ | (6,048,966 | ) | ||
See accompanying notes.
52
Graham Alternative Investment Trading LLC
Statements of Changes in Members’ Capital
Years Ended December 31, 2018 and 2017
| Class 0 | Class 2 | Class M | Total | |||||||||||||||||||||||||
| Units | Capital | Units | Capital | Units | Capital | Capital | ||||||||||||||||||||||
| Members’ capital, December 31, 2016 | 650,889.077 | $ | 95,631,060 | 379,525.982 | $ | 40,771,563 | 4,671.470 | $ | 1,187,406 | $ | 137,590,029 | |||||||||||||||||
| Subscriptions | 22,311.608 | 3,197,637 | 6,175.457 | 640,000 | – | – | 3,837,637 | |||||||||||||||||||||
| Redemptions | (341,623.555 | ) | (48,128,656 | ) | (64,979.288 | ) | (6,670,972 | ) | – | – | (54,799,628 | ) | ||||||||||||||||
| Incentive allocation | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | (3,979,561 | ) | – | (2,046,667 | ) | – | (22,738 | ) | (6,048,966 | ) | |||||||||||||||||
| Members’ capital, December 31, 2017 | 331,577.130 | 46,720,480 | 320,722.151 | 32,693,924 | 4,671.470 | 1,164,668 | 80,579,072 | |||||||||||||||||||||
| Subscriptions | 1,966.934 | 275,000 | 974.513 | 100,000 | – | – | 375,000 | |||||||||||||||||||||
| Redemptions | (70,429.451 | ) | (10,011,338 | ) | (70,521.264 | ) | (7,119,338 | ) | – | – | (17,130,676 | ) | ||||||||||||||||
| Incentive allocation | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | (1,804,644 | ) | – | (1,560,361 | ) | – | (37,167 | ) | (3,402,172 | ) | |||||||||||||||||
| Members’ capital, December 31, 2018 | 263,114.613 | $ | 35,179,498 | 251,175.400 | $ | 24,114,225 | 4,671.470 | $ | 1,127,501 | $ | 60,421,224 | |||||||||||||||||
See accompanying notes.
53
Graham Alternative Investment Trading LLC
Statements of Cash Flows
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows provided by operating activities | ||||||||
| Net loss | $ | (3,402,172 | ) | $ | (6,048,966 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Net loss allocated from investments in Master Funds | 2,277,453 | 3,453,861 | ||||||
| Net income allocated from investment in Graham Cash Assets LLC | (1,059,277 | ) | (859,221 | ) | ||||
| Proceeds from sale of investments in Master Funds | 81,122,724 | 110,380,663 | ||||||
| Proceeds from sale of investments in Graham Cash Assets LLC | 76,894,719 | 139,927,540 | ||||||
| Investments in Master Funds | (81,320,699 | ) | (105,239,398 | ) | ||||
| Investments in Graham Cash Assets LLC | (57,861,902 | ) | (89,226,111 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Decrease in accrued advisory fees | (25,489 | ) | (103,208 | ) | ||||
| Decrease in accrued sponsor fees | (13,920 | ) | (103,124 | ) | ||||
| Decrease in accrued professional fees | (5,947 | ) | (12,778 | ) | ||||
| Decrease in accrued administrator’s fees | (2,171 | ) | (4,414 | ) | ||||
| Net cash provided by operating activities | 16,603,319 | 52,164,844 | ||||||
| Cash flows used in financing activities | ||||||||
| Subscriptions | 375,000 | 3,837,637 | ||||||
| Redemptions | (16,978,319 | ) | (56,002,481 | ) | ||||
| Net cash used in financing activities | (16,603,319 | ) | (52,164,844 | ) | ||||
| Net change in cash and cash equivalents | – | – | ||||||
| Cash and cash equivalents, beginning of year | – | – | ||||||
| Cash and cash equivalents, end of year | $ | – | $ | – | ||||
| Supplemental cash flow information | ||||||||
| Interest paid | $ | 12,287 | $ | 12,217 | ||||
See accompanying notes.
54
Graham Alternative Investment Trading LLC
Notes to Financial Statements
December 31, 2018
1. Organization and Business
Graham Alternative Investment Trading LLC (“GAIT”) was formed on May 18, 2006, commenced operations on August 1, 2006 and is organized as a Delaware Limited Liability Company. Graham Capital Management, L.P. (the “Managing Member” or “Manager”) is the Managing Member and the sole investment advisor. The Managing Member is registered as a Commodity Pool Operator and Commodity Trading Advisor with the U.S. Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association. The Managing Member is also registered with the Securities and Exchange Commission as an investment adviser. GAIT is a commodity pool, and as such is subject to the oversight and jurisdiction of the CFTC.
The investment objective of GAIT is to achieve long-term capital appreciation through professionally managed trading through its investment in various master trading vehicles (“Master Funds”). As more fully described in Notes 2 and 3, these Master Funds invest in a broad range of derivative instruments such as currency forward and futures contracts; bond, interest rate, and index futures contracts; commodity forward and futures contracts, and options and swaps thereon traded on U.S. and foreign exchanges, as well as over-the-counter (“OTC”).
Graham Alternative Investment Fund I LLC Blended Strategies Portfolio and Graham Alternative Investment Fund II LLC Blended Strategies Portfolio are the primary investors of GAIT.
SEI Global Services, Inc. (“SEI”) is GAIT’s independent administrator and transfer agent. SEI is responsible for certain matters pertaining to the administration of GAIT.
GAIT will terminate on December 31, 2050 or at an earlier date if certain conditions occur as outlined in the Limited Liability Company Agreement (“LLC Agreement”).
Duties of the Managing Member
Subject to the terms and conditions of the LLC Agreement, the Managing Member has complete and exclusive responsibility for managing and administering the affairs of GAIT and for directing the investment and reinvestment of the assets of GAIT.
2. Summary of Significant Accounting Policies
These financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all amounts are stated in U.S. dollars. GAIT is an investment company and applies specialized accounting guidance as outlined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services – Investment Companies. The preparation of these financial statements requires the Manager to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Investments in Master Funds
GAIT invests in various Master Funds which are managed by the Managing Member. These investments are valued in the accompanying statements of financial condition at fair value in accordance with U.S. GAAP based upon GAIT’s proportionate share of the Master Funds’ reported net asset values. Gains and losses are allocated monthly by each Master Fund to GAIT based upon GAIT’s proportionate share of the net asset value of each Master Fund and are included in the statements of operations and incentive allocation.
55
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Due from/to Brokers
Due from/to brokers on the Master Funds’ financial statements primarily consist of cash balances carried as margin deposits with clearing brokers for the purpose of trading in futures contracts, foreign currency contracts and other derivative financial instruments and securities, and receivables/payables for unsettled transactions. Substantially all of the Master Funds’ cash and investments are held as collateral by its brokers to secure derivative instruments and securities.
Revenue Recognition
All positions in financial instruments are recorded on the trade date at fair value. Net unrealized appreciation or depreciation on open derivative financial instruments is included in the Master Funds’ statements of financial condition as the difference between the original purchase price and the current market value at the end of the period. Any change in net unrealized appreciation or depreciation from the preceding period is reported in the Master Funds’ statements of operations. Interest income and expense are recorded on the accrual basis. Dividends are recorded on the ex-dividend date and are net of applicable withholding taxes. All other expenses are recorded on the accrual basis. Realized gains and losses are calculated based on the specific identification method.
Brokerage Commissions and Fees
Brokerage commissions and fees on the Master Funds’ financial statements represent all brokerage commissions and other fees incurred in connection with the Master Funds’ trading activity and are recorded on the accrual basis.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated using the exchange rates at December 31, 2018 and 2017. Gains and losses resulting from foreign currency transactions are calculated using daily exchange rates prevailing on the transaction date. The Master Funds do not isolate the portion of results of operations from changes in foreign exchange rates on investments and cash from fluctuations arising from changes in market prices held. The Master Funds’ currency translation gains and losses are included in the statements of operations and incentive allocation within net realized loss and net (decrease) increase in unrealized appreciation on investments.
Fair Value
The fair value of GAIT’s assets and liabilities, which qualify as financial instruments under U.S. GAAP, approximates the carrying amounts presented in the statements of financial condition. Changes in these carrying amounts are included in the statements of operations and incentive allocation.
GAIT follows U.S. GAAP for fair value measurements, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements. GAIT reports the fair value of its investment related assets and liabilities in accordance with the hierarchy established under U.S. GAAP. U.S. GAAP uses a three-level hierarchy for fair value measurement based on the activeness of the market and the transparency and independence of inputs used in the valuation of an asset or liability as of the measurement date.
56
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Fair Value (continued)
The fair value hierarchy categorizes asset and liability positions into one of three levels, as summarized below, based on the inputs and assumptions used in deriving fair value.
| · | Level 1 inputs are unadjusted closing or settlement prices for such assets or liabilities as published by the primary exchange upon which they are traded. |
| · | Level 2 inputs include quoted prices for similar assets and liabilities obtained from independent brokers and/or market makers in each security. |
| · | Level 3 inputs are those which are considered unobservable and are significant in arriving at fair value. |
GAIT’s investments in the Master Funds and Graham Cash Assets LLC (“Cash Assets”) have been valued at net asset value using the practical expedient. Accordingly, under U.S. GAAP, these investments are excluded from categorization in the fair value hierarchy. GAIT’s investments in the Master Funds and Cash Assets are discussed in Notes 3 and 4. There were no Level 3 assets or liabilities held at any point during the years ended December 31, 2018 or 2017 by GAIT, the Master Funds, or Cash Assets.
Derivative Instruments
In the normal course of business, the Master Funds utilize derivative financial instruments in connection with their trading activities. Derivative instruments derive their value from underlying assets, indices, reference rates or a combination of these factors. Investments in derivative financial instruments are subject to additional risks that can result in a loss of all or part of an investment. The Master Funds’ derivative financial instruments are classified by the following primary underlying risks: interest rate, foreign currency exchange rate, commodity price, and equity price risks. These risks can be in excess of the amounts recognized in the statements of financial condition. In addition, the Master Funds are also subject to additional counterparty risk should their counterparties fail to meet the terms of their contracts. Management of counterparty risk involves a number of considerations, such as the financial profile of the counterparty, specific terms and duration of the contractual agreement, and the value of collateral held, if any. The Master Funds have established initial credit approval, credit limits, and collateral requirements and may reduce their exposure to any counterparties they deem necessary. Trading in non-U.S. dollar denominated derivative instruments may subject the value of, and gains and losses associated with, such contracts to additional risks related to adverse changes in the applicable exchange rates.
Unrealized appreciation and depreciation from derivative financial instruments are recorded based on changes in their fair value. Realized gains and losses are recorded when the positions are closed. All unrealized and realized gains and losses related to derivative financial instruments are included in net gain (loss) on investments in the Master Funds’ statements of operations.
Futures Contracts
The Master Funds use futures contracts in an attempt to take advantage of changes in the value of equities, commodities, interest rates, bonds and foreign currencies. Futures contracts are valued based upon the closing price as of the valuation date established by the primary exchange upon which they are traded.
57
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Derivative Instruments (continued)
Futures Contracts (continued)
A futures contract represents a commitment for the future purchase or sale of an asset or cash settlement based on the value of an asset on a specified date. The purchase and sale of futures contracts are executed on an exchange which requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments are made or received by the Master Funds each day, depending on the daily fluctuations in the value of the contract. These changes in valuation are recorded for financial statement purposes as unrealized appreciation and depreciation by the Master Funds. Relative to over-the-counter derivative financial instruments, futures contracts provide reduced counterparty risk to the Master Funds since futures are exchange-traded and the exchanges’ clearing house guarantees the futures against default. However, some non-U.S. exchanges are “principals’ markets” in which no common clearing facility exists, and the Master Funds may look only to the clearing broker for performance of the contract. The U.S. Commodity Exchange Act requires an FCM to segregate all funds received from such FCM’s customers in respect of regulated futures transactions. If the FCM were not to do so to the full extent required by law, the assets of the Master Funds might not be fully protected in the event of the bankruptcy or insolvency of the FCM. In that case, the Master Funds would be limited to recovering only a pro rata share of all available funds segregated on behalf of the FCM’s combined customer accounts, even though certain property specifically traceable to the Master Funds was held by the FCM. In addition, in the event of bankruptcy or insolvency of an exchange or an affiliated clearing house, the Master Funds might experience a loss of funds deposited through its FCM as margin with such exchange or affiliated clearing house, the loss of unrealized profits on its open positions, and the loss of funds owed to it as realized profits on closed positions.
Forward Contracts
The Master Funds enter into foreign currency forward contracts in an attempt to take advantage of changes in exchange rates. Forward currency transactions are contracts or agreements for delivery of specific currencies or the cash equivalent value at a specified future date and an agreed upon price. Forward contracts are not guaranteed by an exchange or clearing house and therefore the risks include the inability of counterparties to meet their obligations under the terms of the contracts as well as the risks associated with movements in fair value.
Exchange traded forward contracts are valued based upon the settlement prices as of the valuation date, established by the primary exchange upon which they are traded. All other forward contracts are valued based upon a forward curve constructed using independently quoted forward points. Changes in fair value of each forward contract are recognized as unrealized appreciation and depreciation.
58
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Derivative Instruments (continued)
Swap Contracts
The Master Funds may enter into various swap contracts in an attempt to take advantage of changes in interest rates and asset values. Exchange traded interest rate swap contracts are executed on an exchange which requires margin deposits with a Central Clearing Counterparty (“CCP”). Subsequent payments are made or received by the Master Funds each day, depending on the daily fluctuations in the value of the contract. These changes in valuation are recorded for financial statement purposes as unrealized appreciation or depreciation by the Master Funds. Relative to over-the-counter interest rate swap contracts, exchange-traded interest rate swap contracts provide reduced counterparty risk since they are exchange-traded and the exchange’s clearinghouse guarantees against default. The Commodity Exchange Act requires a CCP to segregate all funds received from such CCP’s customers in respect of exchange traded interest rate swaps. If the CCP were not to do so to the full extent required by law, the assets of the Master Funds might not be fully protected in the event of the bankruptcy or insolvency of the CCP. In that case, the Master Funds would be limited to recovering only a pro rata share of all available funds segregated on behalf of the CCP’s combined customer accounts, even though certain property specifically traceable to the Master Funds is held by the CCP. In addition, in the event of bankruptcy or insolvency of an exchange or an affiliated clearing house, the Master Funds could experience a loss of funds deposited through its CCP as margin with such exchange or affiliated clearing house, the loss of unrealized profits on its open positions, and the loss of funds owed to it as realized profits on closed positions. All funds deposited with both U.S. and non-U.S. CCPs are included in due from brokers on the statements of financial condition. Over the counter swap contracts are not guaranteed by an exchange or an affiliated clearing house or regulated by any U.S. or foreign government authorities. Failure of a counterparty to meet its obligation under the terms of the swap contract could result in the loss of any unrealized appreciation on open positions. It may not be possible to dispose of or close out a swap position without the consent of the counterparty, and the Master Funds may not be able to enter into an offsetting contract in order to cover its risk.
An interest rate swap contract is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified rates for a specified notional amount of the underlying assets. The payment flows are usually netted against each other, with the difference being paid by one party to another. Interest rate swap positions are generally valued as the present value of the net future cash flows as estimated by the Manager using a discount curve constructed from independently obtained future interest rate assumptions.
A total return swap contract is an agreement that obligates two parties to exchange cash flows calculated by reference to changes in specified prices for a specified notional amount of the underlying assets. The payment flows are usually netted against each other, with the difference being paid by one party to another. Total return swaps are generally valued based upon the value of the underlying instruments as determined by the primary exchange on which they are traded.
Exchange traded swaps are valued based upon the closing prices established by the primary exchange upon which they are traded. Changes in fair value of each swap are recognized as unrealized appreciation or depreciation. The Master Funds record realized gains or losses when a swap contract is terminated.
59
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Derivative Instruments (continued)
Options
The Master Funds may buy and sell covered and uncovered exchange traded and over-the-counter options on futures, foreign currencies, commodities, interest rates and equities to take advantage of the price movements of the financial instrument underlying the option or to hedge positions in the underlying assets. Option contracts give one party the right, but not the obligation, to buy or sell within a limited time or on a specified date, a financial instrument, commodity or currency at a contracted price. Options may also be settled in cash, based on differentials between specified indices or prices.
When purchasing options, the Master Funds are exposed to counterparty risk to the extent that a seller of an over-the-counter option does not meet its obligations under the terms of the option contract. The maximum risk of loss to the Master Funds is the unrealized appreciation of the contracts and the premiums paid to purchase its open option contracts. Relative to over-the-counter options, exchange traded options provide reduced counterparty risk to the Master Funds since the exchanges’ clearinghouse guarantees the option against default.
Selling uncovered options may subject the Master Funds to unlimited risk of loss. As the writer of an option, the Master Funds bear the market risk of an unfavorable change in the price of the underlying instrument.
Exchange traded options are valued based upon the settlement prices published as of the valuation date by the principal exchange upon which they are traded. In the absence of an exchange published settlement price, the option will be valued using the last reported sales price reported on the exchange for the valuation date. Over-the-counter options and exchange traded options with no reported sales price on the valuation date will generally be valued at the average of the last reported bid and offer quotes from independent brokers or from the exchange, respectively.
Credit Risk Related Contingent Features
OTC derivative instruments are subject to ISDA Master Agreements which generally require among other things, that the Master Funds maintain a predetermined level of net assets or rate of return and provide limits with respect to any decline in value over 1-month, 3-month and 12-month periods. If the Master Funds were to violate such provisions, the counterparty to these instruments could demand liquidation of the outstanding positions. There were no events that occurred throughout the years ended December 31, 2018 and 2017 which caused any counterparty to demand liquidation of any outstanding positions. Graham K4D Trading Ltd. had derivative instruments subject to credit risk related contingent features in a net liability position in the amount of $3,714,582 and $876,222 at December 31, 2018 and 2017, respectively. Graham Commodity Strategies LLC had derivative instruments subject to credit risk related contingent features in a net liability position in the amount of $1,049 and $12,435 at December 31, 2018 and 2017, respectively.
New York Mercantile Exchange Corporate Membership
Graham Commodity Strategies LLC, a Master Fund in which GAIT invests, is a member of the New York Mercantile Exchange (“NYMEX”). As a result of its membership, Graham Commodity Strategies LLC owns two NYMEX seats and 30,000 shares of the CME Group. Graham Commodity Strategy LLC’s policy is to value the NYMEX seats and the shares of the CME Group at fair value. As of December 31, 2018 and 2017, the two NYMEX seats were valued at $220,000 and $260,000, respectively, and the 30,000 shares of CME Group were valued at $5,643,600 and $4,381,500, respectively, both of which are contained within Exchange Memberships on Graham Commodity Strategies LLC’s statements of financial condition. The NYMEX seats and CME Group shares are considered Level 1 assets as described in the Fair Value section of Note 2.
60
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Chicago Board of Trade Membership
Graham K4D Trading Ltd., a Master Fund in which GAIT invests, is a member of the Chicago Board of Trade (“CBOT”) under Rule 106.S and owns two B-1/Full seats and one B-2/Associate seat (“collectively, “CBOT memberships”). Graham K4D Trading Ltd.’s policy is to value the CBOT memberships at fair value. As of December 31, 2018 and 2017, the two B-1/Full seats were valued at a total of $560,000 and $720,000, respectively, and the B-2/Associate seat was valued at $51,000 and $72,250, respectively, all of which are included in Exchange Memberships on the statements of financial condition. Additionally, Graham K4D Trading Ltd. owns a Chicago Mercantile Exchange (“CME”) seat valued at $145,500 and $232,000 at December 31, 2018 and 2017, respectively, which is also included in Exchange Memberships on the statements of financial condition. The CBOT memberships and CME seat are considered Level 1 assets as described in the Fair Value section of Note 2.
Fixed Income Securities
The fixed income securities positions are valued at the mean between the last reported bid and ask quotations received from independent brokers. GAIT is exposed to credit risk relating to whether the issuers will meet their obligations when they come due until the fixed income securities are sold or reach maturity.
Recent Accounting Pronouncement
In August 2018, the Financial Accounting Standards Board issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies, removes and adds certain disclosure requirements on fair value measurements. ASU 2018-13 removes the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between Levels, the valuation processes for Level 3 fair value measurements and changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements. ASU 2018-13 includes modified requirements to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and sales of Level 3 assets and liabilities in lieu of a Level 3 rollforward. For investments in certain entities that calculate net asset value, ASU 2018-13 requires an entity to disclose the timing of liquidation of the investee’s assets. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. GAIT has elected to early adopt ASU 2018-13 as of the year ended December 31, 2018.
Indemnifications
In the normal course of business, the Master Funds, Cash Assets, and GAIT enter into contracts that contain a variety of indemnifications. Such contracts may include those by Cash Assets and the Master Funds with their brokers and trading counterparties. GAIT’s maximum exposure under these arrangements is unknown; however, GAIT has not had prior claims or losses with respect to such indemnifications and considers the risk of loss to be remote. At December 31, 2018 and 2017, no accruals have been recorded by GAIT for indemnifications.
Cash and Cash Equivalents
GAIT classifies all highly liquid investments with a maturity of three months or less at the time of purchase as cash equivalents. Cash deposited with a bank is subject to credit risk. In the event of the bank's insolvency, recovery of the GAIT’s cash would be limited to account insurance or other protection afforded by such deposit. At December 31, 2018 and 2017, GAIT did not have any cash or cash equivalents.
61
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
3. Investments in Master Funds
As of December 31, 2018 and 2017, GAIT invested in various Master Funds, all of which were managed by the Manager. GAIT’s investments in these Master Funds, as well as the investment objectives of each Master Fund, are summarized below. Master Funds in which GAIT invested 5% or more of its Members’ Capital are individually identified. All of the Master Funds and GAIT are related parties. The Master Funds do not charge management or incentive allocation, and all offer monthly subscriptions and redemptions.
| December 31, 2018 | ||||||||||||
| Investment – Objective | Percent of Members’ Capital | Fair Value | Net Income (Loss) | |||||||||
| Global Macro Funds | ||||||||||||
| Graham Commodity Strategies LLC | 4.03% | | $ | 2,439,800 | $ | 2,535,205 | ||||||
| Systematic Macro Funds | ||||||||||||
| Graham K4D Trading Ltd. | 5.45% | | 3,290,363 | (4,812,658 | ) | |||||||
| 9.48% | | $ | 5,730,163 | $ | (2,277,453 | ) | ||||||
| December 31, 2017 | ||||||||||||
| Investment – Objective | Percent of Members’ Capital | Fair Value | Net Income (Loss) | |||||||||
| Global Macro Funds | ||||||||||||
| Graham Commodity Strategies LLC | 4.01% | | $ | 3,235,547 | $ | (5,975,551 | ) | |||||
| Systematic Macro Funds | ||||||||||||
| Graham K4D Trading Ltd. | 5.68% | | 4,573,968 | 2,521,690 | ||||||||
| 9.69% | | $ | 7,809,515 | $ | (3,453,861 | ) | ||||||
The following table summarizes the financial position of each Master Fund as of December 31, 2018:
| Graham Commodity Strategies LLC (Delaware) | Graham K4D Trading Ltd. (BVI) | |||||||
| Assets: | ||||||||
| Fixed income securities, at fair value (cost $62,362,617) | $ | - | $ | 62,592,100 | ||||
| Due from brokers | 76,813,273 | 13,515,716 | ||||||
| Derivative financial instruments, at fair value | 20,399,655 | - | ||||||
| Exchange memberships, at fair value | 5,863,600 | 756,500 | ||||||
| Accrued interest income | 36,830 | 364,002 | ||||||
| Dividends receivable | 36,750 | - | ||||||
| Total assets | 103,150,108 | 77,228,318 | ||||||
| Liabilities: | ||||||||
| Derivative financial instruments, at fair value | 1,878,673 | 7,631,786 | ||||||
| Interest payable | 525 | 11,474 | ||||||
| Total liabilities | 1,879,198 | 7,643,260 | ||||||
| Members’ Capital / Net Assets | $ | 101,270,910 | $ | 69,585,058 | ||||
| Percentage of Master Fund held by GAIT | 2.41 | % | 4.73 | % | ||||
62
Graham Alternative Investment Trading LLC
Notes to Financial Statements (continued)
3. Investments in Master Funds (continued)
The following schedules display the condensed schedules of investments for the Master Funds as of December 31, 2018:
| Description | Number of Contracts / Notional Amounts | Fair Value | Percentage of Members’ Capital of Master Fund | |||||||||
| Graham Commodity Strategies LLC | ||||||||||||
| Exchange memberships (cost $2,146,960) | ||||||||||||
| United States (cost $2,146,960) | | | | |||||||||
| Financial services (cost $2,146,960) | $ | 5,863,600 | 5.79 | % | ||||||||
| Total exchange memberships | $ | 5,863,600 | 5.79 | % | ||||||||
| Derivative financial instruments | ||||||||||||
| Long contracts | ||||||||||||
| Futures | ||||||||||||
| Commodity | $ | 3,698,683 | 3.65 | % | ||||||||
| Currency | (1,165 | ) | (0.00 | )% | ||||||||
| Foreign index | (42,275 | ) | (0.04 | )% | ||||||||