News Column

MLM INDEX FUND - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 8, 2014

General

The purpose of the Trust is to replicate the results of the MLM Index™ or subset thereof, an index designed to measure the risk premium available to futures traders. Designed as such, the results of the Trust and each of its respective Series depend on two factors, the results of the MLM Index™ itself, and the Manager's ability to replicate that Index. It is important to note that the Manager also calculates the results of the MLM Index™. Thus, their role is twofold - to calculate the results of the MLM Index™, and to replicate the results of the MLM Index™ for the Trust. Any changes made to the composition of the MLM Index™ by the MLM Index™ Committee of the Manager will affect the trading of the Trust and each of the Series, since the objective is to replicate the MLM Index™ as published. The Trust consists of several separate series of interests (each, a "Series"), each with its own assets and liabilities. Under the Trust Agreement, the Trust may issue multiple Series of Interests. The Trust maintains separate and distinct records for each Series and the assets associated with each such Series are held and accounted for separately from the other assets of the Trust and of any other Series thereof. The debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing, with respect to a particular Series, can only be enforced against the assets of such Series only and not against the assets of the Trust generally or the assets of any other Series. Currently the Trust has four active series of interests: the Unleveraged Series, the Leveraged Series, the Commodity L/N Unleveraged Series (or "Commodity L/N Series") and the Commodity L/S Unleveraged Series (or "Commodity L/S Series"). The Unleveraged Series attempts to replicate the MLM Index™ without any leverage, while the Leveraged Series trades the Trading Program at three times leverage. Leverage is the ability to control large dollar amounts of a commodity with a comparatively small amount of capital. The Leveraged Series purchases or sells $3 fair value of contracts for every $1 invested in the Series. The Commodity L/S Unleveraged Series and Commodity L/N Unleveraged Series attempt to replicate the MLM Commodity Long/Short Index and MLM Commodity Long/Neutral Index respectively, without leverage.



Results of the MLM Index™

The MLM Index™ is calculated from the prices of 22 liquid futures markets. These markets are traded on domestic and foreign exchanges. For each market, the MLM Index™ generally uses the price of 4 different delivery months each year. For example, in the Japanese Yen futures market, the MLM Index™ uses the March, June, September and December delivery months. On the day before trading day, the MLM Index™ determines whether to hold a long or short position in each constituent contract based on the calculation methodology of the MLM Index™. Once established, that position is held for the subsequent period, at which time it is re-evaluated. The monthly results of each constituent market are then used to calculate the MLM Index™ return. The objective of the Trust is to replicate this monthly return. The MLM Commodity L/S Index is a subset of the MLM Index and contains only the commodity futures markets of the entire MLM Index. The MLM Commodity L/N Index contains the same commodity futures contracts, but does not have short positions when the MLM Index algorithm indicates a short position in a particular contract. The volatility of the constituent markets in the MLM Index™ can affect the results of a Series. The influences on this volatility are varied and unpredictable. However, since the object of each Series is to replicate the MLM Index™, the Manager takes no unusual action to mitigate this volatility. The role of the Manager is to buy or sell the appropriate number of futures contracts in each constituent market such that the aggregate return of those positions replicates as closely as possible the results of the MLM Index™ and its subsets. 53



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In order to accomplish this objective, the Manager must calculate the number of contracts based on the assets in each Series. Since the MLM Index™ rebalances positions each month, at that time the Manager must ascertain the asset level and execute orders to achieve the desired allocations. This is achieved by adding the performance results of each Series for the month to the assets at the beginning of the month, and adding additions of capital from new subscriptions and subtracting redemptions in order to determine the asset level at the end of the period.



Summary of Critical Accounting Policies

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Other than accruals maintained in the normal course of business, neither management nor the Trust prepares, maintains or updates any estimates. Management believes that the estimates utilized in preparing the financial statements are reasonable and prudent; however, actual results could differ from those estimates. The Trust's significant accounting policies are described in detail in Note 2 of the Notes to Financial Statements. The Trust records all investments at fair value in its financial statements, with changes in fair value reported as a component of realized and unrealized gain (loss) on investments in the Statements of Operations. Generally, fair values are based on market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price.



Financial Condition

To replicate the results of the MLM Index™, each Series must execute trades on domestic or foreign futures exchanges. The Manager deposits a percentage of the assets of each Series into separate accounts at Citigroup Global Markets. The amount deposited is determined by the margin requirement established by the exchanges to hold the positions in each Series. Each Series' assets are held in separate custodial accounts at State Street Bank and Trust (the "Bank"). The Trust has contracted with Aberdeen Asset Management ("Aberdeen") to manage the money in these accounts so as to maximize the interest income which accrues to each Series, while maintaining strict credit controls as determined by the CE Act. When Citigroup Global Markets requires additional assets to maintain the positions for a Series, the Bank makes a wire transfer to Citigroup Global Markets. If Citigroup Global Markets has surplus assets in a Series account, Citigroup Global Markets makes a wire transfer to the account at the Bank. The Trust owns no capital assets and does not borrow money. Since the objective of the Trust is to replicate the results of the MLM Index™, its entire asset base participates in the speculative trading of futures contracts. As such, all the assets of each Series are at risk. The level of assets will be determined by the results of each Series, and the effect of addition of capital and the redemption of Series interests. These variables are impossible to predict with any certainty. 54



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Liquidity

The majority of each Series' assets are held in liquid short-term interest rate instruments. Each Series takes substantial exposure in futures markets, which requires relatively small deposits, called margin, to hold the positions. As of June 30, 2014, increases (decreases) in cash and cash equivalents amounted to approximately $13.7m, ($0.3m), $2.9m and ($0.1m) for the Unleveraged Series, Leveraged Series, Commodity L/N Series and the Commodity L/S Series of the Trust, respectively. As at June 30, 2014, increases (decreases) in due from broker amounted to approximately $(0.1m), $1.8m, $(1.8m) and $0.8m for the Unleveraged Series, Leveraged Series, Commodity L/N Series and the Commodity L/S Series of the Trust, respectively. Net cash provided by (used in) operations amounted to approximately $(0.3m), $1.8m, $(0.8m) and $(0.2m) for the Unleveraged Series, Leveraged Series, Commodity L/N Series and the Commodity L/S Series of the Trust, respectively. For the period ended June 30, 2014 the Unleveraged Series, Leveraged Series, Commodity L/N Series and the Commodity L/S Series generated net income (loss) from operations of approximately $(0.6), $(0.2m), $2.6m and $(0.7m), respectively. In general, each unleveraged Series will have about 5% of its assets on deposit with brokers as margin and each leveraged Series will have about 15% of its assets on deposit with brokers as margin, with the balance held in custodial accounts with a major financial institution. A holder of interests in a Series may liquidate that holding at the end of any month at the net asset value of the interests, upon 10 days written notice to the Manager. While the Manager generally must honor all requests for redemption if presented in proper form, the Manager may suspend temporarily any redemption if the effect of such redemption, either alone or in conjunction with other redemptions, would impair the relevant Series' ability to operate if the impairment would be caused by a third party other than the Manager. Further, the right to obtain a redemption is contingent upon the relevant Series having property sufficient to discharge its liabilities on the date of redemption. Under certain circumstances, the Manager may find it advisable to establish a reserve for contingent liabilities. In such event, the amount receivable by a redeeming holder of interests will be reduced by his proportionate share of the reserve. There is no secondary market for interests in the Trust, and none is anticipated. There are restrictions for transfer of interests. Although each Series trades in futures contracts which are in general liquid, the exchanges impose daily trading limits, which act to suspend trading when a particular market or contract trades up or down to a pre-determined price level. Should this happen, and a Series was attempting to execute trades in that situation, the Series may not be able to accurately replicate the results of the MLM Index™. These rules have not had a material impact on the operation of any Series to date. Each Series generally trades only in the largest and most liquid futures contracts, and generally has available approximately 85%-95% of its assets in the form of highly liquid money market securities. The Trust believes that, except in extreme market conditions, all open positions can be liquidated in an efficient, orderly fashion.



Off-Balance Sheet Arrangements

The Trust has no off-balance sheet arrangements that it believes does or will be reasonably likely to have a material current or future effect on any Series' results of operations, financial condition, liquidity, capital expenditures or capital resources. 55



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Market and Credit Risks

The nature of the Trust is such that it undertakes substantial market risk in following its mandate to replicate the MLM Index™ and its subsets. Although the Manager monitors the intraday and daily valuation of each portfolio, no extraordinary measures are taken to reduce market risk. Specifically, the Manager maintains positions required to match, as closely as possible, the return of the MLM Index™ and its subsets. There could be certain circumstances where the Manager might be called upon to make a change to this policy, such as the closing of an exchange or some other emergency situation. In such case, management would use its best efforts to respond to such circumstances with the interests of the investors in mind. The MLM Index™ and its subsets are not designed to predict which market will exhibit positive performance in any given year. The Manager does not select the constituent markets based on expectations of future performance. The MLM Index™ and its subsets are designed to represent participation in a diverse basket of futures contracts using a trend-following algorithm. The MLM Index™ and its subsets are a diversified Index producing different levels of return in the various sectors from year to year. Each Series incurs various kinds of credit risk in its operations. In order to facilitate the trading of a Series, assets must be placed with Futures Commission Merchants. Management of the Trust deals only with established registered firms, and monitors their financial condition on an ongoing basis. In addition, if a Series were to enter into over-the-counter transactions ("OTC transactions"), additional counterparty risk would be incurred. There were no OTC transactions during the six months ended June 30, 2014 in any Series.



Results of Operations

At June 30, 2014 and December 31, 2013, the Series of the Trust had assets as follows: Trust Series June 30, 2014 December 31, 2013 Unleveraged Series $ 56,965,570$ 43,592,730 Leveraged Series $ 4,003,652 $ 6,297,468



Commodity L/N Unleveraged Series $ 135,873,235$ 129,589,830 Commodity L/S Unleveraged Series $ 36,959,857$ 37,606,767 Total

$ 233,802,314$ 217,086,795 At June 30, 2014 and December 31, 2013, the Series of the Trust had liabilities as follows: Trust Series June 30, 2014 December 31, 2013 Unleveraged Series $ 21,114,291 $ 4,770,918 Leveraged Series $ 163,387 $ 1,834,228 Commodity L/N Unleveraged Series $ 110,846 $ 110,733 Commodity L/S Unleveraged Series $ 131,004 $ 34,691 Total $ 21,519,528 $ 6,750,570



Net income (loss) from operations for the Series of the Trust for the six months ended June 30, 2014 and June 30, 2013 was as follows:

Trust Series June 30, 2014 June 30, 2013 Unleveraged Series $ (567,421 )$ (1,201,634 ) Leveraged Series $ (150,221 )$ (1,287,918 )



Commodity L/N Unleveraged Series $ 2,583,292$ (7,068,287 ) Commodity L/S Unleveraged Series $ (743,223 )$ (1,807,365 ) Total

$ 1,122,427$ (11,365,204 ) 56



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The Trust's net (loss) income is directly related to the performance of the MLM Index™, which the Trust is designed to replicate. For the six months ended June 30, 2014, MLM Index™ performance and its subsets were (0.75)%, 2.61% and (1.24%) for the MLM Index, MLM Commodity Index L/N and the MLM Commodity Index L/S respectively. Performance was (2.09%), (5.09%) and (2.54%) respectively for the same period ended June 30, 2013. A Series' performance may be negative in years when the MLM Index™ is positive or have greater losses when the MLM Index™ is negative due to the timing of subscriptions and redemptions, and the fees charged. Since inception of the Trust, the correlation of monthly results between each Series and the MLM Index™ and its subsets adjusted for fees is 0.99.



The following table represents the performance by class for the MLM Index™ Fund for the six months ended June 30, 2014 and 2013.

June 30, 2014 Unleveraged Commodity L/N Unleveraged Unleveraged Series Leveraged Series Series Commodity L/S Series Class A Class B Class C Class D Class A Class B Class C Class D Class D Class E Class D Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares



Total Return: (2.18 )% (1.69 )% (1.71 )% (1.46 )% (4.42 )% (3.69 )% (3.65 )% (3.29 )% 1.96 %

2.08 % (1.99 )% June 30, 2013 Unleveraged Commodity L/N Unleveraged Unleveraged Series Leveraged Series Series Commodity L/S Series Class A Class B Class C Class D Class A Class B Class C Class D Class D Class E Class D Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares



Total Return: (3.43 )% (2.95 )% (2.98 )% (2.73 )% (8.68 )% (7.98 )% (7.93 )% (7.59 )% (5.75 )%

(5.63 )% (3.49 )% The components of the return of the MLM Index™ are the capital gains earned from the changes in futures market prices, and the interest income earned on cash balances. The mechanics and rules of futures markets allow the Trust to earn interest on approximately 100% of the assets in the Trust. The interest income takes two forms, directly from the Trust's futures broker paid on the margin deposits held by the broker, and excess cash.


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Source: Edgar Glimpses


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