10-Q 1 form10q.htm GRAHAM ALTERNATIVE INVESTMENT FUND II LLC 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
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 0-53967
 
GRAHAM ALTERNATIVE INVESTMENT FUND II LLC
(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)
 
Paul Sedlack
Graham Capital Management, L.P.
40 Highland Avenue
Rowayton, CT  06853
(203) 899-3400
(Registrant’s telephone number, including area code)
 
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 x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer    o
 
Accelerated filer    o
 
Non-accelerated filer o
 
Smaller reporting company x   
 
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes o  No x
As of October 1, 2012, 235,823.414 Units of the Systematic Strategies Portfolio were outstanding.
As of October 1, 2012, 1,029,846.693 Units of the Blended Strategies Portfolio were outstanding. 
 


 
 

 
 
GRAHAM ALTERNATIVE INVESTMENT FUND II LLC
FORM 10-Q
 
INDEX
 
   
Page
Number
       
PART I - Financial Information:
 
       
 
Item 1.
Financial Statements:
 
       
   
Graham Alternative Investment Fund II LLC
 
       
   
1
       
   
2
       
   
3
       
   
5
       
   
6
       
   
Graham Alternative Investment Trading LLC
 
       
   
15
       
   
16
       
   
17
       
   
18
       
   
19
       
   
20
       
   
Graham Alternative Investment Trading II LLC
 
       
   
63
 
 
 

 
 
Exhibits  
   
EX - 31.1
Certification
EX - 31.2
Certification
EX - 32.1
Certification
 
 

 
PART I

Item 1. Financial Statements
Graham Alternative Investment Fund II LLC

Consolidated Statements of Financial Condition
 
   
September 30, 2012
(Unaudited)
   
December 31, 2011
(Audited)
 
Assets
           
Investment in Graham Alternative Investment Trading LLC, at fair value
  $ 113,349,406     $ 146,634,313  
Investment in Graham Alternative Investment Trading II LLC, at fair value
    17,656,094       23,346,984  
Redemptions receivable from Graham Alternative Investment Trading LLC
    10,999,238       4,335,458  
Redemptions receivable from Graham Alternative Investment Trading II LLC
    583,592       575,408  
Total assets
  $ 142,588,330     $ 174,892,163  
                 
Liabilities and members’ capital
               
Liabilities:
               
Accrued redemptions
  $ 11,582,830     $ 4,910,866  
Total liabilities
    11,582,830       4,910,866  
                 
Members’ capital:
               
Blended Strategies Portfolio
               
Class 0 Units (793,290.657 and 966,888.461 units issued and outstanding at $116.90 and $123.17, respectively)
    92,738,587       119,087,637  
Class 2 Units (223,180.736 and 278,890.248 units issued and outstanding at $92.35 and $98.77, respectively)
    20,610,819       27,546,676  
Total Blended Strategies Portfolio
    113,349,406       146,634,313  
                 
Systematic Strategies Portfolio
               
Class 0 Units (90,016.962 and 112,079.324 units issued and outstanding at $77.99 and $81.35, respectively)
    7,020,422       9,117,153  
Class 2 Units (145,806.452 and 184,238.954 units issued and outstanding at $72.94 and $77.24, respectively)
    10,635,672       14,229,831  
Total Systematic Strategies Portfolio
    17,656,094       23,346,984  
Total members’ capital
    131,005,500       169,981,297  
Total liabilities and members’ capital
  $ 142,588,330     $ 174,892,163  

See accompanying notes.
 
 
1

 
Graham Alternative Investment Fund II LLC

Consolidated Statements of Operations

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
(Unaudited)
   
2011
(Unaudited)
   
2012
(Unaudited)
   
2011
(Unaudited)
 
Net loss allocated from investments in other funds:
                       
Net realized gain (loss) on investments
  $ 1,358,182     $ (295,249 )   $ 4,406,162     $ (1,466,734 )
Net decrease in unrealized appreciation on investments
    (1,585,489 )     (856,701 )     (5,889,065 )     (5,308,730 )
Net loss allocated from investments in other funds
    (227,307 )     (1,151,950 )     (1,482,903 )     (6,775,464 )
                                 
Net investment loss allocated from investments in other funds:
                               
Investment income:
                               
Interest income
    76,416       175,041       246,215       560,066  
                                 
Expenses:
                               
Brokerage fees
    919,345       1,264,845       2,969,996       3,573,397  
Advisory fees
    748,197       1,028,087       2,402,286       2,920,386  
Sponsor fees
    374,098       514,044       1,201,143       1,460,194  
Incentive allocation
    -       -       -       14,461  
Interest and other
    16,035       26,071       36,603       55,374  
Total expenses
    2,057,675       2,833,047       6,610,028       8,023,812  
Net investment loss allocated from investments in other funds
    (1,981,259 )     (2,658,006 )     (6,363,813 )     (7,463,746 )
Net loss
  $ (2,208,566 )   $ (3,809,956 )   $ (7,846,716 )   $ (14,239,210 )

See accompanying notes.

 
2

 
Graham Alternative Investment Fund II LLC

Consolidated Statements of Changes in Members’ Capital

For the nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)
 
    Blended Strategies Portfolio  
   
Class 0 Units
   
Class 2 Units
   
Total
 
   
Units
   
Capital
   
Units
   
Capital
   
Blended Strategies
Portfolio
 
                               
Members’ capital, December 31, 2010
    875,825.668     $ 121,701,356       230,452.833     $ 26,198,813     $ 147,900,169  
Subscriptions
    242,552.526       33,408,396       79,224.471       8,885,003       42,293,399  
Redemptions
    (58,046.780 )     (7,879,927 )     (24,457.680 )     (2,707,864 )     (10,587,791 )
Net loss
          (7,711,265 )           (2,126,622 )     (9,837,887 )
Members’ capital, September 30, 2011
    1,060,331.414     $ 139,518,560       285,219.624     $ 30,249,330     $ 169,767,890  
                                         
     Blended Strategies Portfolio  
   
Class 0 Units
   
Class 2 Units
   
Total
 
   
Units
   
Capital
   
Units
   
Capital
   
Blended Strategies
 Portfolio
 
                                         
Members’ capital, December 31, 2011
    966,888.461     $ 119,087,637       278,890.248     $ 27,546,676     $ 146,634,313  
Subscriptions
    88,488.116       10,894,754       19,176.245       1,890,854       12,785,608  
Redemptions
    (262,085.920 )     (31,828,251 )     (74,885.757 )     (7,334,618 )     (39,162,869 )
Net loss
          (5,415,553 )           (1,492,093 )     (6,907,646 )
Members’ capital, September 30, 2012
    793,290.657     $ 92,738,587       223,180.736     $ 20,610,819     $ 113,349,406  

See accompanying notes.
 
 
3

 
Graham Alternative Investment Fund II LLC

Consolidated Statements of Changes in Members’ Capital (continued)

For the nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)
 
    Systematic Strategies Portfolio      
   
Class 0 Units
   
Class 2 Units
   
Total
       
   
Units
   
Capital
   
Units
   
Capital
   
Systematic
Strategies Portfolio
   
Total Members’
Capital
 
                                     
Members’ capital, December 31, 2010
    122,899.506     $ 12,648,247       86,626.635     $ 8,638,694     $ 21,286,941     $ 169,187,110  
Subscriptions
    43,311.027       4,369,009       106,334.600       10,261,585       14,630,594       56,923,993  
Redemptions
    (58,207.379 )     (5,281,272 )     (13,202.894 )     (1,248,863 )     (6,530,135 )     (17,117,926 )
Net loss
          (2,082,580 )           (2,318,743 )     (4,401,323 )     (14,239,210 )
Members’ capital, September 30, 2011
    108,003.154     $ 9,653,404       179,758.341     $ 15,332,673     $ 24,986,077     $ 194,753,967  
 
    Systematic Strategies Portfolio      
   
Class 0 Units
   
Class 2 Units
   
Total
       
   
Units
   
Capital
   
Units
   
Capital
   
Systematic
Strategies Portfolio
   
Total Members’
Capital
 
                                     
Members’ capital, December 31, 2011
    112,079.324     $ 9,117,153       184,238.954     $ 14,229,831     $ 23,346,984     $ 169,981,297  
Subscriptions
    4,452.995       363,279       3,074.637       236,000       599,279       13,384,887  
Redemptions
    (26,515.357 )     (2,152,721 )     (41,507.139 )     (3,198,378 )     (5,351,099 )     (44,513,968 )
Net loss
          (307,289 )           (631,781 )     (939,070 )     (7,846,716 )
Members’ capital, September 30, 2012
    90,016.962     $ 7,020,422       145,806.452     $ 10,635,672     $ 17,656,094     $ 131,005,500  
 
See accompanying notes.
 
 
4

 
Graham Alternative Investment Fund II LLC

Consolidated Statements of Cash Flows
 
    Nine Months Ended
September 30,
 
    2012
(Unaudited)
    2011
(Unaudited)
 
             
Cash flows provided by (used in) operating activities            
Net loss
  $ (7,846,716 )   $ (14,239,210 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Net loss allocated from investment in Graham Alternative Investment Trading LLC
    6,907,646       9,837,887  
Net loss allocated from investment in Graham Alternative Investment Trading II LLC
    939,070       4,401,323  
Proceeds from sale of investments in Graham Alternative Investment Trading LLC
    32,499,089       9,922,856  
Proceeds from sale of investments in Graham Alternative Investment Trading II LLC
    5,342,915       2,547,321  
Investments in Graham Alternative Investment Trading LLC
    (12,785,608 )     (42,293,399 )
Investments in Graham Alternative Investment Trading II LLC
    (599,279 )     (14,630,594 )
Net cash provided by (used in) operating activities
    24,457,117       (44,453,816 )
                 
Cash flows (used in) provided by financing activities
               
Subscriptions
    13,384,887       56,923,993  
Redemptions
    (37,842,004 )     (12,470,177 )
Net cash (used in) provided by financing activities
    (24,457,117 )     44,453,816  
                 
Net change in cash and cash equivalents
           
                 
Cash and cash equivalents, beginning of period
           
Cash and cash equivalents, end of period
  $     $  
 
See accompanying notes.
 
 
5

 
Graham Alternative Investment Fund II LLC
 
 
September 30, 2012
 
1. Organization and Business
 
Graham Alternative Investment Fund II LLC (the “Fund”) was formed on May 16, 2006, commenced operations on August 1, 2006 and is organized as a Delaware Limited Liability Company (“LLC”). The Fund offers members Class 0 and Class 2 units of a Blended Strategies Portfolio, and Class 0 and Class 2 units of a Systematic Strategies Portfolio. 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 Blended Strategies Portfolio assets dedicated to trading in Graham Alternative Investment Trading LLC (“GAIT”), a Delaware LLC which was formed on May 18, 2006 and commenced operations on August 1, 2006 through an investment in GAI. The Fund invests all of its Systematic Strategies Portfolio assets dedicated to trading in Graham Alternative Investment Trading II LLC (“GAIT II”), a Delaware LLC formed on July 16, 2008 and commenced operations on January 4, 2009 through an investment in GAI. GAIT and GAIT II (collectively the “GAIT Funds”) invest in various master trading vehicles (“Master Funds”), all of which are managed by Graham Capital Management, L.P. (the “Advisor” or “Manager”). The Fund is the sole owner of GAI and GAI invests all of its assets into the GAIT Funds.  The Manager is the director of GAI and the sole investment advisor of GAI, the GAIT Funds and the Fund. The Manager is registered as a Commodity Pool Operator and Commodity Trading Advisor with the Commodity Futures Trading Commission and is a member of the National Futures Association. The Manager is also registered as a Registered Investment Advisor with the Securities and Exchange Commission. The Fund is registered as a reporting company under 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, options and associated derivative instruments, such as options and swaps, through its investments in the GAIT Funds, which in turn invest 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.
 
In addition to trading in the Interbank market for foreign exchange, the Manager currently executes orders on all the major U.S. futures exchanges and may also trade on, but is not limited to, the Bolsa de Mercadorias and Futuros (“BMF”), Borsa Italiana Idem (“IML”), the Eurex Exchange (“Eurex”), the Hong Kong Exchanges and Clearing Ltd. (“HKEX”), the Intercontinental Exchange (“ICE”), the London Metal Exchange (“LME”), the Montreal Exchange (“ME”), the Mercado de Futuros Financieros (“MEFF”), the NYSE Euronext (“Euronext”), the Osaka Securities Exchange (“OSE”), the Singapore Exchange (“SGX”), the South African Exchange (“SAFEX”), the Sydney Futures Exchange Ltd. (“SFE”), the Tokyo Commodity Exchange (“TOCOM”), the Tokyo Financial Exchange (“TFX”), and the Tokyo Stock Exchange (“TSE”).
 
SEI Global Services, Inc. (“SEI”) serves as the independent administrator and transfer agent of the Fund and GAI.  SEI is responsible for certain matters pertaining to the administration of the Fund and GAI.
 
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”) of the Fund.
 
The performance of the Fund is directly affected by the performance of the GAIT Funds; therefore these consolidated financial statements should be read in conjunction with the attached financial statements of the GAIT Funds.
 
 
6

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
1. Organization and Business (continued)
 
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 the GAIT Funds.
 
2. Summary of Significant Accounting Policies
 
These consolidated 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 these consolidated financial statements requires the Manager to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
Principles of Consolidation
 
The Fund owns 100% of GAI and as such these consolidated financial statements include all the accounts of the Fund and GAI. 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.
 
Investments in Graham Alternative Investment Trading LLC and Graham Alternative Investment Trading II LLC
 
The Fund records its investments in the GAIT Funds at fair value based upon the Fund’s proportionate share of the GAIT Funds’ reported net asset value in accordance with U.S. GAAP. In determining its net asset value, the GAIT Funds record their investments in Master Funds at fair value based upon the GAIT Funds’ proportionate share of the Master Funds’ reported net asset value. The Fund records its proportionate share of the GAIT Funds’ 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 GAI and the GAIT Funds are recorded on a trade date basis. The accounting policies of the GAIT Funds are described in their attached respective financial statements.
 
Each of the GAIT Funds charges its investors, including the Fund, an advisory fee, brokerage 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 their portion of the advisory fee, brokerage fee, sponsor fee and incentive allocation charged by the GAIT Funds.

At September 30, 2012 and December 31, 2011, the Fund owned 35.37% and 35.15%, respectively of GAIT, and 37.17% and 33.67%, respectively of GAIT II.

Fair Value

The fair value of the assets and liabilities of the Fund and the GAIT Funds, 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.
 
 
7

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
2. Summary of Significant Accounting Policies (continued)
 
Fair Value (continued)
 
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 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. With respect to the Fund’s investments in the GAIT Funds, Level 2 inputs include the net asset value of the underlying fund in which it holds an investment.
 
·
Level 3 inputs are those which are considered unobservable and are significant in arriving at fair value.

The Fund reports the fair value of its investment related assets and liabilities in accordance with the hierarchy established under U.S. GAAP.  In accordance with this hierarchy, the Fund’s investments in the GAIT Funds have been classified as a Level 2 valuation. There were no Level 3 assets or liabilities held at any point during the nine month period ended September 30, 2012 or the year ended December 31, 2011 by the Fund, the GAIT Funds, or the Master Funds, and there were no transfers between Level 1 and Level 2 during those periods. Transfers between levels, if any, are recognized on the actual date of the event or change in circumstances that cause the transfer.
 
Indemnifications
 
In the normal course of business, the Fund, the GAIT Funds, Graham Cash Assets LLC (“GCA”), and the Master Funds enter into contracts that contain a variety of indemnifications. Such contracts include those by GCA 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.
 
3. Capital Accounts
 
The Fund offers Class 0 Units and Class 2 Units (collectively the “Units”) in both Blended and Systematic Strategies Portfolios. 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 contribution 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 Accounts as of the beginning of such fiscal period.
 
 
8

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited 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 2 Units are subject to a redemption fee equal to 2% of their Net Asset Value if redeemed within six months from their subscription date and a redemption fee equal to 1% of their Net Asset Value if redeemed more than six and less than twelve months from their subscription date. Class 0 Units are not subject to a redemption fee. Redemption fees are payable to the Manager upon redemption of Units from the proceeds of such redemption. Redemption fees of $7,412 and $5,081 were paid to the Manager for the nine month periods ended September 30, 2012 and 2011, respectively, and are included as redemptions in the consolidated statements of changes in members’ capital.
 
4. Fees and Related Party Transactions
 
Advisory Fees
 
Each Class of the GAIT Funds other than Class M pays the Manager an advisory fee (the “Advisory Fee”) at an aggregate annual rate equal to 2% of the Net Asset Value of such Class. 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 effected with respect to Units of such Class during the month.
 
Sponsor Fees
 
Each Class of the GAIT Funds other than Class M pays the Manager a sponsor fee (the “Sponsor Fee”) at an annual rate of 1% of its Net Asset Value, payable monthly in arrears, determined in the same manner as the Advisory Fee.
 
 
9

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
4. Fees and Related Party Transactions (continued)
 
Incentive Allocation
 
At the end of each calendar quarter, the Manager of the GAIT Funds 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 the GAIT Funds, 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 the GAIT Funds 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 assets redeemed from such class bears to the net assets 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.
 
Brokerage Fees
 
Each Class of the GAIT Funds other than Class M pays the Manager a brokerage fee (the “Brokerage Fee”) at the annual rate specified in the table below. This Brokerage Fee is payable monthly in arrears and calculated as of the last business day of each month in the same manner as the Advisory Fee.
 
Class
Annual Rate
   
Class 0
2%
Class 2
4%

In consideration of the Brokerage Fee, the Manager bears all of the GAIT Funds’ trading commissions (including exchange, clearing and regulatory fees relating to its trades), routine legal expenses, internal and external accounting, audit and tax preparation expenses, fees and expenses of an external or internal administrator, and expenses and costs of printing and mailing reports and notices, together with the costs incurred in connection with the organization of the GAIT Funds and the Fund and the continuous offering of Units. To the extent the GAIT Funds are allocated any of these expenses from the Master Funds in which they invest, the Manager will reimburse the GAIT Funds for those amounts.  These reimbursements are included in commission reimbursements in the GAIT Funds’ statements of operations and managing member allocation.  As a result, there is no impact to the Fund’s consolidated statement of operations.
 
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.
 
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.
 
 
10

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited 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 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. 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.

6. Financial Highlights
 
The following is the per Unit operating performance calculation for the three month periods ended September 30, 2012 and 2011:
 
   
Blended Strategies
Portfolio
   
Systematic Strategies
 Portfolio
 
   
Class 0
   
Class 2
   
Class 0
   
Class 2
 
Per unit operating performance
                       
Net asset value per unit, June 30, 2011
  $ 132.67     $ 107.48     $ 95.59     $ 91.69  
Net loss:
                               
Net investment loss
    (2.50 )     (2.54 )     (1.12 )     (1.49 )
Net gain (loss) on investments
    1.41       1.12       (5.09 )     (4.90 )
Net loss
    (1.09 )     (1.42 )     (6.21 )     (6.39 )
Net asset value per unit, September 30, 2011
  $ 131.58     $ 106.06     $ 89.38     $ 85.30  
                                 
Net asset value per unit, June 30, 2012
  $ 118.77     $ 94.30     $ 78.23     $ 73.54  
Net loss:
                               
Net investment loss
    (1.27 )     (1.49 )     (1.04 )     (1.31 )
Net gain (loss) on investments
    (0.60 )     (0.46 )     0.80       0.71  
Net loss
    (1.87 )     (1.95 )     (0.24 )     (0.60 )
Net asset value per unit, September 30, 2012
  $ 116.90     $ 92.35     $ 77.99     $ 72.94  
 
 
11

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
6. Financial Highlights (continued)
 
The following represents ratios to average members’ capital and total return for the three month periods ended September 30, 2012 and 2011 for the Blended Strategies Portfolio:
 
   
Blended Strategies Portfolio
   
Class 0
 
Class 2
   
2012
 
2011
 
2012
 
2011
                         
Total return before Incentive Allocation
    (1.57 )%     (0.82 )%     (2.07 )%     (1.32 )%
Incentive Allocation
    0.00       0.00       0.00       0.00  
Total return after Incentive Allocation
    (1.57 )%     (0.82 )%     (2.07 )%     (1.32 )%
                                 
Net investment loss before Incentive Allocation
    (1.06 )%     (1.88 )%     (1.57 )%     (2.36 )%
Incentive Allocation
    0.00       0.00       0.00       0.00  
Net investment loss after Incentive Allocation
    (1.06 )%     (1.88 )%     (1.57 )%     (2.36 )%
                                 
Total expenses before Incentive Allocation
    1.31 %     1.32 %     1.81 %     1.80 %
Incentive Allocation
    0.00       0.00       0.00       0.00  
Total expenses after Incentive Allocation
    1.31 %*     1.32 %*     1.81 %*     1.80 %*
 
*- The percentages above represent total gross expenses before commission reimbursements (See Note 4), which represent 0.20% of average members’ capital for 2012 and 0.20% of average members’ capital for 2011.
 
The following represents ratios to average members’ capital and total return for the three month periods ended September 30, 2012 and 2011 for the Systematic Strategies Portfolio:
 
   
Systematic Strategies Portfolio
   
Class 0
 
Class 2
   
2012
 
2011
 
2012
 
2011
                         
Total return before Incentive Allocation
    (0.31 )%     (6.50 )%     (0.82 )%     (6.97 )%
Incentive Allocation
    0.00       0.00       0.00       0.00  
Total return after Incentive Allocation
    (0.31 )%     (6.50 )%     (0.82 )%     (6.97 )%
                                 
Net investment loss before Incentive Allocation
    (1.29 )%     (1.17 )%     (1.74 )%     (1.63 )%
Incentive Allocation
    0.00       0.00       0.00       0.00  
Net investment loss after Incentive Allocation
    (1.29 )%     (1.17 )%     (1.74 )%     (1.63 )%
                                 
Total expenses before Incentive Allocation
    1.37 %     1.35 %     1.81 %     1.82 %
Incentive Allocation
    0.00       0.00       0.00       0.00  
Total expenses after Incentive Allocation
    1.37 %*     1.35 %*     1.81 %*     1.82 %*
 
*- The percentages above represent total gross expenses before commission reimbursements (See Note 4), which represent 0.05% of average members’ capital for 2012 and 0.12% of average members’ capital for 2011.
 
 
12

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
6. Financial Highlights (continued)

The following is the per Unit operating performance calculation for the nine month periods ended September 30, 2012 and 2011:
 
   
Blended Strategies
Portfolio
   
Systematic Strategies
Portfolio
 
   
Class 0
   
Class 2
   
Class 0
   
Class 2
 
Per unit operating performance
                       
Net asset value per unit, December 31, 2010
  $ 138.96     $ 113.68     $ 102.92     $ 99.72  
Net loss:
                               
Net investment loss
    (5.32 )     (5.98 )     (3.43 )     (4.73 )
Net loss on investments
    (2.06 )     (1.64 )     (10.11 )     (9.69 )
Net loss
    (7.38 )     (7.62 )     (13.54 )     (14.42 )
Net asset value per unit, September 30, 2011
  $ 131.58     $ 106.06     $ 89.38     $ 85.30  
                                 
Net asset value per unit, December 31, 2011
  $ 123.17     $ 98.77     $ 81.35     $ 77.24  
Net loss:
                               
Net investment loss
    (3.68 )     (4.43 )     (2.89 )     (3.83 )
Net loss on investments
    (2.59 )     (1.99 )     (0.47 )     (0.47 )
Net loss
    (6.27 )     (6.42 )     (3.36 )     (4.30 )
Net asset value per unit, September 30, 2012
  $ 116.90     $ 92.35     $ 77.99     $ 72.94  

The following represents ratios to average members’ capital and total return for the nine month periods ended September 30, 2012 and 2011 for the Blended Strategies Portfolio:
 
   
Blended Strategies Portfolio
   
Class 0
 
Class 2
   
2012
 
2011
 
2012
 
2011
                         
Total return before Incentive Allocation
    (5.09 )%     (5.30 )%     (6.50 )%     (6.69 )%
Incentive Allocation
    0.00       (0.01 )     0.00       (0.01 )
Total return after Incentive Allocation
    (5.09 )%     (5.31 )%     (6.50 )%     (6.70 )%
                                 
Net investment loss before Incentive Allocation
    (2.99 )%     (3.82 )%     (4.52 )%     (5.25 )%
Incentive Allocation
    0.00       (0.01 )     0.00       (0.01 )
Net investment loss after Incentive Allocation
    (2.99 )%     (3.83 )%     (4.52 )%     (5.26 )%
                                 
Total expenses before Incentive Allocation
    3.83 %     3.87 %     5.36 %     5.37 %
Incentive Allocation
    0.00       0.01       0.00       0.01  
Total expenses after Incentive Allocation
    3.83 %*     3.88 %*     5.36 %*     5.38 %*
 
*- The percentages above represent total gross expenses before commission reimbursements (See Note 4), which represent 0.70% of average members’ capital for 2012 and 0.79% of average members’ capital for 2011.
 
 
13

 
Graham Alternative Investment Fund II LLC

Notes to Unaudited Consolidated Financial Statements (continued)
 
6. Financial Highlights (continued)
 
The following represents ratios to average members’ capital and total return for the nine month periods ended September 30, 2012 and 2011 for the Systematic Strategies Portfolio:
 
   
Systematic Strategies Portfolio
   
Class 0
 
Class 2
   
2012
 
2011
 
2012
 
2011
                         
Total return before Incentive Allocation
    (4.13 )%     (13.15 )%     (5.57 )%     (14.45 )%
Incentive Allocation
    0.00       (0.01 )     0.00       (0.01 )
Total return after Incentive Allocation
    (4.13 )%     (13.16 )%     (5.57 )%     (14.46 )%
                                 
Net investment loss before Incentive Allocation
    (3.53 )%     (3.32 )%     (4.98 )%     (4.73 )%
Incentive Allocation
    0.00       (0.01 )     0.00       (0.01 )
Net investment loss after Incentive Allocation
    (3.53 )%     (3.33 )%     (4.98 )%     (4.74 )%
                                 
Total expenses before Incentive Allocation
    3.89 %     3.93 %     5.33 %     5.45 %
Incentive Allocation
    0.00       0.01       0.00       0.01  
Total expenses after Incentive Allocation
    3.89 %*     3.94 %*     5.33 %*     5.46 %*
 
*- The percentages above represent total gross expenses before commission reimbursements (See Note 4), which represent 0.25% of average members’ capital for 2012 and 0.48% of average members’ capital for 2011.
 
Total return is calculated for Class 0 and Class 2 Units taken as a whole and has not been annualized. Total return is calculated as the change in total members’ capital adjusted for subscriptions or redemptions during the period. An individual member’s return may vary from these returns based on the timing of capital transactions and the applicability of Advisory Fees, Brokerage Fees, Sponsor Fees and the Incentive Allocation. 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 the GAIT Funds. 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 three and nine month periods ended September 30, 2012 and 2011.
 
7. Subsequent Events
 
The Fund had subscriptions of approximately $1.8 million and redemptions of approximately $2.4 million through November 14, 2012, the date through which subsequent events were evaluated by management.  These amounts have not been included in the consolidated financial statements.

 
14

 
Graham Alternative Investment Trading LLC

Statements of Financial Condition
 
   
September 30, 2012
(Unaudited)
   
December 31, 2011
(Audited)
 
Assets
           
Investments in Master Funds, at fair value
  $ 61,293,129     $ 87,903,988  
Investment in Graham Cash Assets LLC, at fair value
    285,289,620       344,807,748  
Accrued commission reimbursements
    223,322       331,720  
Receivable from Master Funds
    5,875       18,287  
Total assets
  $ 346,811,946     $ 433,061,743  
                 
Liabilities and members’ capital
               
Liabilities:
               
Accrued redemptions
  $ 24,824,231     $ 13,947,652  
Accrued brokerage fees
    653,432       852,551  
Accrued advisory fees
    567,211       734,211  
Accrued sponsor fees
    283,606       367,106  
Payable to Master Funds
    2,512       2,155  
Total liabilities
    26,330,992       15,903,675  
                 
Members’ capital:
               
Class 0 Units (2,297,034.613 and 2,827,795.124 units issued and outstanding at $116.90 and $123.17 per unit, respectively)
    268,531,769       348,287,779  
Class 2 Units (553,749.493 and 688,937.679 units issued and outstanding at $92.35 and $98.77 per unit, respectively)
    51,138,946       68,048,075  
Class M Units (4,671.470 and 4,671.470 units issued and outstanding at $173.44 and $176.01 per unit, respectively)
    810,239       822,214  
Total members’ capital
    320,480,954       417,158,068  
Total liabilities and members’ capital
  $ 346,811,946     $ 433,061,743  

See accompanying notes.
 
 
15

 
Graham Alternative Investment Trading LLC

Condensed Schedules of Investments
 
   
September 30, 2012
(Unaudited)
     
December 31, 2011
(Audited)
 
Description
 
Fair Value
   
Percentage of
Members’
Capital
     
Fair Value
   
Percentage of
Members’
Capital
 
                           
Investments in Master Funds, at fair value
                         
Graham Commodity Strategies LLC
  $ 17,490,643       5.46 %     $ 19,823,897       4.75 %
Graham Energy Focus LLC
    -       0.00 %       4,391,910       1.05 %
Graham Fed Policy Ltd.
    -       0.00 %       5,956,632       1.43 %
Graham Global Monetary Policy LLC
    9,631,317       3.01 %       10,693,175       2.56 %
Graham K4D Trading Ltd.
    34,171,169       10.66 %       45,101,309       10.82 %
Graham Macro Directional LLC
    -       0.00 %       1,937,065       0.46 %
Total investments in Master Funds
  $ 61,293,129       19.13 %     $ 87,903,988       21.07 %
 
See accompanying notes.
 
 
16

 
Graham Alternative Investment Trading LLC

Statements of Operations and Managing Member Allocation
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
(Unaudited)
   
2011
(Unaudited)
   
2012
(Unaudited)
   
2011
(Unaudited)
 
Net gain (loss) allocated from investments in Master Funds:
                       
Net realized gain on investments
  $ 1,038,332     $ 5,422,708     $ 9,935,223     $ 4,257,925  
Net decrease in unrealized appreciation on investments
    (2,020,366 )     (3,566,381 )     (14,232,046 )     (14,872,899 )
Brokerage commissions and fees
    (693,076 )     (1,320,014 )     (2,684,268 )     (3,866,326 )
Net gain (loss) allocated from investments in Master Funds
    (1,675,110 )     536,313       (6,981,091 )     (14,481,300 )
                                 
Net investment loss allocated from investments in Master Funds
    (8,036 )     (62,904 )     (45,702 )     (119,491 )
                                 
Investment income:
                               
Interest income
    185,718       439,886       598,677       1,453,597  
Total investment income
    185,718       439,886       598,677       1,453,597  
                                 
Expenses:
                               
Brokerage fees
    2,090,971       3,014,313       6,762,197       8,769,947  
Advisory fees
    1,813,258       2,616,830       5,847,390       7,598,949  
Sponsor fees
    906,629       1,308,415       2,923,695       3,799,474  
Interest and other
    19,923       4,970       27,488       23,474  
Commission reimbursements
    (693,076 )     (1,320,014 )     (2,684,268 )     (3,866,326 )
Total expenses
    4,137,705       5,624,514       12,876,502       16,325,518  
Net investment loss of the Fund
    (3,951,987 )     (5,184,628 )     (12,277,825 )     (14,871,921 )
                                 
Net loss
    (5,635,133 )     (4,711,219 )     (19,304,618 )     (29,472,712 )
                                 
Incentive allocation
    -       -       -       (51,877 )
                                 
Net loss available for pro-rata allocation to all members
  $ (5,635,133 )   $ (4,711,219 )   $ (19,304,618 )   $ (29,524,589 )

See accompanying notes.
 
 
17


Graham Alternative Investment Trading LLC

Statements of Changes in Members’ Capital

For the nine months ended September 30, 2012 (unaudited) and 2011 (unaudited)
 
   
Class 0
   
Class 2
   
Class M
   
Total
 
   
Units
   
Capital
   
Units
   
Capital
   
Units
   
Capital
   
Capital
 
                                           
Members’ capital, December 31, 2010
    2,685,172.128     $ 373,121,130       639,582.657     $ 72,710,381       4,671.470     $ 882,328     $ 446,713,839  
Subscriptions
    763,027.691       105,586,997       159,240.404       17,823,871                   123,410,868  
Redemptions
    (463,051.112 )     (61,843,890 )     (79,285.065 )     (8,791,036 )           (51,877 )     (70,686,803 )
Incentive allocation
          (44,314 )           (7,563 )           51,877        
Net loss
          (24,033,627 )           (5,424,119 )           (14,966 )     (29,472,712 )
Members’ capital, September 30, 2011
    2,985,148.707     $ 392,786,296       719,537.996     $ 76,311,534       4,671.470     $ 867,362     $ 469,965,192  
                                                         
   
Class 0
   
Class 2
   
Class M
   
Total
 
   
Units
   
Capital
   
Units
   
Capital
   
Units
   
Capital
   
Capital
 
                                                         
Members’ capital, December 31, 2011
    2,827,795.124     $ 348,287,779       688,937.679     $ 68,048,075       4,671.470     $ 822,214     $ 417,158,068  
Subscriptions
    145,451.826       17,940,683       47,476.248       4,649,394                   22,590,077  
Redemptions
    (676,212.337 )     (82,069,164 )     (182,664.434 )     (17,893,409 )                 (99,962,573 )
Incentive allocation
                                         
Net loss
          (15,627,529 )           (3,665,114 )           (11,975 )     (19,304,618 )
Members’ capital, September 30, 2012
    2,297,034.613     $ 268,531,769       553,749.493     $ 51,138,946       4,671.470     $ 810,239     $ 320,480,954  

See accompanying notes.
 
 
18

 
Graham Alternative Investment Trading LLC

Statements of Cash Flows
 
   
Nine Months Ended
September 30,
 
   
2012
(Unaudited)
   
2011
(Unaudited)
 
Cash flows provided by (used in) operating activities
           
Net loss
  $ (19,304,618 )   $ (29,472,712 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Net loss allocated from investments in Master Funds
    7,026,793       14,600,791  
Net income allocated from investment in Graham Cash Assets LLC
    (598,677 )     (1,453,597 )
Proceeds from sale of investments in Master Funds
    476,843,495       613,324,164  
Proceeds from sale of investments in Graham Cash Assets LLC
    442,227,109       477,724,559  
Investments in Master Funds
    (457,246,660 )     (666,147,665 )
Investments in Graham Cash Assets LLC
    (382,110,304 )     (497,643,390 )
Changes in assets and liabilities:
               
Accrued commission reimbursements
    108,398       (217,827 )
Accrued brokerage fees
    (199,119 )     75,611  
Accrued advisory fees
    (167,000 )     73,559  
Accrued sponsor fees
    (83,500 )     36,779  
Net cash provided by (used in) operating activities
    66,495,917       (89,099,728 )
                 
Cash flows (used in) provided by financing activities
               
Subscriptions
    22,590,077       123,410,868  
Redemptions
    (89,085,994 )     (34,311,140 )
Net cash (used in) provided by financing activities
    (66,495,917 )     89,099,728  
                 
Net change in cash and cash equivalents
    -       -  
                 
Cash and cash equivalents, beginning of period
    -       -  
Cash and cash equivalents, end of period
  $ -       -  

Supplemental non cash operating activities
 
Investments and proceeds related to investments in Master Funds consolidated into Graham Commodity Strategies LLC not included above:  $1,362,929 (See Note 2)
 
See accompanying notes.
 
 
19

 
Graham Alternative Investment Trading LLC

Notes to Unaudited Financial Statements

September 30, 2012
 
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 Commodity Futures Trading Commission and is a member of the National Futures Association. The Managing Member is also registered as a Registered Investment Advisor with the Securities and Exchange Commission.
 
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.
 
In addition to trading in the Interbank market for foreign exchange, the Manager currently executes orders on all the major U.S. futures exchanges and may also trade on, but is not limited to, the Bolsa de Mercadorias and Futuros (“BMF”), Borsa Italiana Idem (“IML”), the Eurex Exchange (“Eurex”), the Hong Kong Exchanges and Clearing Ltd. (“HKEX”), the Intercontinental Exchange (“ICE”), the London Metal Exchange (“LME”), the Montreal Exchange (“ME”), the Mercado de Futuros Financieros (“MEFF”), the NYSE Euronext (“Euronext”), the Osaka Securities Exchange (“OSE”), the Singapore Exchange (“SGX”), the South African Exchange (“SAFEX”), the Sydney Futures Exchange Ltd. (“SFE”), the Tokyo Commodity Exchange (“TOCOM”), the Tokyo Financial Exchange (“TFX”), and the Tokyo Stock Exchange (“TSE”).
 
Graham Alternative Investment Fund I LLC, Graham Alternative Investment Fund II LLC, and Graham Alternative Investment III Ltd. 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. The preparation of these financial statements requires the Managing Member to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
 
20

 
Graham Alternative Investment Trading LLC
 
Notes to Unaudited Financial Statements (continued)
 
2. Summary of Significant Accounting Policies (continued)
 
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 managing member allocation.
 
During the period ended September 30, 2012 certain Master Funds in which GAIT invested consolidated their assets under Graham Commodity Strategies LLC and then ceased operations.  The dates of the consolidation were as follows:
 
Master Fund
Consolidation Date
Graham Fed Policy Ltd.
May 29, 2012
Graham Energy Fundamental LLC
May 29, 2012
Graham Macro Directional LLC
May 30, 2012
Graham Macro Technical Ltd.
May 30, 2012
Graham Macro Data Driven LLC
May 31, 2012
 
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 managing member 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.  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. With respect to GAIT’s investments in the other funds managed by the Manager, Level 2 inputs include the net asset value of the underlying fund in which it holds an investment.
 
·
Level 3 inputs are those which are considered unobservable and are significant in arriving at fair value.

 
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Graham Alternative Investment Trading LLC

Notes to Unaudited Financial Statements (continued)
 
2. Summary of Significant Accounting Policies (continued)
 
Fair Value (continued)
 
GAIT reports the fair value of its investment related assets and liabilities in accordance with the hierarchy established under U.S. GAAP.  In accordance with this hierarchy, GAIT’s investments in Master Funds and Graham Cash Assets LLC (“GCA”) have been classified as Level 2.  These investments are discussed in Notes 3 and 4.  The Master Funds record all of their derivative financial instruments at fair value, which is derived in accordance with U.S. GAAP. There were no Level 3 assets or liabilities held at any point during the nine months ended September 30, 2012 or the twelve months ended December 31, 2011 by GAIT, the Master Funds, or GCA, and there were no transfers between levels during those periods. Transfers between levels, if any, are recognized on the actual date of the event or change in circumstances that cause the transfer.
 
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 gains and losses 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.

 
22

 
Graham Alternative Investment Trading LLC

Notes to Unaudited Financial Statements (continued)

2. Summary of Significant Accounting Policies (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 gains or losses 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 gains or losses.
 
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.  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 gains 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 Fund may not be able to enter into an offsetting contract in order to cover its risk. Swaps are subject to the International Swap and Derivative Association (“ISDA”) Master Agreements which generally require among other things, that a Master Fund maintain a predetermined level of net assets, and provide limits with respect to any decline in the Master Fund’s net asset value over 1-month, 3-month and 12-month periods. If a Master Fund were to violate such provisions, the counterparty to the swaps could demand liquidation of outstanding swap positions.
 
 
23

 
Graham Alternative Investment Trading LLC

Notes to Unaudited Financial Statements (continued)
 
2. Summary of Significant Accounting Policies (continued)
 
Swap Contracts (continued)
 
A total return swap contract is an agreement that obligates two parties to exchange cash flows calculated by reference to changes in specified prices or 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.

Exchange traded swaps are valued based upon the closing prices established by the primary exchange upon which they are traded. Total return swaps are valued based upon the exchange published settle price of the underlying reference instrument. Changes in fair value of each swap are recognized as unrealized gains or losses. The Master Funds record realized gains or losses when a swap contract is terminated. Interest is calculated and accrued throughout the life of each swap. Payments received at the end of each reset period are recorded against such accruals.

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.

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 gains 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.
 
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 last reported bid and offer quotes from independent brokers or from the exchange, respectively.
 
Recent Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU No. 2011-11”). The amendments in ASU No. 2011-11 affect all entities that have financial instruments that are either offset or are subject to an enforceable master netting arrangement or similar agreement in accordance with authoritative guidance under U.S. GAAP. Entities will be required to disclose both gross information and net information about instruments and transactions eligible for offsetting or subject to an agreement similar to a master netting arrangement in the statement of financial position, to enable users of its financial statements to understand the effect of those arrangements on its financial position. The disclosure is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Manager of the Fund is evaluatingthe impact that the adoption of ASU No. 2011-11 will have on the Fund’s financial statements.
 
 
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Graham Alternative Investment Trading LLC

Notes to Unaudited Financial Statements (continued)
 
2. Summary of Significant Accounting Policies (continued)
 
Indemnifications
 
In the normal course of business, the Master Funds, GCA, and GAIT enter into contracts that contain a variety of indemnifications. Such contracts include those by GCA 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.
 
3. Investments in Master Funds
 
As of September 30, 2012 and December 31, 2011, 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, while smaller investments are aggregated under the caption “Other Master Funds.” The number of Master Funds included for the period in each aggregated category is disclosed parenthetically next to each name. All of the Master Funds and GAIT are related parties. The Master Funds do not charge management or incentive fees and all offer monthly subscriptions and redemptions.
 
September 30, 2012
 
Investment – Objective
 
Percent of
Members’
Capital
   
Fair Value
   
Net Loss
 (three months
then ended)
   
Net Loss
 (nine months
then ended)
 
                         
Graham K4D Trading Ltd. –  (a)
    10.66 %   $ 34,171,169     $ 2,483,427     $ (603,781 )
Graham Commodity Strategies LLC – (c)
    5.46 %     17,490,643       (5,745,948 )     (12,934,428 )
Other Master Funds (6) –  (b) (c) (d)
    3.01 %     9,631,317       1,579,375       6,511,416  
      19.13 %   $ 61,293,129     $ (1,683,146 )   $ (7,026,793 )
 
December 31, 2011
             
Investment – Objective
 
Percent of
Members’
Capital
   
Fair Value
   
Net Gain
(three months ended
September 30, 2011)
   
Net Loss (nine
 months ended
September 30, 2011)
 
                         
Graham K4D Trading Ltd. –  (a)
    10.82 %   $ 45,101,309     $ (16,837,697 )   $ (33,582,747 )
Other Master Funds (8) –  (b) (c) (d) (e)
    10.25 %     42,802,679       17,311,106       18,981,956  
      21.07 %   $ 87,903,988     $ 473,409     $ (14,600,791 )
 
(a) – Systematic Macro  (b) – Fixed Income (c) – Global Macro (d) – Energy Related (e) – Commodities  
 
 
25

 
Graham Alternative Investment Trading LLC
 
Notes to Unaudited Financial Statements (continued)
 
3. Investments in Master Funds (continued)
 
The following table summarizes the financial position of each Master Fund as of September 30, 2012:
 
   
Graham
Commodity
Strategies LLC
(Delaware)
   
Graham
Global Monetary
Policy LLC
(Delaware)
   
Graham K4D
Trading Ltd.
(BVI)
 
Assets:
                 
Due from brokers
  $ 337,885,653     $ 96,842,950     $ 299,033,271  
Options, at fair value
    4,742,335       -       -  
Derivative financial instruments, at fair value
    3,792,869       11,949,850       -  
CME Membership, at fair value
    2,296,500       -       865,729  
Subscriptions receivable
    13,318       119       5,647  
Total assets
    348,730,675       108,792,919