FAIR VALUE OF INVESTMENTS

9 Months Ended

Sep. 30, 2011

FAIR VALUE OF INVESTMENTS

FAIR VALUE OF INVESTMENTS

3.  FAIR VALUE OF INVESTMENTS

The Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) which provides authoritative guidance on fair value measurement. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair value of an investment is the amount that would be received to sell the investment in an orderly transaction between market participants at the measurement date (i.e. the exit price). All investments (including derivative financial instruments and derivative commodity instruments) are held for trading purposes.  The investments are recorded on trade date and open contracts are recorded at fair value (described below) at the measurement date. Investments denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date.  Gains or losses are realized when contracts are liquidated.  Unrealized gains or losses on open contracts are included in Equity in a commodity trading account.  Any change in net unrealized gain or loss from the preceding period is reported in the Statements of Operations.

The fair value measurement guidance established a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level I — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded investments. As required by the fair market value measurement guidance, the Fund does not adjust the quoted price for these investments even in situations where the Fund holds a large position and a sale could reasonably impact the quoted price.

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of generally accepted and understood models or other valuation methodologies. Investments which are generally included in this category are investments valued using market data.

Level III — Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair value for these investments is determined using valuation methodologies that consider a range of factors, including but not limited to the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the Fair Value Measurement. MLAI’s assessment of the significance of a particular input to the Fair Value Measurement in its entirety requires judgment, and considers factors specific to the investment.

Following is a description of the valuation methodologies used for investments, as well as the general classification of such investments pursuant to the valuation hierarchy.

Exchange traded investments are fair valued by the Fund by using the reported closing price on the primary exchange where it trades such investments.  These closing prices are observed through the clearing broker and third party pricing services. For non-exchange traded investments, quoted values and other data provided by nationally recognized independent pricing sources are used by the Fund as inputs into its process for determining fair values.

The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair market value.

The Fund has determined that Level I securities would include most of its futures and options contracts where it believes that quoted prices are available in an active market.

Where the Fund believes that quoted market prices are not available or that the market is not active, fair values are estimated by using quoted prices of securities with similar characteristics, pricing models or matrix pricing and these are generally classified as Level II securities. The Fund determined that Level II securities would include its forward and certain futures contracts.

The Fund’s net unrealized profit (loss) on open forward and futures contracts by the above fair value hierarchy levels as of September 30, 2011 and December 31, 2010 are as follows:

Net unrealized profit (loss)
on open contracts	Total			Level I			Level II			Level III
Futures
Long	$	(13,701,675	)	$	(830,981	)	$	(12,870,694	)	$	—
Short	$	18,027,220		$	4,147,773		$	13,879,447		$	—
	$	4,325,545		$	3,316,792		$	1,008,753		$	—
Forwards
Long	$	(7,145,409	)	$	—		$	(7,145,409	)	$	—
Short	$	6,181,588		$	—		$	6,181,588		$	—
	$	(963,821	)	$	—		$	(963,821	)	$	—
September 30, 2011	$	3,361,724		$	3,316,792		$	44,932		$	—

Net unrealized profit (loss)
on open contracts	Total			Level I			Level II			Level III
Futures
Long	$	11,183,881		$	7,332,217		$	3,851,664		$	—
Short	$	(3,592,701	)	$	(37,835	)	$	(3,554,866	)	$	—
	$	7,591,180		$	7,294,382		$	296,798		$	—
Forwards
Long	$	6,292,330		$	—		$	6,292,330		$	—
Short	$	(3,230,066	)	$	—		$	(3,230,066	)	$	—
	$	3,062,264		$	—		$	3,062,264		$	—
December 31, 2010	$	10,653,444		$	7,294,382		$	3,359,062		$	—

The Fund’s volume of trading forwards and futures as of the period and year ended September 30, 2011 and December 31, 2010, respectively, are representative of the activity throughout these periods. There were no transfers to or from Level I or II during the quarter ended September 30, 2011.

The Fund engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Such contracts meet the definition of a derivative as noted in the guidance for accounting for derivative and hedging activities. The fair value amounts of and the gains and losses on derivative instruments is disclosed in the Statements of Financial Condition and Statements of Operations respectively. There are no credit related contingent features embedded in these derivative contracts.

The following table indicates the trading gains and losses, by commodity industry sector, on derivative instruments for each of the three and nine month periods ended September 30, 2011 and 2010:

	For the three months ended			For the nine months ended
	September 30, 2011			September 30, 2011
Commodity Industry Sector	Gain (loss) from trading			Gain (loss) from trading
Agriculture	$	590,134		$	130,090
Currencies	(2,578,984		)	(1,128,671		)
Energy	(12,506,256		)	(6,794,343		)
Interest rates	28,110,429			41,345,314
Metals	3,415,413			1,304,344
Stock indices	(12,927,918		)	(22,334,518		)
Total	$	4,102,818		$	12,522,216

	For the three months ended			For the nine months ended
	September 30, 2010			September 30, 2010
Commodity Industry Sector	Gain (loss) from trading			Gain (loss) from trading
Agriculture	$	399,184		$	(261,508	)
Currencies	626,783			1,194,308
Energy	(501,214		)	(12,149,593		)
Interest rates	12,671,706			47,591,519
Metals	477,946			(178,884		)
Stock indices	(46,532		)	(9,612,454		)
Total	$	13,627,873		$	26,583,388

The Fund is subject to the risk of insolvency of a counterparty, an exchange, a clearinghouse or MLPF&S.  Fund assets could be lost or impounded during lengthy bankruptcy proceedings.  Were a substantial portion of the Fund’s capital tied up in a bankruptcy or other similar types of proceedings, MLAI might suspend or limit trading, perhaps causing the Fund to miss significant profit opportunities.  There are increased risks in dealing with unregulated trading counterparties including the risk that assets may not benefit from the protection afforded to “customer funds” deposited with regulated dealers and brokers.