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CTF > SEC Filings for CTF > Form 10-K on 20-Mar-2013All Recent SEC Filings

Show all filings for NUVEEN LONG/SHORT COMMODITY TOTAL RETURN FUND | Request a Trial to NEW EDGAR Online Pro



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the financial statements and notes to financial statements included in this Annual Report. The discussion and analysis includes forward-looking statements that generally relate to future events or future performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or the negative of these terms or other comparable terminology. These forward-looking statements are based on information currently available to the Manager, the Commodity Sub-advisor and the Collateral Sub-advisor, and are subject to a number of risks, uncertainties and other factors, both known (such as those described in "Item 1A. Risk Factors" and elsewhere in this Annual Report) and unknown, that could cause the actual results, performance, prospects or opportunities of the Fund to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws or otherwise the Fund and the Manager undertake no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Annual Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Annual Report.


The Fund is a commodity pool which was organized as a Delaware statutory trust on May 25, 2011, and commenced operations on October 25, 2012, with the public offering of 18,800,000 Shares. Prior to the initial public offering, the Fund was inactive except for matters relating to its organization and registration. The Fund's investment objective is to generate attractive total returns. The Fund is actively managed and seeks to outperform the Index. In pursuing its investment objective, the Fund will invest directly in a diverse portfolio of exchange-traded commodity futures contracts that represent the main commodity sectors and are among the most actively traded futures contracts in the global commodity markets. Generally, individual commodity futures positions may be either long or short (or flat in the case of energy futures) depending upon market conditions. The Fund also employs an options strategy that seeks to produce option premiums for the purpose of enhancing the Fund's risk-adjusted total return over time. The Fund is unleveraged, and the Fund's commodity contract positions are fully collateralized with cash equivalents and short-term, high grade debt securities.

During the last quarter of the fiscal year ended December 31, 2012, the Fund completed its initial public offering, and its shares began trading on the NYSE MKT. Since the Fund's initial public offering the Fund has used the proceeds from its share issuance as collateral, with the balance that is not maintained at BCI as initial and variation margin invested in short-term, high grade debt securities. The collateral supports various investments in futures contracts and options on futures contracts in accordance with the Fund's investment objectives.

Results of Operations

The Year Ended December 31, 2012-Fund Share Price

The Fund's shares were initially offered on October 25, 2012, at a price of $25.00 per share. Since the initial offering, the NYSE MKT exchange share price decreased 15.12% (not including an assumed reinvestment of distributions) to $21.22 at December 31, 2012. The high and low intra-day share prices for the year were $25.39 (November 9, 2012) and $20.97 (December 31, 2012), respectively. During the year, the Fund paid distributions totaling $0.1550 per share to shareholders. The cumulative total return on market value for the Fund, including the assumed reinvestment of distributions for the period from the commencement of operations to December 31, 2012, was -14.50%. At December 31, 2012, the shares of the Fund traded at a 6.60% discount to the Fund's net asset value of $22.72.

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The Year Ended December 31, 2012-Net Assets of the Fund

The Fund's net assets increased from $20,055 at December 31, 2011, to $427.1 million at December 31, 2012. The increase in the Fund's net assets was primarily due to the initial public offering of the Fund on October 25, 2012, which generated net proceeds of $447.9 million, and was offset by a net loss of $17.9 million for the period and a distribution to shareholders of $2.9 million.

The Fund's total return on net asset value for the period beginning with its commencement of operations (October 25, 2012) through December 31, 2012, which includes the effect of the Fund's expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund's distribution, was -4.19%. The Fund began investing in commodities on October 31, 2012 and completed the initial invest-up of its commodity strategy on November 1, 2012. The performance presented for the Fund's commodity portfolio and the Index are for the period beginning on November 1, 2012, and ending December 31, 2012, which reflect the performance once the Fund had fully implemented its commodity strategy. The Fund's long/short commodity futures and options portfolio returned -3.67% before considering the expenses of the Fund, underperforming the Index, which returned -1.41% during the period.

Commodity markets overall were highly volatile during 2012, and during the reporting period continued a decline that began in mid-September. As measured by the Dow Jones-UBS Commodity Index, commodities fell 2.57% from November 1 through year end. Economic growth was sluggish, but improving during the reporting period, which posed a headwind for commodities, even though central banks initiated monetary measures, resulting in lesser tailwinds when compared to earlier in 2012.

Prices of agricultural commodities ran up during the summer on fears of reduced crop sizes due to the extensive drought across the U.S. Price spikes slowed during November and December as the true extent of damage to soybean, corn and wheat crops became better known and was less than feared. The market's attention then turned to large pending harvests in South America. Among agricultural commodities, expectations of large crops, as well as weakened demand, held down prices of cotton, sugar and coffee. In the energy markets, Brent crude oil was up slightly for the period on geopolitical concerns, but WTI crude oil gained sharply. WTI appreciated on expectations that the surplus of oil in the Midwestern U.S. would be reduced in 2013 by the turnaround of the crucial Seaway pipeline. Natural gas prices fell in the year's final two months on further additions to an already large surplus in storage, resulting from ongoing record production and warmer than usual fall weather. In the metals group, prices were off as well, as they moderated from gains made in August and September in anticipation of further easing of monetary policy by the U.S. Federal Reserve.

The Fund's positions in all commodities groups experienced losses for the period. For agricultural commodities, positive performance by positions in soybean oil and coffee (which appreciated approximately 2% and 8%, respectively) was offset by losses in corn, wheat, soybeans, soybean meal, cotton and sugar. In energy the portfolio experienced losses of approximately 4% during the period, with large losses in heating oil and natural gas (approximately 8% and 14%, respectively). The Fund also showed a negative return on its positions in metals, with losses of approximately 4% for copper, gold and silver. Despite the negative return in metals, the Fund outperformed the Index in silver, where the Index experienced a loss of approximately 7%. In livestock, the Fund declined approximately 4% for the period.

Relative to the Index, within the agriculture group, the Fund outperformed the Index in its holdings of corn, wheat, and cotton. In metals, relative outperformance in silver was offset by underperformance in gold and copper. The Fund underperformed versus the Index in most energy commodities, particularly in heating oil and natural gas. The Fund also underperformed relative to the Index in the livestock group.

During the reporting period, the Fund held long and short contracts that were generally in line with the Index. Differences arose in the energy group, where the Fund held long positions in heating oil and natural gas when the benchmark held flat positions. In metals, the Fund generally held short positions early in the period and later

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moved to a long position, while the Index did the opposite. These differences detracted from the Fund's performance for the period when compared to the Index. Toward the end of the period, the Fund held a short position in silver, in contrast to the Index's long position during the entire period. This difference resulted in the Fund's outperformance of the Index on this position.

The key driver of the Index's long positions is the upward momentum in the prices of its constituents relative to the moving averages of commodity prices, and the key driver, conversely, of the Index's short or flat positions is the downward momentum in the prices of other constituents relative to the moving averages of commodity prices. The Fund's long and short/flat positions share the same drivers as the Index, but are established more actively and with greater frequency. This dependence on momentum puts the Index and the Fund at risk to price patterns that seem to demonstrate upward momentum (causing a shift from short/flat to long) but then shift to an equally compelling semblance of downward momentum (causing a shift from long to short/flat). This phenomenon is customarily described as a "whipsaw," and the Fund's greater potential for trading activity exposes it to greater whipsaw risk than the more passive Index. The whipsaw over the period explains a good portion of the Index's performance, as well as the Fund's underperformance relative to the Index.

The Fund also employs a strategy of writing covered options on commodities futures positions in the portfolio, with the goals of limiting the volatility of the Fund's returns and providing cash flow for the Fund's distributions. Gresham utilizes a strategy in which exchange-traded commodity put and/or call options are sold on up to 25% of the value of each of its commodity futures contracts that are deemed to have sufficient trading volume and liquidity. During the period, the Fund sold options on approximately 15% of the value of each commodity position. If the Fund holds a long position in a specific commodity, it will sell covered calls on those contracts; if a short position is held, it will sell covered puts on contracts in that commodity. Typically, the options sold are at or in the money, which results in the collecting of premiums. Though the majority of the Fund's option positions expire in the money, which can limit the returns of the portfolio, they are an important tool for reducing the Fund's volatility. From October 31, 2012, through December 31, 2012, the Fund had lower volatility than the Index, as measured by standard deviation of return.

The Fund has the flexibility to sell both puts and calls on a single commodity, should such commodity "flip" positions (i.e. go from a long position to a short position) during the life of a particular option. In such a case, the Fund can collect additional premiums. During the reporting period, the Fund was able to sell both puts and calls on several commodities, including live cattle, lean hogs, gold and silver, which benefitted the Fund. The Fund's option strategy generated net realized gains of $976,112 and change in net unrealized appreciation of $1,282,295 for the period.

During the year ended December 31, 2012, the Fund's collateral investments generated interest income of $87,459, which represents 0.02% of average net assets for the period from October 25, 2012, (the Fund's commencement of operations) to December 31, 2012.

The net asset value per share on October 25, 2012, was $23.88, which by the end of the year had decreased to $22.72. This represents a decrease of 4.86% in net asset value (not including the effect of reinvesting distributions). The Fund also paid a distribution of $0.1550 per share to shareholders during the period. When these distributions are taken into account, the cumulative total return for the Fund on net asset value was -4.19% for the period beginning October 25, 2012, and ending on December 31, 2012.

The Fund generated a net loss for the year ended December 31, 2012, of $17.9 million, resulting from $87 thousand of interest income, net realized losses of $14.7 million, change in net unrealized depreciation of $1.9 million and net expenses of $1.4 million.

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Fund Total Returns

The following table presents selected total returns for the Fund as of December 31, 2012. Total returns based on market value and net asset value are based on the change in net asset value and market value, respectively, for a share during the period presented. The total returns presented assume the reinvestment of distributions at net asset value on the distribution payment date for returns based on net asset value, and at market value on the distribution payment date for returns based on market value.

                                       1 Month        Inception
                     Market Value        -14.53 %         -14.50 %
                     Net Asset Value      -2.29 %          -4.19 %

"Since inception" returns present performance for the period since the Fund's commencement of operations on October 25, 2012.

Returns represent past performance, which is no guarantee of future performance.

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Commodity Weighting

The table below presents the composition of the Fund's commodity portfolio and
the Index as of December 31, 2012. The December 31, 2012 composition serves as a
guide to how the composition of the Fund's commodity portfolio compared to that
of the Index.

                                                 Fund                               Index
Commodity Group       Commodity       Exposure(1)    Composition        Exposure(1)       Composition
Energy            Crude Oil - Brent   Long                  10.19 %       Long                   10.08 %
                  Crude Oil - WTI     Flat                   9.60 %       Flat                    9.99 %
                  Heating Oil         Long                  16.91 %       Flat                   16.79 %
                  Natural Gas         Flat                   6.55 %       Flat                    6.88 %
                  Unleaded Gas        Long                   6.67 %       Long                    6.61 %

                                                            49.92 %                              50.35 %

Agriculture       Corn                Long                   7.54 %             Long              7.47 %
                  Soybean             Long                   8.82 %             Long              8.74 %
                  Wheat               Long                   3.15 %             Long              3.12 %
                  Soybean Meal        Long                   1.74 %             Long              1.72 %
                  Soybean Oil         Short                  1.96 %            Short              1.93 %
                  Cotton              Short                  1.37 %            Short              1.34 %
                  Sugar               Short                  3.16 %            Short              3.10 %
                  Coffee              Short                  1.72 %            Short              1.77 %

                                                            29.46 %                              29.19 %

Metals            Copper              Long                   2.53 %             Long              2.51 %
                  Gold                Long                   9.98 %             Long              9.87 %
                  Silver              Short                  3.54 %             Long              3.51 %

                                                            16.05 %                              15.89 %

Livestock         Live Cattle         Short                  3.02 %            Short              3.04 %
                  Lean Hogs           Long                   1.55 %             Long              1.53 %

                                                             4.57 %                               4.57 %

Total                                                      100.00 %                             100.00 %

(1) The Fund and the Index may take long and short positions on commodity futures contracts. The Fund and the Index will not short energy futures contracts due to prices of energy futures contracts generally being more sensitive to geopolitical events than to economic factors. References to a flat position mean that instead of shorting an energy futures contract when market signals dictate, the Fund will not have a futures contract position for that energy commodity, and will instead move that position to cash.

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Liquidity and Capital Resources

The Fund implements its strategy by taking long and/or short positions in commodity futures contracts with a portion of the Fund's assets, writing put and call options pursuant to the long/short commodity investment program and by investing the remaining assets of the Fund as collateral in cash equivalents, U.S. government securities and other short-term, high grade debt securities. The Fund expects it will post 15% to 25% of its assets in a margin account with BCI; the remaining 75% to 85% of its assets will be held by the Fund in a separate collateral pool and managed by the Collateral Sub-advisor. The Fund believes the higher allocation to initial margin will provide a significant buffer to accommodate variations in the required margin posting that may result from market volatility, potential gains and losses on the contracts, and changes in margin rules, and will minimize the frequency of cash transfers from the Fund's other collateral pool to meet variation margin requirements. The Fund does not intend to utilize leverage and its commodity contract positions are fully collateralized. Ordinary expenses and distributions are met by cash on hand, although distributions may at times consist of return of capital and may require that the Fund liquidate investments. The Fund earns interest on its continuing investments in short-term, high grade debt securities. The Fund also generates cash from the premiums it receives when writing options on the Fund's futures contracts.

The Fund's investments in commodity futures contracts and options on commodity futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as "daily limits." During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the futures contract can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Fund from promptly liquidating its commodity futures positions.

The Fund's shares trade on the NYSE MKT, and shares are not redeemed by the Fund in the normal course of business (although the Manager may decide to do so at its discretion), thereby alleviating the need for the Fund to have liquidity available for possible shareholder redemptions.

The Fund is unaware of any other trends, demands, conditions or events that are reasonably likely to result in material changes to the Fund's liquidity needs.

Because the Fund invests in commodity futures contracts, its capital is at risk from changes in the value of these contracts (market risk) or the potential inability of clearing brokers or counterparties to perform under the terms of the contracts (credit risk).

Market Risk

Investing in commodity futures contracts involves the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Fund's commitments to purchase commodities will be limited to the gross or face amount of the contracts held.

The Fund's exposure to market risk may be influenced by a number of factors, including changes in international balances of payments and trade, currency devaluations and revaluations, changes in interest and foreign currency exchange rates, price volatility of commodity futures contracts and market liquidity, weather, geopolitical events and other factors. These factors also affect the Fund's investments in options on commodity futures contracts. The inherent uncertainty of the Fund's investments as well as the development of drastic market occurrences could ultimately lead to a loss of all, or substantially all, of investors' capital.

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Credit Risk

The Fund may be exposed to credit risk from its investments in commodity futures contracts and options on commodity futures contracts resulting from the clearing house associated with a particular exchange failing to meet its obligations to the Fund. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance of one of their members, which should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., as in some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.

The Fund attempts to minimize market risks, and the Commodity Sub-advisor attempts to minimize credit risks, by abiding by various investment limitations and policies, which include limiting margin accounts, investing only in liquid markets and permitting the use of stop-loss orders. The Commodity Sub-advisor implements procedures which include, but are not limited to:

Employing the options strategy to limit directional risk (although there is no guarantee that the Fund's options strategy will be successful);

Executing and clearing trades only with counterparties the Commodity Sub-advisor believes are creditworthy;

Limiting the amount of margin or premium required for any one commodity contract or all commodity contracts combined; and

Generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.

A commodity broker, when acting as the Fund's futures commission merchant, is required by CFTC regulations to separately account for and segregate all assets of the Fund relating to domestic futures investments. A commodity broker is not allowed to commingle such assets with other assets of the commodity broker. In addition, CFTC regulations require a commodity broker, when acting as the Fund's futures commission merchant, to hold in a "secured" account assets of the Fund related to foreign futures investments and not commingle such assets with assets of the commodity broker.

As it relates to the Fund's assets held as collateral for its investments in commodity futures contracts, there is credit risk present in the securities used to invest the Fund's cash. While these consist of cash equivalents, U.S. government securities and other short-term, high-grade debt securities, like any investment, these too would be affected by any credit difficulties that might be experienced by their issuers.

Off-Balance Sheet Arrangements

As of December 31, 2012, the Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. While the Fund's exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Fund's financial position.

Contractual Obligations

The Fund's contractual obligations are with the Manager, the Sub-advisors, the custodian, the transfer agent and the commodity broker. Management fee payments made to the Manager are calculated as a percentage

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of the Fund's assets. The custodian fee is primarily based on the Fund's assets and trading activity. The transfer agent fee is calculated based on Fund's the total number of registered accounts. Commission payments to the commodity broker are on a contract-by-contract or round-turn basis. The Manager cannot anticipate the amount of payments that will be required under these arrangements for future periods, as these payments are based on figures which are not known until a future date. Additionally, these agreements may be terminated by either party for various reasons.

Critical Accounting Policies

The Fund's critical accounting policies are as follows:

Preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Fund's application of these policies involves judgments and actual results may differ from the estimates used.

The Fund holds a significant portion of its assets in options, futures contracts, and high quality debt instruments, all of which will be recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported on the Statement of Operations as changes in unrealized appreciation (depreciation).

The use of fair value to measure financial instruments, with related unrealized appreciation or depreciation recognized in earnings in each period, is fundamental to the Fund's financial statements.

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Generally, commodity futures contracts and options on commodity futures contracts traded on an exchange will be valued at the final settlement . . .

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