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CTF > SEC Filings for CTF > Form 10-Q on 10-May-2013All Recent SEC Filings

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

Form 10-Q for NUVEEN LONG/SHORT COMMODITY TOTAL RETURN FUND


10-May-2013

Quarterly Report


Item 2. 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 Item 1 of Part I of this Quarterly Report (the "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 Nuveen Commodities Asset Management, LLC ("NCAM" or the "Manager"), Gresham Investment Management LLC and its Near Term Active division (such division referred to herein as "Gresham" or the "Commodity Sub-advisor") and Nuveen Asset Management, LLC ("Nuveen Asset Management" or the "Collateral Sub-advisor") and are subject to a number of risks, uncertainties and other factors, both known and unknown, that could cause the actual results, performance, prospects or opportunities of the Nuveen Long/Short Commodity Total Return Fund (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 Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

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. The shares of the Fund trade on the NYSE MKT under the ticker symbol "CTF". 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 its benchmark, the Morningstar® Long/Short Commodity IndexSM (the "Index"). In pursuing its investment objective, the Fund invests directly in a diverse portfolio of exchange-traded commodity futures contracts that are among the most actively traded futures contracts in the global commodity markets. 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 a commodity option writing 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, U.S. government securities and other short-term, high grade debt securities.

Results of Operations

The Quarter Ended March 31, 2013 - Fund Share Price

The Fund's shares traded on the NYSE MKT at a price of $20.23 on the close of business on March 28, 2013 (the last trading day of the quarter). This represents a decrease of 4.67% in share price (not including an assumed reinvestment of distributions) from the $21.22 price at which the shares of the Fund traded on the close of business on December 31, 2012. The high and low intra-day share prices for the year were $23.93 (January 28, 2013) and $19.52 (March 11, 2013), respectively. During the quarter, the Fund declared distributions totaling $0.465 per share to shareholders, of which $0.155 was paid on April 1, 2013. The Fund's total return on market value for the quarter, which assumes reinvestment of such distributions, was -2.58%. At March 28, 2013 (the last trading day of the quarter), shares of the Fund traded at a 6.47% discount to the Fund's net asset value of $21.63 per share.


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The Quarter Ended March 31, 2013 - Net Assets of the Fund

The Fund's net assets decreased from $427.1 million at December 31, 2012, to $406.7 million at March 31, 2013, a decrease of $20.4 million. The decrease in the Fund's net assets was due to $14.1 million in net realized losses and $4.1 million in net unrealized appreciation on the Fund's commodity portfolio during the year, a net investment loss of $1.7 million, and $8.7 million of distributions to shareholders.

For the quarter the Fund's commodity portfolio returned -2.48%, before considering the expenses of the Fund, and underperformed the Index, which returned 2.72% for the quarter. The Fund's total return on net asset value for the quarter, which includes the effect of the Fund's expenses and the performance of the collateral portfolio and assumes the reinvestment of the Fund's distribution, was -2.77%.

Overall commodities prices had a favorable start to 2013 with a rise in January, but fell sharply in February, and saw a modest recovery in March. As measured by the Dow Jones-UBS Commodity Index, a long-only, broad-based commodity benchmark, the commodity markets fell 1.2% during the first quarter of 2013. In contrast to 2012, when commodities prices moved in reaction to macroeconomic and geopolitical forces, during the quarter commodity prices responded to the supply and demand fundamentals of individual markets. In agriculture, prices were weak in reaction to large pending harvests. Energy commodities saw a volatile period, but ended up for the quarter. Livestock commodities were challenged by continuing supply issues, and metals experienced a weak quarter as well.

Agriculture commodities generally declined during the quarter. Markets continued to moderate from the severe drought conditions and record high grains prices experienced during the summer of 2012, as well as the large supplies being brought to the world market from South America's record crops in soybeans, sugar and coffee. Moreover, on the last day of the quarter, grains sold off sharply in response to reports from the United States ("U.S.") Department of Agriculture showing larger-than-expected U.S. inventories in March, and forecasting greater supplies of corn, soybeans and wheat for the coming U.S. crop year. Agriculture's one bright spot was cotton, where markets were optimistic about large export sales to China, as well as a smaller U.S. crop, as growers favor corn and soybeans due to their higher prices. Energy markets had a positive quarter, with WTI Crude Oil experiencing gains, aided by the slow-but-steady pace of economic growth in the U.S., as well as Brent crude oil, which also gained on an apparent reduction in geopolitical tensions. Natural gas prices experienced a sharp rise from very low levels, as unseasonably cold weather in March spurred heating demand, reducing inventories from their sustained record levels. Livestock markets saw a steady decline during the quarter due to high grain prices which have led ranchers to bring their herds to market early, increasing available supplies, as well as the fact that in March, China placed bans on feed additives in pork imports, possibly constraining a large portion of U.S. export sales. In metals, copper was lower on growing supplies and the slow pace of global manufacturing, while gold and silver were down on reduced demand for safe investment havens as investors worldwide moved to risk assets during the quarter.

The Fund's portfolio saw losses in three out of four commodity groups in first quarter 2013 (metals, agriculture, and energy) and a gain in livestock. The Fund lost approximately 7% on its positions in metals during the quarter, including losses of approximately 8%, 6%, and 3% in gold, silver, and copper, respectively. For agricultural commodities, a large loss in soybeans (approximately 10%), as well as losses in wheat (approximately 5%), soybean meal (approximately 1%), and corn (approximately less than 1%), outweighed gains in sugar, coffee, and cotton (approximately 7%, 5%, and 4%, respectively), leading to a loss of approximately 2% for the group overall. In energy, the portfolio experienced a loss of approximately 1% during the quarter, made up of losses in heating oil, WTI crude oil, and natural gas of approximately 5%, 5% and 4%, respectively, which were partly offset by a large gain in Reformulated Gasoline Blendstock for Oxygen Blending ("RBOB") gasoline (more commonly known as unleaded gasoline) and a gain in Brent crude oil of approximately 8% and 2%, respectively. In livestock, the Fund experienced gains in both live cattle and lean hogs of approximately 4% and 2%, respectively, resulting in earnings of approximately 4% for the quarter.

Relative to the Index, considering both the return and the portfolio weightings of the specific commodities, the commodity portfolio underperformed in all four commodities groups, for a total underperformance of


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approximately 5%. Metals detracted approximately 2% of relative performance, with underperformance in all three commodities, with the largest detractor being gold. Agriculture detracted approximately 2% from relative performance, as the Fund underperformed in its positions in soybeans, wheat and sugar, but outperformed in cotton and corn. In soybean meal, soybean oil and coffee, the Fund performed in line with the Index. The Fund underperformed in all energy positions, detracting from relative performance by approximately 1.5%, primarily from losses in natural gas, heating oil and WTI crude oil. In livestock the Fund underperformed in both live cattle and lean hogs, detracting from relative performance by approximately 0.1%.

The Fund's long, short or flat positioning of the contracts in its portfolio versus the Index varied by commodity and group during the quarter. Of the 19 commodities in the portfolio during the quarter, the long, short or flat positions of eight were closely in line with those of the Index. Of the 11 commodities where positions varied significantly between the Fund and the Index, 10 detracted from performance. In the metals group, the Fund moved between long and short positions on gold several times early in the quarter, but held a short position for most of the period, while the Index made only one change and spent nearly the entire period holding a short position. The Fund underperformed in gold with a return of approximately -8% versus a return of approximately 6% for the Index. In agriculture, the Fund experienced large relative underperformance in soybeans. The market showed no distinctive trend during the quarter, and the Fund moved from long to short several times, contributing to underperformance against the Index with a return of approximately -10%, while the Index held a long position for the majority of the period and experienced a return of approximately 1%. In wheat, which declined for most of the quarter, the Index moved from a long to a short position early in the quarter, while the Fund moved in mid-quarter, leading to a return of approximately -5% for the Fund's wheat positions, versus a return of approximately 17% for the Index. Positioning contributed to the Fund's return in cotton, a market which rose during the quarter, where the Index moved from short to long midway through the quarter, while the Fund held a long position during most of the quarter, outperforming the Index by approximately 7%.

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 effect during the quarter explains a significant portion of 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 notional 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 notional 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 December 31, 2012, through March 31, 2013, the Fund had lower volatility than the Index, as measured by the standard deviation of returns.

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 or vice-versa) 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 lean hogs, gold, silver, cotton, corn, soybeans and soybean


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meal which benefitted the Fund to a modest degree. The Fund's option strategy generated net realized gains of $7,054,173 and change in net unrealized depreciation of $1,627,290 for the period.

During the quarter ended March 31, 2013, the Fund's collateral investments generated interest income of $133,431, which represents 0.03% of average net assets for the quarter ended March 31, 2013.

The net asset value per share on March 31, 2013, was $21.63. This represents a decrease of 4.80% in net asset value (not including an assumed reinvestment of distributions) from the $22.72 net asset value as of December 31, 2012. The Fund declared distributions totaling $0.465 per share to shareholders during the quarter. When an assumed reinvestment of these distributions is taken into account, the total return for the Fund on net asset value was -2.77% for the quarter ended March 31, 2013.

The Fund generated a net loss of $11.7 million for the quarter ended March 31, 2013, resulting from interest income of $0.1 million, net expenses of $1.8 million, net realized losses of $14.1 million, and net unrealized appreciation of $4.1 million.

Fund Total Returns

The following table presents selected total returns for the Fund as of March 31, 2013. Total returns based on market value and net asset value are based on the change in market value and net asset value, respectively, for a share during the period presented. The total returns presented assume the reinvestment of distributions at market value on the distribution payment date for returns based on market value, and at net asset value on the distribution payment date for returns based on net asset value. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the market price per share at the end of the period for total returns based on market value, and at the ending net asset value per share at the end of the period for total returns based on net asset value.

                                                Cumulative
                               1 Month       3 Month        Since Inception
             Market Value         -4.83 %       -2.58 %               -16.71 %
             Net Asset Value      -0.75 %       -2.77 %                -6.84 %

"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 March 31, 2013. The March 31, 2013 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                   10.10 %    Long                   10.03 %
                  Crude Oil - WTI    Long                    9.90 %    Flat                    9.73 %
                  Heating Oil        Long                   16.12 %    Long                   16.13 %
                  Natural Gas        Long                    6.82 %    Long                    6.89 %
                  Unleaded Gas       Long                    6.97 %    Long                    6.95 %

                                                            49.91 %                           49.73 %

Agriculture       Corn               Long                    7.22 %    Long                    7.19 %
                  Soybean            Long                    8.61 %    Long                    8.55 %
                  Wheat              Short                   3.17 %    Short                   3.54 %
                  Soybean Meal       Short                   1.64 %    Long                    1.64 %
                  Soybean Oil        Short                   1.83 %    Short                   1.87 %
                  Cotton             Long                    1.27 %    Long                    1.27 %
                  Sugar              Short                   3.29 %    Short                   3.31 %
                  Coffee             Short                   1.83 %    Short                   1.80 %

                                                            28.86 %                           29.17 %

Metals            Copper             Short                   2.39 %    Short                   2.42 %
                  Gold               Short                  10.24 %    Short                  10.23 %
                  Silver             Short                   3.75 %    Short                   3.78 %

                                                            16.38 %                           16.43 %

Livestock         Live Cattle        Short                   3.27 %    Short                   3.12 %
                  Lean Hogs          Short                   1.58 %    Short                   1.55 %

                                                             4.85 %                            4.67 %

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 contracts 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.

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's investment activity in futures contracts and writing commodity options does not require a significant outlay of capital. The Fund currently expects to post approximately 15% of its assets in a margin account with BCI to cover its futures contracts; the remaining assets are held by the Fund in a separate collateral pool 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


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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 cash equivalents, U.S. government securities and other 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. On March 14, 2013, the Fund announced the adoption of an open-market share repurchase program pursuant to which it is authorized to repurchase an aggregate of up to 10% of its outstanding common shares. As of March 31, 2013, the Fund had not repurchased any shares through this program. During April 2013, the Fund repurchased 9,500 shares at a weighted average price of $18.76 per share.

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.

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


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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 the Commodity Futures Trading Commission (the "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. . . .

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