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CTF > SEC Filings for CTF > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for NUVEEN LONG/SHORT COMMODITY TOTAL RETURN FUND

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


7-Aug-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, and also invests in commodity options contracts (the futures and options are sometimes referred to as the "commodity portfolio"). 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 June 30, 2013 - Fund Share Price

The Fund's shares traded on the NYSE MKT at a price of $19.87 on the close of business on June 28, 2013 (the last trading day of the quarter). This represents a decrease of 1.78% in share price (not including an assumed reinvestment of distributions) from the $20.23 price at which the shares of the Fund traded on the close of business on March 28, 2013 (the last trading day of the previous quarter). The high and low intra-day share prices for the quarter were $20.81 (April 3, 2013) and $17.75 (June 25, 2013), respectively. During the quarter, the Fund declared distributions totaling $0.465 per share to shareholders, of which $0.155 was paid on July 1, 2013. The Fund's cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was 0.57%. At June 28, 2013 (the last trading day of the quarter), shares of the Fund traded at a 5.87% discount to the Fund's net asset value of $21.11 per share.

The Quarter Ended June 30, 2013 - Net Assets of the Fund

The Fund's net assets decreased from $406.7 million at March 31, 2013, to $396.6 million at June 30, 2013, a decrease of $10.1 million. The decrease in the Fund's net assets was due to $9.8 million in net realized losses and


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$10.2 million in net unrealized appreciation on the Fund's portfolio during the quarter, a net investment loss of $1.6 million, $8.7 million of distributions to shareholders, and $0.2 million of share repurchases.

Commodity markets continued to struggle in the second quarter of 2013 and were heavily influenced by supply and demand fundamentals of individual markets. The broad commodity market fell consecutively in April, May, and June as most commodities posted declines, as measured by the Dow Jones UBS Commodity Index ("DJ-UBSCI"), which fell 9.5% for the second quarter of 2013; the Manager believes the DJ-UBSCI is representative of the overall commodities market. This was a more favorable environment for strategies with the ability to short commodities. The Index (the Morningstar® Long/Short Commodity Indexsm and the Fund's benchmark) experienced a slightly positive result of 0.03% for the quarter, with three of its four commodities groups, agriculture, energy and livestock, experiencing losses for the quarter, while metals posted a strong gain just offsetting those losses.

Energy commodities represented 46.2% of the Index at the end of the period, and are its most significant commodity group by weight. Energy commodities within the long-only DJ-UBSCI fell 8.5% in the quarter as weakening global demand put downward pressure on prices. The Index suffered a smaller loss of approximately 7.0% as the ability to hold flat positions helped limit losses.

Agricultural commodities made up 28.2% of the Index at the end of the period. Most agricultural commodities declined in the quarter as the DJ-UBSCI group lost 4.5% due to expectations of generous supplies for many markets, including coffee, corn and wheat. Notably, soybeans and soybean meal gained over the quarter. The Index's agriculture positions fell approximately 2.8% in the quarter, outperforming the DJ-UBSCI.

Metals, of which there are three in the Index (gold, silver and copper), made up a combined 21.0% of the Index at the end of the quarter. The quarter saw all three commodities fall significantly, as measured by the DJ-UBSCI, with silver, gold and copper falling 31.6%, 23.4% and 11.1%, respectively, in the quarter. Slowing GDP growth in China, pointing to lower demand in global manufacturing and domestic construction, contributed to some of the largest quarterly declines in the metals arena in many years. The Index benefitted from these declines as it held short positions and gained approximately 27.9% in this group, offsetting the losses experienced in the other three groups.

Livestock, the smallest group in the Index at the end of the period at 4.6%, gained in long-only terms per the DJ-UBSCI by approximately 2.2%. Seasonal strength in U.S. demand for summer grilling, as well as April and May reports of a virus affecting piglets that could impair breeding of the U.S. herd later in 2013, provided strength in lean hogs. The Index experienced a small loss of approximately 0.9% in this environment.

In this mostly negative market environment for commodity prices, the Fund's long/short commodity and options portfolio benefited from the flexibility to hold both long and short positions along with the retention of option premium. The Fund's commodity portfolio outperformed its benchmark Index and posted a positive 0.07% gain during the second quarter of 2013 (before considering the expenses of the Fund or the performance of the collateral portfolio) with moderately less volatility, well outpacing the broad market as measured by the DJ-UBSCI, which lost 9.5% 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 a loss of 0.23%. Relative to the Index, the primary driver of the Fund's commodity portfolio outperformance came from agriculture positions, followed by relative outperformance in livestock. Underperformance in metals and energy did not outweigh the benefits in agriculture. As many commodities began to display price momentum, either positive or negative, the negative effects of "whipsaw" abated which contributed to the positive relative performance. See more on whipsaw later in this discussion.

In agriculture commodities, the Index held short positions in most of its contracts for much of the period. The Fund's commodity portfolio positions in agriculture rose approximately 0.3% versus the Index's loss of approximately 2.8%. The Fund's portfolio, when compared to the Index, benefited from switches from short to


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long, or vice-versa, ahead of the Index in corn, soybeans, and soybean meal, which allowed the Fund to generate positive returns in this group and drove overall results. Position switching during the quarter also generated additional option premium in those commodities for the Fund as it collected both call and put premiums, in line with its options strategy.

The Fund gained approximately 2.0% in livestock, outperforming the Index by approximately 2.9%, in part due to a switch to a long position in lean hogs in late May in advance of the Index, which remained short. The switch of position in lean hogs also generated additional option premium for the Fund. Gains in livestock, while positive to performance, had a modest overall impact given the relatively small weight of the group in both the Fund's portfolio, 4.7%, and in the Index, 4.6%, as measured at the end of the period.

As noted above, the Index's metals group returned approximately 27.9% for the quarter, driven by short positions in all three (silver, gold and copper) metals markets, as each fell during the entire quarter. The Fund's commodities portfolio also held short positions for the quarter and returned approximately 23.1% on its metals positions. Underperformance versus the Index was a result of switching between long and short positions during the quarter, and of options written being exercised, which meant some of the upside of holding short metals positions was offset by the Fund's put options being exercised.

Energy holdings, despite their relatively large weight in both the Fund's portfolio, 45.4%, and within the Index, 46.2%, both measured at the end of the period, had little impact on relative performance. The Fund's energy positions lost approximately 8.4% vs. the Index's nearly 7.0% loss. The Fund's slight underweight positions and retention of options premium helped mitigate the impact of the absolute underperformance, resulting in only a small impact on relative results.

The Fund employs a strategy of writing covered options on commodity 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 quarter, 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. For the quarter, 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 quarter, the Fund was able to sell both puts and calls on several commodities, including corn, soybean meal, soybeans, and lean hogs, which benefitted the Fund.

It is important to remember that a key driver of the Index's long (and short) positions is the upward (or downward) momentum in the prices of its constituents relative to the moving averages of commodity prices. The Fund's commodity portfolio long and short/flat positions share the same drivers as the Index, but are established more actively and with greater frequency (intra-month versus the Index's once per month methodology). This dependence on momentum puts the Index and the Fund's commodity portfolio 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 in certain periods.

During the quarter ended June 30, 2013, the Fund's collateral investments generated interest income of $120,496, which represents 0.03% of average net assets for the quarter ended June 30, 2013.


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The net asset value per share on June 30, 2013, was $21.11. This represents a decrease of 2.40% in net asset value (not including an assumed reinvestment of distributions) from the $21.63 net asset value as of March 31, 2013. 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 cumulative total return for the Fund on net asset value was -0.23% for the quarter ended June 30, 2013.

The Fund generated a net loss of $1.1 million for the quarter ended June 30, 2013, resulting from interest income of $0.1 million, net expenses of $1.6 million, net realized losses of $9.8 million, and net unrealized appreciation of $10.2 million.

The Six Months Ended June 30, 2013 - Fund Share Price

The Fund's shares traded on the NYSE MKT at a price of $19.87 on the close of business on June 28, 2013 (the last trading day of the period). This represents a decrease of 6.36% 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 six month period were $23.93 (January 28, 2013) and $17.75 (June 25, 2013), respectively. During the six month period, the Fund declared distributions totaling $0.930 per share to shareholders, of which $0.155 was paid on July 1, 2013. The Fund's cumulative total return on market value for the six month period, which assumes reinvestment of such distributions, was -2.03%. At June 28, 2013 (the last trading day of the period), shares of the Fund traded at a 5.87% discount to the Fund's net asset value of $21.11 per share.

The Six Months Ended June 30, 2013 - Net Assets of the Fund

The Fund's net assets decreased from $427.1 million at December 31, 2012, to $396.6 million at June 30, 2013, a decrease of $30.5 million. The decrease in the Fund's net assets was due to $23.9 million in net realized losses and $14.3 million in net unrealized appreciation on the Fund's portfolio during the period, a net investment loss of $3.2 million, $17.5 million of distributions to shareholders, and $0.2 million in share repurchases.

Commodities markets fell steadily during the first six months of 2013, and while rallies in January, March and late April limited the drop, the broad market ended down 10.5% for the period, as measured by the DJ-UBSCI, with all of its commodity groups falling during the period. This was a favorable environment for strategies with the ability to short commodities. The Index (the Morningstar® Long/Short Commodity Indexsm and the Fund's benchmark), experienced a positive result of almost 2.8% for the first half of 2013 with three of its four commodities groups (metals, livestock and agriculture) posting gains, while energy experienced the only loss.

Energy commodities represented 46.2% of the Index at the end of the period and are its most significant commodity group by weight. As represented in the long-only DJ-UBSCI, energy commodities fell 2.0% for the six month period. The Index experienced a loss of approximately 5.6% in the energy group for the period, stemming from losses in all six contracts held in the Index, led by gas oil and heating oil.

Agricultural commodities made up 28.2% of the Index at the end of the period. In an environment where many commodity prices, including coffee, wheat, sugar, corn, and soybean oil, fell, the Index posted a moderate gain of approximately 0.2%, reflective of the benefits of the ability to take short positions in a generally downward market environment.

Metals, of which the Index includes three commodities (gold, silver and copper), were a combined 20.9% weight in the Index at the end of the period. The Index's metals group gained more than 30% for the six month period, having switched between long and short metals positions early in the period, but staying short during the large fall in the second quarter. The magnitude of the positive return combined with the significant proportion in the Index, resulted in metals being a key driver of the Index's six month positive return.


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Livestock, the smallest group in the Index at the end of the period at 4.6%, lost in long-only terms per the DJ-UBSCI by 4.4%. The Index held short positions in both live cattle and lean hogs for most of the period, benefiting from the commodity price declines and posting a gain of approximately 4.2% in the first half.

In the environment of mostly declining commodity prices over the first six months of 2013, the Fund's commodity portfolio lost nearly 2.4% (before considering the expenses of the Fund or the performance of the collateral portfolio), but outperformed the 10.5% loss experienced by commodities in general as measured by the long-only DJ-UBSCI. The Fund's commodity portfolio strategy that allows shorting of commodities combined with options writing drove this outperformance. But, versus the Index, the Fund's portfolio underperformed. The Index, as noted above, posted a positive return for the period of 2.8% while the Fund's portfolio lost 2.4%, a difference of about 5.2%. The Fund's total return on net asset value for the period, which includes the effect of the Fund's expenses and the performance of the collateral portfolio and assumes the reinvestment of the Fund's distributions, was a loss of 2.99%.

A key driver of the underperformance in the period was a phenomenon known as "whipsaw." This was most evident earlier in the period as many commodity prices trended sideways and the Fund's commodity portfolio approach of switching between long and short positions more often than the Index, which switches only once per month, had a negative impact on returns. In terms of commodity groups, the Fund's commodity portfolio experienced losses in energy and agriculture, and gains in metals and livestock. Relative to the Index, the portfolio underperformed most notably in metals and secondarily in energy and agriculture. A slight outperformance in livestock had marginal impact given the relatively small weight of the livestock group in the Fund's portfolio and the Index (4.7% and 4.6%, respectively, as measured at the end of the period). The Fund's portfolio did experience less volatility than the Index during the period aided by the options program.

The Fund's commodity portfolio relative underperformance in the metals group was the key driver of underperformance over the period, accounting for about 60% of the shortfall versus the Index, as estimated by the Fund's Commodity Sub-advisor. Both the Fund's portfolio and the Index were fully short during the second quarter, but the Fund's portfolio switched often between long and short from the start of the period through early February, resulting in losses largely attributable to the whipsaw effect. The Fund's portfolio experienced a gain of approximately 14.8% over the six months, but this was well behind the Index's gain.

Energy represented the next largest negative relative impact as the Fund's portfolio lost 9.7% vs. the Index's loss of 5.6%. The Fund's energy positions were generally in line with those of the Index for most of the period for Brent crude oil, heating oil, gas oil and RBOB gasoline, but moved between flat and long positions more often than the Index in WTI crude oil and natural gas, contributing to underperformance in both, again as a result of the whipsaw impact.

Moderate underperformance in agricultural commodities and slight outperformance in Livestock had a relatively small impact over the period versus the Index. Despite the result versus the benchmark, agriculture holdings helped the portfolio versus commodities in general as the group's loss of approximately 1.8% in portfolio terms outperformed the 7.5% loss of the DJ-UBSCI's agriculture group. In livestock, the Fund's portfolio posted a positive return of approximately 5.8%, while the livestock group lost 4.4% of its value in DJ-UBSCI terms.

The Fund 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 six months, 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


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Fund's volatility. For the six months, 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 six months, the Fund was able to sell both puts and calls on several commodities, including corn, soybean meal, soybeans, and lean hogs, which benefitted the Fund.

It is important to remember that a key driver of the Index's long (and short) positions is the upward (or downward) momentum in the prices of its constituents relative to the moving averages of commodity prices. The Fund's commodity portfolio long and short/flat positions share the same drivers as the Index, but are established more actively and with greater frequency (intra-month versus the Index's once per month methodology). This dependence on momentum puts the Index and the Fund's commodity portfolio 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 in certain periods.

During the six month period ended June 30, 2013, the Fund's collateral investments generated interest income of $253,927, which represents 0.06% of average net assets for the six month period ended June 30, 2013.

The net asset value per share on June 30, 2013, was $21.11. This represents a decrease of 7.09% 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 $0.930 per share to shareholders during the six month period. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was -2.99% for the six month period ended June 30, 2013.

The Fund generated a net loss of $12.8 million for the six month period ended June 30, 2013, resulting from interest income of $0.3 million, net expenses of $3.5 million, net realized losses of $23.9 million, and net unrealized appreciation of $14.3 million.

Fund Total Returns

The following table presents selected total returns for the Fund as of June 30, 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
                            3 Month       Year to Date        Since Inception
          Market Value          0.57 %            -2.03 %               -16.24 %
          Net Asset Value      -0.23 %            -2.99 %                -7.06 %

"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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Distributions

The Fund makes regular monthly distributions to its shareholders stated in terms of a fixed cents per share distribution rate. The Manager seeks to establish a distribution rate that, among other factors, roughly corresponds to its projections of the total return that could reasonably be expected to be generated by the Fund over an extended period of time. The Fund's projected or actual distribution rate is not a prediction of what the Fund's actual total returns will be over any specific future period.

The Fund's ability to make distributions will depend on a number of factors, . . .

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