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CTF > SEC Filings for CTF > Form 10-Q on 6-Nov-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


6-Nov-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"). The Index tracks the historical total return performance of a diverse portfolio of commodity futures, which may be invested long, short or flat, and, as of September 30, 2013, was comprised of 19 different commodities. The Index uses a momentum rule to determine if each commodity futures position is long, short or flat. The Index is fully collateralized with short-term Treasury bills. 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 September 30, 2013-Fund Share Price

The Fund's shares traded on the NYSE MKT at a price of $17.23 on the close of business on September 30, 2013. This represents a decrease of 13.29% in share price (not including an assumed reinvestment of distributions) from the $19.87 price at which the shares of the Fund traded on the close of business on June 28, 2013 (the last trading day of the previous quarter). The high and low intra-day share prices for the quarter were $19.98 (July 1, 2013) and $17.11 (September 30, 2013), respectively. During the quarter, the Fund declared distributions totaling $0.465 per share to shareholders, of which $0.155 was paid on October 1, 2013. The remainder was paid during the quarter. The Fund's cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was -10.99%. At September 30, 2013, shares of the Fund traded at a 15.87% discount to the Fund's net asset value of $20.48 per share. During the quarter the Fund repurchased


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108,000 shares, refer to "Part II-Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" in this Report for further details on the repurchase activity.

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

The Fund's net assets decreased from $396.6 million at June 30, 2013, to $382.6 million at September 30, 2013, a decrease of $14.0 million. The decrease in the Fund's net assets was due to $11.4 million in net realized gains and $13.2 million in net unrealized depreciation on the Fund's portfolio during the quarter, a net investment loss of $1.6 million, $8.7 million of distributions to shareholders, and $1.9 million of share repurchases.

During the quarter ended September 30, 2013, the Fund's collateral investments generated interest income of $105,432, which represents 0.03% of average net assets for the quarter ended September 30, 2013.

The net asset value per share on September 30, 2013, was $20.48. This represents a decrease of 2.98% in net asset value (not including an assumed reinvestment of distributions) from the $21.11 net asset value as of June 30, 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 -0.80% for the quarter ended September 30, 2013.

The Fund generated a net loss of $3.4 million for the quarter ended September 30, 2013, resulting from interest income of $0.1 million, net expenses of $1.7 million, net realized gains of $11.4 million, and net unrealized depreciation of $13.2 million.

The Quarter Ended September 30, 2013-Overall Commodity Market Commentary

Commodity markets were influenced by two major themes during the third quarter of 2013, the anticipation of an earlier-than-expected reduction in the pace of the U.S. Federal Reserve's asset purchases (known as quantitative easing or QE) and the escalation of geopolitical tension in the Middle East. The broad commodity market rose 2.1% for the quarter, as measured by the Dow Jones UBS Commodity Index ("DJ-UBSCI"). The Index (the Morningstar® Long/Short Commodity IndexSM, which is the Fund's benchmark) was up 0.5% for the quarter. Within the Index, losses in metals and livestock were slightly offset by gains in energy and agriculture.

Energy commodities represented 47.8% of the Index at the end of the quarter, and were its most significant commodity group by weight. Energy prices rose within the broad market, driven by a rally in crude oil prices as geopolitical turmoil in the Middle East threatened supplies, which helped the energy group appreciate by approximately 4%.

Agricultural commodities made up 28.8% of the Index at the end of the quarter. Corn prices continued to be pressured by expectations for a supply glut as the harvest peaked in the third quarter. Soybean oil also saw declining prices because of high supply and low demand. In contrast, soybean prices were lifted by concerns about poor crop conditions and tight 2012 supply. However, while agriculture commodity prices in the broad market generally declined, the Index's agriculture positions rose approximately 2.7% in the quarter, aided by short positions in corn and soybean oil.

The Index includes three metals: gold, silver and copper, which made up a combined 18.9% of the Index at the end of the quarter. In long-only terms, gold and silver prices were bolstered by renewed demand for physical precious metals. Large inflows into silver-oriented exchange traded funds also supported silver prices. Copper prices rallied on the expectation of rising demand for raw materials from China, as well as the continuation of QE in the United States. However, the Index's metals group fell approximately 9.3% because of its short positions in all three metals.

Livestock is the smallest group, comprising 4.6% of the Index at the end of the quarter. Market prices for lean hogs and live cattle rose in the quarter. Demand during the summer grilling season and concerns about supply shortages buoyed lean hog prices. Live cattle prices rallied on concerns that declining cattle weights, after the use of a weight-gaining feed supplement had been discontinued, could potentially hurt beef supplies. The Index experienced a loss of approximately 0.7% for the group attributable to a short position in live cattle.


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The Quarter Ended September 30, 2013-Fund Commodity Portfolio Commentary

The Fund's commodity portfolio, which includes the futures and options exposure, was down 0.5% for the third quarter (before considering the expenses of the Fund or the performance of the collateral portfolio), underperforming its Index, which returned 0.5%. The Fund's total return on net asset value for the quarter, which includes the effect of the Fund's expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund's distributions, was a loss of 0.80%. Relative to the Index, the Fund's commodity portfolio underperformed most significantly in energy, experienced flat performance in agriculture, and had modestly positive contributions from metals and livestock.

The Fund writes - that is, sells - covered options on its portfolio's commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund's distributions. Gresham utilizes a strategy that sells exchange-traded commodity put and/or call options on up to approximately 25% of the value of each of the Fund's commodity futures contracts, when those contracts 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, and the Fund receives cash for the related premiums. Though the majority of the Fund's option positions are exercised, which can limit the Fund's full participation in gains related to that commodity position, they are an important tool for reducing the Fund's return volatility. For the quarter ended September 30, 2013, the Fund's option program helped to contribute to the commodity portfolio's lower volatility when compared to its Index, as measured by the 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 this case, the Fund can collect additional premiums. During the quarter, the Fund was able to sell both puts and calls on soybeans and soybean meal, which contributed positively to the Fund's performance.

The Fund's energy positions underperformed the Index during the quarter, declining approximately 0.1% versus an increase of approximately 4.0% for the Index. While the Fund's long Brent and WTI crude oil positions in a rising market were a positive contributor to absolute performance, gains were offset by gyrations in the market that caused the Fund to switch from long positions to flat positions, and vice versa, in gasoline (RBOB), gas oil, and heating oil. This switching activity was disadvantageous to relative performance during the quarter.

Agricultural commodities gained approximately 1.9% for the Fund. A rally in soybean meal prices hurt the Fund's short position but bolstered the Index's long position. However, the Fund's short corn position contributed favorably to performance, as did the large premiums generated from the sale of both puts and calls on soybean meal and soybeans.

The Fund's metals holdings declined approximately 6.7%, as strengthening gold, silver and copper prices were unfavorable for the Fund's short positions. While the Fund experienced a negative return, it outperformed the Index for the group due to its options positions.

The Fund was up approximately 0.6% in livestock, while the Index was down approximately 0.7%. A rally in live cattle prices was disadvantageous for the Fund's short position. However, demand during the summer grilling season and concerns about supply shortages buoyed lean hog prices helping the Fund's long position.

The Nine Months Ended September 30, 2013-Fund Share Price

The Fund's shares traded on the NYSE MKT at a price of $17.23 on the close of business on September 30, 2013. This represents a decrease of 18.80% 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 nine month period were $23.93 (January 28, 2013) and $17.11 (September 30, 2013), respectively. During the nine month period, the Fund declared distributions totaling $1.395 per share to shareholders, of which $0.155 was paid on October 1, 2013. The remainder was paid during the period. The Fund's cumulative total return on market value for the nine month period, which assumes reinvestment of such distributions, was -12.80%. At September 30, 2013, shares of the


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Fund traded at a 15.87% discount to the Fund's net asset value of $20.48 per share. During the nine month period the fund repurchased 117,500 shares, refer to "Part II-Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" in this Report for further details on the repurchase activity.

The Nine Months Ended September 30, 2013-Net Assets of the Fund

The Fund's net assets decreased from $427.1 million at December 31, 2012, to $382.6 million at September 30, 2013, a decrease of $44.5 million. The decrease in the Fund's net assets was due to $12.5 million in net realized losses and $1.1 million in net unrealized appreciation on the Fund's portfolio during the period, a net investment loss of $4.8 million, $26.2 million of distributions to shareholders, and $2.1 million in share repurchases.

During the nine month period ended September 30, 2013, the Fund's collateral investments generated interest income of $359,359, which represents 0.09% of average net assets for the nine month period ended September 30, 2013.

The net asset value per share on September 30, 2013, was $20.48. This represents a decrease of 9.86% 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 $1.395 per share to shareholders during the nine 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 -3.77% for the nine month period ended September 30, 2013.

The Fund generated a net loss of $16.2 million for the nine month period ended September 30, 2013, resulting from interest income of $0.4 million, net expenses of $5.2 million, net realized losses of $12.5 million, and net unrealized appreciation of $1.1 million.

The Nine Months Ended September 30, 2013-Overall Commodity Market Commentary

The year began on a positive note for the broad commodity market, but prices turned volatile amid global economic uncertainty, geopolitical tensions in the Middle East and North Africa, and speculation about the timing of the U.S. Federal Reserve QE tapering. In the broad commodities market, as measured by the DJ-UBSCI, declines in the first and second quarters (-1.2% and -9.5%, respectively) overwhelmed a slight gain (2.1%) in the third quarter, for an overall loss of 8.6% for the nine month period ended September 30, 2013. In contrast, the Index (the Fund's benchmark) returned 3.2%, as the ability to take short positions was advantageous in declining markets. Among the commodity groups represented in the Index, metals posted the largest gain by far, followed by modestly positive performance in livestock and agriculture. The energy group, however, fell during the nine month period.

Energy commodities represented 47.8% of the Index at the end of the nine month period, and were its most significant commodity group by weight. Within the Index, the energy group lost approximately 1.8% due to switching between flat and long positions, driven by price volatility during the period.

Agricultural commodities made up 28.8% of the Index at the end of the nine month period. Soybean and soybean meal rose during the period, but corn, wheat, and soybean oil had much larger declines. The Index advanced approximately 2.8%, bolstered by a short position in corn, whose prices subsequently dropped on fears of oversupply.

The Index includes three metals: gold, silver and copper, which made up a combined 18.9% of the Index at the end of the nine month period. In the broad markets, as measured by DJ-UBSCI, all three metals sustained double-digit declines: gold plunged 21.2%, silver fell 28.8%, and copper declined 10.5%. However, the Index's metals group was its best-performing group, rising approximately 23.3%, as short positions initiated during the first quarter across the board were favorable in a period of falling prices.

Livestock is the smallest group, comprising 4.6% of the Index at the end of the nine month period. Expanding supply early in the year depressed prices for lean hogs and live cattle, but prices rallied later in the year on stronger summer demand and concerns about tightening supply. Against this backdrop, livestock appreciated approximately 3.4% in the Index. At the end of the third quarter the Index was short live cattle, which ended the period lower, and long lean hogs, which finished the period higher.


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The Nine Months Ended September 30, 2013-Fund Commodity Portfolio Commentary

In the environment of mostly declining commodity prices over the first nine months of 2013, the Fund's commodity portfolio lost 2.9% (before considering the expenses of the Fund or the performance of the collateral portfolio), which outperformed the long-only DJ-UBSCI, due to the Fund's ability to take short positions and write options contracts. However, the Fund underperformed the Index, which returned 3.2%, a difference of about 6.1%. The Fund's total return on net asset value for the nine month period, which includes the effect of the Fund's expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund's distributions, was a loss of 3.77%. Relative to the Index, the Fund had disappointing results in energy, metals, and agricultural positions on a weighted basis. The livestock group was a positive relative contributor to weighted performance.

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 switching between long and short (or flat in the case of energy) positions more often than the Index, which switches only once per month, had a negative impact on returns. The Fund has taken steps to limit the frequency of its position shifts thereby mitigating whipsaw risk. In terms of commodity groups, the Fund experienced absolute losses in energy, and absolute gains in metals, livestock and agriculture. Relative to the Index, the Fund underperformed most notably in energy and metals and slightly underperformed in agriculture. Outperformance in livestock had a marginal impact given the relatively small weight of the livestock group in the Fund and the Index (4.6% for both as measured at the end of the period).

The Fund's relative underperformance in the energy group was a significant driver of underperformance over the period, accounting for just over half of the shortfall versus the Index, as estimated by Gresham. The Fund's energy positions moved between flat and long positions more often than the Index across many energy commodities including crude oil, gas oil heating oil, gasoline (RBOB), and natural gas. This contributed to underperformance for the group, largely attributable to the whipsaw effect.

Metals represented the next largest negative relative impact as the Fund's metals positions rose approximately 7.2%, underperforming the Index's surge of approximately 23.3%. Primarily in gold, but also in silver, the Fund's holdings switched often between long and short from the start of the period through early February, 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.

The Fund writes - that is, sells - covered options on its portfolio's commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund's distributions. Gresham utilizes a strategy that sells exchange-traded commodity put and/or call options on approximately 25% of the value of each of the Fund's commodity futures contracts, when those contracts are deemed to have sufficient trading volume and liquidity. During the nine month 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, and the Fund receives cash for the related premiums. Though the majority of the Fund's option positions are exercised, which can limit the Fund's full participation in gains related to that commodity position, they are an important tool for reducing the Fund's return volatility. For the nine month period, the Fund's option program helped to contribute to the commodity portfolio's lower volatility when compared to its 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 this case, the Fund can collect additional premiums. During the period, the Fund was able to sell both puts and calls on several commodities, including corn, soybean meal, soybeans, cotton, wheat, gold, and lean hogs, which contributed positively to Fund performance.

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


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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.

Fund Total Returns

The following table presents selected total returns for the Fund as of September 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        -10.99 %            -12.80 %               -25.44 %
          Net Asset Value      -0.80 %             -3.77 %                -7.80 %

"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.

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, including, most importantly, the long-term total returns generated by the Fund's commodity investments and the gains generated through the Fund's options strategy. The Fund's actual financial performance will likely vary significantly from month-to-month and from year-to-year, and there may be periods, perhaps of extended durations of up to several years, when the distribution rate exceeds the Fund's actual total returns. In the event that the amount of income earned or capital gains realized by the Fund is not sufficient to cover the Fund's distributions, the Fund may be required to liquidate investments to fund distributions at times or on terms that could be disadvantageous to the Fund and its shareholders.

Because the Fund's investment performance since its inception has been negative, the Fund has effectively been drawing upon its assets to meet payments prescribed by its distribution policy. The Fund also has paid fees and expenses that have also been drawn from the Fund's assets.

As market conditions and portfolio performance may change, the rate of distributions on the shares and the Fund's distribution policy could change. The Manager reserves the right to change the Fund's distribution policy and the basis for establishing the rate of its monthly distributions, or may temporarily suspend or reduce distributions without a change in policy, at any time and may do so without prior notice to shareholders. The reduction or elimination of the Fund's distributions could have the effect of increasing the Manager's management fees.

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