Item 1. Business
Organization
The Nuveen Diversified Commodity Fund (the Fund) was organized as a Delaware statutory trust on December 7, 2005, to operate as a commodity
pool. Nuveen Commodities Asset Management, LLC, the Funds manager (NCAM or the Manager), a wholly-owned subsidiary of Nuveen Investments, Inc. (Nuveen Investments), is a Delaware limited liability company
registered as a commodity pool operator with the Commodity Futures Trading Commission (the CFTC) and is a member of the National Futures Association (the NFA). The Fund commenced operations on September 27, 2010, with its
initial public offering. The Fund operates pursuant to a Second Amended and Restated Trust Agreement dated as of March 30, 2012 (the Trust Agreement). The Funds shares represent units of fractional undivided beneficial interest in,
and ownership of, the Fund. The Funds shares trade on the NYSE MKT under the ticker symbol CFD. The Fund is not a mutual fund, a closed-end fund, or any other type of investment company within the meaning of the
Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
The Manager has selected its affiliate, Gresham
Investment Management LLC (Gresham LLC), acting through its Near Term Active division (in that capacity, Gresham or the Commodity
Sub-advisor),
to manage the Funds
commodity investment strategy and its options strategy. Gresham LLC is a Delaware limited liability company, the successor to Gresham Investment Management, Inc., formed in July 1992. Gresham LLC is registered with the CFTC as a commodity trading
advisor and commodity pool operator, is a member of the NFA and is registered with the Securities and Exchange Commission (the SEC) as an investment adviser.
The Manager has selected its affiliate, Nuveen Asset Management, LLC (Nuveen Asset Management or the Collateral Sub-advisor), to manage the Funds collateral invested in cash
equivalents, U.S. government securities and other short-term, high grade debt securities. Nuveen Asset Management is a Delaware limited liability company and is registered with the SEC as an investment adviser.
Investment Objective and Investment Strategy
The Funds investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. Risk-adjusted total return refers to the income and capital appreciation
generated by a portfolio (the combination of which equals its total return) per unit of risk taken, with such risk measured by the volatility of the portfolios total returns over a specific period of time. In pursuing its investment objective,
the Fund invests directly in a diversified portfolio of commodity futures, forward and options contracts to obtain broad exposure to all principal groups in the global commodity markets. The Funds investment strategy has three elements:
|
|
|
An actively managed portfolio of commodity futures and forward contracts utilizing Greshams proprietary Tangible Asset Program
®
, or TAP
®
, a long-only rules-based commodity investment strategy designed to maintain consistent, fully collateralized exposure to commodities as an asset class;
|
|
|
|
An integrated program of writing commodity call options designed to enhance the risk-adjusted total return of the Funds commodity investments
(TAP
®
and the options strategy are collectively referred to as TAP PLUS
SM
); and
|
|
|
|
A collateral portfolio of cash equivalents, U.S. government securities and other short-term, high grade debt securities.
|
During temporary defensive periods or during adverse market circumstances, the Fund may deviate from its investment policies and objective
.
Commodity Investments.
The Fund invests substantially all of its assets in a diversified portfolio of commodity
futures and forward contracts pursuant to TAP
®
, an actively managed, fully collateralized, long-only,
rules-based commodity investment strategy. TAP
®
is designed to maintain consistent, fully collateralized
exposure to
2
commodities as an asset class. Fully collateralized means that the Fund maintains as collateral cash equivalents, U.S. government securities and other short-term, high grade debt
securities in an aggregate amount corresponding to the full notional value of its commodity investments. Long-only means that all of the Funds commodity futures and forward contracts will be on a long basis, seeking to profit from
potential increases in commodity prices, and the Fund will not short any commodity futures and forward contracts, seeking to profit from declines in commodity prices. Rules-based means that the Fund will manage its commodity investments
consistent with TAP
®
program rules which specify minimum liquidity requirements for commodity contract trading
and other parameters such as eligible commodity contracts, contract term, commodity weightings and annual and interim rebalancing of individual commodities and the TAP portfolio.
The Fund makes commodity investments in the six principal commodity groups in the global commodities markets:
Except for certain limitations described herein, there are no restrictions or limitations on the specific commodity contracts in which the Fund may invest. The specific commodities in which the Fund
invests, and the relative target weighting of those commodities, are determined annually by the Commodity
Sub-advisor.
The target weights are expected to remain unchanged until the next annual determination.
The Funds portfolio concentration in any single commodity or commodity group will be limited in an attempt to moderate volatility. The Fund intends to limit the target weightings of each commodity group such that no groups target
weighting may constitute more than 35% of TAP
®
, no two groups combined target weightings may constitute
more than 60% of TAP
®
, no single commoditys target weighting may constitute more than 70% of its group and
no commodity complex may constitute more than 80% of the commodity groups weight (e.g., within the energy group, petroleum is considered to be the commodity complex for crude oil, heating oil and gasoline; therefore, the combination of those
three individual commodities cannot comprise greater than 80% of the portfolios energy weight). Under normal market circumstances, the Commodity
Sub-advisor
avoids exercising discretion between such
annual determinations. However, the actual portfolio weights may vary during the year and may in certain circumstances be rebalanced subject to TAP
®
s rule-based procedures. The Commodity
Sub-advisor
may change the TAP
®
rules at year end and as a result may change the commodities it invests in. For target weightings as of December 31, 2013, see Item 7 of this Annual Report.
Gresham believes that the relative performance of strategies that invest in exchange-traded commodity futures and forward contracts may be
enhanced through active implementation. Generally, the Fund expects to invest in short-term commodity futures and forward contracts with terms of one to three months, but may invest in commodity contracts with terms of up to six months. Gresham
regularly purchases and subsequently sells, i.e. rolls, individual commodity futures and forward contracts throughout the year so as to maintain a fully invested position. As the commodity contracts near their expiration dates,
Gresham rolls them over into new contracts. Gresham seeks to add value compared with leading commodity market benchmarks by actively managing the implementation of the rolls of the commodity contracts. As a result, the roll dates, terms and contract
prices selected by Gresham may vary based upon Greshams judgment of the relative value of different contract terms. Greshams active management approach is market driven and opportunistic and is intended to minimize market impact and
avoid market congestion during certain days of the trading month.
Because the nature of the Funds investments in commodity futures and
forward contracts does not require significant outlays of principal, currently approximately 15% of the Funds net assets are committed to establishing those positions. In addition, the Fund expects that, if put options are purchased in the
future, no more
3
than 5% of the Funds net assets would be used to purchase commodity put options at any one time and that option premiums generated by the sale of call options on commodity futures and
forward contracts would be sufficient to cover the premiums paid for those put options.
Most of the commodity futures and options contracts
acquired to facilitate implementing the investment strategy are exchange listed and generally qualify as Section 1256 Contracts for tax purposes. Section 1256 Contracts held by the Fund at the end of a taxable year of the Fund will be
treated for U.S. federal income tax purposes as if they were sold by the Fund at their fair market value on the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as marking to
market), together with any gain or loss resulting from any actual sales of Section 1256 Contracts (or other termination of the Funds obligations under such contracts), must be taken into account by the Fund in computing its taxable
income for the year. Capital gains and losses from Section 1256 Contracts generally are characterized as long-term capital gains or losses to the extent of 60% of the gains or losses and as short-term capital gains or losses to the extent of 40% of
the gains or losses. Gains and losses from certain non-U.S. currency transactions, however, will be treated as ordinary income and losses unless certain conditions are met. Shareholders of the Fund will generally take into account their pro rata
share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by the Fund.
Options Strategy.
Pursuant to the options strategy, the Fund writes
out-of-the-money
call options on individual futures and forward contracts held by it, and may write out-of-the-money call options on baskets of commodities or on broad-based
commodity indices, such as the
DJ-UBSCI,
whose prices are expected to closely correspond to at least a substantial portion of the commodity futures and forward contracts held by the Fund. A call option gives
its owner (buyer) the right but not the obligation to buy the underlying futures contract at a particular price, known as the strike price, at any time between the purchase date and the expiration date of the option. The person who writes (sells)
the option to the buyer is thus required to fulfill the contractual obligation (by selling the underlying futures contract to the buyer at the strike price) should the option be exercised. If the option is covered, the writer (seller) has an
offsetting futures position. The Fund writes commodity call options that are U.S. exchange-traded and that are typically American-style (exercisable at any time prior to expiration). The Fund also writes commodity call options that are
non-U.S.
exchange traded and that are typically European-style (exercisable only at the time of expiration). The Fund may write commodity call options on a continual basis on up to approximately 50% of
the notional value of each of its commodity futures and forward contract positions that, in Greshams determination, have sufficient option trading volume and liquidity. The Fund may write commodity call options with terms up to one year and
with strike prices that may be up to 20%
out-of-the-money.
Generally, the Fund expects to write commodity call
options with terms of one to three months. Subject to the foregoing limitations, the implementation of the options strategy is within Greshams discretion. Over extended periods of time, the term and out
of-the-moneyness
of the commodity options may vary significantly. While generating option premiums for the Fund, the call options will cause the Fund to forgo the right to any appreciation above the
exercise price of the call options on the percentage of the notional value of the Funds long commodity positions covered by the call options. The Funds risk-adjusted return over any particular period may be positive or negative.
Collateral Investments.
The Funds investments in commodity futures and forward contracts and options on commodity futures and
forward contracts generally do not require significant outlays of principal. Currently, in the normal course of business, approximately 15% of the Funds net assets are committed as initial and variation margin to secure
the Funds futures and forward contract positions. These assets are placed in one or more commodity futures accounts maintained by the Fund at Barclays Capital Inc. (BCI), the Funds clearing broker, and are invested by BCI in
high-quality instruments permitted under CFTC regulations. The remaining collateral (approximately 85% of the Funds net assets) is held in a separate collateral investment account managed by the Collateral
Sub-advisor.
The Funds assets held in this separate collateral account are invested in cash
equivalents, U.S. government securities and other short-term, high grade debt securities with final terms not exceeding one year at the time of investment. These collateral investments (other than U.S. government securities) shall be rated at all
times at the
4
applicable highest short-term or long-term debt or deposit rating or money market fund rating as determined by at least one nationally recognized statistical rating organization
(NRSRO) or, if unrated, judged by the Collateral
Sub-advisor
to be of comparable quality. These collateral investments consist primarily of direct and guaranteed obligations of the U.S. government
and senior obligations of U.S. government agencies and may also include, among others, money market funds and bank money market accounts invested in U.S. government securities as well as repurchase agreements collateralized with U.S. government
securities.
While the principal investment objective for the separate collateral account is the preservation of capital, the assets in the
collateral account also provide the potential for returns that may supplement the returns from the Funds commodity investments. The assets in the separate collateral account may only be used for the purposes of making distributions to
shareholders, payment of operating expenses, and to replenish the Funds margin account, if necessary (and if there are excess funds in the margin account, those will be transferred to the separate collateral account). No parties other than the
Fund have any access to, rights to, or ability to control the assets in the collateral account, and those assets will not be pledged. The Fund may not pledge any of its assets, except to collateralize its investments in accordance with its
investment objectives (i.e., for margin purposes), and only the assets maintained by the Fund with BCI will be used for this purpose. Any declines in the value of the assets held in the Funds collateral account would negatively affect the net
asset value of the Funds shares.
Management of the Fund
Trustee
Wilmington Trust Company (the Delaware Trustee), a Delaware trust
company, is the resident Delaware trustee of the Fund. The Delaware Trustee is unaffiliated with the Manager. The Delaware Trustees duties with respect to the Funds management are limited to its express obligations under the Trust
Agreement. In particular, the Delaware Trustee will accept service of legal process on the Fund in the State of Delaware and will make certain filings as required under the Delaware Statutory Trust Act, as amended (the Delaware Statutory Trust
Act). The rights and duties of the Delaware Trustee, the Independent Committee (as defined below), the Manager and the shareholders are governed by the provisions of the Delaware Statutory Trust Act and by the Trust Agreement. Except for the
limited duties described herein and in the Trust Agreement that are exercised by the Delaware Trustee and the Independent Committee, all duties and responsibilities to manage the business and affairs of the Fund are vested in the Manager, pursuant
to the Trust Agreement and Delaware Statutory Trust Act.
Independent Committee
The Manager has established the independent committee, comprised of four members who are unaffiliated with the Manager (the Independent
Committee), which fulfills the audit committee and nominating committee functions for the Fund, as well as any other functions required under the NYSE MKT listing standards or as set forth in the Trust Agreement. Each member of the Independent
Committee receives an annual fee of $30,000, and each member of the Independent Committee also receives (a) a fee of $1,250 per meeting per fund for attendance in person or by telephone at a regularly scheduled quarterly meeting of the
Independent Committee; and (b) a fee of $1,500 per meeting for attendance in person or by telephone at any special, non-regularly scheduled meeting of the Independent Committee. In addition to the payments described above, the Independent
Committee chair receives an additional annual fee of $6,000. The Independent Committee members will also be compensated for out-of-pocket costs in connection with attending Independent Committee meetings. The fees of the Independent Committee
members are paid by NCAM, which will be reimbursed for such fees on a pro rata basis by each fund managed by NCAM. NCAM currently manages two funds, the Fund and the Nuveen Long/Short Commodity Total Return Fund (CTF).
The Independent Committee does not have any duties (including fiduciary duties) or responsibilities to manage the Fund, all of which the Trust Agreement
vests in the Manager, except those functions required under the listing standards of the NYSE MKT. Consequently, the Independent Committee does not have the wide-ranging duties and
5
powers similar to a board of directors of an investment company. The Trust Agreement provides that the
members of the Independent Committee will be indemnified by the Fund against liabilities arising out of the performance of their duties pursuant to the Trust Agreement, except to the extent that any such liabilities result from actual fraud or
willful misconduct by such member of the Independent Committee. The Fund also provides Directors and Officers Insurance coverage to the members of the Independent Committee. The Independent Committee has the authority to remove any
member of the Independent Committee who either ceases to be an independent director pursuant to the NYSE MKT listing standards or is subject to statutory disqualification under Sections 8a(2) or 8a(3) of the Commodities Exchange Act
(CEA). The Independent Committee may appoint new members of the Independent Committee in the event of any vacancy caused by death, resignation or removal.
Manager
NCAM is the manager of the Fund, and is responsible for determining the
Funds overall investment strategy and its implementation, including:
|
|
|
the selection and ongoing monitoring of:
|
|
|
|
the Commodity Sub-advisor, which invests the Funds assets pursuant to TAP PLUS
SM
; and
|
|
|
|
the Collateral Sub-advisor, which invests the Funds collateral in short-term, high grade debt securities;
|
|
|
|
assessment of performance and potential needs to modify strategy or change sub-advisors;
|
|
|
|
the determination of the Funds administrative policies;
|
|
|
|
the management of the Funds business affairs; and
|
|
|
|
the provision of certain clerical, bookkeeping and other administrative services for the Fund.
|
The Manager is registered with the CFTC as a CPO (effective date of registration January 4, 2006) and is a member of the NFA. The Manager was
previously registered as a CTA, but withdrew its CTA registration effective as of March 5, 2013. Except to the extent carried out by the Independent Committee, the Manager has complete responsibility to ensure that the Fund complies with all
obligations under the CEA. The Manager, Commodity Sub-advisor and Collateral Sub-advisor act in a similar capacity for CTF, a commodity pool traded on the NYSE MKT. Neither the Fund nor the Manager has established formal procedures to resolve
potential conflicts of interest related to managing the investments and operations of the Fund.
The Manager may change,
or temporarily deviate from, the Funds investment strategy and the manner in which the strategy is implemented if the Manager determines that it is in the best interests of Fund shareholders to do so based on existing market conditions or
otherwise. For instance, the Manager could change or deviate from the Funds investment strategy or the manner in which it is implemented if, among other things, the Manager determined to replace Gresham (in which case the Fund would no longer
employ the TAP
®
or TAP PLUS
SM
investment program because TAP
®
and TAP PLUS
SM
are proprietary to Gresham), or if the commodity option markets experienced a lack of volatility or liquidity so that it was no longer in the best interest of the Fund and its shareholders for the Fund
to employ the options strategy, or if other unforeseen circumstances arose that necessitated a change in the Funds strategy or its implementation. In addition, the Manager has the rights and obligations with respect to the Fund as described
under the Trust Agreement. As permitted under Delaware law, the Trust Agreement provides that the Manager does not owe any duties (including fiduciary duties) to the Fund, other than the implied contractual covenant of good faith and fair dealing.
The Manager is a wholly-owned subsidiary of Nuveen Investments, a Delaware corporation. Founded in 1898, Nuveen Investments and its
affiliates had approximately $220.5 billion of assets under management as of December 31, 2013. Nuveen Investments is a listed principal of the Manager.
6
Commodity Sub-advisor
The Manager has selected Gresham to manage the Funds assets pursuant to TAP PLUS
SM
. Gresham LLC is a Delaware limited liability company, the successor to Gresham Investment Management, Inc., formed in
July 1992. Gresham LLC is registered with the CFTC as a CTA (effective date of registration August 17, 1994) and as a CPO (effective date of registration August 17, 1994) and is a member of the NFA. Gresham LLC also is registered with the
SEC as an investment adviser. As of December 31, 2013, Gresham LLC had approximately $14.7 billion of client assets under management, including approximately $6.7 billion under management by Gresham NTA and approximately $8.0 billion under
management by Gresham LLCs other division, the Term Structure Monetization division (Gresham TSM). Gresham LLCs senior management team has extensive experience in overall supervision of commodities portfolio management and
trading operations. Gresham LLCs sole business activity is to render commodity investment advisory services and manage assets on behalf of its clients and in doing so it administers several commodity investment programs.
Gresham LLC offers investment management services through two independent divisions, Gresham NTA and Gresham TSM. Gresham NTA and Gresham TSM operate
independently of each other under the independent account controller exemption under CFTC Regulation 150.3(a). Each division implements independent trading decisions and positions and is restricted from having access to, or knowledge of, the other
divisions trading decisions and positions, and is physically and technologically separated from the other division. See Item 1A. Risk FactorsCommodity Investment Strategy Risks for further discussion.
On December 31, 2011, Nuveen Investments completed its acquisition of a 60% stake in Gresham LLC. As part of the acquisition, Gresham LLCs
management and investment teams maintained a significant minority ownership stake in the firm, and will operate independently while leveraging the strengths of certain shared resources of Nuveen Investments.
Gresham pursues the Funds investment objective by utilizing an actively-managed, fully collateralized, long-only, rules-based
commodity investment strategy and an options strategy (together referred to as TAP PLUS
SM
). Gresham believes that commodities as an asset class are often underrepresented in the investment portfolios of individuals, and that maintaining consistent exposure to commodities may potentially add
significant diversification benefits to an investors portfolio that is otherwise composed primarily of U.S equities and U.S. bonds.
Collateral Sub-advisor
The Manager has
selected Nuveen Asset Management to invest the Funds collateral (excluding the initial and variation margin maintained at BCI) in short-term, high grade debt securities. Nuveen Asset Management, a registered investment adviser, is a subsidiary
of Nuveen Investments. As of December 31, 2013, Nuveen Asset Management had approximately $117.0 billion of assets under management. The Funds collateral is invested in cash equivalents, U.S. government securities and other short-term,
high grade debt securities, including corporate obligations. Such securities are common investments for Nuveen Asset Management in several of its investment strategies.
Management Fees
For the services and facilities provided by the Manager, the Fund pays the
Manager an annual fee based on the Funds average daily net assets, payable on a monthly basis, according to the following schedule:
|
|
|
|
|
Average Daily Net Assets
|
|
Management Fee
|
|
For the first $500 million
|
|
|
1.250
|
%
|
For the next $500 million
|
|
|
1.225
|
|
For the next $500 million
|
|
|
1.200
|
|
For the next $500 million
|
|
|
1.175
|
|
For net assets over $2 billion
|
|
|
1.150
|
|
7
Pursuant to an agreement among the Manager, the Fund and the Commodity
Sub-advisor,
the Commodity
Sub-advisor
receives from the Manager an annual fee of .35% of the Funds average daily net assets, payable on a monthly basis.
Pursuant to an agreement among the Manager, the Fund and the Collateral
Sub-advisor,
the Collateral
Sub-advisor
receives from the Manager an annual fee based on the Funds average daily net assets, payable on a monthly basis, according to the following schedule:
|
|
|
|
|
Average Daily Net Assets
|
|
Management Fee
|
|
For the first $500 million
|
|
|
.3000
|
%
|
For the next $500 million
|
|
|
.2875
|
|
For the next $500 million
|
|
|
.2750
|
|
For the next $500 million
|
|
|
.2625
|
|
For net assets over $2 billion
|
|
|
.2500
|
|
Average daily net assets means the total assets of the Fund, minus the sum of its total liabilities.
The fees of the Commodity Sub-advisor and Collateral Sub-advisor (collectively, the Sub-advisors) are paid by the Manager out of
the fees the Manager receives from the Fund, and the Fund does not reimburse the Manager for those fees.
In addition to the fee of the
Manager, the Fund pays all other costs and expenses of its operations, including, but not limited to, custody fees, transfer agent expenses, legal fees, expenses of independent auditors, expenses of preparing, printing and distributing shareholder
reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
The agreements with each of the Sub-advisors may
be terminated at any time, without penalty, by either the Manager or a Sub-advisor upon 120 days written notice. Also, the agreement with the Commodity Sub-advisor can be terminated by the Commodity Sub-advisor in certain circumstances on 90 days
notice. Each of the agreements provides that each of the Sub-advisors will not be liable to the Fund in connection with the performance of its duties, and the Fund will indemnify the Sub-advisor for losses and costs arising out of its status as a
Sub-advisor to the Fund if the Sub-advisor acted in good faith and in a manner it reasonably believed to be in, or not opposed to, the best interests of the Fund, except, in each case, for a loss resulting from the
Sub-advisors
willful misfeasance, bad faith or gross negligence or reckless disregard of its duties and obligations under the agreement. The Sub-advisors will indemnify the Fund and the Manager for
losses and costs attributable to such willful misfeasance, bad faith, gross negligence or reckless disregard.
If the Manager determines it is
in the best interests of shareholders to select additional CTAs or replace a
Sub-advisor,
the Manager will consider certain information with respect to each new CTA, including the following:
|
|
|
general information, including the identity of its affiliates and key personnel;
|
|
|
|
investment strategy and risk management of the CTA;
|
|
|
|
the CTAs financial condition;
|
|
|
|
relevant performance history and the quality of services provided;
|
|
|
|
capacity to take on new business.
|
None of the foregoing agreements, or any extensions or replacements of such agreements, are subject to the approval of the Independent Committee or the Funds shareholders. As a result, the Manager
may amend, extend
8
or replace any such agreement in its sole discretion, and therefore may increase the fees of the Manager and either sub-advisor without any approval by the Independent Committee or the
Funds shareholders.
Employees
The Fund has no employees.
Available Information
The Fund files with or submits to the SEC annual and quarterly reports and other information meeting the information requirements pursuant to
Section 13(a) and 15(d) of the Exchange Act. These reports are available on the Funds website at
http://www.nuveen.com/CommodityInvestments
. Investors may also inspect and copy any materials the Fund files with the SEC at the
SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
(http://www.sec.gov) which contains reports, proxy statements and other information filed electronically with the SEC. The Fund also posts on its website an information statement and certain daily and monthly reports required by CFTC regulations,
all of which may contain information, including performance information of the Fund and the Commodity Sub-advisor, that is disclosed only through such website posting.
Item 1A. Risk Factors
An investment in the Fund
involves a high degree of risk. Investors should be aware of the various risks, including those described below. Investors should consider carefully the risks described below before making an investment decision. Investors should also refer to the
other information included in this Annual Report, including the Funds financial statements and the related notes and the Funds other filings with the SEC. Additional risks and uncertainties not presently known by the Fund or not
presently deemed material by the Fund may also impair the Funds operations and performance. If any of the following events occur, the Funds performance could be materially and adversely affected. In such case, the Funds net asset
value and the trading price of the Funds shares may decline and you may lose all or part of your investment.
An investment in the
Fund involves a high degree of risk. You should not invest in shares unless you can afford to lose all of your investment.
Commodity
Investment Strategy Risks
You may lose all of your investment.
An investment in the Funds shares is subject to investment
risk, including the possible loss of the entire amount that you invest. An investment in the Funds shares represents an indirect investment in the commodity futures and forward contracts owned by the Fund, the prices of which can be volatile,
particularly over short time periods. Investments in individual commodity futures and forward contracts and options on futures contracts and forward contracts historically have had a high degree of price variability and may be subject to rapid and
substantial price changes. These price changes may be magnified by computer-driven algorithmic trading, which is becoming more prevalent in the commodities markets. The Fund could incur significant losses on its investments in those commodity
futures and forward contracts. If the Fund experiences greater losses than gains during the period you hold shares, you will experience a loss for the period even if the Funds historical performance is positive. The Funds risk-adjusted
returns over any particular period may be positive or negative. Movements in commodity investment prices are outside of the Funds control, are extremely difficult to predict and may not be anticipated by the Commodity Sub-advisor. Price
movements may be influenced by, among other things:
|
|
|
governmental, agricultural, trade, fiscal, monetary and exchange control programs and policies;
|
|
|
|
weather and climate conditions;
|
9
|
|
|
changing supply and demand relationships;
|
|
|
|
changes in international balances of payments and trade;
|
|
|
|
U.S. and international rates of inflation;
|
|
|
|
currency devaluations and revaluations;
|
|
|
|
U.S. and international political and economic events;
|
|
|
|
changes in interest and foreign currency/exchange rates;
|
|
|
|
changes in philosophies and emotions of market participants.
|
The Funds shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other governmental agency.
The changing interests of investors, hedgers
and speculators in the commodity markets may influence whether futures prices are above or below the expected future spot price
. In order to induce investors or speculators to take the corresponding long side of a futures contract, commodity
producers must be willing to sell futures contracts at prices that are below the present value of expected future spot prices. Conversely, if the predominant participants in the futures market are the ultimate purchasers of the underlying commodity
futures contracts in order to hedge against a rise in prices, then speculators should only take the short side of the futures contract if the futures price is greater than the present value of the expected future spot price of the commodity. This
can have significant implications for the Fund when it is time to reinvest the proceeds from a maturing futures contract into a new futures contract. If the interests of investors, hedgers and speculators in futures markets have shifted such that
commodity purchasers are the predominant participants in the market, the Fund will be constrained to reinvest at higher futures prices which could have a negative effect on the Funds returns.
Conversely, if commodity sellers are the predominant participants in the market, the Fund will be constrained to reinvest at lower prices which could
have a negative effect on the Funds returns and may cause it to suffer losses on its long positions.
Regulatory developments could
significantly and adversely affect the Fund.
Commodity markets are subject to comprehensive statutes and regulations promulgated not only by the CFTC but also by self-regulatory organizations such as the NFA. Among other things, the CFTC and the
exchanges on which futures contracts are traded are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the
establishment of daily limits and the suspension of trading. Any of these actions, if taken, could adversely affect the returns of the Fund by limiting or precluding investment decisions the Fund might otherwise make. The regulation of commodity
transactions in the U.S. is a rapidly changing area of law and is subject to ongoing modification by government, self-regulatory and judicial action. In addition, various national governments have expressed concern regarding the disruptive effects
of speculative trading in the currency markets and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial and adverse to the Fund.
Daily trading limits imposed by the exchanges and position limits established by the CFTC may adversely affect the Fund.
The CFTC and
U.S. commodities exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day by regulations referred to as daily price fluctuation limits or daily trading limits. Once the daily
trading limit has been reached in a particular futures contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit
for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially disguising substantial losses the Fund may ultimately incur.
10
Separately, the CFTC and the U.S. commodities exchanges and certain non-U.S. exchanges have established
limits referred to as speculative position limits or accountability levels on the maximum net long or short futures positions that any person may hold or control in contracts traded on such exchanges. In October 2011, the
CFTC adopted final regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) that would have imposed new position limits on 28 individual agricultural, metal and energy commodity
futures and options contracts and on swaps that are economically equivalent to such contracts in order to prevent excessive speculation and manipulation in the commodity markets. On September 28, 2012, the U.S. District Court for the District
of Columbia vacated the new position limit regulations and remanded the matter to the CFTC for further consideration consistent with the courts opinion. The CFTC originally appealed the courts decision, but in November 2013, the CFTC
withdrew its appeal and re-proposed position limit regulations substantially as outlined above, with a few modifications. In addition, the CFTC proposed regulations that would expand certain exemptions from aggregation of accounts of related parties
for these purposes. The public comment period for these proposed regulations closed on February 10, 2014. It remains to be seen whether the CFTC will modify the proposed regulations in response to public comments.
The CFTCs existing position limit regulations require that a trader aggregate all positions in accounts over which the trader controls trading.
However, a trader is not required to aggregate positions in multiple accounts or commodity pools if such trader (or its applicable divisions/subsidiaries) qualifies as an independent account controller under applicable CFTC regulations
and avails itself of the independent account controller exemption under such regulations. In February 2013, Gresham NTA began operating under the independent account controller exemption such that Gresham NTA is not required to aggregate its
positions with Greshams other division. The re-proposed regulations would maintain the independent account controller exemption. However, if the CFTC does not adopt or renew the independent account controller exemption, or if the exemption
were modified or otherwise unavailable, Gresham NTA would be required to aggregate its positions with Greshams other division for purposes of the CFTCs position limits regulations. In that case, it is possible that investment decisions
of the Commodity Sub-advisor would be modified and that positions held by the Fund would have to be liquidated to avoid exceeding such position limits, potentially resulting in substantial losses to the Fund and the value of your investment. In
addition, failure to comply with the requirements of the independent account controller exemption could lead to an enforcement proceeding against Gresham LLC and could adversely affect the Fund.
The re-proposed regulations are extremely complex and, if ultimately implemented, whether in their current or an alternative form, may require further
guidance and interpretation by the CFTC to determine in all respects how they apply to the Fund. The full implementation of the Funds investment strategy could be negatively impacted by the existing or any future position limits regulations.
Any deflation or unanticipated changes in inflation may negatively affect the expected future spot price of underlying commodities.
Deflation or unanticipated changes in the rate of inflation may result in changes in the future spot price of the underlying commodities that could negatively affect the Funds profitability and result in potential losses. In addition,
reduced economic growth may lead to reduced demand for the underlying commodities and put downward pressure on the future spot prices, adversely affecting the Funds operations and profitability. Although the Manager and the Commodity
Sub-advisor believe that the Funds options strategy can provide the potential for current gains from option premiums, in up markets, the Fund will forego potential appreciation in the value of the underlying contracts to the extent the price
of those contracts exceeds the exercise price of options written by the Fund plus the premium collected by writing the call options.
Options Strategy Risks
There can be
no assurance that the Funds options strategy will be successful.
The Fund uses options on commodity futures and forward contracts to seek to enhance the Funds risk-adjusted total returns. The Fund may seek to protect its commodity
futures and forward contracts positions in the event of a market decline in those positions by purchasing commodity put options that are out-of-the money. The Funds use of options, however, may not provide any, or only partial,
protection from adverse commodity price changes. Specific price
11
movements of the commodities or futures contracts underlying an option cannot be accurately predicted. There may be imperfect correlation between the changes in the market value of the futures
contracts and the corresponding options contracts held by the Fund. Accordingly, the return performance of the Funds commodity futures and forward contracts may not parallel the performance of the commodities or indices that serve as the basis
for the options bought or sold by the Fund; this basis risk may reduce the Funds overall returns. Investing in options is volatile and requires an accurate assessment of the market and the underlying instrument. Factors such as increased or
reduced volatility, limited dollar value traded and timing of placing and executing orders may preclude the Fund from achieving the desired results of the options strategy and could affect the Funds ability to generate income and gains and
limit losses. Because of the volatile nature of the commodities markets, the writing (selling) of commodity options involves a high degree of risk.
The Fund may forego gains (i.e. capital appreciation) above the option exercise price on up to approximately 50% of its commodity futures and forward contracts as a result of selling
out-of-the-money commodity call
options.
The Fund writes commodity call options with terms up to one year that may be up to 20%
out-of-the-money
on a continual basis on up to approximately 50% of the notional value of each of its commodity
futures and forward contract positions that, in Greshams determination, have sufficient option trading volume and liquidity. As the writer of a call option, the Fund sells, in exchange for receipt of a premium, the right to any appreciation in
the value of the futures or forward contract over a fixed price on or before a certain date in the future. Accordingly, the Fund is effectively limiting its potential for appreciation to the amount the option is out-of-the-money during
the option term on up to approximately 50% of the notional value of its portfolio invested in commodity futures and forward contract positions. As commodity prices change, an option that was out-of-the-money when written may subsequently become
in-the-money.
The Fund may incur put premium costs without benefiting from its investment in commodity put options.
The
Fund does not currently intend to purchase put options and therefore will not incur put premium costs. In the future, however, the Fund may purchase commodity put options on all or substantially all of the notional value of its commodity futures and
forward contract positions. As a holder of a put option, the Fund, in exchange for payment of a premium, has the right to receive from the seller of the commodity put option, if the current price is lower than the exercise price, the difference
between the put exercise price and the current price of the underlying commodity futures or forward contract on or before a specified date (in the case of American-style options, on or before the expiration date or, in the case of
European-style options, at the expiration date). If the price of the commodity futures or forward contract is greater than the exercise price of the put option upon expiration, then the Fund will have incurred the cost of the option but
not have received any benefit from its purchase. In addition, because the Fund generally will purchase commodity put options that are substantially out-of-the-money, the Fund will not be protected against, and will bear the loss associated with, a
market decline down to the exercise price of the option.
The Fund is subject to gap risk, which is the risk that a commodity price will
change from one level to another with no trading in between.
Usually such movements occur when there are adverse news announcements, which can cause a commodity price to drop substantially from the previous days closing price. In the event
of an extreme market change or gap move in the price of a single commodity when Gresham is unable to trade, the Funds exposure to that commodity will increase in proportion to the Funds option exposure. The Funds option strategy
increases the Funds gap risk and could adversely affect the Funds performance in the event that the price of an individual commodity futures contract drops substantially. Gap risk may also negatively impact the trading price of the
Funds shares.
Risk that the Funds Shares May Trade at a Discount to Net Asset Value
There is a risk that the Funds shares may trade at prices other than the Funds net asset value per share.
The net asset value of each
share will change as fluctuations occur in the market value of the Funds portfolio. Investors should be aware that the public trading price of a share may be different from the net asset value of a share and that shares may trade at a discount
from their net asset value (which could be significant). The price
12
difference may be due to the fact that supply and demand forces at work in the secondary trading market for
shares are not necessarily the same as the forces influencing the prices of the commodity futures and forward contracts and other instruments held by the Fund at any point in time.
Risks Related to an Exchange Listing
NYSE MKT may halt trading in the shares which
would adversely impact your ability to sell shares.
The Funds shares are listed on the NYSE MKT under the market symbol CFD. Trading in shares may be halted due to market conditions or, in light of the NYSE MKT rules and
procedures, for reasons that, in the view of the NYSE MKT, make trading in shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker rules that require
trading to be halted for a specified period based on a specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the shares will continue to be met or will remain unchanged.
The lack of an active trading market for shares may result in losses on your investment at the time of disposition of your shares
Although the
Funds shares are listed on the NYSE MKT, there can be no guarantee that an active trading market for the shares will be maintained. If you need to sell your shares at a time when no active market for them exists, the price you receive for your
shares, assuming that you are able to sell them, likely will be lower than that you would receive if an active market did exist.
Commodity
Sub-advisor
Risks
Gresham is using the TAP PLUS
SM
strategy for the Fund that differs from the TAP
®
strategy, which has a longer historical performance record.
Greshams historical performance record (as presented in the Funds information statement
posted on its website) reflects the use of TAP
®
and TAP PLUS
SM
. Prior to the completion of the Funds initial public offering,
Gresham had not previously employed TAP PLUS
SM
(TAP
®
plus the options strategy) for the accounts of clients and, as a result, its historical performance record for TAP
®
is not based on an investment approach that is identical to the investment approach used for the Fund. TAP
PLUS
SM
is designed to enhance the Funds
risk-adjusted total returns, which may have the effect of limiting the level of gains or losses that the Fund otherwise would achieve. Therefore, Greshams historical performance record for TAP
®
is not as relevant to investors in the Fund as it would be if Gresham were using only TAP
®
in investing for the Fund.
Past performance is no
assurance of future results.
The Funds performance to date is due in part to the proprietary commodity investment methodology employed by Gresham. Gresham bases its investment decisions on three inputs: (i) systematic calculations of the
values of global commodity production; (ii) total U.S. dollar trading volume on commodity futures and forwards exchanges and (iii) global import/export trade values. If Gresham were removed or replaced, any subsequent commodity sub-advisor to the
Fund might employ a different commodity investment strategy than Gresham. Neither Greshams proprietary methodology nor the investment methodology that may be used by any subsequent commodity sub-advisor takes into account unanticipated world
events that may cause losses to the Fund. In any event, past performance does not assure future results.
Descriptions of the Commodity
Sub-advisor
s
strategies may not be applicable in the future.
The Commodity Sub-advisor or any subsequent commodity sub-advisor may make material changes to the investment strategy it uses in investing the Funds
assets with the consent of the Manager, who has the sole authority to authorize any material changes. If this happens, the descriptions in this document would no longer be accurate or useful. The Manager does not anticipate that this will occur
frequently, if at all. You will be informed of any changes to the Commodity Sub-advisors strategy that the Manager deems to be material; however, you may not be notified until after a change occurs. Non-material changes may be made by the
Commodity Sub-advisor or any subsequent commodity sub-advisor without the Managers consent. Such potential changes may nevertheless affect the Funds performance.
13
Speculative position limits and daily trading limits may reduce profitability and result in substantial
losses.
All accounts owned or managed by a commodity trading advisor, such as the Commodity Sub-advisor, its principals and its affiliates, are typically combined for speculative position limit purposes unless an exemption from aggregation is
available.
It is possible that the Commodity Sub-advisor will approach or reach position limits for accounts managed within the Gresham NTA
division, irrespective of the independent account controller exemption. If so, the Commodity Sub-advisor may have a conflict of interest with respect to allocating limited positions among various accounts it manages. Further, the investment
decisions of the Commodity Sub-advisor may be modified to avoid exceeding regulatory position limits, potentially subjecting the Fund to substantial losses and forcing the Fund to forego certain opportunities. The Commodity Sub-advisor may have to
reduce the size of positions that would otherwise be taken for the Fund, liquidate commodity futures contracts at disadvantageous times or prices, or not trade in certain markets on behalf of the Fund in order to avoid exceeding such limits.
Modification of trades that would otherwise be made by the Fund, if required, could adversely affect the Funds operations as well as
profitability. In addition, a violation of speculative position limits by the Commodity Sub-advisor could lead to regulatory or self-regulatory action resulting in mandatory liquidation of certain positions held by the Commodity Sub-advisor on
behalf of its accounts. There can be no assurance that the Commodity Sub-advisor will liquidate positions held on behalf of all the Commodity Sub-advisors accounts, including the Commodity Sub-advisors own accounts, in a proportionate
manner. In the event the Commodity Sub-advisor chooses to liquidate a disproportionate number of positions held on behalf of the Fund at unfavorable prices, the Fund may incur substantial losses.
Increased competition could adversely affect the Fund.
The Commodity Sub-advisor believes that there has been, over time, an increase in interest
in commodity investing. As Greshams capital under management increases, an increasing number of traders may attempt to initiate or liquidate substantial positions at or about the same time as the Commodity Sub-advisor, or otherwise alter
historical trading patterns or affect the execution of trades, to the detriment of the Fund.
Other Risks of the Funds Investment
Strategy
There may be a loss on investments in short-term debt securities.
When the Fund purchases a futures contract, the Fund is
required to deposit with its futures commission merchant only a portion of the value of the contract. This deposit is known as initial margin. If and when the market moves against the position, the Fund is required to make additional
deposits known as variation margin. The Fund invests its assets, other than the amount of margin required to be maintained by the Fund, in short-term, high grade debt securities. The value of these high grade debt securities generally
moves inversely with movements in interest rates (declining as interest rates rise). The value of these high grade debt securities might also decline if the credit quality of the issuer deteriorates, or if the issuer defaults on its obligations. If
the Fund is required to sell short-term debt securities before they mature when the value of the securities has declined, the Fund will realize a loss. This loss may adversely impact the price of the Funds shares.
Daily disclosure of portfolio holdings could allow replication of the Funds portfolio and could have a negative effect on the Funds
holdings.
Because the Funds total portfolio holdings are disclosed on a daily basis, other investors may attempt to replicate the Funds portfolio or otherwise use the information in a manner that could have a negative effect on the
Funds individual portfolio holdings and the Funds portfolio as a whole.
Certain of the Funds investments may become
illiquid.
The Fund may not always be able to liquidate its investments at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. Recently, some
institutional investors have scaled back or exited their commodity trading business, which has resulted, and may continue to result, in reduced liquidity and significantly increased spreads in the commodity markets. A market disruption, such as a
foreign government taking political actions that disrupt the market in its currency or in a major export, can also make it difficult to
14
liquidate a position. Alternatively, limits imposed by futures exchanges or other regulatory organizations, such as speculative position limits and daily price fluctuation limits, may contribute
to a lack of liquidity with respect to some commodity investments.
Market illiquidity and higher spreads may cause losses to investors. The
large stated value of the Funds commodity investments increases the risk of illiquidity by both making those investments more difficult to liquidate at favorable prices and increasing the losses incurred while trying to do so.
An investment in the Fund may not necessarily diversify an investors overall portfolio.
The investment performance of commodities has shown
little long-term historical correlation to the performance of other asset classes such as U.S. equities and U.S. bonds. Little correlation means that there is a low statistical relationship between the performance of commodity investments, on the
one hand, and U.S. equities and U.S. bonds, on the other hand. Because there is little long-term historical correlation, the Fund cannot be expected to be automatically profitable during unfavorable periods in the stock or bond markets, or vice
versa. If, during a particular period of time, the Funds performance moves in the same general direction as the other financial markets or the Fund does not perform successfully relative to overall commodity markets, you may obtain little or
no diversification benefits during that period from an investment in the Funds shares. In such a case, the Fund may have no gains to offset your losses from such other investments, and you may suffer losses on your investment in the Fund at
the same time losses on your other investments are increasing.
During a period when commodity prices are fairly stable, the absence of
backwardation in the prices of commodity futures contracts held long by the Fund may cause the price of your shares to decrease.
As the futures contracts held by the Fund near expiration, they are replaced by contracts that have a
later expiration. For example, a contract purchased and held in March 2013 may have an expiration date in June 2013. As this contract nears expiration, a long position in the contract may be replaced by selling the June 2013 contract and purchasing
a contract expiring in September 2013. This process is known as rolling. Historically, the prices of some futures contracts (generally those relating to commodities such as crude oil, heating oil and sugar, that are typically consumed
immediately rather than stored) have often been higher for contracts with near-term expirations than for contracts with longer-term expirations. This circumstance is referred to as backwardation. Absent other factors, in these
circumstances, the sale of a long position in the June 2013 contract would be made at a higher price than the purchase of the September 2013 contract, thereby allowing the Fund to purchase a greater quantity of the September 2013 contract.
Conversely, a contango market is one in which the prices of commodity futures contracts in the near-term months are lower than the prices of contracts in the longer-term months due to long-term storage costs and other factors.
Commodities that have historically traded in a contango market are wheat, corn, gold, natural gas, coffee, lean hogs and soybean oil. The absence of backwardation or contango in certain commodities could adversely
affect the value of the Funds portfolio and consequently decrease the value of your shares.
Investments in futures contracts will
expose the Fund to the risk of temporary aberrations or distortions in the commodity markets.
The Fund is subject to the risk that temporary aberrations or distortions in the markets (such as war, strikes, geopolitical events and natural
disasters) will occur that impact commodity prices and negatively impact the value of the Funds positions, thereby adversely affecting the value of your shares.
Because futures contracts have no intrinsic value, the positive performance of your investment is wholly dependent upon an equal and offsetting loss.
Futures trading is a risk transfer economic
activity. For every gain there is an equal and offsetting loss rather than an opportunity to participate over time in general economic growth. Unlike most alternative investments, an investment in shares of the Fund does not involve acquiring any
asset with intrinsic value. Overall stock and bond prices could rise significantly and the economy as a whole prosper while shares of the Fund trade unprofitably.
Recent market conditions.
The recent financial crisis in the U.S. and global economies, including the European sovereign debt crisis, has resulted, and may continue to result, in an unusually high
degree of volatility in the financial markets, both domestic and foreign. Liquidity in some markets has decreased and credit has become
15
scarcer worldwide. Recent regulatory changes, including the Dodd-Frank Act and the introduction of new international capital and liquidity requirements under Basel III, may cause lending activity
within the financial services sector to be constrained for several years as Basel III rules phase in and rules and regulations are promulgated and interpreted under the Dodd-Frank Act. In response to the crisis, the U.S. and other governments and
the Federal Reserve and certain foreign central banks have taken steps to support financial markets. Withdrawal of this support (even when anticipated and done generally, as in the case of the Federal Reserves tapering of its bond purchases),
failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding, could adversely impact the value and liquidity of certain securities and futures contracts.
In addition, since 2010, the risks of investing in certain foreign government debt have increased dramatically as a result of the European debt crisis,
which began in Greece and spread to various other European countries. These debt crises and the ongoing efforts of governments around the world to address these debt crises have also resulted in increased volatility and uncertainty in the global
financial markets. It is impossible to predict the effects of these or similar events in the future on the Fund, though it is possible that these or similar events could have a significant adverse impact on the value and risk of investments held by
the Fund.
In the United States, on August 5, 2011, Standard & Poors Financial Services, LLC, a subsidiary of The
McGraw-Hill Companies, Inc. (S&P), lowered its long-term sovereign credit rating on the U.S. federal government debt to AA+ from AAA. Any further credit rating downgrade could increase volatility in financial
markets, and could result in higher interest rates and higher Treasury yields and increase the costs of capital and financing. In addition, global economies and financial markets are becoming increasingly interconnected, which increases the
possibilities that conditions in one country or region might adversely impact issuers in a different country or region.
Risk of Investing
in Non-U.S. Markets
Investing in non-U.S. markets will expose the Fund to additional credit and regulatory risk.
The Fund
currently expects that up to 40% of its net assets invested in commodity futures and forward contracts and options on commodity futures and forward contracts may be in non-U.S. markets. Some non-U.S. markets present risks because they are not
subject to the same degree of regulation as their U.S. counterparts. None of the SEC, CFTC, NFA or any domestic exchange regulate activities of any foreign boards of trade or exchanges, including the execution, delivery and clearing of
transactions, nor do they have the power to compel enforcement of the rules of a foreign board of trade or exchange or of any applicable non-U.S. laws or regulations. Similarly, the rights of market participants, such as the Fund, in the event
of the insolvency or bankruptcy of a non-U.S. exchange or broker are also likely to be more limited than in the case of U.S. exchanges or brokers. As a result, in these markets, the Fund would have less legal and regulatory protection than
it does when it invests domestically.
Investing through non-U.S. exchanges is subject to the risks presented by exchange controls,
expropriation, increased tax burdens and exposure to local economic declines and political instability. An adverse development with respect to any of these variables could reduce the profit or increase the loss on investments of the Fund in the
affected international markets.
The Funds non-U.S. investments may be exposed to losses resulting from non-U.S. exchanges that
are less developed or less reliable than U.S. exchanges.
Some non-U.S. commodity exchanges may be in a more
developmental stage than U.S. exchanges, so that prior price histories may not be indicative of current price dynamics. In
addition, the Fund may not have the same access to certain contracts on foreign exchanges as do local traders, and the historical market data on which the Commodity Sub-advisor bases its strategies may not be as reliable or accessible as it is in
the U.S. All of these factors could adversely affect the performance of the Fund.
Regulatory and Operating Risks
The Fund is not a regulated investment company.
Unlike other Nuveen Investments-sponsored funds, the Fund is not a mutual fund, a closed-end fund,
or any other type of investment company within the meaning of the 1940
16
Act. Accordingly, you do not have the protections afforded by that statute which, among other things,
regulates the relationship between the investment company and its investment adviser and mandates certain authority to be held by the board of directors of an investment company.
The Fund has a limited operating history.
The Fund commenced its investment activities on September 30, 2010 following the completion of its initial public offering. Therefore, the Fund has a
limited performance history to serve as a basis for you to evaluate an investment in the Fund.
Manager and Commodity
Sub-advisor
experience.
Before the Fund commenced operations, the Manager had not previously operated a commodity pool or selected a commodity trading advisor. While the Commodity Sub-advisor had previously managed assets pursuant
to TAP
®
, it had never employed TAP PLUS
SM
when managing assets for clients before the Fund commenced operations.
Conflicts of interest could adversely affect the Fund.
There are conflicts of interest in the structure and operation of the Fund. The Manager has
sole authority to manage the Fund, and its interests may conflict with those of Fund shareholders. For example, the Managers fees are based on the Funds net assets, which could provide an incentive for the Manager to reduce or suspend
distributions by the Fund. In addition, the collateral Sub-advisor and Commodity Sub-advisor are affiliates of the Manager. Each Sub-advisor may encounter conflicts between the interests of the Fund and its other clients. Further, a conflict of
interest may also arise when the Commodity Sub-advisor approaches or reaches position limits with respect to futures positions established for the benefit of the Fund and fails to allocate limited contracts available among other accounts it manages
or, alternatively, liquidates positions held by other accounts in a disproportionate manner. Although the Fund, the Manager, and the Sub-advisors have not established formal procedures to resolve potential conflicts of interest related to managing
the investments and operations of the Fund, the Manager and the sub-advisors have adopted codes of ethics in recognition of their fiduciary obligations to clients, including the Fund, and in accordance with applicable securities and commodities laws
and regulations. Each of the Manager and the Sub-advisors resolve conflicts of interest as they arise based on its judgment and analysis of the particular conflict. The Manager and the Sub-advisors seek to resolve all potential conflicts in a manner
that is fair and equitable to the Fund and its shareholders over time. However, it is possible that the Manager and/or the Sub-advisors could resolve a potential conflict in a manner that is not in the best interest of the Fund or its shareholders.
Departure of key personnel could adversely affect the Fund.
In managing and directing the Funds activities and affairs, the
Manager relies heavily on Gresham, which has a relatively small number of personnel. If any of Jonathan S. Spencer, President and Chief Investment Officer of Gresham LLC, Douglas J. Hepworth, Director of Research of Gresham LLC, or Susan Wager and
Randy Migdal, the Funds portfolio managers, were to leave Gresham LLC or be unable to carry out their present responsibilities, it may have an adverse effect on the Funds management. In addition, should market conditions deteriorate or
for other reasons, Nuveen, NCAM, Nuveen Asset Management and Gresham LLC may need to implement cost reductions in the future which could make the retention of qualified and experienced personnel more difficult and could lead to personnel turnover.
Shareholders have limited voting rights, and the Independent Committee has certain limited duties and powers, and neither will be able to
affect management of the Fund regardless of performance.
Unlike the holder of capital stock in an investment company, Fund shareholders have limited voting rights or other means to control or affect the Funds business. The Fund also does
not have a board with the ability to control the management and operation of the Fund that would be typical of a board of directors of a corporation. In addition, the powers and duties of the Independent Committee are very limited with respect to
the Fund. The Independent Committees sole powers are (i) to terminate for cause the Manager of the Fund (which, under the Trust Agreement, will automatically cause the Fund to terminate and be liquidated if at the time there is not a remaining
Manager and shareholders have not voted to elect a replacement Manager), and (ii) to serve the audit committee and nominating committee functions of the Fund. The Independent Committee, unlike the board of directors of an investment company, does
not have the power to cause the Fund to change its investment objective or policies, effect changes to operations, approve the advisory fees of the Manager or replace the Manager or Sub-advisors. Rather, the power to determine the Funds
policies and direct its operations is
17
conferred on the Manager. Thus, Fund shareholders do not benefit from the protection of their interests afforded to registered investment companies under the 1940 Act through the existence of an
independent board of directors with extensive powers to control the operations of the company. Therefore, the shareholders to a large extent are dependent on the abilities, judgment and good faith of the Manager in exercising its wide-ranging powers
over the Fund, limited solely by the implied covenant of good faith and fair dealing applicable to the Manager in its relations with the Fund and its shareholders. If the Manager voluntarily withdraws or is removed by a vote of shareholders and
shareholders have not voted to elect a replacement Manager, the Fund will terminate and will liquidate its assets pursuant to the Trust Agreement.
The Manager may not be removed by Fund shareholders except upon approval by the affirmative vote of the holders of over 50% of the outstanding shares (excluding shares owned by the Manager and its
affiliates), subject to the satisfaction of certain conditions. Any removal of the Manager by Fund shareholders or by the Independent Committee (upon 60 days written notice and under certain limited circumstances) will result in the liquidation of
the Fund if at the time there is not a remaining manager unless a successor manager is appointed as provided in the Trust Agreement. Thus, it is extremely unlikely that Fund shareholders will be able to make any changes in the management of the
Fund, even if performance is poor.
Fees and expenses are charged regardless of Fund performance and may result in depletion of assets
.
Regardless of its investment performance, the Fund pays brokerage commissions, over-the-counter dealer spreads, management fees and operating and extraordinary expenses. A management fee will be paid by the Fund even if the Fund experiences a net
loss for the year. Consequently, the expenses of the Fund could, over time, result in significant losses to your investment therein, including the loss of all of your investment. You may not achieve profits, significant or otherwise.
The value of the shares may be adversely affected if the Fund is required to indemnify the members of the Independent Committee or the Manager.
Under the Trust Agreement, each of the members of the Independent Committee and the Manager has the right to be indemnified for any liability or expense it incurs absent actual fraud or willful misconduct. That means that the Manager may require
the assets of the Fund to be sold in order to cover losses or liability suffered by it or by the members of the Independent Committee. Any sale of that kind would reduce the net asset value of the Fund and the value of the shares.
The failure of a clearing broker to comply with financial responsibility and customer segregation rules and/or the bankruptcy of one of the
Funds clearing brokers could result in a total loss of Fund assets.
Under current CFTC regulations, a clearing broker maintains customers assets in a bulk segregated account. There is a risk that assets deposited by the Fund with the
clearing broker as margin for futures contracts may, in certain circumstances, be used to satisfy losses of other clients of the Funds clearing broker or the clearing brokers own payment obligations. In addition, the assets of the Fund
may not be fully protected in the event of that clearing brokers bankruptcy, as the clearing brokers customers, such as the Fund, are entitled to recover, even in respect of property specifically traceable to them, only a pro rata share
of all property, if any, available for distribution to all of that clearing brokers customers. The Fund also may be subject to the risk of the failure of, or delay in performance by, any exchanges and their clearing organizations, if any, on
which commodity interest contracts are traded.
Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives
clearing organization to segregate all funds and other property received from a clearing members clients in connection with domestic futures and options contracts from any funds held at the clearing organization to support the clearing
members proprietary trading. Nevertheless, all customer funds held at a clearing organization in connection with any futures or options contracts are held in a commingled omnibus account and are not identified to the name of the clearing
members individual customers. With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a
defaulting customer of the clearing member to the clearing organization. As a result, in
18
the event of a default of the clearing brokers other clients or the clearing brokers failure to extend its own funds
in connection with any such default, the Fund would not be able to recover the full amount of assets deposited by the clearing broker on behalf of the Fund with the clearing organization.
The clearing brokers may be subject to legal or regulatory proceedings in the ordinary course of their business. A clearing brokers involvement in
costly or time-consuming legal proceedings may divert financial resources or personnel away from the clearing brokers trading operations, which could impair the clearing brokers ability to successfully execute and clear the Funds
trades.
An investment in the shares may be adversely affected by competition from other methods of investing in commodities.
The Fund
competes with other financial vehicles, including other commodity pools, hedge funds, traditional debt and equity securities issued by companies in the commodities industry, other securities backed by or linked to such commodities, and direct
investments in the underlying commodities or commodity futures contracts. Market and financial conditions, and other conditions beyond the Managers or Commodity Sub-advisors control, may make it more attractive to invest in other
financial vehicles or to invest in such commodities directly, which could limit the market for the shares.
The commodity markets have
volatility risk.
The commodity markets have experienced periods of extreme volatility. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have resulted in significant
reductions in values of a variety of commodities. Similar future market conditions may result in rapid and substantial valuation increases or decreases in the Funds holdings. In addition, volatility in the commodity and securities markets may
directly and adversely affect the setting of distribution rates on the Funds shares.
The Fund has not been subject to independent
review or review on your behalf.
Shareholders do not have legal counsel representing them in connection with the Fund. Accordingly, a shareholder should consult its legal, tax and financial advisers regarding the desirability of investing in the
Fund. As previously noted, you cannot predict the expected results of this Fund from the performance history of other accounts managed by the Commodity Sub-advisor.
Deregistration of the
Manager or Sub-advisors
could disrupt operations.
The Manager and the Commodity Sub-advisor are registered commodity pool operators, the Commodity Sub-advisor is
a registered commodity trading advisor and the Collateral Sub-advisor is a registered investment adviser. If the CFTC were to terminate, suspend, revoke or not renew the Managers commodity pool operator registration, the Manager would be
compelled to withdraw as the Funds manager, and the shareholders would then determine whether to select a replacement manager or to dissolve the Fund. If the CFTC and/or the SEC, as applicable, were to terminate, suspend, revoke or not renew
either of the Sub-advisors registrations, the Manager would terminate the management agreement with that Sub-advisor. The Manager could choose to appoint a new sub-advisor or terminate the Fund. No action is currently pending or threatened
against the Manager, the Commodity Sub-advisor or the collateral Sub-advisor.
The Funds distribution policy may change at any
time.
Distributions paid by the Fund to its shareholders are derived from the current income and gains from the Funds portfolio investments and the options strategy, but to the extent such current income and gains are not sufficient to pay
distributions, the Funds distributions may represent a return of capital. The total return generated by the Funds investments can vary widely over the short term and long term and the Fund may liquidate investments in order to make
distributions. The timing and terms of any such liquidation could be disadvantageous to the Fund. The Manager reserves the right to change the Funds 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. Any suspension or reduction of distributions will increase the Funds assets under management upon which
NCAM earns management fees and may negatively affect the market price of the Funds shares.
19
New regulatory developments may increase competition from other exchange-traded commodity funds that
could limit the market for, and reduce the liquidity of, the shares.
The CFTC recently adopted rules that, subject to certain conditions, permit the manager (commodity pool operator) of an exchange-traded commodity fund to claim relief from
certain requirements relating to the delivery and acknowledgment of commodity pool disclosure documents, delivery of monthly account statements, and the requirement to keep the Funds books and records at the commodity pool operators main
business office. In addition, those rules exempt the independent directors and trustees of an actively managed, exchange-traded commodity pool from having to register as commodity pool operators in their own right, where those persons are required
to serve as such only for purposes of composing an audit or other committee under the Sarbanes-Oxley Act of 2002 and exchange listing requirements. These rules may increase the attractiveness of forming exchange-traded commodity funds similar to the
Fund, relative to other investment vehicles, including hedge funds, other commodity pools, traditional debt and equity securities issued by companies in the commodities industry and securities backed by or linked to commodities. An increase in the
number of such funds facilitated by the new rules could limit the market for, and reduce the liquidity of, the shares and/or make it more difficult for the Fund to implement its investment strategy.
Tax Risk
Your tax liability may
exceed cash distributions.
You will be taxed on your share of the Funds taxable income and gain each year, regardless of whether you receive any cash distributions from the Fund. Your share of such income or gain, as well as the tax
liability generated by such income or gain, may exceed the distributions you receive from the Fund for the year.
Certain provisions of the
Internal Revenue Code may cause investors who purchased Fund shares at a discount to net asset value to recognize gain in the first year of purchase without having sold their shares.
The Fund is taxed as a partnership, and as such you are
treated as owning your proportionate share of Fund assets. Section 743(b) of the Internal Revenue Code of 1986, as amended (the Code), generally requires the Fund to adjust your proportionate share of the basis in the Funds assets
(your share of the inside basis in the Fund) to reflect your initial outside basis in your shares (i.e., the initial purchase price of your shares). In addition, Section 1256 of the Code requires the Fund to treat a large
majority of its futures contracts as having been sold for tax purposes at the end of each year at their then-current market value.
The
combined effect of Sections 743(b) and 1256 is that if you purchase Fund shares at a discount to net asset value during the year and hold those shares through year end, you would be deemed to have realized a capital gain substantially equal to the
amount of that discount. Any such deemed gain would be reflected on your Schedule K-1 for that year (in addition to all other items of gain and loss for the year), and your outside basis in the Funds shares would be stepped up by
the amount of that gain. This basis step-up would have the effect of reducing your capital gain (or increasing your capital loss) upon any subsequent sale of your shares. This would accelerate your realization of capital gain, but would not increase
the amount of gain realized over the full period of the investment. This acceleration effect would be particularly acute for investors who purchase shares at substantial discounts to net asset value. This deemed capital gain would be avoided if the
Funds net asset value per share were to fall below your purchase price per share by year end; conversely, if the Funds net asset value were to increase by year end, your deemed capital gain would be higher than the amount of the
discount.
The calculations under Section 743(b) of the Code are complex, and there is little legal authority concerning the mechanics of the
calculations, particularly in the context of publicly traded partnerships. It is possible that the Internal Revenue Service (IRS) will successfully assert that some or all of the conventions utilized by the Fund to determine and allocate
the Section 743(b) basis adjustments do not satisfy the technical requirements of the Code or the regulations and, thus, will require different basis adjustments to be made.
You could owe tax on your share of the Funds ordinary income despite overall losses.
Gain or loss on futures and forward contracts and options on futures and forward contracts will generally
be taxed as capital gains or losses for U.S. federal income tax purposes. Interest income is ordinary income. In the case of an individual,
20
capital losses can only be used to offset capital gains plus $3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary income each year. Therefore, you may be
required to pay U.S. federal income tax on your allocable share of the Funds ordinary income, even though the Fund incurs overall losses.
Certain Fund expenses may be treated as miscellaneous itemized deductions rather than as deductible ordinary and necessary business expenses.
Certain expenses incurred by the Fund may be treated as miscellaneous itemized deductions for U.S. federal income tax purposes, rather than as deductible ordinary and necessary business expenses, with the result that shareholders who are
individuals, trusts, or estates may be subject to limitations on the deductibility of their allocable share of such expenses.
Tax-exempt
investors may recognize unrelated business taxable income with respect to their investment in the Fund.
Persons that are otherwise exempt from U.S. federal income tax may be allocated unrelated business taxable income as a result of their
investment in the Fund. In particular, for charitable remainder trusts, investment in the Fund may not be appropriate.
Non-U.S. investors
may face U.S. tax consequences.
Non-U.S. investors should consult their own tax advisors concerning the applicable foreign as well as the U.S. federal income tax implications of an investment in the
Fund. Non-U.S. investors
may also be subject to special withholding tax provisions if they fail to furnish the Fund (or another appropriate person) with a timely and properly completed Form W-8BEN or other applicable form.
Changes in the Funds tax treatment could adversely affect distributions to shareholders.
The Fund believes that under current law and
regulations it will be taxed as a partnership that is not subject to corporate income tax for U.S. federal income tax purposes. However, the Fund has not requested, nor will it request, any ruling from the IRS as to this status. If the IRS were to
challenge the U.S. federal income tax status of the Fund, such a challenge could result in (i) an audit of each shareholders entire tax return and (ii) adjustments to items on that return that are unrelated to the ownership of
shares. In addition, each shareholder would bear the cost of any expenses incurred in connection with an examination of its personal tax return.
In addition, the Fund generally could be impacted adversely by proposed changes and future changes in U.S. federal income tax laws or tax administration, including changes that might treat publicly traded
partnerships like the Fund as taxable corporations. If for any reason the Fund were taxable as a corporation for U.S. federal income tax purposes in any taxable year, its income, gains, losses and deductions would be reflected on its own tax return
rather than being passed through (proportionately) to shareholders. Its net income would be subject to taxation, reducing cash available for distributions and resulting in distributions being treated as dividends to the extent of current or
accumulated earnings and profits. Such a tax reclassification could materially reduce the overall performance and after-tax returns of the Fund, possibly causing a decline in the price of the Fund shares.
Items of income, gain, deduction, loss and credit with respect to Fund shares could be reallocated if the IRS does not accept the conventions used by
the Fund in allocating Fund tax items.
U.S. federal income tax rules applicable to partnerships are complex and often difficult to apply to widely held partnerships. The Fund will apply certain conventions in an attempt to comply with applicable
rules and to report income, gain, deduction, loss and credit to Fund shareholders in a manner that reflects shareholders share of Fund items, but these conventions may not be in full technical compliance with applicable tax requirements. It is
possible that the IRS will successfully assert that the conventions used by the Fund to allocate income to the shareholders do not satisfy the technical requirements of the U.S. federal income tax law and could require that items of income, gain,
deduction, loss or credit be reallocated in a manner that adversely affects you.
Tax rates and other features under current U.S. federal
income tax law may be adversely affected in the future.
Long-term capital gains and ordinary income are now taxed to non-corporate investors at maximum U.S. federal income tax rates of 20% and 39.6%, respectively. There continue to be proposals
for further changes to U.S. federal income tax law, some of which could adversely affect the Fund or its Shareholders.
21
Increased oversight of foreign financial assets.
Under the Foreign Account Tax Compliance provisions
of the Hiring Incentives to Restore Employment Act (commonly known as FATCA) enacted in 2010, foreign financial institutions and non-financial foreign entities and certain U.S. taxpayers holding foreign financial assets will be subject
to an enhanced reporting, disclosure, certification, withholding, and enforcement regime. Among other things, certain withholdable payments made to a foreign financial institution or non-financial foreign entity will generally be subject
to withholding tax unless the foreign financial institution enters into a disclosure compliance agreement with the U.S. Treasury or the non-financial foreign entity certifies as to its ownership. Such potentially withholdable payments
under FATCA include certain interest, dividends, rents, and other gains or income from U.S. sources, but exclude income derived from the active conduct of a business. The general effective date of FATCA is July 1, 2014. Investors should consult
their tax advisors concerning the potential impact of FATCA on them.
You will receive a Schedule K-1 and as a result may incur additional
costs.
Investors in the Fund will receive a Schedule K-1 (not a Form 1099) reporting their allocable portion of the tax items of the Fund. This form is expected to be available
by
the end of the first week
of March following
the taxable year it relates to. If there were a delay in making Schedule
K-1 available, it could be more difficult for investors to complete their tax return in a timely fashion. In the event the Fund has income and/or gains, investors may be
required to pay taxes on their portion of such income and/or gains and the amount of those taxes may exceed their distributions from the Fund or the amount they receive when they sell their shares. Schedule K-1 is complex and shareholders
who
seek advice from tax advisors with respect to their Schedule K-1 may incur additional costs in the form of
fees.
Possible
constructive termination
. Under U.S. federal income tax law applicable to publicly traded partnerships like the Fund, if a partnership experiences sales or exchanges of 50% or more of its shares during a twelve month period, the partnership is
constructively terminated, requiring it to close its tax year (and file its tax returns for that period or request an extension by the 15th day of the fourth month after the month in which the termination occurs) and restart a new tax
year. It is difficult for publicly traded partnerships to ascertain on a real-time basis when constructive terminations occur given that shares are typically held in street name. Publicly traded partnerships typically identify actual beneficial
owners only during the course of preparing year-end tax information for shareholders. Therefore, a publicly traded partnership may not be aware that a constructive termination occurred until well after the fact, which potentially subjects the
partnership to substantial penalties for failing to file the tax return for the period preceding the termination in a timely manner. Based on information received by the Manager to date, the Manager does not believe the Fund experienced a
constructive termination during the tax year ended December 31, 2013.
If you loan your shares to a short seller to cover a
short sale of shares, you may be considered as having disposed of those shares.
Because you may be considered to have sold shares that you loan to a short seller to cover a short sale of shares, you may no longer be treated for tax
purposes as a partner with respect to those shares during the period of the loan to the short seller and you may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss
or deduction with respect to those shares may not be reportable by you and any cash distributions you receive as to those shares could be fully taxable as ordinary income. Shareholders desiring to assure their status as partners and avoid the risk
of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their shares.
Shareholders are strongly urged to consult their own tax advisors and counsel with respect to the possible tax consequences to them of an investment in any shares. The tax consequences may differ in
respect of different shareholders.