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Article by DailyStocks_admin    (01-05-14 11:36 PM)

Description

NUVEEN DIVERSIFIED COMMODITY FUND. Vice President WILLIAM IV ADAMS bought 18,500 shares on 12-23-2013 at $ 15.24

BUSINESS OVERVIEW

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 and commenced operations on September 27, 2010, with the public offering of 8,550,000 shares. The Fund’s shares represent units of fractional undivided beneficial interest in, and ownership of, the Fund. Fund shares trade on the NYSE MKT (formerly known as NYSE Amex) under the ticker symbol “CFD.” The Fund operates pursuant to a Second Amended and Restated Trust Agreement (the “Trust Agreement”). 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 (the “1940 Act”), and is not subject to regulation thereunder.

Prior to its initial public offering, the Fund had no operations other than those related to organizational matters and the recording of organization expenses ($597,000) and their reimbursement by Nuveen Securities, LLC, (“Nuveen”), a wholly-owned subsidiary of Nuveen Investments, Inc. (“Nuveen Investments”) and an affiliate of Nuveen Commodities Asset Management, LLC, the Fund’s manager (“NCAM” or the “Manager”). On May 11, 2010, the Fund received a $20,055 initial capital contribution from, and issued 840 shares to, NCAM, a wholly-owned subsidiary of Nuveen Investments. NCAM is a Delaware limited liability company registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (the “CFTC”) and is a member of the National Futures Association (“NFA”). The Manager has the power and authority, without shareholder approval, to cause the Fund to issue shares from time to time as it deems necessary or desirable. The number of shares authorized is unlimited.

The Manager has selected Gresham Investment Management LLC (“Gresham LLC”), acting through its Near Term Active division (“Gresham NTA”), as the Fund’s commodity sub-advisor, which is referred to in this Annual Report in that capacity as “Gresham” or the “Commodity Sub-advisor.” 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 (“CTA”) and a CPO, is a member of the NFA and is registered with the Securities Exchange Commission (“SEC”) as an investment adviser. On December 31, 2011, Nuveen Investments completed its acquisition of a 60% stake in Gresham LLC. As part of the acquisition, Gresham LLC’s management and investment teams maintained a significant minority ownership stake in the firm, and operate independently while leveraging the strengths of certain shared resources of Nuveen Investments.

The Manager has selected its affiliate, Nuveen Asset Management, LLC (“Nuveen Asset Management” or the “Collateral Sub-advisor”), an affiliate of the Manager, to invest the Fund’s collateral 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 Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. The Manager focuses on the Dow Jones-UBS Commodity Index ® (“DJ-UBSCI”) when evaluating the performance of the Fund. 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 portfolio’s total returns over a specific period of time. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures and forward contracts to obtain broad exposure to all principal groups in the global commodity markets. The Fund’s investment strategy has three elements:

•
An actively managed portfolio of commodity futures and forward contracts utilizing Gresham’s proprietary Tangible Asset Program (“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 Fund’s 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 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 Fund’s 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:

•
energy;
•
industrial metals;
•
agriculturals;
•
precious metals;
•
foods and fibers; and
•
livestock.

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 Fund’s 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 group’s target weighting may constitute more than 35% of TAP ® , no two groups’ combined target weightings may constitute more than 60% of TAP ® , no single commodity’s target weighting may constitute more than 70% of its group and no commodity complex may constitute more than 80% of the commodity group’s 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 portfolio’s 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, 2012, as well as TAP ® weightings as of February 28, 2013, which reflect the 2013 annual determination, 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 Gresham’s judgment of the relative value of different contract terms. Gresham’s 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 Fund’s investments in commodity futures and forward contracts does not require significant outlays of principal, currently approximately 15% of the Fund’s net assets are committed to establishing those positions. In addition, the Fund expects that, if put options are purchased in the future, no more than 5% of the Fund’s 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 Fund’s 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 Gresham’s 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 Gresham’s 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 Fund’s long commodity positions covered by the call options. The Fund’s risk-adjusted return over any particular period may be positive or negative.

Collateral Investments. The Fund’s 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 Fund’s net assets are committed as “initial” and “variation” margin to secure the Fund’s 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 Fund’s clearing broker, and are invested by BCI in high-quality instruments permitted under CFTC regulations. The remaining collateral (currently approximately 85% of the Fund’s net assets) is held in a separate collateral investment account managed by the Collateral Sub-advisor.

The Fund’s 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 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 Fund’s commodity investments. The assets in the separate collateral account may only be used for the purposes of making distributions to shareholders and to replenish the Fund’s 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 Fund’s collateral account would negatively affect the net asset value of the Fund’s 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 Trustee’s duties with respect to the Fund’s 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, 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, 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 (effective as of April 1, 2012). 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 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. The independent committee has the right under limited circumstances to terminate the Manager only for cause. “Cause” consists of a statutory disqualification of the Manager under Section 8a(2) or 8(a)3 of the CEA, suspension or revocation of the Manager’s CPO registration or the bankruptcy, insolvency or receivership of the manager.

Manager

NCAM is the manager of the Fund, and is responsible for determining the Fund’s overall investment strategy and its implementation, including:
•
the selection and ongoing monitoring of:
•
the Commodity Sub-advisor, which invests the Fund’s assets pursuant to TAP PLUS SM ; and
•
the Collateral Sub-advisor, which invests the Fund’s 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 Fund’s administrative policies;
•
the management of the Fund’s 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 (effective date of registration January 4, 2006), 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 that completed its initial public offering on October 30, 2012. 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 Fund’s 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 Fund’s 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 Fund’s 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 $218.6 billion of assets under management as of December 31, 2012. Nuveen Investments is a listed principal of the Manager.

Commodity Sub-advisor

The Manager has selected Gresham to manage the Fund’s 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, 2012, Gresham LLC had approximately $16 billion of client assets under management, including approximately $7.0 billion under management by Gresham NTA and approximately $9.0 billion under management by Gresham LLC’s other division, the Term Structure Monetization division (“Gresham TSM”). Gresham LLC’s senior management team has extensive experience in overall supervision of commodities portfolio management and trading operations. Furthermore, the entire Gresham LLC team collectively has over 300 years of experience focused on commodities. Gresham LLC’s 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 in compliance with the CFTC’s independent account controller exemption. Each division implements independent trading decisions and positions and is restricted from having access to, or knowledge of, the other division’s trading decisions and positions, and is physically and technologically separated from the other division. See “Item 1A. Risk Factors—Commodity 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 LLC’s 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 Fund’s 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 investor’s 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 Fund’s 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, 2012, Nuveen Asset Management had approximately $119.6 billion of assets under management. The Fund’s 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.

The Fund’s collateral portfolio seeks current income, liquidity and preservation of capital. Accordingly, the Fund anticipates that it will maintain significant collateral that will be invested in cash equivalents, U.S. government securities and other short-term, high quality debt securities with maturities up to one year. These collateral investments (other than U.S. government securities) shall be rated at all times at the applicable highest short-term or long-term debt or deposit rating or money market fund rating as determined by at least one NRSRO.

MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

The Fund is a commodity pool which was organized as a Delaware statutory trust on December 7, 2005 and commenced operations on September 27, 2010, with the public offering of 8,550,000 shares. Prior to the initial public offering, the Fund was inactive except for matters relating to its organization and registration. The Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures and forward contracts to obtain broad exposure to all principal groups in the global commodity markets. The Fund is unleveraged, and the Fund’s commodity contract positions are fully collateralized with cash equivalents and short-term, high grade debt securities. The Fund also writes commodity call options seeking to enhance the Fund’s risk-adjusted total return. The Manager focuses on the DJ-UBSCI when evaluating the performance of the commodity futures, forwards, and options positions (the commodity portfolio) in the Fund’s portfolio.

During the fiscal year ended December 31, 2010, the Fund completed its initial public offering, and its shares trade on the NYSE MKT. Since the Fund’s initial public offering, the Fund has used the proceeds from its share issuance as collateral, with the balance that is not maintained at BCI as initial and variation margin invested in short-term, high grade debt securities. The collateral supports various investments in futures contracts and call options on futures contracts in accordance with the Fund’s investment objectives.

Results of Operations

The Year Ended December 31, 2012 – Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $19.97 on the close of business on December 31, 2012. This represents a decrease of 1.63% in share price (not including an assumed reinvestment of distributions) from the $20.30 price at which the shares of the Fund traded on the close of business on December 30, 2011 (the last trading day of the previous fiscal year). The high and low intra-day share prices for the year were $24.98 (March 22, 2012) and $19.16 (June 1, 2012), respectively. During the year, the Fund paid distributions totaling $1.740 per share to shareholders. The Fund’s total return on market value for the year, which accounts for such distributions, was 6.67%. At December 31, 2012 (the last trading day of the year), shares of the Fund traded at a 6.59% discount to the Fund’s net asset value of $21.38 per share.

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

The Fund’s net assets decreased from $214.2 million at December 31, 2011, to $197.1 million at December 31, 2012, a decrease of $17.1 million. The decrease in the Fund’s net assets was due to $2.1 million in net realized gains and $0.7 million in net unrealized appreciation on the Fund’s commodity portfolio during the year, a net investment loss of $3.6 million, $16.1 million of distributions to shareholders, and a $0.2 million decrease in net assets due to share repurchases.

The Fund’s commodity portfolio, gained 1.43% for the year, before considering the expenses of the Fund. The overall commodities market, as measured by the DJ-UBSCI, was down -1.06% for the year. The Fund’s total return on net asset value for the same period, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio, and assumes reinvestment of the Fund’s distributions, was -0.50%. Commodity markets were relatively volatile during 2012 due to macroeconomic and geopolitical issues, such as the European sovereign debt crisis and unrest in the Middle East, continuing to weigh on the market’s expectations for global growth, and the supply and demand for physical commodities, while extreme drought across the US created fears of failed crops. Commodities prices generally fell from January through May 2012, then rallied until September, and weakened into year end.

Three of the six commodity groups in the Fund’s portfolio — agriculturals, industrial metals and precious metals — delivered positive returns for the year, while the energy, livestock and foods and fibers groups delivered negative returns. Agriculturals made the largest gain in the portfolio, up approximately 12% for the year, pushed higher by the damaging effects of drought. Soybean meal and soybeans saw the largest returns at approximately 41% and 23%, respectively, and other grains made substantial gains as well. Precious metals increased approximately 7% in the Fund, which Gresham believes was due to investors seeking protection from potential future inflation from central banks’ accommodative monetary policy — gold and silver returned approximately 7% and 9%, respectively. Industrial metals rose approximately 0.5% on hopes of rising industrial production (particularly lead, zinc and copper). The energy group fell approximately 2% on declines in crude oil and natural gas (approximately 2% and 22%, respectively). Livestock ended the year near where it started, losing approximately 0.5%. Foods and fibers dropped approximately 15% for the year as favorable growing conditions fostered large crops in cotton, sugar and coffee, which returned approximately -10%, -10% and -25% for the Fund, respectively.

Relative to its benchmark, the DJ-UBSCI, the Fund outperformed in four commodities groups (energy, livestock, precious metals and foods and fibers), underperformed in agriculturals, and performed in line with the benchmark in industrial metals. The sharp run-up in prices of grains in 2012’s second and third quarters resulted in the exercise of some of the Fund’s covered call options, leading to underperformance in all positions in the agriculturals group, except soybean oil. However, the Fund’s positions in agriculturals nonetheless gained approximately 12% for the year, versus 14.45% for the DJ-UBSCI. In energy, the Fund outperformed in crude oil, heating oil, natural gas and unleaded gas. The Fund lost approximately 2% on its energy holdings, compared to a loss of 9% for the DJ-UBSCI, due to profitable management of contract positions, especially in natural gas, and premiums earned on the portfolio’s covered options.

The Fund employs a strategy of writing covered options on commodities futures positions in the portfolio, with the goals of limiting the volatility of the Fund’s return and providing cash flow for the Fund’s distributions. Over the period, the commodity call option component of the Fund’s portfolio was generally successful, as it served to limit volatility and allowed the Fund to participate meaningfully in the upside appreciation of certain underlying commodity futures contracts. The Commodity Sub-advisor utilizes a quantitative strategy to determine the strike prices of the call options it writes (sells) at various levels out of the money. Typically, the further out of the money a written call option’s strike price is, the more upside potential remains for the underlying futures contract, although this potential can be offset by a smaller premium being received for selling the option.
During the year, several of the commodity futures portfolio’s call options expired without being exercised. Depending on the contract and time period, this allowed the Fund to earn the entire call option premium without sacrificing any appreciation on the related futures contract, thereby offsetting some of the Fund’s losses, and benefiting the Fund’s overall performance. In certain cases during the year where the futures contract price appreciation was significant, the options the Fund wrote were exercised, which limited the Fund’s full participation in that commodity contract’s gains. This effect is illustrated by corn, where the commodity returned approximately 19% in the DJ-UBSCI for 2012 but 6% for the Fund over the same period, reflecting the negative impact of forgone futures contract appreciation due to option contracts being exercised. That is, the premiums received on the exercise of the options contracts were less than the foregone upside of the futures positions. (As noted, however, while the Fund did not capture all of the upside appreciation in certain agriculture-related commodity futures contracts, the Fund did participate meaningfully in the rise in agricultural commodity markets for the year, returning approximately 12% versus 14% for the DJ-UBSCI.) In summary, the options program allowed the Fund to limit its volatility relative to its benchmark while also allowing the Fund to participate meaningfully in the appreciation in those commodity groups with strong price appreciation.
During the year ended December 31, 2012, the Fund’s collateral investments generated interest income of $248,744, which represents 0.12% of average net assets for the fiscal year.

The net asset value per share on December 31, 2012, was $21.38. This represents a decrease of 7.88% in net asset value (not including the effect of distributions) from the $23.21 net asset value per share as of December 31, 2011. The Fund paid distributions totaling $1.740 per share to shareholders during the year. When these distributions are taken into account, the total return for the Fund on net asset value was -0.50% for the year ended December 31, 2012.

The Fund generated a net loss of $0.8 million for the year ended December 31, 2012, resulting from interest income of $0.3 million, net expenses of $3.9 million, net realized gains of $2.1 million, and net unrealized appreciation of $0.7 million.

The Year Ended December 31, 2011 – Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $20.30 at the close of business on December 30, 2011 (the last trading day of the year). This represents a decrease of 21.32% in share price (not including the effect of distributions) from the $25.80 price at which the shares of the Fund traded on the close of business on December 31, 2010 (the last trading day of the previous fiscal period). The high and low intra-day share prices for the year were $29.40 (April 29, 2011) and $18.59 (December 19, 2011), respectively. During the year, the Fund paid distributions totaling $1.740 per share to shareholders. The Fund’s total return on market value for the year, which accounts for such distributions, was -15.59%. At December 30, 2011 (the last trading day of the year), the shares of the Fund traded at a 12.54% discount to the Fund’s net asset value of $23.21 per share.

The Year Ended December 31, 2011 – Net Assets of the Fund

The Fund’s net assets decreased from $247.8 million at December 31, 2010, to $214.2 million at December 31, 2011, a decrease of $33.6 million. The decrease in the Fund’s net assets was due to $7.9 million in net realized gains and $21.0 million in net unrealized depreciation on the Fund’s commodity portfolio during the year, a net investment loss of $3.6 million, $16.1 million of distributions declared to shareholders, and a $0.8 million decrease in net assets due to share repurchases.

The Fund’s commodity and options portfolio finished 2011 on a positive note gaining 3.3% in the fourth quarter before considering the expenses of the Fund. The overall commodities market, as measured by the DJ-UBSCI, gained 0.3% during the fourth quarter. The Fund’s commodity and options portfolio finished the full calendar year 2011 down 6.1% before considering expenses of the Fund, while its benchmark, the DJ-UBSCI, finished down 13.3%. The Fund’s total return on net asset value for the same period, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund’s distributions, was -7.16%. Commodity markets were relatively volatile during the majority of 2011, with issues such as the European sovereign debt crisis and unrest in the Middle East remaining unresolved and affecting the market’s expectations for global growth.

Individual commodity markets were mixed in 2011 with three of the six principal commodity groups in the Fund’s commodity portfolio finishing higher. Livestock led the way with an increase of more than 2%, while the energy and the precious metals groups each finished approximately 1% higher. These groups were led by unleaded gas, gold, and feeder cattle sub-groups, which gained approximately 16%, 11%, and 7% respectively. The three groups that declined in 2011 were industrial metals, which decreased approximately 20% as each individual commodity within the sector posted negative returns, agriculture, which decreased approximately 13%, and foods & fibers, which declined approximately 9% over the year. At the sub-group level, the significant detractors were natural gas, cocoa, wheat, and zinc, which declined approximately 38%, 32%, 25%, and 23% respectively.

The Fund’s portfolio outperformed the DJ-UBSCI by approximately 7.2% for the year, before considering the expenses of the Fund. This resulted from the Fund’s commodity weighting differences versus the DJ-UBSCI and the trading strategy employed. Five of the six commodity groups in which the Fund trades outperformed the benchmark, led by the portfolio’s holdings in the energy group, which outperformed the DJ-UBSCI mainly because of the underweight in natural gas, along with the overweight in crude oil, when compared to the index. The Fund’s investments in the agriculture group also significantly outperformed the DJ-UBSCI, as the Fund’s smaller allocations to soybeans and wheat, along with the selection of specific wheat contracts, contributed to the positive relative returns. The Fund’s livestock, industrial metals, and foods & fibers groups also outperformed the DJ-UBSCI for the year. The precious metals group was the sole detractor from relative performance mostly due to the inclusion of platinum and palladium in the Fund’s portfolio. Contracts in these metals, which declined in value during 2011, are not part of the DJ-UBSCI.

The commodity call option component of the Fund’s portfolio was generally successful over the period as it served to limit volatility without significant impact on the commodity futures contracts. The Commodity Sub-advisor utilizes a quantitatively driven strategy to set the call option strike prices it writes (sells) at various levels out-of-the money. Typically, the more out-of-the-money a written call option strike price is, the more upside potential remains, though this is balanced by less premium received for selling the options. During the year, several of the commodity portfolio’s call options expired without being exercised. This allowed the Fund to earn the call option premium offsetting some of the Fund’s losses without sacrificing any appreciation depending on the contract and time period, which benefited the Fund’s performance. In certain cases during the year, including during the fourth quarter where the futures price appreciation was significant (for example West Texas Intermediate (WTI) crude oil futures), the options the Fund wrote were exercised, which limited the Fund’s full participation in that commodity contract’s gains. In November, while WTI crude oil futures prices rose almost 8%, the commodity portfolio’s futures and options performance was up approximately 6% over the same period, reflecting the impact of the forgone futures contract appreciation due to the option contracts being in-the-money.

During the year ended December 31, 2011, the Fund’s collateral investments generated interest income of $309,181, which represents 0.13% of average net assets for the fiscal year.

The net asset value per share on December 31, 2011, was $23.21. This represents a decrease of 13.20% in net asset value (not including the effect of distributions) from the $26.74 net asset value per share as of December 31, 2010. The Fund paid distributions totaling $1.740 per share to shareholders during the year. When these distributions are taken into account, the total return for the Fund on net asset value was -7.16% for the year ended December 31, 2011.

The Fund generated a net loss of $16.7 million for the year ended December 31, 2011, resulting from interest income of $0.3 million, net expenses of $3.9 million, net realized gains of $7.9 million, and net unrealized depreciation of $21.0 million.

The Year Ended December 31, 2010 – Fund Share Price

The Fund’s shares were initially offered on September 27, 2010, at a price of $25.00 per share. Since the initial offering, the share price on the NYSE MKT increased 3.20% (not including the effect of distributions) to $25.80 at December 31, 2010. The high and low share prices for the year were $28.00 (October 13, 2010) and $22.54 (October 1, 2010), respectively. During the year, the Fund paid distributions totaling $0.435 per share to shareholders. The cumulative total return on market value for the Fund, including the distributions paid during the period, was 4.99%. At December 31, 2010, the shares of the Fund traded at a 3.52% discount to the Fund’s net asset value.

The Year Ended December 31, 2010 – Net Assets of the Fund

The Fund’s net assets increased from zero at December 31, 2009, to $247.8 million at December 31, 2010. The increase in the Fund’s net assets was primarily due to the initial public offering of the Fund on September 27, 2010, which generated net proceeds of $203.7 million, the exercise of an option granted by the Fund to the underwriters of the Fund’s initial public offering to purchase additional shares of the Fund, which was exercised in October for 716,200 shares and generated net proceeds of $17.1 million after underwriting commissions and offering expenses, and the increase in value of the Fund’s futures and options portfolio (the commodity portfolio) which the Fund began trading on October 1, 2010.

The Fund’s commodity portfolio, which the Fund began trading on October 1, rose slightly more than 15% during the period before considering the expenses of the Fund. The overall commodities market, as measured by the DJ-UBSCI rose 15.8%. The Fund’s total return on net asset value for the same period, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund’s distributions, was 13.92%. Commodity market performance was driven in part by the continuing recovery of global economic growth and the expectation of rising inflation. In addition, global supply forces such as weather-related concerns including drought in Russia and floods in Australia combined with strong demand from emerging markets to increase commodity prices.

The Fund’s commodity portfolio performed well in this environment as it generated positive returns in all six principal commodity groups and all sub-groups in which it trades. Among the six principal commodity groups in which the Fund trades, foods and fibers, agriculture and precious metals led the commodity portfolio’s results and experienced an increase in value of approximately 28%, 26% and 13%, respectively. The remaining commodity groups, energy, industrial metals, and livestock, experienced increases of nearly 11%, over 11% and more than 5%, respectively. The commodity portfolio’s largest futures holding was crude oil, which represented about one-fifth of the futures and options portfolio at year end and generated a return of approximately 11.3% versus the DJ-UBSCI return of 9.7%. Crude oil, like gold and copper, continued to behave like a “risk asset,” performing well when equities performed well and poorly when U.S. Treasury securities performed well. With the anticipation of further quantitative easing building around the U.S. Federal Reserve’s November 3, 2010 meeting, investors continued to focus on assets tied to inflation and dollar weakness. Crude oil prices rose sharply at the end of October, with strong buying interest in the near term futures contracts coupled with producer hedging driving the demand for long-term futures contracts. Other areas of relative strength versus the DJ-UBSCI included soybean meal, feeder cattle, platinum, cocoa, lead and palladium, all of which generated positive returns for the portfolio but are not represented in the index. Despite modest overweight positions in high-performing cotton and sugar, the commodity portfolio underperformed the DJ-UBSCI results in the foods and fibers group by about 10 percentage points or 28% versus 38% for the index over the period. This was largely due to the hedging impacts of the call options component which, while reducing the volatility of the portfolio, effectively limited the price appreciation otherwise experienced on the underlying futures contracts over and above call premiums received. The portfolio’s underweight holdings in strongly performing agricultural commodities, specifically corn, wheat and soybeans, also negatively impacted performance relative to the DJ-UBSCI.
During the year ended December 31, 2010, the Fund’s collateral investments generated interest income of $80,235, which represents 0.04% of average net assets for the period beginning on September 27, 2010, and ending on December 31, 2010.

The net asset value per share on September 27, 2010 was $23.88, which by the end of the year increased to $26.74, an increase of 12.00% before distributions. The Fund also paid total distributions of $0.435 per share to shareholders during the period. When these distributions are taken into account, the total cumulative return for the Fund on a net asset value basis was 13.92% for the period beginning on September 27, 2010, and ending on December 31, 2010.
The Fund generated net income for the year ended December 31, 2010, of $31.0 million, resulting from $80,235 of interest income, net realized gains of $15.2 million, change in net unrealized appreciation of $17.0 million and net expenses of $1.3 million.

Fund Total Returns

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

“Since inception” returns present performance for the period since the Fund’s commencement of operations on September 27, 2010.
Returns represent past performance, which is no guarantee of future performance.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Introduction

The Fund is a commodity pool which was organized as a Delaware statutory trust on December 7, 2005, and commenced operations on September 27, 2010, with its initial public offering. The shares of the Fund trade on the NYSE MKT (formerly known as the NYSE Amex) under the ticker symbol “CFD.” The Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures and forward contracts to obtain broad exposure to all principal groups in the global commodity markets. The Fund is unleveraged, and the Fund’s commodity contract positions are fully collateralized with cash equivalents, and short-term, high grade debt securities. The Fund also writes commodity call options seeking to enhance the Fund’s risk-adjusted total return. The Manager focuses on the Dow Jones-UBS Commodity Index ® (“DJ-UBSCI”) when evaluating the performance of the commodity futures, forwards, and options positions (the “commodity portfolio”) in the Fund’s portfolio.

Results of Operations

The Quarter Ended September 30, 2013—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $16.55 on the close of business on September 30, 2013. This represents a decrease of 3.05% in share price (not including an assumed reinvestment of distributions) from the $17.07 price at which the shares of the Fund traded on the close of business on June 28, 2013 (the last trading day of the previous quarter). The high and low intra-day share prices for the quarter were $17.60 (September 10, 2013) and $16.04 (August 8, 2013), respectively. During the quarter, the Fund declared distributions totaling $0.390 per share to shareholders, of which $0.130 was paid on October 1, 2013. The remainder was paid during the quarter. The Fund’s cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was -0.78%. At September 30, 2013, the shares of the Fund traded at a 11.97% discount to the Fund’s net asset value of $18.80.

The Quarter Ended September 30, 2012—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $22.02 on the close of business on September 28, 2012 (the last trading day of the period). This represents an increase of 7.94% in share price (not including an assumed reinvestment of distributions) from the $20.40 price at which the shares of the Fund traded on the close of business on June 29, 2012 (the last trading day of the previous quarter). The high and low intra-day share prices for the quarter were $23.25 (September 24, 2012) and $20.20 (July 2, 2012), respectively. During the quarter, the Fund declared distributions totaling $0.435 per share to shareholders, of which $0.145 was paid on October 1, 2012. The remainder was paid during the quarter. The Fund’s cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was 10.12%. At September 28, 2012, the shares of the Fund traded at a 3.67% discount to the Fund’s net asset value of $22.86.

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

The Fund’s net assets increased from $170.7 million as of June 30, 2013, to $173.3 million as of September 30, 2013, an increase of $2.6 million. The increase in the Fund’s net assets was due to $0.1 million in net realized gains and $6.9 million in net unrealized appreciation on the Fund’s portfolio during the quarter, a net investment loss of $0.8 million, and $3.6 million of distributions to shareholders.
During the quarter ended September 30, 2013, the Fund’s collateral investments generated interest income of $43,001, which represents 0.02% of average net assets for the quarter ended September 30, 2013.

The net asset value per share on September 30, 2013, was $18.80. This represents an increase of 1.57% in net asset value (not including an assumed reinvestment of distributions) from the $18.51 net asset value as of June 30, 2013. The Fund declared distributions totaling $0.390 per share during the quarter. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was 3.66% for the quarter ended September 30, 2013.

The Fund generated a net gain of $6.2 million for the quarter ended September 30, 2013, resulting from expenses of $0.8 million, net realized gains of $0.1 million, and net unrealized appreciation of $6.9 million.

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

Commodity markets were influenced by two major themes during the third quarter of 2013, the anticipation of an earlier-than-expected reduction in the pace of the U.S. Federal Reserve’s asset purchases (known as quantitative easing or QE) and the escalation of geopolitical tension in the Middle East. The broad commodity market rose 2.1% for the quarter, as measured by the DJ-UBSCI. The strongest performing group was precious metals, followed by industrial metals, energy, and livestock. The foods and fibers group was relatively flat, and agriculture fell during the quarter.

Energy commodities represented 36.7% of the DJ-UBSCI at the end of the quarter, and were its most significant commodity group by weight. The prices of both Brent and West Texas Intermediate (WTI) crude oil rallied during the quarter as geopolitical turmoil in the Middle East threatened supplies. Heating oil and gasoline also rose. Natural gas, however, declined amid robust inventories and mild weather forecasts.

Agricultural commodities, as grouped by Gresham, made up 20.4% of the DJ-UBSCI at the end of the quarter. As in the second quarter, corn prices continued to be pressured by expectations for a supply glut as the harvest peaked in the third quarter. Soybean oil also saw declining prices because of high surplus and low demand. In contrast, soybean prices were lifted by concerns about poor crop conditions and low 2012 supply.

Industrial metals represented 16.5% of the DJ-UBSCI at the end of the quarter. All of the industrial metals advanced during the quarter, led by copper. Robust demand is expected from China, which pledged to increase infrastructure spending and recently posted better economic data. The continuation of QE and improving unemployment data in the U.S. also supported copper’s gain.

Precious metals represented 12.6% of the DJ-UBSCI at the end of the quarter. Near-term spot prices indicated high demand for physical gold, at levels not seen since 1999. Individuals in Asian and Middle Eastern countries have been buying physical gold for jewelry and coins/bars, and the perception of gold as a “safe haven” for investors during times of economic uncertainty further contributed to gold’s advance. Silver prices also strengthened, and in fact outperformed gold in August, benefiting from increasing Asian demand and large inflows into silver-oriented exchange traded funds.
Foods and fibers, as grouped by Gresham, made up a combined 8.3% of the DJ-UBSCI at the end of the quarter. Although cotton and sugar had positive performance for the quarter, it was almost entirely offset by weakness in coffee. Coffee remained in a bear market since mid-May due to ample supply amid favorable crop conditions.

Livestock was the smallest group, comprising 5.6% of the DJ-UBSCI at the end of the quarter. Demand during the summer grilling season and concerns about supply shortages buoyed lean hog prices. Live cattle prices rallied in August after Tyson Foods and other food producers discontinued the use of a cattle feed supplement designed to speed weight gain, fueling concerns that declining cattle weights could potentially hurt beef supplies.

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

The Fund’s commodity portfolio returned approximately 4.0% (before considering the expenses of the Fund or the performance of the collateral portfolio), outperforming the DJ-UBSCI, which returned 2.1% for the quarter. The Fund’s total return on net asset value for the quarter, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio and assumes the reinvestment of the Fund’s distributions, was a gain of 3.66%. At the commodity group level, the Fund outperformed the DJ-UBSCI on an absolute basis in energy, agriculturals, foods and fibers, industrial metals, and livestock, but underperformed the DJ-UBSCI in precious metals.

The Fund writes—that is, sells—covered options on its commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those contracts are deemed to have sufficient trading volume and liquidity. The Fund receives cash for the related premiums. The Fund’s option-writing activity benefitted Fund performance for the quarter as most of the contracts written went unexercised. For the quarter ended September 30, 2013, the Fund’s option program helped to contribute to the commodity portfolio’s lower volatility when compared to the DJ-UBSCI, as measured by the standard deviation of return.

The Fund’s energy positions gained approximately 5.1% versus the DJ-UBSCI’s 2.8%. On a weighted basis, a larger weight in crude oil, which rose during the period, and a smaller weight in natural gas, which fell, drove the Fund’s outperformance over the DJ-UBSCI. Detracting slightly from relative performance were options positions in WTI that were exercised.

The Fund’s agricultural positions fell approximately 1.9%, while the DJ-UBSCI’s were down nearly 4.0%. The Fund’s smaller weightings in both corn and soybean oil aided outperformance on a weighted basis. Additionally, the Fund’s corn position benefited from better contract selection and more advantageous timing in rolling some of its futures contracts, as well as the collection of option premiums on contracts that expired without being exercised.
In industrial metals, the Fund was up approximately 5.3%, compared to the DJ-UBSCI position’s 4.3% return. The Fund’s performance in this group was aided by its options strategy, as none of the options written were exercised.

The Fund’s precious metals positions returned approximately 8.5% versus the DJ-UBSCI’s 9.0%, in part because the Fund’s silver options were exercised, which detracted from absolute Fund performance in silver. However, the Fund slightly outperformed the DJ-UBSCI on a weighted basis, as the Fund held a 13.7% weight in the group and the DJ-UBSCI held 12.6%. This relative overweight provided the Fund with greater exposure to the group’s overall gain.

The Fund outperformed the DJ-UBSCI in foods and fibers, gaining approximately 3.1% versus the DJ-UBSCI’s 0.9%. The Fund’s underweight to coffee was the main driver of outperformance for the group.
The Fund’s livestock positions, up approximately 4.2%, also outpaced the DJ-UBSCI’s, up 2.6%. On a weighted basis, the Fund slightly outperformed the DJ-UBSCI, as the Fund’s larger weighting amplified the positive effect of a rising market.

The Quarter Ended September 30, 2012—Net Assets of the Fund

The Fund’s net assets increased from $197.5 million as of June 30, 2012, to $210.7 million as of September 30, 2012, an increase of $13.2 million. The increase in the Fund’s net assets was due to $13.7 million in net realized gains and $4.5 million in unrealized appreciation on the Fund’s portfolio during the quarter, a net investment loss of $1.0 million, and $4.0 million of distributions declared to shareholders.

The Fund’s commodity and options portfolio gained approximately 9.0% during the quarter before considering the expenses of the Fund. The overall commodities market, as measured by the DJ-UBSCI, rose 9.7% during the quarter. The index rose during each month of the quarter, with the bulk of gains recorded in July. Commodity performance continued to be driven by investor uncertainty over the global economic outlook, although anticipation of a third round of quantitative easing by the U.S. Federal Reserve and apparent progress on solving the European debt crisis lifted some commodity markets at the end of the quarter. The effects of the severe drought across the United States also impacted a number of commodity markets, primarily agriculturals, livestock and natural gas.
In aggregate, the Fund’s commodity portfolio underperformed the DJ-UBSCI by approximately 0.7% for the quarter, before considering the expenses of the Fund. With respect to the different commodities groups, the Fund’s commodity portfolio outperformed the DJ-UBSCI for the quarter in energy, industrial metals, livestock, and foods and fibers, and underperformed the DJ-UBSCI in agriculturals and precious metals.

Agricultural commodities were generally strong for the third quarter, as the continuing severe drought reduced expected crop production and yields, thus tightening supplies. Grains prices made large gains in July and August, but moderated in September. Corn, soybeans and wheat gained 19%, 12% and 17%, respectively, within the DJ-UBSCI. For the agricultural group, the Fund returned approximately 7.1%, versus 13.7% for the DJ-UBSCI. Within the agricultural commodity group, the Fund’s options writing hindered the Fund’s performance when compared to the DJ-UBSCI.

Energy commodities also showed strength in the third quarter, up 12% as a group in the DJ-UBSCI. Crude oil and refined products gained from concerns over several potential threats to near-term supplies including political tensions in the Middle East, production shortfalls in the North Sea, and refinery outages in the United States from hurricanes and accidents. Natural gas gained in the quarter, benefiting from the hot summer weather and the consequent strong demand for gas to produce electricity for air conditioning. The Fund held larger portfolio allocations than the DJ-UBSCI to all energy commodities except natural gas. For the energy group, the Fund portfolio returned approximately 12.8%, versus 11.9% for the DJ-UBSCI.

Industrial metals experienced large gains during the quarter: aluminum rose 9%, copper rose 7%, and nickel and zinc each gained 10% in the DJ-UBSCI. Although weak performers earlier in the year, industrial metals rose on expectations of an improved global economy resulting from monetary easing by the Federal Reserve. The Fund’s portfolio weighting in industrial metals is slightly lower than that of the DJ-UBSCI, but the Fund was able to retain premiums on options positions and therefore outperformed for the third quarter. For the industrial metals group, the Fund portfolio returned approximately 9.6%, versus 8.6% for the DJ-UBSCI.

Livestock commodities were volatile during the third quarter. They rose early in the period with grain prices, as the market expected ranchers to pass along the increased costs. Later in the quarter, however, because of higher feeding costs, farmers began to bring livestock to market early, increasing short-term supplies and sending prices lower. Lean hogs were down 11% in the quarter, and live cattle prices were lower by approximately 3% in the DJ-UBSCI. For the overall livestock group, the Fund portfolio lost approximately 3.9%, compared to a loss of 5.8% for the DJ-UBSCI.

The precious metals group in the DJ-UBSCI gained 13.4% in the third quarter, primarily driven by a gain of almost 25% in silver and a gain in gold of slightly more than 10%. Prices rose in anticipation of monetary easing by the U.S. Federal Reserve. For the precious metals group, the Fund portfolio returned approximately 13.3%, versus 13.4% for the DJ-UBSCI.

Foods and fibers were off for the quarter by 3% in the DJ-UBSCI, primarily on a 6% drop in sugar, which weakened on forecasts that the sugar cane crop in Brazil would be larger than expected due to a favorable turn in the weather. Due to portfolio weights in coffee and cocoa contracts traded in the London International Financial Futures Exchange (“LIFFE”), which are not part of the DJ-UBSCI, the Fund outperformed the DJ-UBSCI in foods and fibers for the third quarter. For the food and fibers group, the Fund’s portfolio lost approximately 0.2%, versus a loss of 3.3% for the DJ-UBSCI.

The commodity call option component of the portfolio had mixed results over the period. Even though the Fund lost some of the upside on positions that were called, it served to limit the volatility of the overall portfolio. The Commodity Sub-advisor utilizes a quantitatively-driven strategy to set the call option strike prices it writes (sells) at various levels out of the money. Typically, when a call option’s strike price is further out of the money, a greater upside potential remains, although this benefit can be offset by a smaller premium for selling the options.

During the quarter, a portion of the commodity portfolio’s options expired without being exercised, which benefited the Fund’s performance. This allowed the Fund to earn the call option premium, offsetting some of the losses experienced in the futures positions, and in some cases, depending on the contract and time period, without sacrificing any appreciation. For example, with respect to crude oil (WTI), out-of-the-money options with high relative premiums helped the portfolio’s performance. Heating oil and copper options also earned premiums offsetting futures losses. However, among the agricultural commodity group, the Fund’s options writing limited the upside capture. This is illustrated by corn as prices rose approximately 19% in the quarter in the DJ-UBSCI, but the performance of the Fund’s corn position was approximately 7% over the same period, reflecting the negative impact of forgone futures contract appreciation as the option contracts were exercised. That is, the premiums received on the options contracts were less than the foregone upside of the futures positions. For the Fund’s commodity portfolio overall, the increased volatility in third quarter drove higher premiums for option writing.

During the quarter ended September 30, 2012, the Fund’s collateral investments generated interest income of $60,753, which represents 0.03% of average net assets for the quarter ended September 30, 2012.

The net asset value per share on September 30, 2012, was $22.86. This represents an increase of 6.67% in net asset value (not including the effect of reinvesting distributions) from the $21.43 net asset value as of June 30, 2012. The Fund declared distributions totaling $0.435 per share during the quarter, of which $0.145 was paid on October 1, 2012. The remainder was paid during the quarter. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was 8.74% for the quarter ended September 30, 2012.
The Fund generated a net gain of $17.2 million for the quarter ended September 30, 2012, resulting from interest income of $0.1 million, net expenses of $1.1 million, net realized gains of $13.7 million, and net unrealized appreciation of $4.5 million.

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

The Fund’s shares traded on the NYSE MKT at a price of $16.55 on the close of business on September 30, 2013. This represents a decrease of 17.13% in share price (not including an assumed reinvestment of distributions) from the $19.97 price at which the shares of the Fund traded on the close of business on December 31, 2012. The high and low intra-day share prices for the nine month period were $22.09 (January 23, 2013) and $16.04 (August 8, 2013), respectively. During the nine month period, the Fund declared distributions totaling $1.260 per share to shareholders, of which $0.130 was paid on October 1, 2013. The remainder was paid during the nine month period. The Fund’s cumulative total return on market value for the nine month period, which assumes reinvestment of such distributions, was -11.33%. At September 30, 2013, the shares of the Fund traded at a 11.97% discount to the Fund’s net asset value of $18.80.
The Nine Months Ended September 30, 2012—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $22.02 on the close of business on September 28, 2012 (the last trading day of the period). This represents an increase of 8.47% in share price (not including an assumed reinvestment of distributions) from the $20.30 price at which the shares of the Fund traded on the close of business on December 30, 2011 (the last trading day of the previous fiscal period). The high and low intra-day share prices for the nine month period were $24.98 (March 22, 2012) and $19.16 (June 1, 2012), respectively. During the nine month period, the Fund declared distributions totaling $1.305 per share to shareholders, of which $0.145 was paid on October 1, 2012. The remainder was paid during the nine month period. The Fund’s cumulative total return on market value for the nine month period, which assumes reinvestment of such distributions, was 15.13%. As of September 28, 2012, the shares of the Fund traded at a 3.67% discount to the Fund’s net asset value of $22.86.

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

The Fund’s net assets decreased from $197.1 million as of December 31, 2012, to $173.3 million as of September 30, 2013, a decrease of $23.8 million. The decrease in the Fund’s net assets was due to $12.6 million in net realized losses and $2.7 million in unrealized appreciation on the Fund’s portfolio during the period, a net investment loss of $2.3 million, and $11.6 million of distributions declared to shareholders.
During the nine month period ended September 30, 2013, the Fund’s collateral investments generated interest income of $160,054, which represents 0.09% of average net assets for the nine month period ended September 30, 2013.

The net asset value per share on September 30, 2013, was $18.80. This represents a decrease of 12.07% in net asset value (not including an assumed reinvestment of distributions) from the $21.38 net asset value as of December 31, 2012. The Fund declared distributions totaling $1.260 per share during the nine month period. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was -6.29% for the nine month period ended September 30, 2013.

The Fund generated a net loss of $12.2 million for the nine month period ended September 30, 2013, resulting from interest income of $0.2 million, expenses of $2.5 million, net realized losses of $12.6 million, and net unrealized appreciation of $2.7 million.

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

The calendar year began on a positive note for the broad commodity market, but prices turned volatile amid global economic uncertainty, geopolitical tensions in the Middle East and North Africa, and speculation about the timing of the U.S. Federal Reserve’s QE tapering. In the DJ-UBSCI, declines in the first and second quarters (-1.2% and -9.5%, respectively) overwhelmed a slight gain (2.1%) in the third quarter, for an overall loss of 8.6% for the nine-month period ended September 30, 2013. The precious metals, industrials metals, foods and fibers, agriculture and livestock groups fell during the nine month period, while energy appreciated slightly.

Energy commodities represented 36.7% of the DJ-UBSCI at the end of the nine month period, and were its most significant commodity group by weight. Losses in natural gas, heating oil, and gasoline (RBOB) offset gains in crude oil, resulting in an overall 0.77% return for the energy group.

Agricultural commodities, as grouped by Gresham, made up 20.4% of the DJ-UBSCI at the end of the nine month period. Soybean and soybean meal rose during the period, but corn, wheat, and soybean oil had much larger declines. Agriculturals lost 9.9% for the period.

Industrial metals represented 16.5% of the DJ-UBSCI at the end of the nine month period and declined 13.9%, as slowing demand, particularly from China, put downward pressure on the prices of aluminum, copper, nickel, and zinc.

Precious metals represented 12.6% of the DJ-UBSCI at the end of the nine month period. The group posted the weakest performance in the DJ-UBSCI, falling 23.3%. Gold and silver prices fell for most of the period, with demand for perceived “safe haven” investments diminishing, but rallied in the third quarter as demand appeared to re-accelerate.

Foods and fibers, as grouped by Gresham, made up a combined 8.3% of the DJ-UBSCI at the end of the nine month period. Coffee and sugar contracts led the group lower, despite a gain in cotton. The group as a whole fell 10.5%.

Livestock is the smallest group, comprising 5.6% of the DJ-UBSCI at the end of the nine month period. Rising supply early in the year depressed prices for lean hogs and live and feeder cattle, but stronger summer demand and concerns about tightening supply buoyed prices in the second and third quarters. Against this backdrop, livestock declined 1.9% for the period.

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

The Fund lost approximately 5.3% for the nine month period (before considering the expenses of the Fund or the performance of the collateral portfolio), outperforming the DJ-UBSCI, which fell 8.6%. The Fund’s total return on net asset value for the quarter, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund’s distributions, was a loss of 6.29%. At the commodity group level, the Fund outperformed the DJ-UBSCI on an absolute basis in all six groups.

The Fund writes—that is, sells—covered options on its commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those contracts are deemed to have sufficient trading volume and liquidity. The fund receives cash for the related premiums. The Fund’s option-writing activity benefitted fund performance for the period as most of the contracts written went unexercised. For the nine month period ended September 30, 2013, the Fund’s option program helped to contribute to the commodity portfolio’s lower volatility when compared to the DJ-UBSCI, as measured by the standard deviation of return.

The Fund’s energy group positions rose approximately 4.3% during the nine month period versus the DJ-UBSCI’s increase of 0.8%. A smaller weight in the natural gas position, which declined during the period, contributed the most to weighted performance. An overweight in crude oil, which rallied, also added to relative outperformance on a weighted basis.

Agricultural holdings were down approximately 4.5% in the Fund during the nine month period, losing less than the 9.4% decline in the DJ-UBSCI. Although the Fund’s corn and wheat positions had negative absolute performance, a smaller weight in these contracts aided relative performance. This group had the largest contribution to outperformance.

In industrial metals, the Fund’s positions fell approximately 12.0% during the nine month period compared to the DJ-UBSCI’s 13.9% loss. Smaller relative weights in nickel and zinc, which suffered price pressure during the first half of the year, were beneficial to relative performance.
Precious metals were down approximately 21.3% in the Fund and 23.3% in the DJ-UBSCI and contributed to absolute losses for the nine month period. However, the group had a minimal impact on relative performance.

The Fund’s foods and fibers positions declined approximately 6.9% during the nine month period, while the DJ-UBSCI dropped 10.5%. The Fund had less exposure to weak performance in coffee and sugar than the DJ-UBSCI, which bolstered relative performance.

In the livestock group, the Fund’s positions lost approximately 1.5% and the DJ-UBSCI fell 1.9% during the nine month period. While an overweight position in lean hogs added to performance, live and feeder cattle positions detracted, making the overall effect of the group on relative weighted performance almost neutral.

The Nine Months Ended September 30, 2012—Net Assets of the Fund

The Fund’s net assets decreased from $214.2 million as of December 31, 2011, to $210.7 million as of September 30, 2012, a decrease of $3.5 million. The decrease in the Fund’s net assets was due to $0.9 million in net realized gains and $10.5 million in unrealized appreciation on the Fund’s portfolio during the period, a net investment loss of $2.7 million, $12.0 million of distributions declared to shareholders and a $0.2 million decrease in net assets due to share repurchases.

The Fund’s commodity portfolio and options portfolio gained approximately 5.8% during the first nine months of 2012, before considering the expenses of the Fund. The overall commodities market, as measured by the DJ-UBSCI, gained 5.6%. Commodities markets generally rose during January and February 2012, but fell from March through May on investors’ concerns over the global economic outlook. Beginning in June, extreme heat throughout the United States and other parts of the world boosted prices, particularly in the agricultural group, while geopolitical tensions and supply disruption lifted prices in the energy group.
In aggregate, the Fund’s commodity portfolio outperformed the DJ-UBSCI by approximately 0.22% for the first nine months of 2012, before considering the expenses of the Fund. With respect to commodities groups, the Fund’s commodity portfolio outperformed the DJ-UBSCI in energy, industrial metals, livestock, and foods and fibers, and underperformed the DJ-UBSCI in agriculturals and precious metals.

Agricultural commodities made small gains in the first quarter of 2012, but prices weakened through June as early crop forecasts called for ideal growing conditions and record production. In July and August, however, severe drought gripped much of the United States, threatening the year’s harvest and driving prices of corn and soybeans to record levels. As the growing season progressed, the production outlook improved, especially for soybeans, which benefited from late season rains. Soybeans gained 40% in the nine month period, and corn and wheat each gained 29% in the DJ-UBSCI. The Fund underperformed the DJ-UBSCI in those commodities due to losses on option positions, but added value with an allocation to soybean meal, which is not included in the DJ-UBSCI. The Fund’s portfolio returned approximately 21.5% in the agricultural group, while the DJ-UBSCI returned 28.6%.

In energy, prices fell from the start of 2012 through mid-June, on concerns over a decrease in the demand for oil and refined products from a global economic slowdown, as well as growing crude oil inventories and natural gas production in the United States. Crude oil prices reversed in mid-June, however, on fears that political actions in the Middle East might constrain global oil supplies. Additionally, in the United States, gasoline prices gained on refinery shutdowns, both planned and unplanned, and natural gas prices rose due to increased demand from power generation companies. WTI crude oil prices fell 10% in the nine month period, while Brent crude rose 7%, as measured by the DJ-UBSCI. Also, natural gas prices fell 22% for the period overall, while gasoline prices were up 26% in the DJ-UBSCI. The Fund held a larger portfolio allocation than the DJ-UBSCI in all energy commodities except natural gas, and thus outperformed the benchmark. The Fund’s portfolio gained 0.03% in the energy group, while the DJ-UBSCI lost 4.4%.

Prices of industrial metals lost ground from the start of 2012 through mid-June on a poor outlook for industrial production. The group turned around in late August, rallying in anticipation of the benefits to global industrial production of further monetary easing by central banks. Performance of individual commodities was mixed, with aluminum off 1%, while copper and zinc were up 8% and 12%, respectively, in the DJ-UBSCI. The Fund’s portfolio returned 6.3% in the industrial metals group, while the DJ-UBSCI returned 4.4%.

Livestock prices were volatile throughout the nine month period, fluctuating during the first half of the year following the trend of grain prices, reflecting expectations of falling feed costs and a generous supply of cattle and hogs later in the year. However, from July on, the severe drought and higher actual feed costs forced many ranchers to send their herds to market early, pulling prices back. For the first three quarters of 2012, prices of lean hogs, feeder cattle and live cattle all were off, and the livestock group lost 8% in price, as measured by the DJ-UBSCI. The Fund had a greater allocation to livestock than the DJ-UBSCI, but outperformed the benchmark through its profits on options positions. In particular, the Fund’s options on lean hogs added significant value in the third quarter. The Fund’s portfolio lost approximately 5.4% in the livestock group, while the DJ-UBSCI lost 7.9%.

Precious metals in the DJ-UBSCI advanced 15% for the nine month period, with a 23% gain in silver and a 12% rise in gold. The group experienced sharp gains in January and February, which were reversed through the second half of July. Between then and the end of the third quarter, precious metals gained on anticipation of monetary easing by the U.S. Federal Reserve and other central banks. The Fund’s portfolio returned approximately 14.5% in the precious metals group, while the DJ-UBSCI returned 14.6%.

All food and fiber commodities in the DJ-UBSCI benchmark experienced losses for 2012’s first nine months, with cotton falling 17%, sugar 9%, and coffee 27% in the DJ-UBSCI. Prices fell steadily through mid-June, and after staging a one-month rally, resumed their decline. Cotton prices were weak on concerns over global economic growth, while coffee and sugar prices were off due to larger-than-expected crops, as well as a slowdown in demand. For the commodities in the DJ-UBSCI, the Fund holds approximately equal allocations. However, the portfolio also holds positions in LIFFE-traded coffee and cocoa. Neither is included in the DJ-UBSCI, and both experienced gains for the nine month period, providing the Fund with an outperformance for the foods and fibers group. In addition the Fund’s option writing strategy added value in coffee traded in the Intercontinental Exchange (“ICE”). The Fund’s portfolio lost approximately 10.9% in the foods and fibers group, while the DJ-UBSCI lost 16.7%.

During the first nine months of 2012, several of the Fund’s commodity portfolio’s options expired without being exercised. This allowed the Fund to earn the call option premium, and offset some of the losses experienced in the futures positions without sacrificing any appreciation, benefiting the Fund’s performance. The option writing was most beneficial in the energy group, where option premiums helped cushion losses experienced in both crude oil and natural gas positions. In certain cases, such as corn and soybeans, where the futures price appreciation was significant, the options which the Fund had written were exercised, thereby limiting the Fund’s full participation in those commodity contracts’ gains. In total, across all of the commodity and options holdings, the Fund’s portfolio outperformed the DJ-UBSCI by approximately 0.22% before considering the expenses of the Fund, while experiencing less volatility.

During the nine month period ended September 30, 2012, the Fund’s collateral investments generated interest income of $183,931, which represents 0.09% of average net assets for the nine month period ended September 30, 2012.

The net asset value per share as of September 30, 2012, was $22.86. This represents a decrease of 1.51% in net asset value (not including the effect of reinvesting distributions) from the $23.21 net asset value as of December 31, 2011. The Fund declared distributions of $1.305 per share during the nine month period, of which $0.145 was paid on October 1, 2012. The remainder was paid during the period. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was 4.29% for the nine month period ended September 30, 2012.

The Fund generated a net gain of $8.8 million for the nine month period ended September 30, 2012, resulting from interest income of $0.2 million, net expenses of $2.9 million, net realized gains of $1.0 million, and net unrealized appreciation of $10.5 million.

Fund Total Returns

The total returns presented assume the reinvestment of distributions at net asset value on the distribution payment date for returns based on net asset value, and at market value on the distribution payment date for returns based on market value. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the net asset value per share at the end of the period for total returns based on net asset value, and at the ending market price per share at the end of the period for total returns based on market value.

“Since inception” returns present performance for the period since the Fund’s commencement of operations on September 27, 2010.
Returns represent past performance, which is no guarantee of future performance.

Distributions

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

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

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

As market conditions and portfolio performance may change, the rate of distributions on the shares and the Fund’s distribution policy could change. The Manager reserves the right to change the Fund’s distribution policy and the basis for establishing the rate of its monthly distributions, or may temporarily suspend or reduce distributions without a change in policy, at any time and may do so without prior notice to shareholders. The reduction or elimination of the Fund’s distributions could have the effect of increasing the Manager’s management fees. As disclosed in a press release dated July 1, 2013, the Manager has reduced the Fund’s distribution rate effective with the distribution payable on August 1, 2013.

Liquidity and Capital Resources

The Fund pursues its investment objective by taking long positions in commodity futures contracts and writing commodity call options as part of an integrated program designed to enhance the risk-adjusted total return of the Fund’s commodity investments. The Fund’s investment activity in futures contracts and writing commodity call options does not require a significant outlay of capital. The Fund currently expects to post approximately 15% of its net assets in a margin account with Barclay’s Capital Inc., the Fund’s clearing broker, to cover its futures contracts; the remaining assets are held by the Fund in a separate collateral pool managed by the Collateral Sub-advisor. The Fund believes the higher allocation to initial margin will provide a significant buffer to accommodate variations in the required margin posting that may result from market volatility, potential gains and losses on the contracts, and changes in margin rules, and will minimize the frequency of cash transfers from the Fund’s other collateral pool to meet variation margin requirements. The Fund does not intend to utilize leverage and its commodity contract positions are fully collateralized. Ordinary expenses and distributions are met by cash on hand, although distributions may at times consist of return of capital and may require that the Fund liquidate investments. The Fund earns interest on its continuing investments in cash equivalents, U.S. government securities and other short-term, high grade debt securities. The Fund also generates cash from the premiums it receives when writing call options on the Fund’s futures contracts.

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

The Fund’s shares trade on the NYSE MKT and shares are not redeemed by the Fund in the normal course of business (although the Manager may decide to do so at its discretion), thereby alleviating the need for the Fund to have liquidity available for possible shareholder redemptions. On December 21, 2011, the Fund announced the adoption of an open-market share repurchase program, pursuant to which it is authorized to repurchase an aggregate of up to 10% of its outstanding common shares in open-market transactions. Refer to “Part II—Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” in this Report for details of repurchase activity, if any, during the nine months ended September 30, 2013.
The Fund is unaware of any other trends, demands, conditions or events that are reasonably likely to result in material changes to the Fund’s liquidity needs.

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

Market Risk

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

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

Credit Risk

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

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

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

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

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

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

A commodity broker, when acting as the Fund’s futures commission merchant, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate all assets of the Fund relating to domestic futures investments. A commodity broker is not allowed to commingle such assets with other assets of the commodity broker. In addition, CFTC regulations also require a commodity broker, when acting as the Fund’s futures commission merchant, to hold in a “secured” account the assets of the Fund related to foreign commodity futures investments and not commingle such assets with assets of the commodity broker.

If the Fund purchases over-the-counter (“OTC”) commodity put options, the Fund will be exposed to credit risk that the counterparty to the contract will not meet its obligations. In cases where the Fund purchases OTC commodity put options with a counterparty, the sole recourse of the Fund will be the financial resources of the counterparty to the transaction since there is no clearing house to assume the obligations of the counterparty.
As it relates to the Fund’s assets held as collateral for its investments in commodity futures and forwards contracts, there is credit risk present in the securities used to invest the Fund’s cash. While these consist of eligible cash equivalents and high-quality short-term debt securities, like any investment, these too would be affected by any credit difficulties that might be experienced by their issuers.

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