As filed with the Securities and Exchange Commission on March 10, 2006
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Registration No. 333-130360
333-130360-01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Nuveen Commodities Income and Growth Fund
Nuveen Commodities Income and Growth Master Fund LLC
(Rule 140 Co-Registrant)
(Exact name of Registrant as specified in its charter)
20-6750075(Registrant)
Delaware 6799 20-3902564(Co-Registrant)
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
333 West Wacker Drive
Chicago, Illinois 60606
(800) 257-8787
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
John P. Amboian
Principal Executive Officer
333 West Wacker Drive
Chicago, Illinois 60606
(800) 257-8787
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Stacy H. Winick, Esq.
Donald S. Weiss, Esq.
Bell, Boyd & Lloyd LLC
70 West Madison Street
Chicago, Illinois 60602
(312) 372-1121
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Amount to be Proposed Maximum Aggregate Offering Amount of
Securities to be Registered Registered Offering Price per Unit(1) Price(1) Registration Fee(2)
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Common Units of Beneficial
Interest ("Shares") of
Nuveen Commodities Income
and Growth Trust 1,000,000 Shares $25.00 $25,000,000 $2,675.00
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) All of which has previously been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus and disclosure document is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. The
prospectus and disclosure document is not an offer to sell these securities,
and it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED [ ], 2006
P R E L I M I N A R Y P R O S P E C T U S
[ ] Shares
Nuveen Commodities Income and Growth Fund
Nuveen Commodities Income and Growth Master Fund LLC
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The Nuveen Commodities Income and Growth Fund is a commodity pool. The Fund
issues shares, which represent units of fractional undivided beneficial
interest in and ownership of the Fund. The Fund's primary investment objective
is to seek total return through broad exposure to the commodities markets. The
Fund's secondary objective is to provide investors with monthly distributions
not commonly associated with commodity investments. The manner in which the
Fund intends to pursue its investment objectives is discussed starting on page
2. Nuveen Commodities Asset Management, LLC will be the manager of the Fund.
Gresham Investment Management LLC will be responsible for investing the Fund's
assets in commodity futures and forward contracts and implementing an
integrated investment strategy by purchasing and selling commodity options that
is designed to moderate the overall risk and return characteristics of the
portfolio and to generate cash flow. Nuveen Asset Management, an affiliate of
the manager, will be responsible for investing the Fund's debt instruments used
as collateral. The Fund is organized as a Delaware statutory trust.
Investing in the Fund involves significant risks. See "Risk Factors"
starting on page 15.
. Because the Fund is newly organized, its shares have no history of public
trading and the Fund does not have any performance history.
. Fund shares are subject to investment risk, including the possible loss
of the entire amount of your investment.
. Investments in commodities have a high degree of price variability, and
are subject to rapid and substantial changes.
. The Fund may not be able to achieve its investment objectives.
The Fund has applied to have its shares listed for trading on the American
Stock Exchange under the trading or "ticker" symbol "[ ]." Investors must
purchase at least 100 shares in this offering.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved of the securities offered in
this prospectus, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense. THE COMMODITY FUTURES
TRADING COMMISSION ("CFTC") HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN
THIS POOL NOR HAS THE CFTC PASSED ON THE ADEQUACY OR ACCURACY OF THIS
DISCLOSURE DOCUMENT. This prospectus is in two parts: a disclosure document and
a statement of additional information. These parts are bound together and both
contain important information.
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Per Share Total/(2)/
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Public Offering Price $25.00 $
Underwriting Discounts and Commissions
Estimated Offering Expenses/(1)/
Proceeds to the Fund
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(1) Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $[ ].
(2) The Fund has granted the underwriters an option to purchase up to $[ ]
of additional shares at the Public Offering Price less the Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total Public Offering Price, Underwriting
Discounts and Commissions, Estimated Offering Expenses and Proceeds to the
Fund will be $[ , $ , $ and $ ], respectively. See
"Underwriting."
The underwriters expect to deliver the shares to purchasers on or about
[ ], 2006.
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Nuveen Investments, LLC
The date of this prospectus is [ ], 2006.
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT AND OTHER REGULATORY NOTICES
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU
TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
LARGE TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE
POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO
AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS PROSPECTUS CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL ON PAGE 13 AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, BEGINNING ON PAGE 11.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS PROSPECTUS, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS
OF THIS INVESTMENT, BEGINNING ON PAGE 15.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES
OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY
BE EFFECTED.
THE BOOKS AND RECORDS OF THE MASTER FUND AND THE FUND WILL BE MAINTAINED AT
THE OFFICES OF [ ], AND WILL OTHERWISE BE MAINTAINED IN ACCORDANCE
WITH THE RULES OF THE COMMODITY FUTURES TRADING COMMISSION.
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
NEITHER THIS POOL OPERATOR NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY
OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER THE FUND NOR THE MASTER FUND HAS
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE FUND IS NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY.............................................................. 1
BREAK-EVEN ANALYSIS............................................................. 11
FEES AND EXPENSES............................................................... 13
PART ONE: DISCLOSURE DOCUMENT................................................... 14
Reports to Shareholders...................................................... 14
Cautionary Note Regarding Forward-Looking Statements......................... 14
RISK FACTORS.................................................................... 15
Commodity Investment Strategy Risks.......................................... 15
Integrated Investment Strategy Risks......................................... 16
Risk that the Fund's Shares will Trade at a Discount to Net Asset Value...... 17
Risks related to an Exchange Listing......................................... 17
Commodity Subadvisor Risks................................................... 17
Other Risks of the Master Fund's Investment Strategy......................... 18
Risk of Investing in Non-U.S. Markets........................................ 19
Counterparty Risk............................................................ 20
Operating Risks.............................................................. 20
Tax Risk..................................................................... 22
THE MASTER FUND'S INVESTMENTS................................................... 23
Overview of Commodity Investment Strategy and Integrated Investment Strategy. 24
Debt Instruments Used as Collateral.......................................... 26
MANAGEMENT OF THE FUND AND THE MASTER FUND...................................... 26
The Fund..................................................................... 26
The Master Fund.............................................................. 27
The Master-Feeder Structure.................................................. 27
Trustees..................................................................... 27
Manager and Subadvisors...................................................... 27
Management Fees.............................................................. 32
Regulatory and Litigation.................................................... 33
GRESHAM PERFORMANCE RECORD...................................................... 33
THE COMMODITY BROKER............................................................ 35
CONFLICTS OF INTEREST........................................................... 36
INVESTMENT POLICIES OF THE MASTER FUND.......................................... 39
Liquidity.................................................................... 39
Leverage..................................................................... 39
Other Borrowings............................................................. 39
Portfolio Restrictions....................................................... 39
Margin Requirements.......................................................... 39
DESCRIPTION OF FUND SHARES AND THE MASTER FUND UNITS............................ 40
Fund Shares and Master Fund Units............................................ 40
Transfer Agent and Registrar................................................. 41
Limited Voting Rights........................................................ 41
Transfer of Shares........................................................... 41
DISTRIBUTIONS................................................................... 41
NET ASSET VALUE................................................................. 42
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Page
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USE OF PROCEEDS................................................... 43
UNDERWRITING...................................................... 44
ERISA CONSIDERATIONS.............................................. 46
General........................................................ 46
Special Investment Consideration............................... 46
The Fund Should Not Be Deemed to Hold "Plan Assets"............ 46
Ineligible Purchasers.......................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 48
General........................................................ 48
Critical Accounting Policies................................... 48
Liquidity and Capital Resources................................ 48
Market Risk.................................................... 48
Credit Risk.................................................... 49
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS........ 49
THE SECURITIES DEPOSITORY; BOOK-ENTRY-ONLY SYSTEM; GLOBAL SECURITY 50
DECLARATION OF TRUST AND LLC AGREEMENT............................ 51
Authority of the Delaware Trustee.............................. 51
Authority of the Individual Trustees........................... 51
Authority of the Manager....................................... 52
Withdrawal of the Manager...................................... 53
Shareholder Meetings........................................... 53
Indemnification................................................ 53
Manager Expenses............................................... 54
Limited Liability.............................................. 54
Expenses....................................................... 54
The Manager's Fiduciary Responsibility and Remedies............ 54
Provisions of Law.............................................. 55
Termination Events............................................. 55
Books and Records.............................................. 56
Analysis of Critical Accounting Policies....................... 56
Statements, Filings, and Reports............................... 57
Fiscal Year.................................................... 57
Governing Law; Consent to Delaware Jurisdiction................ 57
LEGAL MATTERS..................................................... 57
EXPERTS........................................................... 57
RECENT FINANCIAL INFORMATION AND ANNUAL REPORTS................... 57
PRIVACY POLICY.................................................... 58
FEDERAL INCOME TAX CONSIDERATIONS................................. 58
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR U.S. TAXPAYERS... 58
Status of the Fund............................................. 59
Status of the Master Fund...................................... 60
U.S. Shareholders.............................................. 61
Treatment of the Master Fund Income............................ 61
Allocation of the Master Fund's Profits and Losses............. 62
Monthly Allocation and Revaluation Conventions................. 62
Section 754 Election........................................... 63
ii
Page
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Constructive Termination...................................... 63
Treatment of Cash Distributions............................... 64
Disposition of Shares......................................... 64
Tax Basis in Master Fund Units................................ 64
Limitations on Interest Deductions............................ 64
Organization, Syndication and Other Expenses.................. 65
Passive Activity Income and Loss.............................. 65
Transferor/Transferee Allocations............................. 65
Tax Reporting by the Fund and the Master Fund................. 66
Treatment of Securities Lending Transactions involving Shares. 66
Audits and Adjustments to Tax Liability....................... 66
Tax Shelter Disclosure Rules.................................. 67
Non-U.S. Shareholders......................................... 67
Regulated Investment Companies and Tax-Exempt Organizations... 68
Certain State and Local Taxation Matters...................... 69
Back-up Withholding........................................... 69
PART TWO: STATEMENT OF ADDITIONAL INFORMATION
The Commodity Markets......................................... 71
Debt Instruments.............................................. 78
SUPPLEMENTAL PERFORMANCE TABLE................................... 79
Notes to Supplemental Performance Table....................... 79
GLOSSARY OF DEFINED TERMS........................................ 81
REPORT OF THE INDEPENDENT AUDITORS............................... 83
Where You Can Find More Information........................... 83
Exhibit [ ] (Form of Declaration of Trust).................... [ ]-1
Exhibit [ ] (Form of LLC Agreement)........................... [ ]-1
This prospectus contains information you should consider when making an
investment decision about the shares. You may rely on the information contained
in this prospectus. None of the Master Fund, the Fund, or the manager have
authorized any person to provide you with different information and, if anyone
provides you with different or inconsistent information, you should not rely on
it. This prospectus is not an offer to sell the shares in any jurisdiction
where the offer or sale of the shares is not permitted. You should not assume
that the information in this prospectus is current as of any date other than
the date on the front page of this prospectus.
Until , 2006 (25 days after the date of this prospectus), all dealers
effecting transactions in the offered Shares, whether or not participating in
this distribution, may be required to deliver a prospectus. This requirement is
in addition to the obligations of dealers to deliver a prospectus when acting
as underwriters and with respect to unsold allotments or subscriptions.
iii
NUVEEN COMMODITIES INCOME AND GROWTH FUND
Master-Feeder Structure and Principal Participants
[FLOW CHART]
(1) Nuveen Commodities Asset Management, LLC and Nuveen Asset Management are
wholly owned subsidiaries of Nuveen Investments, Inc.
(2) Nuveen Investments, LLC, a wholly owned subsidiary of Nuveen Investments,
Inc., and [ ] will act as Managing Underwriters and may engage
dealers who are members of the National Association of Securities Dealers,
Inc. to participate in the selling group.
iv
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this prospectus, including the Glossary appearing at the
end of "Part Two: Statement of Additional Information," which contains
explanations of capitalized or other frequently used terms, to understand the
offering fully.
The Fund.................... Nuveen Commodities Income and Growth Fund, a
newly organized Delaware statutory trust, is a
commodity pool. The Fund was organized as a
statutory trust under Delaware law on December 7,
2005. The Fund is operated pursuant to a
Declaration of Trust, which is included as
Exhibit [ ] to this prospectus. The Fund
will invest all of its assets in Nuveen
Commodities Income and Growth Master Fund LLC,
which is organized as a Delaware limited
liability company. The Fund issues shares, which
represent units of fractional undivided
beneficial interest in, and ownership of, the
Fund. After the initial offering, the shares may
be purchased and sold on the American Stock
Exchange. The Fund's principal office is located
at 333 West Wacker Drive, Chicago, Illinois
60606. The main telephone number is
(800) 257-8787.
The Master Fund............. Nuveen Commodities Income and Growth Master Fund
LLC is a newly organized Delaware limited
liability company. The Master Fund was organized
as a limited liability company under Delaware law
on December 7, 2005. The Master Fund is operated
pursuant to a Limited Liability Company
Agreement, which is included as Exhibit [ ] to
this prospectus. It is managed by Nuveen
Commodities Asset Management, LLC, which is
registered as a commodity pool operator and
commodity trading advisor with the National
Futures Association. The Master Fund will issue
units that represent fractional undivided
membership interests in the ownership of the
Master Fund. The Master Fund's principal office
is located at 333 West Wacker Drive, Chicago,
Illinois 60606. The main telephone number is
(800) 257-8787.
The Master-Feeder Structure. The Fund will invest all of its assets in the
Master Fund. The Fund will hold no investment
assets other than Master Fund units. The Fund
will own approximately 99% of the Master Fund
units, and the manager will own the remaining
Master Fund units. The investment results of the
Fund will be directly and completely dependent on
the investment results of the Master Fund.
Listing..................... The Fund has applied to have its shares listed
for trading on the American Stock Exchange under
the trading or "ticker" symbol "[ ]."
Secondary market purchases and sales of shares
will be subject to ordinary brokerage commissions
and charges.
The Offering................ The Fund is offering [ ] shares at
$25.00 per share through a group of underwriters
led by [ ] and Nuveen Investments, LLC
("Nuveen"). You must purchase at least 100 shares
in this offering. The Fund has given the
underwriters an option to purchase up to
[ ] additional shares to cover orders in
excess of [ ] shares. See "Underwriting."
1
Investment Objectives....... The Fund's primary investment objective is to
seek total return through broad exposure to the
commodities markets. The Fund's secondary
objective is to provide investors with monthly
distributions not commonly associated with
commodity investments. The Fund intends to pursue
its investment objectives by investing all of its
assets in the Master Fund, which in turn intends
to pursue these investment objectives by
utilizing:
. an actively managed, rules-based commodity
investment strategy, whereby the Master
Fund will invest in a diversified basket of
commodity futures and forward contracts
with an aggregate notional value
substantially equal to the net assets of
the Master Fund; and
. an integrated investment strategy that
includes a risk management program designed
to (i) systematically moderate the overall
risk and return characteristics of the
Master Fund's commodity investments, and
(ii) generate cash flow to partially
support the Fund's distributions to
shareholders.
In pursuing the integrated investment
strategy, the Master Fund will (i) purchase
"out-of-the-money" commodity put options for
protection against significant asset value
declines and (ii) write (sell)
"out-of-the-money" commodity call options to
obtain option premium cash flow, in each case
on individual futures and forward contracts,
baskets of commodities or on broad based
commodity indices. By utilizing this
integrated investment strategy, the manager
believes that it may favorably reduce the
potential volatility of returns from the
Master Fund's portfolio while also generating
additional cash flows.
The Fund cannot assure you that it will achieve
its investment objectives. See "Risk Factors" and
"The Master Fund's Investments."
Overview of Commodity Investment Strategy and
Integrated Investment Strategy
The Master Fund will typically (i) invest in
commodity futures and forward contracts that are
traded on U.S. and non-U.S. exchanges,
(ii) purchase put and sell call options on
commodity futures and forward contracts that are
traded on U.S. and non-U.S. exchanges, and
(iii) purchase over-the-counter (commonly
referred to as OTC) commodity put options
pursuant to negotiated, bi-lateral arrangements.
The Master Fund will make commodity investments
in the following commodity groups:
. energy;
. industrial metals;
. livestock;
2
. agriculturals;
. tropical foods and fibers; and
. precious metals.
If commodity futures and forward contracts and
options on commodity futures and forward
contracts are listed on multiple exchanges, the
Master Fund will, under normal circumstances,
invest in those commodity contracts that are
listed on the exchange with the greatest dollar
volume traded in those contracts. See "The Master
Fund's Investments" on pages 24-25 for a list of
commodity contracts that the Master Fund may
invest in and the exchanges on which they
currently trade with the greatest dollar volume
traded.
The Master Fund also may invest in other
commodity contracts that are presently, or may
hereafter become, the subject of commodity
futures trading. Except for certain limitations
described herein, there are no restrictions or
limitations on the specific commodity investments
in which the Master Fund may invest.
The manager has selected Gresham Investment
Management LLC (sometimes referred to as Gresham
or the commodity subadvisor) to manage the Master
Fund's commodity investment strategy and its
integrated investment strategy.
Commodity Investment Strategy. The commodity
subadvisor will invest on a notional basis
substantially all of the Master Fund's assets in
commodity futures and forward contracts pursuant
to Gresham's proprietary Tangible Asset
Program/SM/ which is referred to as TAP/SM/, an
actively managed, rules-based commodity
investment strategy. TAP/SM/ is fundamental in
nature and is designed to maintain consistent,
fully collateralized exposure to commodities as
an asset class. Gresham bases its investment
decisions on systematic calculations of the
values of global commodity production and total
U.S. dollar trading volume on commodities futures
and forwards exchanges. See "Management of the
Fund and the Master Fund--Commodity Subadvisor."
Integrated Investment Strategy. Pursuant to the
integrated investment strategy, the Master Fund
will:
. purchase commodity put options that are 8
to 12% "out-of-the-money" on a continual
basis on all or substantially all of the
notional value of its commodity futures and
forward contract positions; and
. write (or sell) commodity call options that
are 5 to 10% "out-of-the-money" on a
continual basis on approximately 50% of the
notional value of its commodity futures and
forward contract positions.
In order to seek protection against significant
declines in the net asset value of the Fund's
shares due to declines in the Master Fund's
3
commodity investments, the Master Fund will
purchase put options on broad based commodity
indices, such as the Dow Jones/AIG Commodity
Index ("DJ/AIGCI") or the Goldman Sachs Commodity
Index ("GSCI"), or on custom indices, whose
prices are expected to closely correspond to at
least a substantial portion of the long commodity
futures and forward contracts held by the Master
Fund. The Master Fund also may purchase put
options on baskets of commodities and on
individual futures and forward contracts held by
it. The commodity put options that the Master
Fund will purchase will be approximately 8 to 12%
"out-of-the-money" (i.e., the exercise price of
the option is less than the price of the futures
or forward contract at the time the option is
purchased). The commodity put options will
generally have terms of approximately 1 year, but
may have terms of up to 3 years. The Master Fund
will purchase OTC commodity put options and
non-U.S. exchange-traded put options that are
"European-style," meaning that the options may be
exercised only at the expiration date of the
option. The Master Fund may also purchase
commodity put options that are U.S.
exchange-traded and "American-style," meaning
that the options may be exercised at any time up
to the expiration date of the option.
The Master Fund will write call options on
individual futures and forward contracts held by
it, on baskets of commodities or on broad based
commodity indices, such as the DJ/AIGCI or the
GSCI, whose prices are expected to closely
correspond to at least a substantial portion of
the commodity futures and forward contracts held
by the Master Fund. The Master Fund will write
commodity call options that are U.S.
exchange-traded and that are "American-style."
The Fund also will write commodity call options
that are non-U.S. exchange-traded and that are
"European-style." The Master Fund will write
commodity call options on approximately 50% of
each of its commodity futures and forward
contracts. The Master Fund will write commodity
call options that are approximately 5 to 10%
"out-of-the-money" (i.e., the exercise price of
the option will be greater than the current price
of the underlying futures or forward contract at
the time the call option is written) to obtain
option premium cash flow from its investments
(though relinquishing potential upside return
above the exercise price of the options).
Assuming that the changes in the value of the
commodity investments underlying the value of the
Master Fund's call options will approximate the
changes in the value of the Master Fund's
commodity futures and forward contracts (which
cannot be assured), the combination of the Master
Fund's commodity investment strategy and the
writing of "out-of-the-money" commodity call
options will result in the Master Fund:
. effectively retaining all of the annual
appreciation, if any, as to approximately
50% of its commodity futures and forward
contracts, and
4
. effectively retaining up to approximately
5% to 10% of the annual appreciation, if
any, as to the other approximately 50% of
its commodity futures and forward contracts.
The excess cash flows derived from selling call
options, less the cost of purchasing put options,
is referred to as "net option premium cash flow."
Regardless of the price performance of the
commodity futures or forward contract, the Master
Fund will retain the option premium cash flow
received by the Master Fund for writing the call
option.
Debt Instruments Used as Collateral
The Master Fund's investments in commodity
futures and forward contracts, options on
commodity futures and forward contracts and OTC
commodity put options generally will not require
significant outlays of principal. To support its
commodity investments, the Master Fund
anticipates that it will maintain significant
collateral that will be invested in short-term
debt instruments with maturities of up to 2 years
that, at the time of investment, are investment
grade quality, including obligations issued or
guaranteed by the U.S. government, its agencies
and instrumentalities, corporate obligations and
asset-backed securities. A debt instrument is
considered investment grade quality if it is
rated within the four highest grades (BBB- or
Baa3 or better by Standard & Poor's Corporation,
a division of The McGraw Hill Companies ("S&P"),
Moody's Investors Service, Inc. ("Moody's") or
Fitch Ratings ("Fitch")) by two or more
nationally recognized statistical rating
organizations that rate such instrument, or if it
is unrated but judged to be of comparable
quality. The Master Fund expects to maintain a
portfolio of debt instruments with an average
credit quality of AA (or A1/P1 with respect to
short-term instruments).
The manager has selected Nuveen Asset Management
(sometimes referred to as the collateral
subadvisor) to manage the Master Fund's
investments in debt instruments.
Special Risk Considerations. An investment in the Fund involves a high degree
of risk. Some of the risks you may face are
summarized below. A more extensive discussion of
these risks appears beginning on page 15.
. The Fund and the Master Fund are newly
organized with no history of operations.
Therefore, there is no performance history
for the Fund or the Master Fund to serve as
a basis for you to evaluate an investment
in the Fund. The manager has not previously
operated a commodity pool.
. An investment in the Fund's shares is
subject to investment risk, including the
possible loss of the entire amount that you
invest.
. Investments in commodity futures and
forward contracts, options on commodity
futures and forward contracts and OTC
5
commodity put options have a high degree of
price variability and are subject to rapid
and substantial changes. The Master Fund
could incur significant losses on its
commodity investments. The Master Fund may
not be able to achieve the Fund's
investment objectives.
. If the Master Fund, and consequently the
Fund, experience more losses than gains
during the period you hold shares, you will
experience a loss even if the Master Fund's
and the Fund's historical performance is
positive.
. Because the Master Fund will purchase
commodity put options that are
approximately 8 to 12% "out-of-the-money,"
the Master Fund will not be fully protected
against a significant market decline under
all circumstances and will likely sustain
losses in a declining market.
. To the extent the Master Fund purchases
commodity put options that are not
exchange-traded, there will be counterparty
risk.
. As the writer of call options for which a
premium is received, the Master Fund will
forego the right to any appreciation in the
value of each commodity futures or forward
contract in its portfolio that effectively
underlies a call option to the extent the
value of the commodity futures or forward
contract exceeds the exercise price of such
option on or before the expiration date.
. The return performance of the Master Fund's
commodity futures and forward contracts may
not parallel the performance of the
commodities or indexes that serve as the
basis for the options bought or sold by the
Master Fund; this basis risk may reduce the
Master Fund's overall returns.
. The Fund is subject to numerous conflicts
of interest, including those that arise
because:
-- the Master Fund's commodity subadvisor,
commodity brokers and their principals
and affiliates may execute trades in
commodity futures and forward
contracts, options on commodity futures
and forward contracts and OTC commodity
put options for the accounts of other
customers that may compete with orders
placed for the Master Fund; and
-- the manager has less of an incentive to
replace the collateral subadvisor
because it is an affiliate of the
manager.
. The Master Fund currently expects that up
to 30% of its investments in commodity
futures and forward contracts, options on
commodity futures and forward contracts and
OTC commodity put options may be in
non-U.S. markets. Some non-U.S. markets
6
present risks because they are not subject
to the same degree of regulation as their
U.S. counterparts.
. Regardless of its investment performance,
the Master Fund will incur fees and
expenses, including brokerage and
management fees. A management fee will be
paid by the Master Fund even if the Master
Fund experiences a net loss for the full
year. To break even in one year on shares
purchased in the offering, and assuming the
Master Fund's portfolio generates annual
interest income of 4.55%, the Master Fund
must earn profits other than from interest
income of 2.44%.
. Neither the Master Fund nor the Fund is a
mutual fund or any other type of
"investment company" within the meaning of
the Investment Company Act of 1940, as
amended, and neither is subject to
regulation thereunder. Also, the Fund's
shares do not represent a deposit or
obligation of, and are not guaranteed or
endorsed by, any bank or other insured
depository institution, and are not
federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve
Board or any other governmental agency.
. Shareholders will have no rights to
participate in the Fund's or the Master
Fund's management other than the right to
elect the individual Trustees of the Fund.
Those Trustees will have less control of
the management and operation of the Fund
then would be typical of the board of
directors of a corporation. Therefore, Fund
shareholders also will have to rely on the
fiduciary duty and judgment of the manager
and the subadvisors to manage the Fund and
the Master Fund.
For additional risks, see "Risk Factors."
Trustees.................... Wilmington Trust Company, a Delaware trust
company, is the Delaware Trustee of the Fund, and
as such will have very limited duties and
liabilities to the Fund. The individual Trustees
will fulfill those functions required under the
American Stock Exchange listing standards and
certain other functions as set forth in the
Declaration of Trust. The Delaware Trustee and
the individual Trustees have delegated to the
manager substantially all of the power and
authority to manage the business affairs of the
Fund.
Manager and Subadvisors..... Nuveen Commodities Asset Management, LLC, a
wholly-owned subsidiary of Nuveen Investments,
Inc. ("Nuveen Investments"), is the manager of
the Master Fund and will be responsible for
determining the Master Fund's overall investment
strategy and its implementation, including:
. the selection and ongoing monitoring of the
subadvisors;
. the management of the Fund's and the Master
Fund's business affairs; and
7
. the provision of certain clerical,
bookkeeping and other administrative
services.
The commodity subadvisor and the collateral
subadvisor are sometimes collectively referred to
as the subadvisors.
The manager, a wholly-owned subsidiary of Nuveen
Investments, is registered with the Commodity
Futures Trading Commission ("CFTC") as a
commodity trading advisor ("CTA") and a commodity
pool operator ("CPO") and is a member of the
National Futures Association ("NFA"). The manager
has no previous operating history or experience
in operating a commodity pool.
Gresham Investment Management LLC will manage the
Master Fund's assets pursuant to the commodity
investment strategy (TAP/SM/) and the integrated
investment strategy. Gresham is a Delaware
limited liability company, the successor to
Gresham Investment Management, Inc., formed in
July 1992. Gresham is registered with the CFTC as
a CTA and a CPO and is a member of the NFA.
Gresham also is registered with the SEC as an
investment adviser. As of December 31, 2005,
Gresham had over $560 million of assets under
management.
Nuveen Asset Management, an affiliate of the
manager and a wholly-owned subsidiary of Nuveen
Investments, will invest the Master Fund's
collateral in short-term, investment grade
quality debt instruments. The collateral
subadvisor is a registered investment adviser.
Founded in 1898, Nuveen Investments and its
affiliates had over $136 billion of assets under
management as of December 31, 2005.
The Master Fund has agreed to pay the manager an
annual fee, payable monthly, in a maximum amount
equal to 1.25% of the Master Fund's average daily
assets, with lower fee levels for assets that
exceed $500 million. The manager has agreed to
pay, out of the fee it receives from the Master
Fund, a fee to each of the commodity subadvisor
and the collateral subadvisor for subadvisory
services at the rates listed on page 32 of the
prospectus. No separate management fee will be
paid by the Fund. For more information on fees
and expenses, see "Management of the Fund and the
Master Fund."
Distributions............... Commencing with the Fund's first distribution,
the Fund intends to make regular monthly
distributions to its shareholders at a level rate
(stated in terms of a fixed cents per share
distribution rate) based on the past and
projected performance of the Fund, which in turn
is dependent on the past and projected
performance of the Master Fund. The Fund's
ability to make distributions at such a level
rate will depend on a number of factors,
including the net earnings (including net
realized capital gains) on the Master Fund's
portfolio investments and the cash flow generated
pursuant to the integrated investment
8
strategy. As portfolio and market conditions
change, the rate of distributions on the shares
and the Fund's distribution policy could change.
The Master Fund expects to receive substantially
all of its current income and gains from the
following sources:
. capital gains (both short-term and
long-term) from the sale or the
marking-to-market of commodity futures and
forward contracts or options on such
contracts;
. option premium cash flow generated from
writing call options on commodity futures
and forward contracts, less the premium
paid for purchasing commodity put options;
and
. interest received on collateral invested in
high quality debt instruments, government
securities and cash equivalents.
The Master Fund and the Fund expect to declare
the initial distribution approximately 45 days,
and to pay that distribution approximately 60 to
90 days after the completion of this offering,
depending on market conditions. For more
information, see "Distributions."
Transfer Agent, Registrar
and Custodian............. [ ] will serve as transfer agent and
registrar for the Fund's shares and custodian for
the assets of the Master Fund and the Fund.
Lehman Brothers Inc., the Master Fund's clearing
broker, also may serve as custodian for all or a
portion of the Master Fund's assets.
Break-even Threshold........ Assuming an initial offering of $250 million, and
assuming the Master Fund's portfolio generates
annual interest income of 4.55%, an investment of
$2,500 must earn profits other than from interest
income of $60.91 or 2.44% in order to
"break-even" at the end of one year of the Master
Fund's operations. In subsequent years, assuming
that the Master Fund has a constant month-end net
asset value of $25 per share, and assuming the
Master Fund's portfolio generates annual interest
income of 4.55%, an investment through share
purchases in the secondary market, after giving
effect to interest income, may lose, $51.59 or
2.06% to "break-even" at the end of such year
period since no underwriting discounts and
commissions are paid in connection with such an
investment. See "Break-Even Analysis."
U.S. Federal Income Tax
Aspects................... Subject to the discussion below in "Federal
Income Tax Considerations," the Fund will be
classified as a grantor trust for United States
federal income tax purposes and as a result, Fund
shareholders will receive an IRS Form 1099
supplemented by additional tax information
relating to the Master Fund's tax status as a
partnership. For United States federal income tax
purposes, each of the Fund's shareholders
generally will be treated as the beneficial owner
of a pro rata portion of the interests in the
Master Fund held by the Fund.
Subject to the discussion below in "Federal
Income Tax Considerations," the Master Fund will
be classified as a partnership
9
for United States federal income tax purposes.
Accordingly, neither the Master Fund nor the Fund
will incur United States federal income tax
liability; rather, each beneficial owner of the
Fund's shares will be required to take into
account its allocable share of the Master Fund's
income, gain, loss, deduction and other items for
the Master Fund's taxable year ending with or
within its taxable year.
Please refer to the "Federal Income Tax
Considerations" section below for information on
the potential United States federal income tax
consequences of the purchase, ownership and
disposition of shares.
10
BREAK-EVEN ANALYSIS
The following "break-even" table indicates the approximate percentage and
dollar returns the Fund must earn after twelve months for investors who
purchase shares (i) in the initial offering and (ii) subsequently in the
secondary market to offset the costs applicable to an investment of $2500 (the
minimum investment on purchases in the initial offering). The assumed
capitalization of the Fund is $250 million. The only percentage that varies
with the size of the Fund's capitalization is Organizational and Offering
Expenses, which are comprised largely of fixed costs. To break even from a
purchase made in the initial offering at the end of one year, and assuming the
Master Fund's portfolio generates annual interest income of 4.55%, the Master
Fund must earn profits other than from interest income of 2.44%. To break even
on an investment in the Fund subsequent to the initial offering, and assuming
the Master Fund's portfolio generates annual interest income of 4.55%, the
Master Fund, after giving effect to the interest income, may lose, up to 2.06%
at the end of one year, since no Underwriting Discounts and Commissions are
paid in connection with such an investment.
Initial Offering Purchases/(1)/ Secondary Market Purchases/(1)/
----------------------------- -----------------------------
Dollar Dollar
Amount Percentage Amount Percentage
------------ ---------- ------------ ----------
Underwriting Discount and Commissions/(2)/........... $ 11,250,000 4.50% $ -- 0.00%
Manager's Management Fee/(3)/........................ $ 3,125,000 1.25% $ 3,125,000 1.25%
Brokerage Commissions and Fees/(4)/.................. $ 700,000 0.28% $ 700,000 0.28%
Transaction Fees/(5)/................................ $ 125,000 0.05% $ 125,000 0.05%
Offering and Organizational Expenses/(6)/............ $ 1,478,925 0.59% $ 1,478,925 0.59%
Operating Expenses/(7)/.............................. $ 786,950 0.31% $ 786,950 0.31%
------------ ------------
Total Fees........................................ $ 17,465,875 6.99% $ 6,215,875 2.49%
Interest Income/(8)/................................. $(11,375,000) (4.55)% $(11,375,000) (4.55%)
------------ ------------
12 Month Break-Even Value on estimated Fund assets of
$250 million (initial offering purchases).......... $ 6,090,875 2.44%
============
12 Month Break-Even Value on a $2,500 Investment
(initial offering purchases)....................... $ 60.91
============
12 Month Break-Even Value on estimated Fund assets of
$250 million (secondary market purchases)/(9)/..... $ (5,159,125) (2.06%)
============
12 Month Break-Even Value on a $2,500 Investment
(secondary market purchases)....................... $ (51.59)
============
- --------
1) The break-even analysis assumes that the Master Fund has a constant
month-end net asset value of $25.00 per share. The dollar amounts shown are
based on estimated Fund assets of $250 million (10 million shares at $25 per
share).
2) The Underwriting Discounts and Commissions will be charged only on shares
sold in the initial offering. There are no underwriting discounts or sales
commissions on shares purchased in the secondary market.
3) The Master Fund will pay the manager an annual fee, payable monthly, in a
maximum amount equal to 1.25% of the Master Fund's average daily assets,
from which the manager will pay maximum advisory fees to the commodity
subadvisor and the collateral subadvisor of 0.35% and 0.35%, respectively.
4) Brokerage commissions on commodity contracts are approximately $10 per round
turn, and the total amount will vary based upon the trading frequency of the
Master Fund's commodity investments, the specific futures and forward
contracts and option contracts purchased, and the volatility of the
commodity futures, forward and options markets.
5) Transaction fees on the Master Fund's collateral investments will vary based
upon the frequency of the Master Fund's purchases of debt instruments, the
specific investments made, and the volatility of the fixed income markets.
11
6) The Master Fund will pay all of the Organizational and Offering Expenses of
the Fund and the Master Fund, including, but not limited to, legal and
accounting fees and expenses, printing fees, exchange fees and regulatory
registration fees and expenses.
7) The Master Fund will pay all of the Operating Expenses of the Fund and the
Master Fund, including, but not limited to, transfer agent fees, fees and
expenses of the trustees, legal and accounting fees and expenses, tax
preparation expenses, filing fees, printing, mailing and duplication costs,
and a Fund administration fee.
8) Interest income for purposes of the break-even analysis currently is
estimated to be earned at a rate of 4.55% based on the current yield on 3
month U.S. Treasury bills as of February 15, 2006. The interest earned on
the Master Fund's collateral investments in high quality debt instruments
may differ from the quoted Treasury bill rate. For investors who purchase
shares in the secondary market, the interest income is expected to exceed
the cost of operating the Fund.
9) Investors who purchase shares after the initial offering may pay customary
brokerage commissions charged by their brokers when purchasing shares on the
exchange. Because such brokerage commission rates will vary, such
commissions have not been included in the break-even table. Investors are
encouraged to review the terms of their brokerage accounts for details on
applicable charges.
See "Fees and Expenses" at page 13.
12
FEES AND EXPENSES
The Master Fund will pay fees and expenses that must be offset by investment
gains and interest income in order to avoid depletion of the Master Fund's
assets. See "Management of the Fund--Management Fees and Expenses."
Type of Fee or Expense Amount
---------------------- ------
Manager's Management Fees Business The Master Fund will pay the manager
Management fees a maximum amount equal to 1.25% of
average daily assets, payable on a
monthly basis. The manager will in
turn pay the commodity subadvisor and
the collateral subadvisor, a maximum
fee of 0.35% and 0.35%, respectively.
There is no performance fee.
Brokerage Commissions and Fees
Brokerage commissions and transaction
fees charged in connection with the
Master Fund's investment activity
estimated at .28% of net assets per
year (includes markup and markdowns
on fixed income trades, floor
brokerage, NFA, exchange, clearing
and give-up fees). On average, the
total round-turn commission expected
to be paid to the commodity broker is
less than $10.
Offering and Organizational and Other The Master Fund will pay all of the
Operating Expenses offering and organizational expenses
of the Fund and the Master Fund,
including, but not limited to, legal
and accounting fees and expenses,
printing fees, fees and expenses of
the Trustees, and various exchange
and regulatory registration fees and
expenses. The Master Fund will pay
expenses incurred in connection with
organizing the Fund and the Master
Fund, and offering of Fund shares to
the public estimated at 0.59% of net
assets. The manager currently
estimates that the aggregate amount
of the offering and organizational
expenses will be approximately $1.48
million.
Routine ongoing expenses: periodic The Master Fund will pay all of the
Board, legal, accounting, filing routine operating, administrative and
and reporting fees, fees and other ordinary expenses of the Fund
expenses of the trustee, transfer and the Master Fund, including, but
agent, administrator and custodian not limited to, transfer agent fees,
fees and expenses of the Trustees,
legal and accounting fees and
expenses, tax preparation expenses,
filing fees, printing, mailing and
duplication costs, and a fund
administration fee. The Master Fund
will pay routine ongoing expenses
estimated at 0.31% of net assets per
year based on the Master Fund's
estimated size of $250 million.
Extraordinary Expenses
The Master Fund will pay all of the
extraordinary fees and expenses, if
any, of the Fund and the Master Fund.
Such extraordinary fees and expenses,
by their nature, are unpredictable in
terms of timing and amount.
13
PART ONE: DISCLOSURE DOCUMENT
Reports to Shareholders
The manager will furnish you with annual reports as required by the rules
and regulations of the SEC as well as with those reports required by the CFTC
and the NFA, including, but not limited to, annual audited financial statements
certified by an independent public accountant and any other reports required by
any other governmental authority that has jurisdiction over the activities of
the Fund and the Master Fund. In addition, each month the manager will post on
its website (http://www.nuveen.com) (which is also the Fund's website) such
information relating to the Fund's shares as the CFTC and the NFA may require
to be given to participants in commodity pools (like the Fund) and quarterly
(and perhaps more frequently) will post underlying Master Fund holdings. Fund
shareholders will be provided with appropriate information to permit them (on a
timely basis) to file U.S. federal and state income tax returns with respect to
their shares.
Cautionary Note Regarding Forward-Looking Statements
This prospectus includes forward-looking statements that generally relate to
future events or future performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential"
or the negative of these terms or other comparable terminology. These
forward-looking statements are based on information currently available to the
manager and subadvisors and are subject to a number of risks, uncertainties and
other factors, both known, such as those described in "Risk Factors" and
elsewhere in this prospectus, and unknown, that could cause the actual results,
performance, prospects or opportunities of the Fund and the Master Fund to
differ materially from those expressed in, or implied by, these forward-looking
statements.
You should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws or otherwise, the
manager and the subadvisors undertake no obligation to publicly update or
revise any forward-looking statements or the risks, uncertainties or other
factors described in this prospectus, as a result of new information, future
events or changed circumstances or for any other reason after the date of this
prospectus.
14
RISK FACTORS
You should consider carefully the risks described below before making an
investment decision. Because of the ownership of the Master Fund by the Fund, a
risk affecting the Master Fund will apply equally to the Fund. You should also
refer to the other information included in this prospectus, including the
Fund's and the Master Fund's financial statements and the related notes.
An investment in the Fund involves a high degree of risk. You should not
invest in shares unless you can afford to lose all of your investment.
Commodity Investment Strategy Risks
You may lose all of your investment. An investment in the Fund's shares is
subject to investment risk, including the possible loss of the entire amount
that you invest. Your investment in the Fund's shares represents an indirect
investment in the Master Fund and in the commodity futures and forward
contracts owned by it. Investments in commodity futures and forward contracts
historically have had a high degree of price variability and may be subject to
rapid and substantial changes. The Master Fund could incur significant losses
on its investments in those commodity futures and forward contracts. Movements
in commodity investment prices are outside of the Master Fund's control and may
not be anticipated by the commodity subadvisor. Price movements may be
influenced by, among other things:
. governmental, agricultural, trade, fiscal, monetary and exchange control
programs and policies;
. weather and climate conditions;
. changing supply and demand relationships;
. changes in balances of payments and trade;
. U.S. and international rates of inflation;
. currency devaluations and revaluations;
. U.S. and international political and economic events;
. changes in interest rates; and
. changes in philosophies and emotions of market participants.
Investments in commodity futures and forward contracts are volatile and may
result in losses. The Master Fund invests in commodity futures and forward
contracts, the prices of which can be volatile, particularly over short periods
of time. The Master Fund bears the risk on every investment it makes that it
will incur a loss. The Master Fund's ability to mitigate losses depends on
successful implementation of the integrated investment strategy. If the Master
Fund experiences in the aggregate more losses than gains during the period you
hold shares, you will experience a loss even if the Master Fund's historical
performance is positive.
The changing interests of investors, hedgers and speculators in the
commodity markets may influence whether futures prices are above or below the
expected future spot price. In order to induce investors or speculators to
take the corresponding long side of a futures contract, commodity producers
must be willing to sell futures contracts at prices that are below the present
value of expected future spot prices. Conversely, if the predominant
participants in the futures market are the ultimate purchasers of the
underlying commodity futures contracts in order to hedge against a rise in
prices, then speculators should only take the short side of the futures
contract if the futures price is greater than the present value of the expected
future spot price of the commodity. This can have significant implications for
the Master Fund when it is time to reinvest the proceeds from a maturing
futures contract into a new futures contract. If the interests of investors,
hedgers and speculators in futures markets have shifted such that commodity
purchasers are the predominant participants in the market, the
15
Master Fund will be constrained to reinvest at higher futures prices which
could have a negative effect on the Master Fund's returns.
Regulatory developments could significantly and adversely affect the Master
Fund. Commodity markets are subject to comprehensive statutes, regulations and
margin requirements. Recent legislation has created a new multi-tiered
structure of exchanges in the U.S. subject to varying degrees of regulation,
and rules and interpretations regarding various aspects of this regulatory
structure have only recently been finalized. Traditional futures exchanges,
which are called designated contract markets, are subject to more streamlined
and flexible core principles rather than the prior statutory and regulatory
mandates. However, with respect to these traditional futures exchanges, the
CFTC and the exchanges are authorized to take extraordinary actions in the
event of a market emergency, including, for example, the retroactive
implementation of speculative position limits or higher margin requirements,
the establishment of daily limits and the suspension of trading. Any of these
actions, if taken, could adversely affect the returns of the Master Fund by
limiting or precluding investment decisions the Master Fund might otherwise
make. The regulation of commodity transactions in the U.S. is a rapidly
changing area of law and is subject to ongoing modification by government and
judicial action. In addition, various national governments have expressed
concern regarding the disruptive effects of speculative trading in the currency
markets and the need to regulate the derivatives markets in general. The effect
of any future regulatory change on the Master Fund is impossible to predict,
but could be substantial and adverse.
Integrated Investment Strategy Risks
The Master Fund may not be able to achieve the objectives of the integrated
investment strategy. The Master Fund intends to use options on commodity
futures and forward contracts to generate cash flow, and to offset significant
losses in the event of a relatively sharp decline in the value of the Master
Fund's commodity futures and forward contract positions. While the Master Fund
seeks to protect its commodity futures and forward contracts positions in the
event of a market decline in those positions with the purchase of put options,
it intends to mitigate the cost of such protection by purchasing commodity put
options that are approximately 8 to 12% "out-of-the money", thus obtaining no
protection for modest market declines and obtaining only partial protection in
the event of a steep decline.
In addition, the return performance of the Master Fund's commodity futures
and forward contracts may not parallel the performance of the commodities or
indexes that serve as the basis for the options bought or sold by the Master
Fund; this basis risk may reduce the Master Fund's overall returns investing in
options is volatile and requires an accurate assessment of the market and the
underlying instrument. Factors such as increased or reduced volatility, limited
dollar value traded and timing of placing and executing orders may preclude the
Master Fund from achieving its desired results in the integrated investment
strategy and could affect the Master Fund's ability to generate income and
limit losses.
The Master Fund may incur put premium costs without benefiting from its
investment in commodity put options. The Master Fund intends to purchase on a
continual basis commodity put options on all or substantially all of the
notional value of its commodity futures and forward contract positions. As a
holder of a put option, the Master Fund, in exchange for payment of a premium,
has the right to receive from the seller of the commodity put option, if the
current price is lower than the exercise price, the difference between the put
exercise price and the current price of the underlying commodity futures or
forward contract on or before a specified date (in the case of "American-style"
options, on or before the date of exercise or, in the case of "European-style"
options, at the exercise date). If the price of the commodity futures or
forward contract is greater than the exercise price of the put option upon
expiration, then the Master Fund will have incurred the cost of the option but
not have received any benefit from its purchase. In addition, because the
Master Fund generally will purchase commodity put options that are
"out-of-the-money," the Master Fund will not be protected against, and will
bear the loss associated with, a market decline down to the exercise price of
the option and will likely sustain losses in a declining market.
16
The Master Fund may forego price appreciation above the option exercise
price on approximately 50% of its commodity futures and forward contracts as a
result of writing "out-of-the-money" commodity call options. The Master Fund
will write commodity call options that are approximately 5% to 10%
"out-of-the-money" on a continual basis on approximately 50% of the notional
value of each of its commodity futures and forward contract positions. As the
writer of a call option, the Master Fund sells, in exchange for receipt of a
premium, the right to any appreciation in the value of the futures or forward
contract over a fixed price on or before a certain date in the future.
Accordingly, the Master Fund is effectively limiting its potential for annual
appreciation to approximately 5% to 10% on approximately 50% of the value of
its portfolio invested in commodity futures and forward contract positions.
The Master Fund's, and consequently the Fund's, rate of distributions may
fluctuate due to the integrated investment strategy. Distributions paid by the
Master Fund to its members, including the Fund, and, in turn, paid by the Fund
to shareholders, will be derived in part from the option premium cash flow that
the Master Fund receives from writing commodity call options, less the cost of
purchasing commodity put options. Net option premium cash flow can vary widely.
Risk that the Fund's Shares will Trade at a Discount to Net Asset Value
There is a risk that the Fund's shares may trade at prices other than the
Fund's net asset value per share. The net asset value of each share will
change as fluctuations occur in the market value of the Master Fund's
portfolio. Investors should be aware that the public trading price of a share
may be different from the net asset value of a share. The price difference may
be due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares are closely related to, but not identical
to, the same forces influencing the prices of the commodity contracts and other
instruments held by the Master Fund at any point in time.
Risks Related to an Exchange-Listing
The Exchange may halt trading in the shares which would adversely impact
your ability to sell shares. The Fund has applied to list the shares for
trading on the American Stock Exchange under the market symbol . Trading
in shares may be halted due to market conditions or, in light of the American
Stock Exchange rules and procedures, for reasons that, in the view of the
American Stock Exchange, make trading in shares inadvisable. In addition,
trading is subject to trading halts caused by extraordinary market volatility
pursuant to "circuit breaker" rules that require trading to be halted for a
specified period based on a specified market decline. There can be no assurance
that the requirements necessary to maintain the listing of the shares will
continue to be met or will remain unchanged. The Fund and the Master Fund will
be terminated if the shares are delisted.
The lack of an active trading market for shares may result in losses on your
investment at the time of disposition of your shares. Although the Fund has
applied to list its shares on the American Stock Exchange, there can be no
guarantee that an active trading market for the shares will develop or be
maintained. If you need to sell your shares at a time when no active market for
them exists, the price you receive for your shares, assuming that you are able
to sell them, likely will be lower than that you would receive if an active
market did exist.
Commodity Subadvisor Risks
Gresham will be using a strategy for the Master Fund that differs from the
strategy on which its historical performance record is based. Gresham's
historical performance record reflects the use of TAP/SM/. Gresham has not
previously employed the integrated investment strategy for its own account or
for the accounts of clients and as a result, its historical performance record
is not based on an investment approach that is identical to the investment
approach to be used for the Master Fund. Therefore, that record is not as
relevant to investors in the Fund as it would be if Gresham were using only
TAP/SM/ in investing for the Master Fund.
17
Past performance is no assurance of future results. Gresham bases its
investment decisions on systematic calculations of the values of global
commodity production and total U.S. dollar trading volume on commodities
futures and forwards exchanges. Any subsequent commodity subadvisor to the
Master Fund may employ a different analysis for investing. Neither Gresham's
systematic methodology nor the technical or fundamental analysis that may be
used by future commodity subadvisors take into account unanticipated world
events that may cause losses to the Master Fund. The addition of the Master
Fund's account will also substantially increase the total amount of assets
Gresham manages which could adversely affect its performance. In any event,
past performance does not assure future results.
Descriptions of the commodity subadvisor's strategies may not be applicable
in the future. The commodity subadvisor or any subsequent commodity subadvisor
may make material changes to the investment strategy it uses in investing the
Master Fund's assets with the consent of the manager, who has the sole
authority to authorize any material changes. If this happens, the descriptions
in this document would no longer be accurate or useful. The manager does not
anticipate that this will occur frequently, if at all. You will be informed of
any changes to the commodity subadvisor's strategy that the manager deems to be
material; however, you may not be notified until after a change occurs.
Non-material changes may be made by the commodity subadvisor or any subsequent
commodity subadvisor without the manager's consent. These changes may
nevertheless affect the Master Fund's performance.
Speculative position and trading limits may reduce profitability. The CFTC
and U.S. exchanges have established "speculative position limits" on the
maximum net long or net short position that any person may hold or control in
particular futures and options on futures. Most exchanges also limit the amount
of fluctuation in certain futures contract prices on a single trading day. The
commodity subadvisor's investment instructions, however, may have to be
modified and positions held by the Master Fund may have to be liquidated in
order to avoid exceeding these limits. Such modification or liquidation could
adversely affect the Master Fund's operations and profitability by increasing
transaction costs to liquidate positions and limiting potential profits on the
liquidated positions.
Increased competition could reduce the profitability of the commodity
subadvisor. The commodity subadvisor believes that there has been, over time,
an increase in interest in commodity investing. As the capital under management
on the same general principles increases, an increasing number of traders may
attempt to initiate or liquidate substantial positions at or about the same
time as the commodity subadvisor, or otherwise alter historical trading
patterns or affect the execution of trades, to the detriment of the Fund.
Other Risks of the Master Fund's Investment Strategies
There may be a loss on investments in short-term instruments. When the
Master Fund purchases a futures contract, the Master Fund is required to
deposit with its futures commission merchant only a portion of the value of the
contract. This deposit is known as "initial margin." If and when the market
moves against the position, the Master Fund is required to make additional
deposits known as "variation margin." The Master Fund invests its assets other
than the amount of margin required to be maintained by the Master Fund, in
short-term investment grade securities. The value of these investment grade
securities generally moves inversely with movements in interest rates
(declining as interest rates rise). The value of these investment grade
securities might also decline if the credit quality of the issuer deteriorates,
or if the issuer defaults on its obligations. If the Master Fund is required to
sell short-term instruments before they mature when the value of the
instruments has declined, the Master Fund will realize a loss. This loss may
adversely impact the price of the Fund's shares.
Certain of the Master Fund's investments could be illiquid. The Master Fund
may not always be able to liquidate its positions at the desired price. It is
difficult to execute a trade at a specific price when there is a relatively
small volume of buy and sell orders in a market. A market disruption, such as a
foreign government taking political actions that disrupt the market in its
currency or in a major export, can also make it difficult to liquidate a
position. Alternatively, limits imposed by futures exchanges or other
regulatory organizations, such as
18
speculative position limits and daily price fluctuation limits, may contribute
to a lack of liquidity with respect to some commodity investments.
Unexpected market illiquidity may cause losses to investors from time to
time. The large face value of the positions that the commodity subadvisor will
acquire for the Master Fund increases the risk of illiquidity by both making
its positions more difficult to liquidate at favorable prices and increasing
the losses incurred while trying to do so.
An investment in the Fund may not necessarily diversify an investor's
overall portfolio. Historically, the investment performance of commodities has
shown a low negative correlation to the performance of other asset classes such
as equity securities and debt instruments. Low correlation means that there is
a low statistical relationship between the performance of commodity interest
transactions, on the one hand, and equity securities or debt instruments, on
the other hand. Because this historical negative correlation is low, the Master
Fund cannot be expected to be automatically profitable during unfavorable
periods in the stock market, or vice versa. If, during a particular period of
time, the Master Fund's performance moves in the same general direction as the
other financial markets or the Master Fund does not perform successfully
relative to overall commodity markets, you may obtain little or no
diversification benefits during that period from an investment in the Fund's
shares. In such a case, the Fund may have no gains to offset your losses from
such other investments, and you may suffer losses on your investment in the
Fund at the same time losses on your other investments are increasing.
See "Commodity Markets" in Part Two of this document for additional
information.
Risk of Investing in Non-U.S. Markets
Investing in non-U.S. markets will expose the Master Fund to additional
credit and regulatory risk. The Master Fund currently expects that up to 30%
of its investments in commodity futures and forward contracts, options on
commodity futures and forward contracts and OTC commodity put options may be in
non-U.S. markets. Some non-U.S. markets present risks because they are not
subject to the same degree of regulation as their U.S. counterparts. None of
the CFTC, NFA, or any domestic exchange regulates activities of any foreign
boards of trade or exchanges, including the execution, delivery and clearing of
transactions, nor has the power to compel enforcement of the rules of a foreign
board of trade or exchange or of any applicable non-U.S. laws. Similarly, the
rights of market participants, such as the Master Fund, in the event of the
insolvency or bankruptcy of a non-U.S. market or broker are also likely to be
more limited than in the case of U.S. markets or brokers. As a result, in these
markets, the Master Fund would have less legal and regulatory protection than
it does when it trades domestically.
In some of these non-U.S. markets, the performance on a contract is the
responsibility of the counterparty and is not backed by an exchange or clearing
corporation and therefore exposes the Master Fund to credit risk. See
"Counterparty Risk" below. Investing through non-U.S. exchanges is subject to
the risks presented by exchange controls, expropriation, increased tax burdens
and exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit or
increase the loss on investments of the Master Fund in the affected
international markets.
The Master Fund's non-U.S. investments may be exposed to losses resulting
from non-U.S. exchanges that are less developed or less reliable than
U.S. exchanges. Some non-U.S. commodity exchanges may be in a more
developmental stage than U.S. exchanges, so that prior price histories may not
be indicative of current price dynamics. In addition, the Master Fund may not
have the same access to certain contracts on foreign exchanges as do local
traders, and the historical market data on which the commodity subadvisor bases
its strategies may not be as reliable or accessible as it is in the U.S. All of
these factors could adversely affect the performance of the Master Fund.
19
Counterparty Risk
OTC transactions are subject to little, if any, regulation and may be
subject to the risk of counterparty default. A portion of the Master Fund's
assets may be used to invest in OTC commodity put options. The Master Fund does
not expect that more than 5% of the Master Fund's net assets will be used to
purchase OTC commodity put options, although the value of the commodities
underlying these OTC put options may represent up to 100% of the notional value
of the Master Fund's commodity investments. OTC commodity put options are
typically transacted on a principal-to-principal basis through dealer markets
that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. The protection of
CFTC regulation or the statutory scheme of the Commodity Exchange Act, as
amended ("CEA") does not apply to this investing activity by the Master Fund.
The markets for OTC commodity contracts rely upon the integrity of market
participants in lieu of the additional regulation imposed by the CFTC on
participants in the futures markets. The lack of regulation in these markets
could expose the Master Fund in certain circumstances to significant losses in
the event of investment abuses or financial failure by participants.
The Master Fund also faces the risk of non-performance by the counterparties
to the OTC commodity put options. Unlike in futures contracts, the counterparty
to these contracts is generally a single bank or other financial institution,
rather than a clearing organization backed by a group of financial
institutions. As a result, there will be greater counterparty credit risk in
these transactions. The counterparty may not be able to meet its obligations to
the Master Fund and as a result, the Master Fund could suffer significant
losses on these contracts.
If a counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Master Fund may experience
significant delays in obtaining any recovery in a bankruptcy or other
reorganization proceeding. The Master Fund may obtain only limited recovery or
may obtain no recovery in such circumstances.
Operating Risks
Neither the Fund nor the Master Fund is a regulated investment
company. Neither the Fund nor the Master Fund is an investment company subject
to the Investment Company Act of 1940, as amended. Accordingly, you do not have
the protections afforded by that statute which, for example, regulates the
relationship between the investment company and its investment adviser.
The Fund and the Master Fund have no operating history. The Fund and the
Master Fund are new and have no operating history. Therefore, there is no
performance history of the Fund or the Master Fund to serve as a basis for you
to evaluate an investment in the Fund. The manager has not previously operated
a commodity pool or selected a commodity trading advisor.
Conflicts of interest could adversely affect the Fund and the Master
Fund. There are conflicts of interest in the structure and operation of the
Fund. The manager has sole authority to manage the Master Fund, and its
interests may conflict with those of Fund shareholders. In addition, the
collateral subadvisor is an affiliate of the manager. The commodity subadvisor
may encounter conflicts between the interests of the Master Fund and its other
clients. These conflicts could result in actions by the manager or one of the
subadvisors that are not in the best interests of the Fund. These conflicts are
described in more detail under "Conflicts of Interest."
Departure of key personnel at Gresham could adversely affect the Master
Fund. In managing and directing the Master Fund's day-to-day activities and
affairs, the manager will rely heavily on Gresham and in particular on Jonathan
S. Spencer, Douglas J. Hepworth and Dr. Henry G. Jarecki. Gresham is leanly
staffed, so if those individuals were to leave or be unable to carry out his
their present responsibilities, it may have an adverse effect on the Master
Fund's management.
Shareholders have limited voting rights and will not be able to affect
management of the Fund regardless of performance. Unlike the holder of capital
stock in a corporation, shareholders have limited voting rights on
20
matters affecting the Fund's business. While Fund shareholders will have the
right to elect individual Trustees, the powers and duties of those individual
Trustees will be more limited than is typical for directors of a corporation.
The manager, whose board is not elected by shareholders, manages the Fund's
activities. Shareholders will have no right to elect the manager on an annual
or any other continuing basis. If the manager voluntarily withdraws, however,
the holders of a majority of the outstanding shares (excluding for purposes of
such determination interests owned by the withdrawing manager and its
affiliates) may elect its successor.
The manager may not be removed as manager by Fund shareholders except upon
approval by the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares (excluding shares owned by the manager and its affiliates),
subject to the satisfaction of certain conditions. Any removal of the manager
by Fund shareholders or by the individual Trustees (upon 60 days written notice
and under certain limited circumstances) will result in the liquidation of the
Fund (and the Master Fund).
Thus, it is extremely unlikely that Fund shareholders will make any changes
in the management of the Master Fund, even if performance is poor.
Fees and expenses are charged regardless of profitability and may result in
depletion of assets. The Master Fund pays brokerage commissions,
over-the-counter dealer spreads, organization and offering expenses, management
fees and operating and extraordinary expenses, in all cases regardless of
whether the Master Fund's activities are profitable. Those fees and expenses
include asset-based management fees of up to 1.25% per year and brokerage fees
and operating expenses expected to be approximately 0.59% per year. Assuming
underwriting discounts and commissions of 4.5%, and assuming the Master Fund's
portfolio generates annual interest income of 4.55%, the Master Fund will have
to generate profits other than from interest income of 2.44% during its first
year of operations in order for an investor in this offering to break even for
the year. Consequently, the expenses of the Master Fund could, over time,
result in significant losses to your investment therein. You may not achieve
profits, significant or otherwise.
The value of the shares may be adversely affected if the Fund is required to
indemnify the individual Trustees or the manager. Under the Fund's Declaration
of Trust, each of the individual Trustees and the manager has the right to be
indemnified for any liability or expense it incurs without negligence or
misconduct. That means that the manager may require the assets of the Fund to
be sold in order to cover losses or liability suffered by it or by the
individual Trustees. Any sale of that kind would reduce the net asset value of
the Fund and the value of the shares.
The failure or bankruptcy of one of its clearing brokers could result in a
substantial loss of Master Fund assets. Under CFTC regulations, a clearing
broker maintains customers' assets in a bulk segregated account. If a clearing
broker fails to do so, or is unable to satisfy a substantial deficit in a
customer account, its other customers may be subject to risk of loss of their
funds in the event of that clearing broker's bankruptcy. In that event, the
clearing broker's customers, such as the Master Fund, are entitled to recover,
even in respect of property specifically traceable to them, only a proportional
share of all property available for distribution to all of that clearing
broker's customers. The Master Fund also may be subject to the risk of the
failure of, or delay in performance by, any exchanges and markets and their
clearing organizations, if any, on which commodity interest contracts are
traded.
From time to time, the clearing brokers may be subject to legal or
regulatory proceedings in the ordinary course of their business. A clearing
broker's involvement in costly or time-consuming legal proceedings may divert
financial resources or personnel away from the clearing broker's trading
operations, which could impair the clearing broker's ability to successfully
execute and clear the Master Fund's trades.
Your ability to judge the Master Fund's performance in a timely manner will
be limited. You cannot review the Fund's holdings on a daily basis, as the
Master Fund's holdings may be posted as infrequently as quarterly. The Fund's
overall investment results will be reported on a periodic (generally at least
monthly) basis. This will limit your ability to judge the Master Fund's
performance to a review of historical performance.
21
An investment in the shares may be adversely affected by competition from
other methods of investing in commodities. The Fund and the Master Fund
constitute a new, and thus untested, type of investment vehicle. They compete
with other financial vehicles, including other commodity pools, hedge funds,
traditional debt and equity securities issued by companies in the commodities
industry, other securities backed by or linked to such commodities, and direct
investments in the underlying commodities or commodity futures contracts.
Market and financial conditions, and other conditions beyond the manager's
control, may make it more attractive to invest in other financial vehicles or
to invest in such commodities directly, which could limit the market for the
shares.
The occurrence of a terrorist attack, or the outbreak, continuation or
expansion of war or other hostilities could disrupt the Master Fund's
investment activity and materially affect the Master Fund's profitability.
Certain events have a disruptive effect on the operations of the Master Fund,
the exchanges, brokers and counterparties with whom the Master Fund does
business, such as terrorist attacks (including the terrorist attacks in the
U.S. on September 11, 2001), war and other geopolitical events. None of the
Master Fund, the Fund, the manager or the subadvisors can predict the effects
of similar events in the future on the U.S. economy.
The offering of shares has not been subject to independent review or review
on your behalf. Shareholders do not have legal counsel representing them in
connection with the Fund. Accordingly, a shareholder should consult his or her
legal, tax and financial advisers regarding the desirability of investing in
the Fund. As previously noted, you cannot predict the expected results of this
Fund or the Master Fund from the performance history of other funds managed by
the commodity subadvisor.
Deregistration of the commodity pool operator and investment subadvisors
could disrupt operations. The manager and the commodity subadvisor are
registered commodity pool operators and registered commodity trading advisors.
If the CFTC were to terminate, suspend, revoke or not renew the manager's
registrations, the manager would be compelled to withdraw as the Master Fund's
manager. The shareholders would then determine whether to select a replacement
manager or to dissolve the Fund. If the CFTC and/or the SEC were to terminate,
suspend, revoke or not renew either of the subadvisor's registrations, the
manager would terminate the management agreement with that subadvisor. The
manager could choose to appoint a new subadvisor or terminate the Fund and the
Master Fund. No action is currently pending or threatened against the manager,
the commodity subadvisor or the collateral subadvisor.
Tax Risk
Your tax liability may exceed cash distributions. You will be taxed on your
share of the Fund's taxable income and gain each year, regardless of whether
you receive any cash distributions from the Fund. Your share of such income or
gain, as well as the tax liability generated by such income or gain, may exceed
the distributions you receive from the Fund for the year.
You could owe tax on your share of the Fund's ordinary income despite
overall losses. Gain or loss on futures and forward contracts and options on
futures and forward contracts will generally be taxed as capital gains or
losses for U.S. federal income tax purposes. Interest income is ordinary
income. In the case of an individual, capital losses can only be used to offset
capital gains plus $3,000 ($1,500 in the case of a married taxpayer filing a
separate return) of ordinary income each year. Therefore, you may be required
to pay tax on your allocable share of the Fund's ordinary income, even though
the Fund incurs overall losses.
Non-U.S. investors may face U.S. tax consequences. Non-U.S. investors
should consult their own tax advisors concerning the applicable foreign as well
as the U.S. tax implications of an investment in the Fund. Non-U.S. investors
may also be subject to special withholding tax provisions if they fail to
furnish the Fund (or another appropriate person) with a timely and properly
completed Form W-8BEN or other applicable form.
If the IRS treated either the Fund or the Master Fund as a corporation for
tax purposes, it would adversely affect distributions to shareholders. Based
upon the continued accuracy of the representations of the manager,
22
the Fund and the Master Fund believe that under current law and regulations
they will be classified as a grantor trust and a partnership, respectively, for
federal income tax purposes. However, neither entity has requested, nor will
they request, any ruling from the IRS as to this status. In addition, you
cannot be sure that those representations will continue to be accurate. If the
IRS were to challenge the federal income tax status of either the Fund or the
Master Fund, such a challenge could result in (i) an audit of each
shareholder's entire tax return and (ii) adjustments to items on that return
that are unrelated to the ownership of shares. In addition, each shareholder
would bear the cost of any expenses incurred in connection with an examination
of his or her personal tax return.
If either the Fund or the Master Fund were taxable as a corporation for
federal income tax purposes in any taxable year, its income, gains, losses and
deductions would be reflected on its own tax return rather than being passed
through (proportionately) to shareholders, and it would become subject to an
entity-level income tax on its net income at corporate rates. This would
adversely affect the Fund's or the Master Fund's overall performance and
ability to make distributions. In addition, some or all of the distributions
made to shareholders would be classified as dividend income which would have
been reduced as a result of the federal, state and local taxes paid by the Fund
or the Master Fund, as the case may be.
Items of income, gain, deduction, loss and credit with respect to Fund
shares could be reallocated if the IRS does not accept the conventions used by
the Master Fund in allocating Master Fund tax items. U.S. federal income tax
rules applicable to partnerships are complex and often difficult to apply to
publicly traded partnerships. The Master Fund will apply certain conventions in
an attempt to comply with applicable rules and to report income, gain,
deduction, loss and credit to Fund shareholders in a manner that reflects
shareholders' beneficial share of Master Fund items, but these conventions may
not be in full technical compliance with applicable tax requirements. It is
possible that the IRS will successfully assert that the conventions used by
Master Fund to allocate income to the Fund and, indirectly, the shareholders do
not satisfy the technical requirements of the U.S. tax law and could require
that items of income, gain, deduction, loss or credit be reallocated in a
manner that adversely affects you.
The current treatment of long-term capital gains under current U.S. federal
income tax law may be adversely affected in the future. Under current law,
long-term capital gains are taxed to non-corporate investors at a maximum
United States federal income tax rate of 15%. This tax treatment may be
adversely affected by future changes in tax laws at any time and is currently
scheduled to expire for tax years beginning after December 31, 2008.
Prospective shareholders are strongly urged to consult their own tax
advisors and counsel with respect to the possible tax consequences to them of
an investment in any shares. The tax consequences may differ in respect of
different shareholders.
THE MASTER FUND'S INVESTMENTS
The Fund's primary investment objective is to seek total return through
broad exposure to the commodities markets. The Fund's secondary objective is to
provide investors with monthly distributions not commonly associated with
commodity investments. The Fund intends to pursue its investment objectives by
investing all of its assets in the Master Fund. The Fund determined to employ a
two-tiered "master-feeder" structure in order to permit the Fund, as a grantor
trust, to issue an IRS Form 1099 supplemented by additional tax information
relating to the Master Fund's tax status as a partnership. See "Federal Income
Tax Considerations." There are additional costs associated with using a
master-feeder structure (such as the expenses associated with having a Delaware
Trustee) but the Fund does not believe these costs are material or will
negatively affect shareholders.
The Master Fund intends to pursue the Fund's investment objectives by
utilizing:
. an actively managed, rules-based commodity investment strategy, whereby
the Master Fund will invest in a diversified basket of commodity futures
and forward contracts with an aggregate notional value substantially
equal to the net assets of the Master Fund; and
23
. an integrated investment strategy that includes a risk management program
designed to (i) systematically moderate the overall risk and return
characteristics of the Master Fund's commodity investments, and
(ii) generate cash flow to partially support the Fund's distributions to
shareholders.
In pursuing this integrated investment strategy, the Master Fund will
(i) purchase "out-of-the-money" commodity put options for protection
against significant asset value declines and (ii) write (sell)
"out-of-the-money" commodity call options to obtain option premium cash
flow, in each case on individual futures and forward contracts, baskets
of commodities or on broad based commodity indexes. By utilizing this
integrated investment strategy, the Master Fund believes that it may
favorably reduce the potential volatility of returns from its commodity
investment strategy while also generating additional cash flows. The Fund
and the Master Fund cannot assure you that it will achieve its investment
objectives.
The Master Fund and the Fund expect to declare their initial distribution
approximately 45 days, and to pay that distribution approximately 60 to 90
days, from the completion of this offering, depending on market conditions. The
Fund cannot assure you that it will achieve its investment objectives. See
"Risk Factors." There are no provisions in the Fund's Declaration of Trust or
the Master Fund's LLC Agreement or otherwise that limit the ability of the
Master Fund to change its investment strategy (including the types of products
in which the Master Fund may invest). The Fund has no present intent to use
leverage or borrowings.
Overview of Commodity Investment Strategy and Integrated Investment Strategy
The Master Fund will typically (i) invest in commodity futures and forward
contracts that are traded on U.S. and non-U.S. exchanges, (ii) purchase put and
sell call options on commodity futures and forward contracts that are traded on
U.S. and non-U.S. exchanges and (iii) purchase OTC commodity put options
pursuant to negotiated, bi-lateral arrangements.
The Master Fund will make commodity investments in the following commodity
groups:
. energy;
. industrial metals;
. livestock;
. agriculturals;
. tropical foods and fibers; and
. precious metals.
If commodity futures and forward contracts and options on commodity futures
and forward contracts are listed on multiple exchanges, the Master Fund will,
under normal circumstances, invest in those commodity contracts that are listed
on the exchange with the greatest dollar volume traded in those contracts. A
list of futures and forward contracts and options on commodity futures and
forward contracts that the Master Fund may invest in, the group they are
associated with and the exchanges on which they currently trade with the
greatest dollar value traded is set forth below:
Group Commodity Exchange
----- --------- --------
Energy Crude Oil New York Mercantile Exchange
Heating Oil New York Mercantile Exchange
Natural Gas New York Mercantile Exchange
Unleaded Gas New York Mercantile Exchange
24
Group Commodity Exchange
----- --------- --------
Industrial Metals Aluminum London Metals Exchange
Copper London Metals Exchange
Lead London Metals Exchange
Nickel London Metals Exchange
Tin London Metals Exchange
Zinc London Metals Exchange
Livestock Feeder Cattle Chicago Mercantile Exchange
Lean Hogs Chicago Mercantile Exchange
Live Cattle Chicago Mercantile Exchange
Pork Bellies Chicago Mercantile Exchange
Agriculturals Bean Oil Chicago Board of Trade
Corn Chicago Board of Trade
Oats Chicago Board of Trade
Soy Meal Chicago Board of Trade
Soybeans Chicago Board of Trade
Wheat Chicago Board of Trade
Tropical Foods and Fibers Lumber Chicago Mercantile Exchange
Milk Chicago Mercantile Exchange
Cocoa New York Board of Trade
Coffee New York Board of Trade
Cotton New York Board of Trade
Orange Juice New York Board of Trade
Sugar New York Board of Trade
Precious Metals Gold New York Commodities Exchange
Silver New York Commodities Exchange
Palladium New York Mercantile Exchange
Platinum New York Mercantile Exchange
The Master Fund also may invest in other commodity contracts that are
presently, or may hereafter become, the subject of commodity futures trading.
Except for certain limitations described herein, there are no restrictions or
limitations on the specific commodity investments in which the Master Fund may
invest.
Because the nature of the Master Fund's investments in commodity futures and
forward contracts will not require significant outlays of principal, less than
10% of the Master Fund's net assets will be committed to establishing those
positions. In addition, the Master Fund does not expect that more than 5% of
the Master Fund's net assets will be used to purchase OTC commodity put
options, although the Master Fund expects that option premium cash flow
generated by the sale of call options on commodity futures and forward
contracts will be sufficient to cover the premiums paid for those put options.
Commodity Investment Strategy (TAP/SM/). The Master Fund will invest on a
notional basis substantially all of its assets in futures and forward contracts
pursuant to the commodity investment strategy TAP/SM/, an actively managed,
rules-based commodity investment strategy. TAP/SM/ is fundamental in nature and
is designed to maintain consistent, fully collateralized exposure to
commodities as an asset class. TAP/SM/ does not require the existence of price
trends in order to be successful. See "Management of the Fund and the Master
Fund--Commodity Subadvisor" for additional information on TAP/SM/.
Integrated Investment Strategy. In order to seek protection against
significant declines in the net asset value of the Fund's shares due to
declines in the Master Fund's commodity investments, the Master Fund will
purchase
25
"out-of-the-money" put options on broad based commodity indices such as the
DJ/AIGCI or the GSCI, or on custom indices, whose prices are expected to
closely correspond to at least a substantial portion of the long commodity
futures and forward contracts held by the Master Fund. The Master Fund also may
purchase put options on baskets of commodities and on individual futures and
forward contracts held by it. The commodity put options that the Master Fund
will purchase will be approximately 8 to 12% "out of the money" to moderate the
premium cost of the options. The commodity put options will generally have
terms of approximately 1 year, but may have terms of up to 3 years. The Master
Fund will purchase OTC commodity put options and non-U.S. exchange-traded put
options that are "European-style." The Master Fund does not expect that more
than 5% of its net assets will be used to purchase OTC commodity put options,
although the value of the commodities underlying these OTC put options may
represent up to 100% of the notional value of the Master Fund's commodity
interests.
Also pursuant to the integrated investment strategy, the Master Fund will
write "out-of-the-money" call options on individual futures and forward
contracts held by it, on baskets of commodities or on broad based commodity
indices, such as the DJ/AIGCI or the GSCI, whose prices are expected to closely
correspond to at least a substantial portion of the commodity futures and
forward contracts held by the Master Fund. The Master Fund will write commodity
call options that are U.S. exchange-traded and that are "American-style." The
Fund also will write commodity call options that are non-U.S. exchange traded
and that are "European-style". The Master Fund will write commodity call
options on approximately 50% of each of its commodity futures and forward
contracts. The Master Fund will write commodity call options that are
approximately 5 to 10% "out-of-the-money". While generating option premium cash
flow for the Master Fund, the call options will cause the Master 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 Master Fund's long commodity
positions covered by the call options.
Debt Instruments Used as Collateral
The Master Fund's investments in commodity futures and forward contracts,
options on commodity futures and forward contracts and OTC commodity put
options generally will not require significant outlays of principal. To support
its commodity investments, the Master Fund anticipates that it will maintain
significant collateral that will be invested in short-term debt instruments
with maturities of up to 2 years that, at the time of investment are investment
grade quality, including obligations issued or guaranteed by the U.S.
government, it agencies and instrumentalities, corporate obligations and
asset-backed securities. A debt instrument is considered investment grade
quality if it is rated within the four highest grades (BBB- or Baa3 or better
by S&P, Moody's or Fitch) by two or more nationally recognized statistical
rating organizations that rate such instrument, or if it is unrated by all such
organizations but judged to be of comparable quality by the collateral
subadvisor. The collateral subadvisor expects to maintain a portfolio of debt
instruments with an average credit quality of AA (or A1/P1 with respect to
short-term instruments). Although earning interest income, the collateral is
subject on a continual basis to additional margin calls by the commodity broker
and to additional deposits in the commodity account if the levels of notional
trading change.
Approximately 100% of the Master Fund's net assets will be invested in
short-term, investment grade quality debt instruments to support the Master
Fund's commodity investments.
MANAGEMENT OF THE FUND AND THE MASTER FUND
The Fund
The Fund is a Delaware statutory trust organized on December 7, 2005. The
Fund maintains its main business office at 333 West Wacker Drive, Chicago,
Illinois 60606. The Fund is a commodity pool. It operates pursuant to the terms
of the Declaration of Trust attached as Exhibit [ ], which grants full
management control to the manager.
26
The Master Fund
The Master Fund is a Delaware limited liability company organized on
December 7, 2005. The Master Fund maintains its main business office at 333
West Wacker Drive, Chicago, Illinois 60606. The Master Fund is a commodity
pool. It operates pursuant to the terms of the LLC Agreement attached as
Exhibit [ ] to this prospectus, which grants full management control to
the manager.
The Master-Feeder Structure
The Fund will invest all of its assets in the Master Fund. The Fund will
hold no investment assets other than Master Fund units. The Master Fund will
pay expenses on behalf of the Fund and such expenses will reduce the net asset
value of Fund shares. The Fund will own approximately 99% of the Master Fund
units, and the manager will own the remaining Master Fund units. The investment
results of the Fund will be directly and completely dependent on the investment
results of the Master Fund.
Trustees
Wilmington Trust Company, a Delaware trust company, is the Delaware Trustee
of the Fund. The Delaware Trustee's principal offices are located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890. The
Delaware Trustee is unaffiliated with the manager. The Delaware Trustee's
duties and liabilities with respect to the offering of the shares and the
Fund's management are limited to its express obligations under the Declaration
of Trust. The rights and duties of the Delaware Trustee, the individual
Trustees, the manager and the shareholders are governed by the provisions of
the Delaware Statutory Trust Act and by the Declaration of Trust.
The individual Trustees will include [two] officers of the manager and
[three] independent member who make up the audit committee and meet the
independent director requirements established by the American Stock Exchange
and the Sarbanes-Oxley Act of 2002. The individual Trustees are listed below:
[chart of trustee information]
Manager and Subadvisors
The Manager. Nuveen Commodities Asset Management, LLC is the manager of the
Master Fund, and will be responsible for determining the Master Fund's overall
investment strategy and its implementation, including:
. the selection and ongoing monitoring of:
(a) the commodity subadvisor, to invest the portion of the Master
Fund's assets to be invested pursuant to TAP/SM/ and the integrated
investment strategy; and
(b) the collateral subadvisor, to invest the Master Fund's collateral
in short-term, investment grade debt instruments;
. the management of the Fund's and the Master Fund's business affairs; and
. the provision of certain clerical, bookkeeping and other administrative
services for the Fund and the Master Fund.
If the manager determines that it is in the best interests of Fund
shareholders to do so based on existing market conditions or otherwise, the
manager may change, or temporarily deviate from, the Master Fund's investment
strategy and the manner in which the strategy is implemented.
The manager is a wholly-owned subsidiary of Nuveen Investments, a Delaware
corporation. Founded in 1898, Nuveen Investments and its affiliates had over
$136 billion of assets under management as of December 31, 2005. Nuveen
Investments is a publicly-traded company.
27
The manager is registered with the CFTC as a CTA (effective date of
registration January 4, 2006) and as a CPO (effective date of registration
January 4, 2006) and is a member of the NFA. [The manager's business and
affairs are managed by a board of directors, which will be comprised of [four]
management directors who also are the executive officers of the Fund [and the
Master Fund,]. The manager has no operating history or experience in operating
a commodity pool.
John P. Amboian is the President of the manager, William Adams IV is the
Executive Vice President of the manager and Julia Antonatos and Gifford R.
Zimmerman are each Managing Directors of the manager. Mr. Amboian (age 44) has
been President of Nuveen Investments, Inc. and its various subsidiaries since
May 1999. Prior thereto, he served as Executive Vice President of Nuveen
Investments, Inc. and its subsidiaries since June 1995. Mr. Adams (age 50) has
been Executive Vice President, U.S. Fund Products of Nuveen Investments, Inc.
since December 1999. Prior thereto, Mr. Adams was Managing Director of
Structured Investments effective September 1997 and Vice President and manager,
Corporate Marketing effective August 1994. Ms. Antonatos (age 42) is a Managing
Director (since 2005) of Nuveen Investments, LLC. Prior thereto, Ms. Antonatos
was a Vice President, from 2002 to 2005, and an Assistant Vice President, from
2000 to 2002, of Nuveen Investments, LLC. Mr. Zimmerman (age 49) is a Managing
Director (since 2002), Assistant Secretary and Associate General Counsel of
Nuveen Investments, LLC. Prior thereto, Mr. Zimmerman was a Vice President and
Assistant General Counsel of Nuveen Investments, LLC. Mr. Zimmerman also serves
as a Managing Director (since 2002), General Counsel and Assistant Secretary of
Nuveen Asset Management and Managing Director (since 2004) and Assistant
Secretary (since 1994) of Nuveen Investments, Inc.
Commodity Subadvisor.
Background and Personnel. The manager has selected Gresham to manage the
assets of the Master Fund to be invested pursuant to TAP/SM/ and the integrated
investment strategy. Gresham is a Delaware limited liability company, the
successor to Gresham Investment Management, Inc. formed in July 1992. Gresham
maintains its main business office at 67 Irving Place, 12/th/ Floor, New York,
NY 10003. Gresham 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 also is registered with
the SEC as an investment adviser. Gresham's sole business activity is to render
commodity interest advisory services and manage assets on behalf of its clients
and administers two trading programs (TAP/SM/, and TAP/SM/ and the integrated
investment strategy). Gresham has not previously employed TAP/SM/ and the
integrated investment strategy for its own account or for the accounts of
clients.
Gresham's principals are Jonathan S. Spencer, Douglas J. Hepworth,
Dr. Stanley A. Lefkowitz and Dr. Henry G. Jarecki. Mr. Spencer is responsible
for investing the Master Fund's assets in TAP/SM /and the integrated investment
strategy.
Mr. Spencer (age 42), the President of Gresham since August 1995, has been
registered with the CFTC as a principal and associated person of Gresham since
August 17, 1994. Mr. Spencer is responsible for Gresham's day-to-day
operational and administrative matters. In December 1986, Mr. Spencer began
working for The Falconwood Corporation, a family office that is affiliated with
Gresham and that manages investments and affairs for the Jarecki family, and is
currently a portfolio manager and an Executive Vice President of that office.
Mr. Spencer also is the President of Enhanced Index Management, LLC, a Delaware
limited liability company formed in March 1999 ("EIM"). Additionally,
Mr. Spencer was the President of KPQ Futures, futures commission merchant, from
September 1991 to July 1995, and Executive Vice President of Windham Futures
Corporation ("Windham") (formerly Brody, White & Company, Inc.), a futures
commission merchant, from August 1995 to August 1996. Mr. Spencer received a
Bachelor of Science Degree in Management Information Systems from the State
University of New York at Buffalo in 1986.
Mr. Hepworth (age 45) is an Executive Vice President of Gresham since
January 2004. He is registered with the CFTC as a principal and associated
person of Gresham. Mr. Hepworth is the Director of Research and the
28
Director of Marketing for Gresham and a member of the Investment Policy
Committee for TAP/SM/. Mr. Hepworth re-joined The Falconwood Corporation in
April 2000 as Director of Research and currently holds that title. He had
worked there from June 1993 until June 1995; in the interim he worked for
Millennium Partners, a multi-strategy hedge fund based in New York.
Mr. Hepworth received his BA from Columbia College in 1982 and earned his CFA
designation in 1994.
Dr. Lefkowitz (age 62) is an Executive Vice President and the Secretary of
Gresham and has been registered with the CFTC as a principal of Gresham since
August 17, 1994. Dr. Lefkowitz also is the Secretary of EIM. Dr. Lefkowitz was
a principal of KPQ Futures from September 1991 to July 1995 and an Executive
Vice President of Windham from August 1995 to August 1996. Dr. Lefkowitz
graduated from Temple University in 1965 with a Bachelor of Arts degree in
Chemistry and from Princeton University in 1970 with a Ph.D. in Chemistry.
Dr. Jarecki (age 72) is the Chairman of Gresham since 1992 as well as the
head of the Investment Policy Committee for TAP/SM/. Dr. Jarecki is known in
the precious metals business for his work with Mocatta & Goldsmid, bullion
dealers to the Bank of England since 1671, and with Mocatta Metals Inc., a
company he founded and later sold to Standard Chartered Bank. In addition,
Dr. Jarecki's career has included senior management positions at international
commodity futures trading and brokerage firms, Brody White & Co., Inc. and
Brody White (UK) Ltd., until their sale to the FIMAT arm of Societe Generale.
Dr. Jarecki was the Chairman of MovieFone, Inc. until its sale to America
Online in 1999. Dr. Jarecki was a Director of the NFA from 1979 to 1993 and
served as a Director of the Commodity Exchange, Inc. from 1970 to 2002, the
Chicago Board of Trade from 1970 to 1996, and the Futures Industry Association
from 1979 to 1985. Dr. Jarecki has been continually employed by the Falconwood
Corporation which he founded in 1976, and is the Chairman of that company.
Dr. Jarecki was the Chairman of the Board of Windham from 1971 until August
1996. He is a graduate of the University of Heidelberg and is a practicing
physician.
Gresham Investment Philosophy and Process. Gresham will pursue the Master
Fund's investment objectives by utilizing an actively managed, rules-based
commodity investment strategy and an integrated investment strategy, each
discussed below. Gresham believes that commodities as an asset class are
under-represented 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 equity securities and debt instruments. Because the structure and
operation of the commodity futures markets provide an opportunity for investors
to potentially achieve positive total returns, Gresham believes that fully
collateralized long commodity futures contracts offer investors the most direct
access and exposure to commodities as an asset class. Over the long-term,
systematic, fundamental, rules-based programs that invest in fully
collateralized long commodity futures contracts offer the potential for
positive total returns with low correlations to equity and debt markets.
Gresham believes that such rules-based programs (i) should focus on
fundamental, qualitative factors, including world-wide production trends,
trading volumes for commodity contracts, the volatility of futures contract
prices and the liquidity of markets and (ii) create consistent exposure through
a highly diversified basket of commodities that may substantially reduce the
volatility of returns compared with investments in individual commodities or
small groups of commodities with limited diversification. Gresham believes that
the commodity markets offer a variety of tools that may be incorporated into an
integrated strategy to systematically manage downside risk, generate current
cash flow, and create the potential for improved risk adjusted returns.
Commodity Investment Strategy (TAP/SM/). So long as Gresham is the
commodity subadvisor, the Master Fund's assets will be actively managed using a
rules-based commodity investment strategy known as TAP/SM/ that invests in a
diversified basket of commodity futures and forward contracts with an aggregate
notional value substantially equal to the net assets of the Master Fund.
TAP/SM/ is fundamental in nature and is designed to maintain a consistent
exposure to commodities as an asset class. TAP/SM/ does not require the
existence of price trends in order to be successful. Commodities as an asset
class have traditionally provided diversification benefits to equity and fixed
income portfolios. In addition, Fund shareholders may benefit from futures and
forward contract price movements.
29
TAP/SM/ currently requires investment in futures or forward contracts for
three commodities in each of the energy, industrial metals, livestock,
agriculturals, tropical foods and fibers and precious metals commodity groups.
Commodity group weightings and individual commodity weightings are chosen by a
process that blends two-thirds of five year global production value and
one-third of five year value of commodity futures contracts traded in dollars.
The process constrains the weightings of each commodity group such that no
group may constitute more than 35% of TAP/SM/ and no single commodity can
constitute more than 70% of its group. In addition, each commodity is
rebalanced continually to its target weighting if its actual weighting deviates
from its target by more than 10%.
To make commodities futures investing comparable to typical unleveraged
positions in equities and bonds, the futures need to be fully collateralized
(typically, futures contracts have margin requirements that are 10% or less of
the face value of the contract). In a fully collateralized futures purchase,
the total return on commodity futures is composed of the price, roll, and
collateral return. The price return reflects the movement in the spot price of
the commodities; roll return measures the returns from investing in nearby
futures contracts and rolling them over into the next nearby contract shortly
prior to their expiration; and the portion of the collateral posted with the
futures commission merchant as margin will return the 90-Day Treasury Bill
rate. The balance of the collateral is managed by the collateral subadvisor for
additional income through investment grade debt instruments.
Integrated Investment Strategy. The Master Fund will purchase
"out-of-the-money" commodity put options on a continual basis on all or
substantially all of the notional value of its commodity futures and forward
positions in order to seek protection against significant declines in the net
asset value of the Fund's shares due to declines in the Master Fund's commodity
investments. The Master Fund also will write commodity call options on a
continual basis on approximately 50% of the notional value of each of its
commodity futures and forward contract positions to obtain premium cash flow.
The Master Fund will purchase put options on broad based commodity indices,
such as the DJ/AIG-CI or the GSCI, or on custom indices, whose prices are
expected to closely correspond to at least a substantial portion of the long
commodity futures and forward contracts held by the Master Fund. The Master
Fund may also purchase put options on baskets of commodities and on individual
futures and forward contracts held by it. The commodity put options that the
Master Fund will purchase will be approximately 8 to 12% "out-of-the-money".
The commodity put options will generally have terms of approximately 1 year,
but may have terms of up to 3 years. The Master Fund will purchase OTC
commodity put options and non-U.S. exchange-traded put options that are
"European-Style." As a holder of a commodity put option, the Master Fund, in
exchange for payment of a premium, has the right to receive from the seller of
the commodity put option, if the current price is lower than the put exercise
price, the difference between the put exercise price and the current price of
the underlying commodity futures or forward contract on or before a specified
date. Because the put options purchased by the Master Fund will be
"out-of-the-money," the Master Fund's portfolio will not be fully protected
against, and will bear the loss associated with, a market decline down to the
exercise price of the option.
The Master Fund also will write near term, "out-of-the-money" call options
on individual futures and forward contracts held by it, on baskets of
commodities or on broad based commodity indices, such as the DJ/AIG-CI or the
GSCI, whose prices are expected to closely correspond to those of at least a
substantial portion of the commodity futures and forward contracts held by the
Master Fund. The Master Fund will write commodity call options that are U.S.
exchange-traded and that are "American-style." The Fund also will write
commodity call options that are non-U.S. exchange-traded and that are
"European-style." The Master Fund will write commodity call options on
approximately 50% of each of its commodity futures and forward contracts. The
Master Fund will write commodity call options that are approximately 5 to 10%
"out-of-the-money" and that have terms of 6 months. As the writer of the call
option, the Master Fund sells, in exchange for receipt of a premium, the right
to any appreciation in the value of the futures or forward contract over a
fixed price (the exercise price) on or before a certain date in the future. If,
on or before the expiration of the call option, the purchaser exercises the
call option, the Master Fund will be obligated to sell the futures or forward
contract to the purchaser of the call at the option exercise price and will
likely replace the futures or forward contract at a price that might be
significantly higher.
30
Assuming that the changes in the value of the commodity investments
underlying the value of the Master Fund's call options will approximate the
changes in the value of the Master Fund's commodity futures and forward
contracts (which cannot be assured), the combination of the Master Fund's
commodity investment strategy and the writing of "out-of-the-money" commodity
call options will result in the Master Fund:
. effectively retaining all of the annual appreciation, if any, as to
approximately 50% of its commodity futures and forward contracts, and
. effectively retaining up to approximately 5% to 10% of the annual
appreciation, if any, as to the other approximately 50% of its commodity
futures and forward contracts.
Regardless of the price performance of the commodity futures or forward
contract, the Master Fund will retain the option premium cash flow received by
the Master Fund for writing the call option.
Collateral Subadvisor.
Background and Personnel. The manager has selected the collateral
subadvisor to invest the Master Fund's collateral in short-term, investment
grade quality debt instruments. The collateral subadvisor, like the manager, is
a wholly-owned subsidiary of Nuveen Investments. Effective January 1, 2005,
Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. (prior thereto,
each a separate investment advisory subsidiary of Nuveen Investments) were
reorganized into Nuveen Asset Management. The collateral subadvisor and its
predecessors have been providing investment advice to mutual funds, closed-end
funds and/or other institutional and retail clients since 1976. As of December
31, 2005, the collateral subadvisor had approximately $61 billion in assets
under management. The collateral subadvisor is comprised of two seasoned
investment teams: a Chicago-based municipal fixed income team and a Los
Angeles-based taxable fixed income team. The taxable fixed income team has
worked together since 2000 (including time at other firms) with senior
professionals averaging over 17 years of investment experience. The team has
diverse and extensive experience in credit research, economic analysis,
financial engineering and risk management. The collateral subadvisor's taxable
fixed income team manages assets in several different strategies including
multistrategy short-term, multistrategy core plus, high yield, emerging markets
debt, and alpha transport. The Master Fund's collateral will be invested in
short-term investment grade debt instruments, including obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities;
corporate obligations; and asset-backed securities. Such instruments are common
investments for the collateral subadvisor in several of its investment
strategies.
Andrew Stenwall (age 40) is a Managing Director and Chief Investment Officer
of the Nuveen Taxable Income Team and is responsible for the Master Fund's
collateral debt instruments. Prior to joining Nuveen Asset Management in 2004,
Mr. Stenwall served as the Fixed Income CIO for Bank of America Capital
Management. Before becoming the Fixed Income CIO in 2002, Mr. Stenwall was the
Managing Director in charge of taxable fixed income and the leader of the
structured products team. From 1995 through 1997, Mr. Stenwall worked for
Lazard Freres Asset Management as a senior portfolio manager. Mr. Stenwall
received his MBA from the Anderson Graduate School of Management at UCLA and a
bachelor's degree in aeronautical engineering from Rensselaer Polytechnic
Institute.
Investment Philosophy and Process. The Master Fund's investments in
commodity futures and forward contracts, options on commodity futures and
forward contracts and OTC commodity put options generally will not require
significant outlays of principal. The collateral subadvisor will invest the
collateral using a short-term, near-cash, fixed-income strategy. The collateral
subadvisor will seek to outperform money market benchmarks using a top-down,
relative value portfolio construction process. The approach will emphasize
current income, liquidity and preservation of capital. As a result, the Master
Fund anticipates that it will maintain significant collateral that will be
invested in short-term debt instruments with maturities up to 2 years that, at
the time of investment, are investment grade quality, including obligations
issued or guaranteed by the U.S. government, its agencies and
instrumentalities, corporate obligations and asset-backed securities. A debt
instrument is considered investment grade quality if it is rated within the
four highest grades (BBB- or Baa3 or better by S&P, Moody's or Fitch) by 2 or
more nationally recognized statistical rating organizations that rate such
instrument, or if it is unrated but judged to be of comparable quality by the
collateral subadvisor. The collateral subadvisor expects to maintain a
portfolio of debt instruments with an average credit quality of AA (or A1/P1
with respect to short-term instruments).
31
Management Fees
The Master Fund has agreed to pay an annual fee based on its average daily
assets, as calculated daily, for the services and facilities provided by the
manager, payable on a monthly basis, according to the following schedule:
Average Daily Managed Assets Management Fee
---------------------------- --------------
Up to $500 million......... 1.250%
$500 million to $1 billion. 1.225%
$1 billion to $1.5 billion. 1.200%
$1.5 billion to $2 billion. 1.175%
$2 billion and over........ 1.150%
Pursuant to an agreement between the manager and the commodity subadvisor,
the commodity subadvisor will receive from the manager a fee based on the
Master Fund's average daily assets, payable on a monthly basis as follows:
Average Daily Managed Assets Management Fee
---------------------------- --------------
Up to $500 million......... 0.3500%
$500 million to $1 billion. 0.3375%
$1 billion to $1.5 billion. 0.3250%
$1.5 billion to $2 billion. 0.3125%
$2 billion and over........ 0.3000%
Pursuant to an agreement between the manager and the collateral subadvisor,
the collateral subadvisor will receive from the manager a fee based on the
Master Fund's average daily assets, payable on a monthly basis as follows:
Average Daily Managed Assets Management Fee
---------------------------- --------------
Up to $500 million......... 0.3000%
$500 million to $1 billion. 0.2875%
$1 billion to $1.5 billion. 0.2750%
$1.5 billion to $2 billion. 0.2625%
$2 billion and over........ 0.2500%
In addition to the fee of the manager, the Master Fund pays all other costs
and expenses of its operations, including [custodian], transfer agent expenses,
legal fees, expenses of independent auditors, expenses of preparing, printing
and distributing shareholder reports, notices, proxy statements, reports to
governmental agencies, and taxes, if any.
Unless earlier terminated, the manager's agreement with each of the
subadvisors will remain in effect for two years from the commencement of the
Master Fund's investment operations, and are renewable for periods of up to two
years. The agreements may be terminated at any time, without penalty, by either
the manager or a subadvisor upon 60 days written notice. If the manager
determines it is in the best interests of shareholders to select additional
CTAs or replace a subadvisor, the manager will consider certain information
with respect to each new CTA, including the following:
. general information including the identity of its affiliates and key
personnel;
. investment strategy and risk management of the CTA;
. the CTA's financial condition;
. relevant performance history and the quality of services provided;
. fees and expenses; and
. capacity to take on new business.
32
Regulatory and Litigation
Within the past 5 years of the date of this prospectus, there have been no
material administrative, civil or criminal actions against the manager, the
underwriters, the subadvisors, or any principal or affiliate of any of them.
This includes any actions pending, on appeal, concluded, threatened, or
otherwise known to them.
GRESHAM PERFORMANCE RECORD
Gresham and two of its principals, Dr. Jarecki and Mr. Spencer have directed
one proprietary account, a family trust, from January 1987 through the present.
Gresham was formed in 1992 to continue the management of this account. Gresham
began managing client accounts in September 2004 and continues to manage client
accounts to-date. All of these accounts are traded pursuant to one strategy,
the Tangible Asset Program (TAP/SM/). The capsule performance table on the
following page reflects the actual trading performance of Gresham's client
accounts traded pursuant to TAP/SM/ and does not include performance based on
the use of the integrated investment strategy. The actual performance record of
Gresham's proprietary account using TAP/SM/ is set forth in the Supplemental
Performance Record included in Part Two.
The results set forth in the accompanying performance records may not be
representative of the results that may be achieved by Gresham in the future, in
part because past results are not necessarily indicative of future results.
Also, Gresham has not previously employed the integrated investment strategy
and as a result, its historical performance record is not based on an
investment approach that is identical to the investment approach to be used for
the Master Fund. Additionally, the risk assumed and, consequently, the
potential for profit experienced by a particular account at different times,
and by different accounts at the same time, vary significantly according to
market conditions and other factors described under the heading "Conflicts of
Interest."
Future investment performance also will be affected by the increasing amount
of funds managed by the commodity subadvisor. For example in certain commodity
investments, the commodity subadvisor may be unable to acquire positions as
large as its strategy might otherwise dictate, because the sizes of these
positions are limited by legal regulations. Also, "skid" or "slippage" (the
difference between ideal and actual trade execution prices, and the transaction
cost resulting therefrom) may increase with the execution of larger orders.
Finally, fewer commodity investments may be sufficiently liquid to trade,
reducing diversification and opportunities to profit.
For all of the above reasons, no investor should expect the same performance
as that of any other account traded previously, simultaneously or subsequently
by Gresham, its principals, or the composite presented herein, as past
performance is not necessarily indicative of future results.
33
Composite Performance Capsule for Gresham Investment Management LLC
(assets under management as of 12/31/05 were approximately $492 million)
Name of CTA: Gresham Investment Management LLC
Name of Trading Program: Tangible Asset Program (TAP/SM/)
Inception of Trading by CTA: July 1, 1992
Inception of Trading in Offered Program: September 2, 2004
Number of accounts currently traded pursuant to the
program as of 12/31/05: 2
Total notional assets/1/ traded pursuant to the
program as of 12/31/05: $491,565,000
Largest monthly draw-down/2/: -5.89%
Worst peak-to-valley draw-down/3/: -6.053% from March 31 - May 31, 2005
Number of profitable accounts that are open: 3
Number of profitable accounts that are closed: 2
Range of returns experienced by profitable open accounts: 3.25% to 25.25%
Range of returns experienced by profitable closed
accounts: 0.66% + 0.66%
Number of losing accounts that have opened: 0
Number of losing accounts that have closed: 0
- --------
1 Notional assets means those assets controlled by the collateral subadvisor
regardless of the quantity of equity used to control those assets.
2 Draw-down means any portfolio loss.
3 Peak-to-valley draw-down is the percentage decline between the portfolio's
highest value during a particular time frame and its lowest subsequent value
during the same time frame.
Past Performance is Not Necessarily Indicative of Future Results. Pursuant
to applicable rules of the CFTC, the performance record for TAP/SM/ is
presented since inception because it has less than a five year record. The
Composite Performance Capsule and the Rates of Return apply only to TAP and do
not include the integrated investment strategy.
Rate of Return (Net)
Month 2004 2005 2006
----- ----- ----- ----
January.. -- 4.30% 2.76%
February. -- 6.51% --
March.... -- 2.85% --
April.... -- -5.53% --
May...... -- -0.56% --
June..... -- 1.94% --
July..... -- 4.30% --
August... -- 6.83% --
September 5.19% 2.43% --
October.. 1.19% -4.14% --
November. 0.41% 0.52% --
December. -5.82% 3.24% --
Year..... -- 24.25% --
- --------
Notes to Table:
1) The Rates of Return are net of all fees and expenses. Fees and expenses
include commissions and fees, administration fees, legal fees, audit fees
and management fees.
2) Gresham managed two separately managed accounts from August 31, 2004 to
December 10, 2004. These accounts have been closed and were charged a
monthly management fee annualized at 0.75%.
34
3) Annualized commissions, transaction fees and expenses, including
administration, legal, accounting and a maximum management fee of 1.25%,
amounted to 1.40% of assets under management.
4) The composite performance does not include a family office account
beneficially owned by Dr. Jarecki, one of the principals of the commodity
subadvisor, that was managed by Mr. Spencer pursuant to TAP/SM/. The results
of this account are presented in Part Two of this prospectus under
"Supplemental Performance Tables."
THE COMMODITY BROKER
Lehman Brothers Inc. ("Lehman") will act as the commodity broker for the
Master Fund and will clear transactions that may be executed by other brokerage
firms on a "give-up" basis. In addition, Lehman may select other brokers or
dealers to execute forward contracts and OTC commodity put options. Lehman is a
wholly owned subsidiary of Lehman Brothers Holdings Inc. Lehman has been known
by various names since its organization and has been known by its present name
since August 1993. Lehman is registered under the CEA as a futures commission
merchant and a commodity pool operator, and is a member of the NFA. Lehman is
also registered with the SEC as a securities broker-dealer. Lehman is a member
of all major U.S. futures exchanges. Lehman's main office is located at 745
Seventh Avenue, New York, NY 10019. Lehman's telephone number at such location
is (212) 526-7000.
The Master Fund has entered into a commodity brokerage agreement with Lehman
that provides that Lehman is authorized to execute transactions to purchase and
sell commodity futures contracts and options on commodity futures contracts for
the account of the Master Fund in accordance with instructions of the commodity
subadvisor, that the Master Fund will promptly pay all margin requirements and
investment losses, that either party may terminate the agreement upon notice.
All assets, contracts and property of the Master Fund directly held by Lehman
are held in accordance with applicable laws and regulations, including the CEA
and CFTC regulations. Lehman is paid commissions for clearing and/or executing
commodity interest transactions on behalf of the Master Fund.
Except as noted below, in the last five years, there have not been any
administrative, civil, or criminal actions, pending or concluded, against
Lehman that are "material" as that term is defined in Section 4.24(l)(2) of the
Regulations of the Commodity Futures Trading Commission.
On December 20, 2002, Lehman reached an agreement in principle with the SEC,
the New York State Attorney General's Office, the New York Stock Exchange, the
NASD and the North American Securities Administrators Association (on behalf of
state securities regulators) to resolve their investigation relating to
allegations of analyst conflicts of interest.
On April 28, 2003, a final global regulatory settlement based on the
agreement in principle was announced, involving several of the leading
securities firms in the U.S., including Lehman, and various federal and state
regulators and self-regulatory organizations. Without admitting or denying any
of the allegations of violations of certain NASD and NYSE rules relating to
investment research activities, Lehman entered into consents and agreements
with the SEC, the NYSE, the NASD and the Alabama Securities Commission (which
acted as Lehman's lead state regulator in connection with the settlement) to
resolve their investigations of Lehman relating to those matters.
Pursuant to the settlement, Lehman agreed to (i) pay $25 million as a
penalty, (ii) pay $25 million as disgorgement of commissions and other monies,
(iii) contribute a total of $25 million over five years to provide third-party
independent research to clients, (iv) contribute a total of $5 million over
five years towards investor education, (v) adopt internal structural and
operational reforms that will further augment the steps it has already taken to
promote research analyst independence and (vi) be enjoined from the alleged
violations of NASD and NYSE rules. In connection with the final settlement,
Lehman also voluntarily agreed to adopt restrictions on the allocation of
shares in initial public offerings to executives and directors of public
companies.
35
Lehman expects to reach similar arrangements with most or all of the other
states, the District of Columbia and the Commonwealth of Puerto Rico. Any
monetary penalties and other payments required by these individual arrangements
are expected to be included within the aggregate amounts discussed above.
Lehman has not passed on the adequacy or accuracy of this prospectus. Lehman
neither will act in any supervisory capacity with respect to the manager,
commodity subadvisor or collateral subadvisor nor participate in the management
of those entities, the Fund or the Master Fund. Therefore, prospective
investors should not rely on Lehman in deciding whether or not to invest in the
Fund.
CONFLICTS OF INTEREST
Conflicts Relating to the Manager. There are present and potential future
conflicts of interest in the Fund's structure and operation you should consider
before you purchase shares. The manager will use this notice of conflicts as a
defense against any claim or other proceeding made.
The collateral subadvisor is an affiliate of the manager. As a result of
this affiliation the fee paid out of the manager's fee to the collateral
subadvisor has not been established by "arm's-length" negotiation, and the
manager has less of an incentive to replace the collateral subadvisor.
The manager has sole current authority to manage the investments and
operations of the Fund and the Master Fund, and may act to create a conflict
with shareholders' best interests. For instance, although the manager intends
to cause the Master Fund to make monthly distributions to the Fund, and in
turn, to cause the Fund to make monthly distributions to shareholders, it has
the discretion to withhold distributions, which could have the effect of
increasing its management fees. Your lack of voting control will limit your
ability to influence matters such as amendment of the Declaration of Trust,
change in the Fund's and the Master Fund's basic investment policy, the
expenses incurred by the Fund, dissolution of the Fund or the Master Fund, or
the sale or distribution of the Fund's or the Master Fund's assets.
Conflicts Relating to Individual Trustees of the Fund. Two of the
individual Trustees of the Fund are officers of Nuveen Investments and the
manager. As a result, those individual Trustees may have conflicts of interest
when dealing with issues involving Nuveen Investments and/or the manager on the
one hand, and the Fund on the other hand.
Conflicts Relating to the Commodity Subadvisor. Situations may arise where
the Master Fund could be disadvantaged because of activities conducted by the
commodity subadvisor for other clients or for the commodity subadvisor, its
principals, affiliates or employees. Such situations may be based on, among
other factors, legal restrictions on the combined size of commodity positions
(commonly referred to as "position limits") that may be taken for all accounts
managed by the commodity subadvisor and its principals; the difficulty of
liquidating an investment for more than one account where the market cannot
absorb the sale of the combined positions; or the determination that a
particular investment is warranted only if hedged with an option and there is
limited availability of such options. It is possible that investment decisions
of the commodity subadvisor may be modified and that positions held by the
Master Fund may have to be liquidated to avoid exceeding such limits. Instances
also may arise where the commodity subadvisor determines that an investment
opportunity is suitable for more than one account but the market is too
illiquid to enable each such client to participate to the extent advisable. In
the above situations, or in other situations in which conflicts arise, the
commodity subadvisor will endeavor to allocate investment opportunities fairly.
The commodity subadvisor in the future may manage accounts that pay higher
advisory fees than the Master Fund, which may provide the commodity subadvisor
with a financial incentive to favor such other accounts over the Master Fund.
36
Commodity contract orders for a client account may, but are not required to,
be combined with orders for other accounts managed by the commodity subadvisor,
including other client accounts and proprietary accounts. When orders are
combined and it is not possible to receive the same execution price, the
commodity subadvisor utilizes average pricing when allocating executed orders
among accounts where possible, and a client account will be charged or credited
with the average price. The effect of the average price may operate on some
occasions to the disadvantage of the Master Fund. Where it is not possible to
use average pricing, the commodity subadvisor will allocate executed orders in
accordance with a systematic methodology that is designed to assure equitable
treatment of all accounts over time. The effect of using this methodology may
on some occasions disadvantage the Master Fund.
Conflicts Relating to the Manager and the Commodity Subadvisor. The manager
and the commodity subadvisor, respectively, intend to operate other domestic
and foreign commodity pools in the future. The manager and the commodity
subadvisor and their principals therefore may be subject to conflicting demands
in respect of their obligations to accounts managed and commodity pools
operated by them. The manager and the commodity subadvisor and their principals
will endeavor to treat each commodity pool and managed account fairly and will
not intentionally favor one account or commodity pool over any other.
Principals, affiliates, and employees of the manager and the commodity
subadvisor, from time to time, may trade for their own accounts. This could
involve a conflict of interest in that such trades may be different from, or
opposite to, those of clients. It is possible that the proprietary positions
taken by the manager or commodity subadvisor's principals, affiliates, and
employees may not be held for the same period of time or may be in different
markets than positions taken by the commodity subadvisor on behalf of a
client's account. Accordingly, no assurance may be given that the proprietary
trading results of the principals, affiliates, and employees of the manager or
commodity subadvisor will be the same as the performance in a client's account.
Moreover, the trading records of the proprietary accounts of the principals,
affiliates, and employees of the manager and the commodity subadvisor will not
be available for review or inspection by clients. It is the commodity
subadvisor's fiduciary responsibility, however, to trade all client accounts in
the best interests of the clients. Although principals, affiliates, and
employees of the manager or commodity subadvisor may, from time to time, trade
for their own account, they will not be permitted to take positions recommended
for client accounts ahead of, or on a more favorable basis than, client
accounts. However, as stated, situations may arise where the Master Fund could
be disadvantaged because of such trading activity. Because each client's fee
arrangement may be different, a potential conflict may arise in the allocation
of the commodity subadvisor's time and resources among clients paying differing
fees.
Officers of the commodity subadvisor are not permitted to establish,
maintain or accept any authority or payments relating to any commodity or
commodity-related brokerage accounts, whether in the officer's own name or in
the name of any other person or entity, without obtaining the commodity
subadvisor's prior consent. Officers of the commodity subadvisor are required
to notify the commodity subadvisor in writing if they maintain a personal
securities account at a brokerage firm and, in such a case, duplicate account
statements must be provided to the commodity subadvisor. The commodity
subadvisor requires its officers who are involved in its advisory business or
who have access to information regarding pending transactions for advisory
clients to enter transactions for their own personal accounts contemporaneously
(to the extent practicable) with transactions being effected for the commodity
subadvisor or any of its advisory clients, or to refrain from engaging in
transactions for their own personal accounts of the nature being effected for
the commodity subadvisor or any of its advisory clients until the latter have
been completed. To the extent that the commodity subadvisor adds personnel to
its payroll in the future, such personnel will be held to the same standard and
subject to the same conditions and restrictions on proprietary trading as
officers of the commodity subadvisor. In the interests of privacy, clients will
not be permitted to inspect the records of trading by the commodity subadvisor,
its affiliates, principals, and employees. In addition, entities controlled by
Dr. Jarecki and the commodity subadvisor's principals, affiliates, and
employees, may buy or sell the same commodity futures and forward contracts and
options on commodity futures and forward contracts and U.S. government
securities for their own account that the commodity subadvisor transacts on
behalf of its advisory clients, including the Master Fund. The commodity
subadvisor's internal policy provides for a quarterly and annual review by its
chief compliance officer of the
37
brokerage statements of Jarecki entities, as well as those of other related
persons, to ensure no conflicts of interest exist. The commodity subadvisor has
a code of ethics, which, among other things, governs personal securities
trading activities in the accounts of its employees and principals.
The Commodity Broker. Participants in the futures market typically maintain
relationships with two types of commodity brokers: executing brokers and
clearing brokers. The executing broker is the one who executes the transactions
on the exchange, and the clearing broker is the one who clears the transactions
and maintains custody of the customer's funds deposited as margin and its
positions. The Master Fund intends to use Lehman as its clearing broker and the
executing broker on various commodity transactions by the Master Fund and may
also act as a dealer or counterparty on forward contracts entered into by the
Master Fund. The Master Fund may also place orders with different executing
brokers. The executing broker may act from time to time as an executing broker
for its own account, accounts of affiliates or accounts in which it or one of
its affiliates has a financial interest. The compensation received by the
executing broker from such accounts may be more or less than the compensation
received for brokerage, forward trading and dealer services provided to the
Master Fund. In addition, various accounts traded through the executing broker
(and over which their personnel may have discretionary trading authority) may
take positions in the futures markets opposite to those of the Master Fund or
may compete with the Master Fund for the same positions. The executing broker
may have a conflict of interest in its execution of trades for the Master Fund
and for other customers. The commodity subadvisor will, however, not retain any
executing broker for the Master Fund which the commodity subadvisor has reason
to believe would knowingly or deliberately favor any proprietary account or
other customer account over the Master Fund with respect to the execution of
commodity interest positions.
The executing broker will benefit from executing orders for other clients,
whereas the Master Fund may be harmed to the extent that the executing broker
has fewer resources to allocate to the Master Fund's accounts due to the
existence of such other clients.
Certain officers or employees of the commodity brokers may be members of
U.S. commodities exchanges and/or serve on the governing bodies and standing
committees of such exchanges, their clearing houses and/or various other
industry organizations. In such capacities, these officers or employees may
have a fiduciary duty to the exchanges, their clearing houses and/or such
various other industry organizations which could compel such employees to act
in the best interests of these entities, perhaps to the detriment of the Master
Fund.
38
INVESTMENT POLICIES OF THE MASTER FUND
Liquidity
The Master Fund invests only in commodity futures and forward contracts that
are traded in sufficient volume to permit, in the manager's opinion, ease of
taking and liquidating positions in these financial interests. Sufficient
volume includes only those futures and forward contracts that trade at least
200,000 contracts per year and that are in the top three of their respective
commodity groups by a measure that includes trading volume.
Leverage
Although the Master Fund has no current intention to utilize leverage (and
subject to the specified limitation noted below), the Master Fund may utilize
leverage through the issuance of its preferred units and/or borrowings. The
Master Fund (and the Fund) may not utilize leverage in an amount exceeding 33%
of the Master Fund's capital after such leverage. In the event that the Master
Fund determines in the future to use leverage through the issuance of preferred
units or borrowings, there can be no assurance that the Master Fund's leverage
strategy will be successful. The use of leverage creates special risks for
shareholders of the Fund, including the likelihood of greater volatility of net
asset value and market price of shares and the risk that fluctuations in rates
on preferred units or in borrowing costs may affect the return to shareholders.
The Master Fund will pay any costs and expenses relating to the issuance and
ongoing maintenance of any preferred units and borrowings, which will result in
a reduction of the net asset value of the Master Fund units, and consequently
the Fund's shares, if the Master Fund utilizes leverage. In addition, the fee
paid to the manager will be calculated based on the Master Fund's average daily
assets (including assets attributable to any preferred units that may be
outstanding and the principal amount of any borrowings).
Other Borrowings
Except as noted above regarding leverage, borrowings will not be used by the
Master Fund, unless the Master Fund is required to borrow money in the event of
delivery, if the Master Fund trades in cash commodities, or for short-term
needs.
Portfolio Restrictions
Commodity Put and Call Options. The Master Fund expects to purchase
commodity put options and write call options on commodity futures and forward
contracts, subject to the following restrictions. The Master Fund may only:
. purchase exchange-traded or OTC put options, provided that immediately
after any such purchase not more than 5% of the Master Fund's total
assets would be invested in OTC commodity put options;
. purchase commodity put options, provided that after any such purchase the
Master Fund would not have more than 100% of the notional value of its
total assets (taken at current value) subject to such put options;
. write exchange-traded commodity call options with respect to its
commodity futures and forward contracts; and
. enter into closing sale or purchase transactions with respect to OTC
commodity put or call options.
General. No single commodity position in the portfolio will exceed 30% of
the Master Fund's net assets.
Margin Requirements
Original or initial margin is the minimum amount of funds that must be
deposited by the Master Fund with the commodity broker to initiate and maintain
an open position in futures contracts. Maintenance margin is the
39
amount (generally less than the original margin) to which an account may
decline before additional margin must be delivered. A margin deposit is like a
cash performance bond. It helps assure the performance of the futures contracts
purchased or sold by the Master Fund. Futures contracts are customarily bought
and sold on margin that represents a very small percentage (ranging upward from
less than 2%) of the aggregate purchase or sales price of the contract. Because
of such low margin requirements, price fluctuations occurring in the futures
markets may create profits and losses that, in relation to the amount invested,
are greater than are customary in other forms of investment or speculation. The
amount of margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is traded and may
be modified from time to time by the exchange during the term of the contract.
Brokerage firms, such as the Master Fund's clearing brokers, carrying
accounts in commodity contracts may not accept lower, and generally require
higher, amounts of margin as a matter of policy to further protect themselves.
The clearing brokers may require the Master Fund to make margin deposits equal
to exchange minimum levels for all commodity contracts. This requirement may be
altered from time to time in the clearing brokers' discretion.
Trading in the OTC markets where no clearing facility is provided generally
does not require exchange-style margin but may require other forms of credit
support.
When the Master Fund purchases an option, there is no margin requirement;
however, the option premium must be paid in full. When the Master Fund sells an
option, on the other hand, the Master Fund is required to deposit margin in an
amount determined by the margin requirements established for the underlying
interest and, in addition, an amount substantially equal to the current premium
for the option. The margin requirements imposed on the writing of options,
although adjusted to reflect the probability that "out-of-the-money" options
will not be exercised, can in fact be higher than those imposed in dealing in
the futures markets directly. Complicated margin requirements apply to spreads
and conversions, which are complex trading strategies in which a trader
acquires a mixture of options positions and futures positions in the underlying
interest.
Margin requirements are computed each day by the Master Fund's clearing
broker. When the market value of a particular open commodity position changes
to a point where the margin on deposit does not satisfy maintenance margin
requirements, a margin call is made by the broker. If the margin call is not
met within a reasonable time, the broker may close out the position. With
respect to the Master Fund's trading, the Master Fund (and not its investors
personally) is subject to margin calls.
DESCRIPTION OF FUND SHARES AND THE MASTER FUND UNITS
Fund Shares and Master Fund Units
The shares represent units of fractional undivided beneficial interest in
and ownership of the Fund. For a description of the rights and privileges of
shareholders under the Declaration of Trust, see "Declaration of Trust and LLC
Agreement."
The Fund will invest all of the proceeds of its offering of shares in the
Master Fund. The Master Fund will issue units of membership interest, or Master
Fund units, which represent units of fractional undivided membership interest
in and ownership of the Master Fund. Master Fund units may be purchased or
redeemed on a continuous basis, but only by the Fund and the manager. The Fund
will own approximately 99% of the Master Fund units, and the manager will own
the remaining Master Fund units. The Fund will hold no investment assets other
than the Master Fund units. The investment results of the Fund will be directly
and completely dependent on the investment results of the Master Fund.
40
Transfer Agent and Registrar
[ ], [ ], [ ], is the Fund's transfer, shareholder services
and distribution paying agent. The Master Fund will be responsible for the
Fund's transfer agency fees in the amount of 0.04% of the Master Fund's total
assets per year.
The Fund's and the Master Fund's custodian is [ ] . The custodian
performs custodial, fund accounting and portfolio accounting services.
All fees charged by the transfer agent for transfers and withdrawals of
shares are borne by the Fund, except that fees similar to those customarily
paid by stockholders for surety bond premiums to replace lost or stolen
certificates, taxes or other governmental charges, special charges for services
requested by a shareholder and other similar fees or charges are borne by the
affected shareholder. There is no charge to shareholders for disbursements of
Fund distributions of available cash. The Fund will indemnify the transfer
agent and its agents from certain liabilities.
The transfer agent may at any time resign, by notice to the Fund, or be
removed by the Fund. Such resignation or removal will become effective upon the
appointment by the manager of a successor transfer agent and registrar and its
acceptance of such appointment. If no successor has been appointed and has
accepted such appointment within 30 days after notice of such resignation or
removal, the manager is authorized to act as the transfer agent and registrar
until a successor is appointed.
Limited Voting Rights
The manager manages the Fund's day-to-day operations and strategic
direction. Except as described under "Declaration of Trust and LLC
Agreement--Withdrawal or Removal of the Manager", a shareholder will have no
right to elect or remove the manager.
Transfer of Shares
After completion of this offering, shares will trade on the American Stock
Exchange under the ticker symbol listed in this prospectus. Shares can be
bought and sold throughout the trading day like other publicly traded
securities. When buying or selling shares through a broker, most investors will
incur customary brokerage commissions and charges.
DISTRIBUTIONS
Commencing with the first distribution, the Fund intends to make regular
monthly distributions to its shareholders at a level rate (stated in terms of a
fixed cents per share distribution rate) based on the past and projected
performance of the Fund, which in turn is dependent on the past and projected
performance of the Master Fund. The Master Fund expects to receive
substantially all of its current income and gains from the following sources:
. capital gains (both short-term and long-term) from the sale or the
marking-to-market of commodity futures and forward contracts or options
on such contracts;
. collections of option premium cash flow generated from writing call
options on commodity futures and forward contracts, less the premium paid
for purchasing put options; and
. interest received on collateral invested in high quality debt
instruments, government securities and cash equivalents.
41
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 will
exceed the Fund's actual total returns. 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.
As portfolio and market conditions change, the rate of distributions on the
shares and the Fund's distribution policy could change. To the extent that the
total return of the Fund's overall strategy exceeds the distribution rate for
an extended period, the Fund may be in a position to increase the distribution
rate or distribute supplemental amounts to shareholders. Conversely, if the
total return of the Fund's overall strategy is less than the distribution rate
for an extended period of time, the Fund will effectively be drawing upon its
net asset value to meet payments prescribed by its distribution policy.
The Fund may make total distributions during a given calendar year in an
amount that exceeds the Fund's net income and net gains for that calendar year,
in which case the excess would normally be treated by shareholders as return of
capital for tax purposes. Also, there may be periods during which the Fund's
distributions may exceed the Fund's net cash flow from distributions from the
Master Fund. The distributions paid by the Fund to its shareholders should not
be viewed as "income."
The Master Fund and the Fund expect to declare their initial distributions
approximately 45 days, and to pay that distribution, approximately 60 to 90
days after the completion of this offering, depending on market conditions.
Under certain market conditions, the Master Fund and the Fund may not make
distributions. Depending on the amount of distributions and on the allocations
of tax items to shareholders, it is possible you may recognize taxable income
without a corresponding receipt of cash. See "Federal Income Tax
Consequences--U.S. Shareholders/Treatment of Master Fund Income." The Master
Fund will make distributions to the Fund (and the Fund will in turn make
distributions to its shareholders) so long as the fair value of the Master
Fund's assets generally exceeds its liabilities.
NET ASSET VALUE
The [ ] calculates the net asset value of the Master Fund's units after
the close of the [markets] each day.
Net asset value per Master Fund unit is computed by dividing the value of
all assets of the Master Fund (including any accrued interest and dividends),
less all liabilities (including accrued expenses and distributions declared but
unpaid), by the total number of Master Fund units outstanding. Under the Master
Fund's current operational procedures, the Master Fund's net asset value is
calculated after close of the American Stock Exchange each day. Because there
will be a direct correspondence between the shares and the Master Fund units,
the net asset value per share of the Fund and the net asset value per Master
Fund unit will be equal.
The values of the Master Fund's exchange-traded commodity futures and
forward contracts and options on commodity futures and forward contracts are
valued at the settlement price determined by the principal exchange through
which they are traded. Market quotes for the Master Fund's exchange-traded
commodity futures and forward contracts and options on commodity futures and
forward contracts may not be readily available if a contract cannot be
liquidated due to the operation of daily limits or, due to extraordinary
circumstances, the exchanges or markets on which the investments are traded do
not open for trading the entire day and no other market prices are available.
In addition, events may occur after the close of the relevant market, but prior
to the determination of the Master Fund's net asset value, that materially
affect the values of the Master Fund's investments. In such circumstances, the
Master Fund will use an independent pricing service to value such investments.
The commodity subadvisor will review the values as determined by the
independent pricing service and discuss those valuations with the pricing
service if appropriate based on pricing oversight guidelines established by the
manager that it believes are consistent with industry standards.
42
The values of the Master Fund's OTC commodity put options are valued by the
commodity subadvisor pursuant to guidelines established by the manager so long
as such guidelines are consistent with industry standards, which may include
the use of quotation reporting systems, established investment bank
counterparties, or other market indicators. In addition, the Master Fund may
use an independent pricing service to value such OTC commodity put options.
In the event the commodity subadvisor uses an independent pricing service to
value any of its commodity futures and forward contracts, options on commodity
futures and forward contracts and OTC commodity put options, the pricing
service typically will value such commodity commodity futures and forward
contracts, options on futures and forward contracts and OTC commodity put
options using a wide range of market data and other information and analysis,
including reference to transactions in other comparable investments if
available. The procedures of any independent pricing service provider will be
reviewed by the manager on a periodic basis.
USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objectives as stated herein. The Fund initially will apply
all of its assets toward the purchase of Master Fund units. The Master Fund
initially will invest all of its assets in commodity futures and forward
contracts and options on commodity futures and forward contracts and OTC
commodity put options and short-term investment grade debt instruments
constituting collateral assets. The manager has sole authority to determine the
percentage of assets that will be:
. held on deposit with the commodity broker or other custodian,
. used for other investments, and
. held in bank accounts to pay current obligations and as reserves.
The commodity subadvisor and the collateral subadvisor expect to deposit a
portion of the Master Fund's net assets with the commodity broker or other
custodian for trading. It is presently anticipated that the Master Fund will be
able to invest substantially all of its net proceeds in accordance with its
investment objectives within approximately 30 business days after the
completion of the offering. Pending such investment, it is anticipated that the
proceeds will be invested in cash and obligations issued or guaranteed by the
U.S. government, its agencies and instrumentalities.
The Master Fund uses only short-term securities to satisfy margin
requirements. The manager expects that all entities that will hold or trade the
Master Fund's assets will be based in the U.S. and will be subject to U.S.
regulations.
Approximately 15% of the Master Fund's assets will normally be committed as
margin for commodity futures contracts (approximately half of which will be
initial margin and the other half of which will be variation margin). All of
the margin will be held at Lehman in an interest-bearing cash account or
invested in obligations, selected by the collateral subadvisor, issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
notional value of the Master Fund's commodity interest positions will not
exceed the Master Fund's net asset value. However, from time to time, the
percentage of assets committed as margin may be substantially more, or less,
than such range. All interest income is used for the Master Fund's benefit.
The clearing broker, government agency or any commodity exchange on which
the Fund trades could increase margins applicable to the Fund to hold futures
or options positions at any time. Moreover, margin is merely a security deposit
and part of the Fund's debt instruments used as collateral.
The offering and organization expenses are expected to be 0.59% and
underwriting commissions are expected to be 4.5% of the offering price of the
shares.
43
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
shares set forth opposite the name of such underwriter.
Underwriters Number of Shares
------------ ----------------
Total....
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares. The representatives have advised the Fund that the underwriters do
not intend to confirm any sales to any accounts over which they exercise
discretionary authority.
The underwriters, for whom [ ] are acting as representatives, propose
to offer some of the shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the shares to
certain dealers at the public offering price less a concession not in excess of
$[ ] per share. The underwriting discounts and commissions the Fund will
pay of $[ ] per share is equal to [ ]% of the initial offering price.
The underwriters may allow, and such dealers may reallow, a concession not in
excess of $[ ] per share on sales to certain other dealers. If all of the
shares are not sold at the initial offering price, the representatives may
change the public offering price and other selling terms. Investors must pay
for any share purchased on or before [ ], 2006. In connection with this
offering, Nuveen may perform clearing services without charge for brokers and
dealers for whom it regularly provides clearing services that are participating
in the offering as members of the selling group.
The Fund has granted to the underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to [ ] additional shares
at the public offering price less the underwriting discounts and commissions.
The underwriters may exercise such option solely for the purpose of covering
overallotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The Fund[, the Master Fund] and the subadvisors have each agreed that, for a
period of 180 days from the date of this prospectus, they will not, without the
prior written consent of [ ], on behalf of the underwriters, dispose of or
hedge any shares or any securities convertible into or exchangeable for shares.
[ ] in its sole discretion may release any of the securities subject to
these agreements at any time without notice. Neither the Fund, the Master Fund
nor the subadvisors will purchase shares of the Fund in this offering.
Prior to the offering, there has been no public market for the shares.
Consequently, the initial public offering price for the shares was determined
by negotiation among the Fund, the manager and the representatives. There can
be no assurance, however, that the price at which the shares will sell in the
public market after this offering will not be lower than the price at which
they are sold by the underwriters or that an active trading market in the
shares will develop and continue after this offering. The Fund has applied to
have its shares listed for trading on the American Stock Exchange under the
trading or "ticker" symbol "[ ]."
The following table shows the underwriting discounts and commissions that
the Fund is to pay to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares:
Paid by Fund
-------------------------
No Exercise Full Exercise
----------- -------------
Per Share $ $
Total.... $ $
44
The Fund, the manager and the subadvisors have each agreed to indemnify the
several underwriters or to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
Total expenses of the share offering payable by the Fund are estimated to be
$[ ]or $[ ] per share. Included in the calculation of offering costs
is a partial reimbursement of certain underwriting expenses incurred by the
underwriters in the offering.
In connection with the offering, [ ], on behalf of the underwriters,
may purchase and sell shares in the open market. These transactions may include
short sales, syndicate covering transactions and stabilizing transactions.
Short sales involve syndicate sales of shares in excess of the number of shares
to be purchased by the underwriters in the offering, which creates a syndicate
short position. "Covered" short sales are sales of shares made in an amount up
to the number of shares represented by the underwriters' over-allotment option.
In determining the source of shares to close out the covered syndicate short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Transactions
to close out the covered syndicate short position involve either purchases of
shares in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also make "naked"
short sales of shares in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price of the shares in
the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of bids for or
purchases of shares in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
[ ] repurchases shares originally sold by that syndicate member in order
to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of shares. They may also cause the price of shares
to be higher than the price that would otherwise exist in the open market in
the absence of these transactions. The underwriters may conduct these
transactions on the American Stock Exchange, or in the over-the-counter market,
or otherwise. If the underwriters commence any of these transactions, they may
discontinue them at any time.
Certain underwriters may make a market in the shares after trading in the
shares has commenced on the American Stock Exchange or elsewhere. No
underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the shares as a result of any market-making
activities undertaken by any underwriter. This prospectus is to be used by any
underwriter in connection with the offering and, during the period in which a
prospectus must be delivered, with offers and sales of the shares in
market-making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale.
In connection with the requirements for listing the Fund's shares on the
American Stock Exchange, the underwriters have undertaken to sell lots of 100
or more shares to a minimum of 400 beneficial owners in the U.S. The minimum
investment requirement is 100 shares.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of the
underwriters to the Fund or the [subadvisors] [manager] if, prior to the
delivery of and payment for the shares, (i) trading in the Fund's shares shall
have been suspended by the SEC, the American Stock Exchange or elsewhere or
trading in securities generally on either the American Stock Exchange or
elsewhere shall have been suspended or limited or minimum prices for trading in
securities generally shall have been established on either the American Stock
Exchange or elsewhere, (ii) a commercial
45
banking moratorium shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the U.S. of a national emergency or war, or other
calamity or crisis the effect of which on financial markets in the U.S. is such
as to make it, in the sole judgment of the representatives, impracticable or
inadvisable to proceed with the offering or delivery of the shares as
contemplated by the prospectus (exclusive of any supplement thereto).
A prospectus in electronic format may be available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to the underwriters for sale to their online
brokerage account holders. The representatives will allocate shares to
underwriters that may make Internet distributions on the same basis as other
allocations. In addition, shares may be sold by the underwriters to securities
dealers who resell shares to online brokerage account holders.
The Fund anticipates that from time to time certain of the underwriters may
act as brokers or dealers in connection with the execution of the Fund's
portfolio transactions after they have ceased to be underwriters and, subject
to certain restrictions, may act as brokers while they are underwriters.
Nuveen, 333 West Wacker Drive, Chicago, Illinois 60606, one of the
representatives of the underwriters, is an affiliate of the collateral
subadvisor.
The principal business address of [ ] is [ ].
ERISA CONSIDERATIONS
General
This section highlights certain considerations that arise under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal
Revenue Code of 1986, as amended (the "Code"), which a fiduciary of an
"employee benefit plan" as defined in and subject to ERISA or of a "plan" as
defined in Section 4975 of the Code who has investment discretion should
consider before deciding to invest the plan's assets in the Fund. "Employee
benefit plans" and "plans" are referred to below as "Plans," and fiduciaries
with investment discretion are referred to below as "Plan Fiduciaries." Plans
include, for example, corporate pension and profit sharing plans, 401(k) plans,
"simplified employee pension plans," Keogh plans for self-employed persons and
IRAs.
Special Investment Consideration
Each Plan Fiduciary must consider the facts and circumstances that are
relevant to an investment in the Fund, including the role that an investment in
the Fund would play in the Plan's overall investment portfolio. Each Plan
Fiduciary, before deciding to invest in the Fund, must be satisfied that the
investment is prudent for the Plan, that the investments of the Plan are
diversified so as to minimize the risk of large losses and that an investment
in the Fund complies with the terms of the Plan.
The Fund Should Not Be Deemed to Hold "Plan Assets"
A regulation issued under ERISA (the "ERISA Regulation") contains rules for
determining when an investment by a Plan in an equity interest of a statutory
trust will result in the underlying assets of the trust being assets of the
Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan assets").
Those rules provide that assets of a statutory trust will not be plan assets of
a Plan that purchases an equity interest in the trust if the equity interest
purchased is a "publicly-offered security" (the "Publicly-Offered Security
Exception"). If the underlying assets of a trust are considered to be assets of
any Plan for purposes of ERISA or Section 4975 of the Code, the operations of
such trust would be subject to and, in some cases, limited by, the provisions
of ERISA and Section 4975 of the Code.
46
The Publicly-Offered Security Exception applies if the equity interest is a
security that is:
(1) "freely transferable" (determined based on the applicable facts and
circumstances);
(2) part of a class of securities that is "widely held" (meaning that the
class of securities is owned by 100 or more investors independent of the
issuer and of each other); and
(3) either (a) part of a class of securities registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the "Exchange
Act") or (b) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the Securities Act of 1933 and the
class of which such security is a part is registered under the Exchange Act
within 120 days (or such later time as may be allowed by the SEC) after the
end of the fiscal year of the issuer in which the offering of such security
occurred.
The manager believes that the conditions described above will be satisfied
with respect to the shares. Therefore, the shares should constitute
"publicly-offered securities" and the Fund's underlying assets should not be
considered to constitute plan assets of any Plan that purchases shares.
Ineligible Purchasers
In general, shares may not be purchased with the assets of a Plan if the
manager, the commodity broker, the subadvisors or any of their affiliates or
employees either:
(1) exercise any discretionary authority or discretionary control
respecting management of the Plan;
(2) exercise any authority or control respecting management or
disposition of the assets of the Plan;
(3) render investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of the Plan;
(4) have any authority or responsibility to render investment advice with
respect to any moneys or other property of the Plan; or
(5) have any discretionary authority or discretionary responsibility in
the administration of the Plan.
In order to comply with these prohibitions, a Plan Fiduciary must represent
that one of the following is true:
(1) neither Nuveen nor any of its employees or affiliates (a) manages any
part of the Plan's investment portfolio or (b) has an agreement or
understanding with the Plan Fiduciary where Nuveen or any of its employees
or affiliates regularly provides the Plan Fiduciary with individualized
information, recommendations or advice used as a primary basis for the
Plan's investment decisions.
(2) a relationship described in (1) above applies to only a portion of
the Plan's assets and the Plan Fiduciary will invest in the Fund only from
the portion of the Plan's assets as to which no such relationship exists.
Violations of the rules under ERISA and/or Section 4975 of the Code by
fiduciaries can result in various types of liabilities, including civil
penalties and excise taxes. Because of the complexity of these rules, Plan
Fiduciaries are strongly encouraged to consult with their legal advisors prior
to causing a Plan to invest in the Fund.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Fund and the Master Fund are new and do not have any operating history.
Critical Accounting Policies
Preparation of the financial statements and related disclosures in
compliance with accounting principles generally accepted in the United States
of America requires the application of appropriate accounting rules and
guidance, as well as the use of estimates. Both the Fund's and the Master
Fund's application of these policies involves judgments and actual results may
differ from the estimates used.
Liquidity and Capital Resources
As of the date of this prospectus, the Master Fund has not begun trading
activities. To date its only transactions have been preparation of this
offering and a capital contribution of $1,000 to the Master Fund by the
manager. Once the Master Fund begins investment activities, it is anticipated
that a portion of its net assets will be allocated to investments in commodity
futures and forward contracts, options on commodity futures and forward
contracts and OTC commodity put options. A significant portion of the Master
Fund's net assets are expected to be held in debt instruments and instruments
permitted by the CFTC for investment of customer segregated or secured amount
funds by a futures commission merchant, substantially all of which will be
highly liquid. A portion of these instruments will be used as margin or
collateral for the Master Fund's investments in commodity futures and forward
contracts, options on commodity futures and forward contracts and OTC commodity
put options and the remainder will be available for use by the Master Fund.
The Master Fund's investments in commodity futures and forward contracts,
options on commodity futures and forward contracts and OTC commodity put
options may be subject to periods of illiquidity because of market conditions,
regulatory considerations and other reasons. For example, commodity exchanges
limit fluctuations in certain commodity futures contract prices during a single
day by regulations referred to as "daily limits." During a single day, no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract for a particular commodity has increased or decreased by an
amount equal to the daily limit, positions in the futures contract can neither
be taken nor liquidated unless the traders are willing to effect trades at or
within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Master Fund from promptly liquidating its
commodity futures positions.
Since the Master Fund will invest in commodity futures and forward
contracts, its capital will be at risk due to changes in the value of these
contracts (market risk) or the inability of counterparties to perform under the
terms of the contracts (credit risk).
Market Risk
Investing in commodity futures and forward contracts will involve the Master
Fund entering into contractual commitments to purchase or sell a particular
commodity at a specified date and price. The market risk associated with the
Master Fund's commitments to purchase commodities will be limited to the gross
or face amount of the contracts held. However, should the Master Fund enter
into a contractual commitment to sell commodities, it would be required to make
delivery of the underlying commodity at the contract price and then repurchase
the contract at prevailing market prices or settle in cash. Since the
repurchase price to which a commodity can rise is unlimited, entering into
commitments to sell commodities will expose the Master Fund to theoretically
unlimited risk.
48
The Master Fund's exposure to market risk will be influenced by a number of
factors including the volatility of interest rates and foreign currency
exchange rates, the liquidity of the markets in which the contracts are traded
and the relationships among the contracts held. The inherent uncertainty of the
Master 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
When the Master Fund enters into commodity futures and forward contracts,
options on commodity futures and forward contracts and OTC commodity put
options, the Master Fund will be exposed to credit risk that the counterparty
to the contract will not meet its obligations. Counterparty risk on OTC
commodity put options will be greater because the counterparty is an individual
financial institution rather than a clearing broker. The Master Fund does not
expect that more than 5% of the Master Fund's net assets will be used to
purchase OTC put options. The counterparty for futures contracts and options on
futures contracts traded on U.S. and on most foreign futures exchanges is the
clearing house associated with the particular exchange. In general, clearing
houses are backed by their corporate members who may be required to share in
the financial burden resulting from the nonperformance by one of their members
and, as such, 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 Master Fund.
In cases where the Master Fund invests in OTC commodity put options with a
counterparty, the sole recourse of the Master 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.
The Master Fund's investment strategy will attempt to minimize these market
risks and the commodity subadvisor will attempt to minimize the credit risks,
by requiring the Master Fund to abide by various investment limitations and
policies, which will include limiting margin accounts, trading only in liquid
markets and permitting the use of stop-loss provisions. The commodity
subadvisor will implement procedures which will include, but will not be
limited to:
. employing the integrated investment strategy, in part, to minimize
directional risk;
. executing and clearing trades with creditworthy counterparties;
. limiting the amount of margin or premium required for any one commodity
or all commodities combined; and
. generally limiting transactions to contracts which will be traded in
sufficient volume to permit the taking and liquidating of positions.
The commodity broker, when acting as the Master Fund's futures commission
merchant in accepting orders for the purchase or sale of domestic futures
contracts, will be required by CFTC regulations to separately account for and
segregate as belonging to the Master Fund, all assets of the Master Fund
relating to domestic futures trading. The commodity broker will not be allowed
to commingle such assets with other assets of the commodity broker. In
addition, CFTC regulations also will require the commodity broker when acting
as the Master Fund's futures commission merchant to hold in a separate account
assets of the Master Fund related to foreign futures trading and not commingle
such assets with others assets of the commodity broker.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
As of the date of this prospectus, the Fund and the Master Fund have not
utilized, nor do they expect to utilize in the future, special purpose entities
to facilitate off-balance sheet financing arrangements and have no
49
loan guarantee arrangements or off-balance sheet arrangements of any kind other
than agreements entered into in the normal course of business, which may
include indemnification provisions related to certain risks service providers
undertake in performing services which are in the best interests of the Fund
and the Master Fund. While the Fund's and the Master Fund's exposure under such
indemnification provisions cannot be estimated, these general business
indemnifications are not expected to have a material impact on either the
Fund's or the Master Funds' financial position.
The Master Fund's contractual obligations are with the manager, commodity
brokers and, to the extent that the Master Fund enters into OTC transactions,
dealers. Management fee payments made to the manager are calculated as a fixed
percentage of the Master Fund's assets. Commission payments to the commodity
broker are on a contract-by-contract, or round-turn basis and to forward
contract dealers are usually based on a fee or percentage of the notional value
of the contract. As such, the manager cannot anticipate the amount of payments
that will be required under these arrangements for future periods as net asset
values are not known until a future date. These agreements are effective for
[1] year terms, renewable automatically for additional one year terms unless
terminated. Additionally, these agreements may be terminated by either party
for various reasons.
THE SECURITIES DEPOSITORY; BOOK-ENTRY-ONLY SYSTEM; GLOBAL SECURITY
The Depository Trust Company ("DTC") acts as securities depository for the
shares. DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of section 17A of the
Exchange Act. DTC was created to hold securities of banks, brokers, dealers and
trust companies, clearing corporations, and certain other organizations, some
of whom own DTC ("DTC Participants") and to facilitate the clearance and
settlement of transactions in such securities among the DTC Participants
through electronic book-entry changes. This eliminates the need for physical
movement of securities certificates. Access to the DTC system is also available
to others such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly ("Indirect Participants"). DTC has agreed to administer
its book-entry system in accordance with its rules and by-laws and the
requirements of law.
Individual certificates will not be issued for the shares. Instead, global
certificates are signed by the Delaware Trustee and the manager on the Fund's
behalf, registered in the name of Cede & Co., as nominee for DTC, and deposited
with the Delaware Trustee on DTC's behalf. The global certificates evidence all
of the shares outstanding at any time. The representations, undertakings and
agreements made on the part of the Fund in the global certificates are made and
intended for the purpose of binding only the Fund and not the Trustee or the
manager individually.
Upon the settlement date of any transfer of shares, DTC credits or debits,
on its book-entry registration and transfer system, the amount of the shares so
transferred to the accounts of the appropriate DTC Participants. The manager
designates the accounts to be credited and charged in the case of creation or
redemption of shares.
Beneficial ownership of the shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and
Indirect Participants. Owners of the shares are shown on, and the transfer of
ownership is effected only through, records maintained by DTC (with respect to
DTC Participants), the records of DTC Participants (with respect to Indirect
Participants), and the records of Indirect Participants (with respect to
shareholders that are not DTC Participants or Indirect Participants).
Shareholders are expected to receive from or through the DTC Participant
maintaining the account through which the shareholder has purchased its shares
a written confirmation relating to such purchase.
Shareholders that are not DTC Participants may transfer the shares through
DTC by instructing the DTC Participant or Indirect Participant through which
the shareholders hold their shares to transfer the shares.
50
Shareholders that are DTC Participants may transfer the shares by instructing
DTC in accordance with the rules of DTC. Transfers are made in accordance with
standard securities industry practice.
DTC may decide to discontinue providing its service with respect to the
shares by giving notice to the manager. Under such circumstances, the manager
will either find a replacement for DTC to perform its functions at a comparable
cost or, if a replacement is unavailable, terminate the Fund.
The rights of the shareholders generally must be exercised by DTC
Participants acting on their behalf in accordance with the rules and procedures
of DTC. Because the shares can only be held in book-entry form through DTC and
DTC Participants, investors must rely on DTC, DTC Participants and any other
financial intermediary through which they hold the shares to receive the
benefits and exercise the rights described in this section. Investors should
consult with their broker or financial institution to find out about procedures
and requirements for securities held in book-entry form through DTC.
DECLARATION OF TRUST AND LLC AGREEMENT
The following summary describes in brief the shares and the Master Fund
units and certain aspects of the operation of the Fund and the Master Fund and
the respective responsibilities of the Delaware Trustee, the individual
Trustees and the manager concerning the Fund and Master Fund and the material
terms of the Declaration of Trust and the LLC Agreement, each of which are
substantially similar except as set forth below. Prospective investors should
carefully review the Forms of Declaration of Trust and LLC Agreement filed as
exhibits to the registration statement of which this prospectus is a part and
consult with their own advisors concerning the implications to such prospective
subscribers of investing in a Delaware statutory trust. Capitalized terms used
in this section and not otherwise defined shall have such meanings assigned to
them under the Declaration of Trust or the LLC Agreement, as applicable.
Authority of the Delaware Trustee
The Delaware Trustee serves as the trustee of the Fund located in the State
of Delaware. The Delaware Trustee will accept service of legal process on the
Fund in the State of Delaware and will make certain filings under the Delaware
Statutory Trust Act. The Delaware Trustee does not owe any other duties to the
Fund, the individual Trustees, the manager or the shareholders. The Delaware
Trustee is permitted to resign upon at least [60] days' notice to the Fund,
provided, that any such resignation will not be effective until a successor
Delaware Trustee is appointed by the manager. The Declaration of Trust provides
that the Delaware Trustee is compensated by the Fund, and is indemnified by the
Fund against any expenses it incurs relating to or arising out of the Fund's
formation, operation or termination, or the performance of its duties pursuant
to the Declaration of Trust, except to the extent that such expenses result
from the Delaware Trustee's gross negligence or willful misconduct. The manager
has the discretion to replace the Delaware Trustee. Neither the Delaware
Trustee, either in its capacity as Delaware Trustee or in its individual
capacity, nor any director, officer or controlling person of the Delaware
Trustee is, or has any liability as, the issuer or a director, officer or
controlling person of the issuer of the shares. The Delaware Trustee's
liability in connection with the issuance and sale of the shares is limited
solely to the express obligations of the Delaware Trustee set forth in the
Declaration of Trust. The Delaware Trustee will have no duty or liability to
supervise or monitor the manager's performance, nor will the Delaware Trustee
have any liability for the manager's acts or omissions.
Authority of the Individual Trustees
The individual Trustees will fulfill those functions required under the
listing standards of the American Stock Exchange. The Declaration of Trust
provides that the individual Trustees will be indemnified by the Fund
51
against liabilities arising out of the performance of their duties pursuant to
the Declaration of Trust. The Fund also expects to provide Directors' and
Officers' Insurance coverage to the individual Trustees.
The individual Trustees have the authority under certain limited
circumstances (including a statutory disqualification of the manager under
Section 8a2 and 8a3 of the CEA, suspension or revocations of the manager's CPO
or CTA registrations or the bankruptcy, insolvency or receivership of the
manager) to remove the manager at any time, without penalty, upon 60 days
written notice. If the manager is removed by the individual Trustees, the Fund
(and the Master Fund) will be liquidated, and all net assets will be
distributed to shareholders pursuant to the procedures set forth in the
Declaration of Trust (and the LLC Agreement).
Authority of the Manager
The manager is generally authorized to perform all acts deemed necessary to
carry out the purposes of the Fund by the Declaration of Trust and of the
Master Fund by the LLC Agreement and to conduct the businesses of the Fund and
the Master Fund. The manager has a power of attorney to take certain actions,
including the execution and filing of documents, on the Fund's behalf and with
respect to the Declaration of Trust and on the Master Fund's behalf and with
respect to the LLC Agreement.
In addition, unless earlier terminated, the manager's agreement with each of
the subadvisors will remain in effect for one year from the commencement of the
Master Fund's investment operations. The agreements may be terminated at any
time, without penalty, by either the manager or a subadvisor upon 60 days
written notice, and will be automatically terminated in the event of
assignment. If the manager determines it is in the best interests of
shareholders to select additional CTAs or replace a subadvisor, the manager
will consider certain information with respect to each new CTA, including the
following:
. general information including the identity of its affiliates and key
personnel;
. investment strategy and risk management of the CTA;
. the CTA's financial condition;
. relevant performance history and the quality of services provided;
. fees and expenses; and
. capacity to take on new business.
The Declaration of Trust limits the authority of the manager as follows:
. The manager is not authorized to institute or initiate on behalf of, or
otherwise cause, the Fund to (a) make a general assignment for the
benefit of creditors; (b) file a voluntary bankruptcy petition; or
(c) file a petition seeking for the Fund a reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under any law.
. The manager may not, without written approval of the specific act by
66 2/3% of the shareholders, take any action in contravention of the
Declaration of Trust, including, without limitation, (i) any act that
would make it impossible to carry on the ordinary business of the Fund,
except as otherwise provided in the Declaration of Trust; (ii) possess
Fund property, or assign any rights in specific Fund property, for other
than a Fund purpose; (iii) amend the Declaration of Trust in any manner,
except as otherwise provided in the Declaration of Trust or applicable
law; or (iv) transfer its interest as manager of the Fund, except as
otherwise provided in the Declaration of Trust.
. In general, the manager may not take any action, or refuse to take any
reasonable action, the effect of which would be to cause the Fund to be
taxable as a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes, without the consent of the
holders of at least 66 2/3% percent of the outstanding voting shares,
including shares owned by the manager and its affiliates.
52
Withdrawal of the Manager
The manager shall be deemed to have withdrawn from the Fund or the Master
Fund upon the occurrence of any one of the following events:
. the manager voluntarily withdraws from the Fund and the Master Fund by
giving written notice to the shareholders and the members, respectively;
. the manager transfers all of its rights as manager;
. the manager (A) makes a general assignment for the benefit of creditors;
(B) files a voluntary bankruptcy petition; (C) files a petition or answer
seeking for itself a reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any law;
(D) files an answer or other pleading admitting or failing to contest the
material allegations of a petition filed against the manager in a
proceeding of the type described in clauses (A)--(C) of this sentence; or
(E) seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator of the manager or of all or any substantial part
of its properties;
. a final and non-appealable judgment is entered by a court with
appropriate jurisdiction ruling that the manager is bankrupt or insolvent
or a final and non-appealable order for relief is entered by a court with
appropriate jurisdiction against the manager, in each case under any
federal or state bankruptcy or insolvency laws as now or hereafter in
effect; or
. a certificate of dissolution or its equivalent is filed for the manager,
or 90 days expire after the date of notice to the manager of revocation
of its charter without a reinstatement of its charter, under the laws of
its state of incorporation.
In addition, the manager may be removed by the Fund with or without cause if
such removal is approved by at least 66 2/3% of the shares (excluding for this
purpose shares held by the manager and its affiliates).
Shareholder Meetings
Upon the written request of holders of at least a majority of the
shareholders, the manager will call a meeting of the shareholders. Notice of
such meeting shall be given within 30 days after, and the meeting shall be held
within 60 days after, receipt of such request. The manager may also call a
meeting upon not less than 20 and not more than 60 days notice prior to the
meeting. Any such notice shall state briefly the purpose of the meeting, which
shall be held at a reasonable time and place.
Indemnification
The Declaration of Trust and the LLC Agreement each provides that the Fund
and the Master Fund, respectively, will indemnify and hold harmless individual
Trustees, the manager and each officer, director, employee and agent thereof
and their respective legal representatives and successors (hereinafter referred
to as a "Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and counsel fees reasonably incurred by any Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of an alleged act or
omission as a manager or officer thereof or by reason of its being or having
been such a manager or officer.
However, neither the Fund nor the Master Fund will indemnify a Covered
Person with respect to any matter as to which such Covered Person shall have
been finally adjudicated in any such action, suit or other proceeding not to
have acted in good faith in the reasonable believe that such Covered Person's
action was in the best interest of the Fund or the Master Fund, and except that
no Covered Person shall be indemnified against any
53
liability to the Fund, the Master Fund, shareholders or members to which such
Covered Person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
Manager Expenses
The manager shall be entitled to receive out of the Master Fund's assets
available therefor reimbursement of all amounts expended by the manager in
payment out of its own funds of properly incurred Fund or Master Fund
obligations (other than Organizational Expenses).
Limited Liability
A number of states do not have "business trust" statutes such as that under
which the Fund has been formed in the State of Delaware. It is possible that a
court in such a state could hold that, due to the absence of any statutory
provision to the contrary in such jurisdiction, the shareholders, although
entitled under Delaware law to the same limitation on personal liability as
stockholders in a private corporation for profit organized under the laws of
the State of Delaware, are not so entitled in such a state. To protect
shareholders against any loss of limited liability, the Declaration of Trust
provides that no written obligation may be undertaken by the Fund unless such
obligation is explicitly limited so as not to be enforceable against any
shareholder personally. Furthermore, the Fund indemnifies all of its
shareholders against any liability that such shareholders might incur in
addition to that of a beneficial owner. The manager is itself generally liable
for all Fund obligations and will use its assets to satisfy any such liability
before such liability would be enforced against any shareholder individually.
The shares are limited liability investments; investors may not lose more
than the amount that they invest plus any profits recognized on their
investment. However, shareholders could be required, as a matter of bankruptcy
law, to return to the estate of the Fund any distribution they received at a
time when the Fund was in fact insolvent or in violation of its Declaration of
Trust. In addition, although the manager is not aware of this provision ever
having been invoked in the case of any public futures fund, shareholders agree
in the Declaration of Trust that they will indemnify the Fund for any harm
suffered by it as a result of
. shareholders' actions unrelated to the Fund's business, or
. taxes imposed on the shares by the states or municipalities in which such
shareholders reside.
The foregoing repayment of distributions and indemnity provisions (other
than the provision for shareholders indemnifying the Fund for taxes imposed
upon it by the state or municipality in which particular shareholders reside)
are commonplace in statutory trusts and limited partnerships.
Expenses
See "Fees and Expenses" and "Management of the Fund--Management Fees and
Expenses."
The Manager's Fiduciary Responsibility and Remedies
Shareholders have legal rights under Delaware law and applicable Federal and
State securities laws. In all dealings affecting the Fund, the manager has a
fiduciary responsibility to you and all other members to exercise good faith
and fairness in all dealings affecting the Fund.
If the manager acts in good faith and exercises its best judgment, it will
not be liable merely because you lost money or the manager otherwise did not
meet the Fund's and the Master Fund's business objectives. Additionally, there
are substantial and inherent conflicts of interest in the Fund's and Master
Fund's structure, which are inconsistent with the managers' fiduciary duties.
54
In the event that you form the belief that the manager has violated its
fiduciary duty, you may seek relief individually or on behalf of the Fund under
applicable laws, including the laws of Delaware and the Federal commodity laws,
to recover damages from or require an accounting by the manager. You also have
the right, subject to applicable contractual, procedural and jurisdictional
requirements, to bring class actions in a Federal court to enforce your rights
and the rights of the other shareholders under the Federal and State securities
laws and the rules and regulations under those laws. Losses suffered by you as
a result of a breach of the securities laws related to your purchase of shares
may be recovered from the manager should the breach of those laws have been
caused by the manager. Under certain circumstances, shareholders also have the
right to institute a reparations proceeding before the CFTC against the
manager, as a registered commodity pool operator and commodity trading advisor,
the commodity broker as a registered futures commission merchant, as well as
those of their respective employees who are required to be registered under the
CEA, and the rules and regulations promulgated thereunder. Private rights of
action are conferred by the CEA for violations of that statute. Investors in
commodities and in commodity pools may, therefore, invoke the protections
provided thereunder.
The responsibility of the manager to you and other shareholders is a
changing area of the law. If you have questions concerning the responsibilities
of the manager, you should consult your legal counsel. The performance of the
manager for the operation of the Fund and its fiduciary duty are governed by
the Declaration of Trust attached as Exhibit [ ].
Provisions of Law
Provisions of Federal and State Securities Laws. This offering is subject
to Federal and State securities laws. If any indemnification of the individual
Trustees or the manager arises out of an alleged violation of such laws, it is
subject to the following legal conditions.
No indemnification may be made in respect of any losses, liabilities or
expenses arising from or out of an alleged violation of Federal or State
securities laws unless: there has been a successful adjudication on the merits
of each count involving alleged securities law violations as to the individual
Trustees, the manager or other particular indemnitee, or such claim has been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the individual Trustees, the manager or other particular indemnitee, or a
court of competent jurisdiction approves a settlement of the claims against the
individual Trustees, the manager or other agent of the Fund or Master Fund and
finds that indemnification of the settlement and related costs should be made;
provided, before seeking such approval, the individual Trustees, the manager or
other indemnitee must apprise the court of the position held by regulatory
agencies against such indemnification. These agencies are the SEC and the
securities administrator of the State or States in which the plaintiffs claim
they were offered or sold shares.
Provisions of the Securities Act of 1933. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to the
individual Trustees, the manager or the subadvisors, the SEC believes that such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
Termination Events
The Fund and the Master Fund will dissolve at any time upon the happening of
any of the following events:
. The filing of a certificate of dissolution or revocation of the manager's
charter (and the expiration of 90 days after the date of notice to the
manager of revocation without a reinstatement of its charter) or upon the
withdrawal, removal, adjudication or admission of bankruptcy or
insolvency of the manager, or an event of withdrawal unless (i) at the
time there is at least one remaining manager and that remaining manager
carries on the business of the Fund and the Master Fund or (ii) within 90
days of such event of withdrawal all the remaining shareholders agree in
writing to continue the business of the Fund and to select, effective as
of the date of such event, one or more successor managers. If the Fund is
terminated
55
as the result of an event of withdrawal and a failure of all remaining
shareholders to continue the business of the Fund and to appoint a
successor manager as provided above within 120 days of such event of
withdrawal, shareholders holding shares representing at least a majority
(over 50%) of the outstanding shares (not including shares held by the
manager and its affiliates) may elect to continue the Fund's business by
forming a new statutory trust, or reconstituted trust, on the same terms
and provisions as set forth in the Declaration of Trust. Any such
election must also provide for the election of a manager to the
reconstituted trust. If such an election is made, all shareholders of the
Fund shall be bound thereby and continue as shareholders of the
reconstituted trust.
. The manager's determination, in its sole discretion, to terminate the
Fund and the Master Fund.
. The occurrence of any event which would make unlawful the continued
existence of the Fund and the Master Fund.
. In the event of the suspension, revocation or termination of the
manager's registration as a CPO or membership as a CPO with the NFA (if,
in either case, such registration is required at such time unless at that
time there is at least one remaining manager whose registration or
membership has not been suspended, revoked or terminated).
. The Fund becomes insolvent or bankrupt.
. The shareholders holding shares representing at least a majority (over
50%) of the outstanding shares (which excludes the shares of the manager)
vote to dissolve the Fund, notice of which is sent to the manager not
less than 90 business days prior to the effective date of termination.
. The Fund is required to be registered as an investment company under the
Investment Company Act of 1940.
. DTC is unable or unwilling to continue to perform its functions, and a
comparable replacement is unavailable.
Books and Records
The [ ] will keep proper books of record and accounts of the Fund and
the Master Fund at its office located at 333 West Wacker Drive, Chicago,
Illinois 60606 or such office, including that of an administrative agent, as it
may subsequently designate upon notice and pursuant to CFTC regulations. These
books and records are open to inspection by any person who establishes to the
manager's satisfaction that such person is a shareholder upon reasonable
advance notice at all reasonable times during the usual business hours of the
Fund.
The manager will keep a copy of the Fund's Declaration of Trust and the
Master Fund's LLC Agreement on file in its office, which will be available for
inspection on reasonable advance notice at all reasonable times during its
usual business hours by any shareholder.
Analysis of Critical Accounting Policies
The Fund's and the Master Fund's critical accounting policies are set forth
in the financial statements in this prospectus prepared in accordance with
U.S. generally accepted accounting principles, which require the use of certain
accounting policies that affect the amounts reported in these financial
statements, including the following: The contracts in which the Master Fund
invests are accounted for on a trade-date basis and marked to market on a daily
basis. The difference between their cost and market value is recorded as
"change in unrealized profit/loss" for open (unrealized) contracts, and
recorded as "realized profit/loss" when open positions are closed out; the sum
of these amounts constitutes the Master Fund's investment revenues. Earned
interest income revenue, as well as management fees, and brokerage commissions
of the Master Fund are recorded on an accrual basis. The manager believes that
all relevant accounting assumptions and policies have been considered.
56
Statements, Filings, and Reports
At the end of each fiscal year, the manager will furnish for distribution to
each person who is a shareholder an annual report containing the Fund's and the
Master Fund's audited financial statements and other information about the Fund
and the Master Fund. The manager is responsible for the registration and
qualification of the shares and notification of the offering under the federal
securities laws and any other securities and blue sky laws of the U.S. or any
other jurisdiction as the manager may select. The manager will also prepare, or
cause to be prepared, and file any periodic reports or updates required under
the Exchange Act. The registration, qualification and notification costs and
the costs of the periodic reports prepared and filed by the manager will be an
expense of the Master Fund.
The accounts of the Fund and the Master Fund will be audited, as required by
law and as may be directed by the manager, by independent certified public
accountants designated from time to time by the manager. The cost of such
audits will be an expense of the Master Fund. The accountants report will be
furnished by the manager to shareholders within 90 calendar days after the end
of the Fund's fiscal year. The manager will make such elections, file such tax
returns, and prepare, disseminate and file such tax reports on behalf of the
Fund and the Master Fund, as it is advised by its counsel or accountants are
from time to time required by any applicable statute, rule or regulation.
Fiscal Year
The fiscal year of the Fund and the Master Fund will initially be the
calendar year. The manager may select an alternate fiscal year.
Governing Law; Consent to Delaware Jurisdiction
The rights of the Delaware Trustee, the individual Trustees, the manager,
the Fund, the Master Fund, [DTC] and the shareholders, are governed by the laws
of the State of Delaware. The Delaware Trustee, the individual Trustees, the
manager, the Fund, the Master Fund and DTC and, by accepting shares, each DTC
Participant and each shareholder, consents to the jurisdiction of the courts of
the State of Delaware and any federal courts located in Delaware. Such consent
is not required for any person to assert a claim of Delaware jurisdiction over
the manager, the Fund or the Master Fund.
LEGAL MATTERS
Bell, Boyd & Lloyd LLC is counsel to, and has advised, the Fund, the Master
Fund and the manager with respect to the preparation of this prospectus and
will be passing upon certain legal matters for the Fund and the Master Fund.
You should seek investment, legal and tax advice from your own legal counsel
and other professionals of your choice.
EXPERTS
The manager has employed financial experts to perform services for the Fund
and the Master Fund. These experts currently are [ ], independent
accounting firm. The financial statements of the Fund and the Master Fund have
been included in this prospectus in reliance on the report of such firm given
upon their authority as experts in accounting and auditing.
RECENT FINANCIAL INFORMATION AND ANNUAL REPORTS
Each month, the manager will post on its website (http://www.nuveen.com)
(which is also the Fund's website) such information relating to the Fund's
shares as the CFTC and the NFA may require to be given to
57
participants in commodity pools (like the Fund) and quarterly (and perhaps more
frequently) will post underlying Master Fund holdings. The manager will also
furnish you with annual reports as required by the rules and regulations of the
SEC as well as with those reports required by the CFTC and the NFA, including,
but not limited to, an annual audited financial statement certified by
independent public accountants and any other reports required by any other
governmental authority, that has jurisdiction over the activities of the Fund
and the Master Fund. Fund shareholders also will be provided with appropriate
information to permit them (on a timely basis) to file United States federal
and state income tax returns with respect to their shares. Additional
information about the Fund or the Master Fund may be posted on the Fund's
website (http://www.nuveen.com) in the discretion of the manager or as required
by regulatory authorities.
PRIVACY POLICY
The Fund and the manager collect certain nonpublic personal information
about investors from the information provided by them in certain documents, as
well as in the course of processing transaction requests. None of this
information is disclosed except as necessary in the course of administering the
Fund--and then only subject to customary undertakings of confidentiality. The
Fund and the manager do not disclose nonpublic personal information about
investors to anyone, except as required by law. The Fund and the manager
restrict access to the nonpublic personal information they collect from
investors to those employees who need access to this information to provide
necessary and related products and services to investors. The Fund and the
manager each maintain physical, electronic and procedural controls to safeguard
this information. These standards are reasonably designed to (1) ensure the
security and confidentiality of investors' records and information, (2) protect
against any anticipated threats or hazards to the security or integrity of
investors' records and information, and (3) protect against unauthorized access
to or use of investors' records or information that could result in substantial
harm or inconvenience to any investor.
FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO U.S. TAXPAYERS
The following discussion describes the material United States federal (and
certain state and local) income tax considerations associated with the
purchase, ownership and disposition of shares as of the date hereof by United
States Shareholders (as defined below) and non-United States Shareholders (as
defined below). Except where noted, this discussion deals only with shares held
as capital assets by Shareholders who acquired shares upon their original
issuance and does not address special Shareholder situations, such as those of:
. dealers in securities or currencies;
. financial institutions;
. regulated investment companies, other than to indicate that income from
the Master Fund can be treated as income from a qualified publicly traded
partnerships ("PTPs") within the meaning of the Code;
. real estate investment trusts;
. tax-exempt organizations;
. insurance companies;
. persons holding shares as a part of a hedging, integrated or conversion
transaction or a straddle;
. traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings; or
. persons liable for alternative minimum tax.
58
Furthermore, the discussion below is based upon the provisions of the Code,
the Treasury regulations promulgated thereunder, or the Regulations, and
administrative and judicial interpretations thereof, all as of the date hereof,
and such authorities may be repealed, revoked, modified or subject to differing
interpretations, possibly on a retroactive basis, so as to result in United
States federal income tax consequences different from those described below.
A "U.S. Shareholder" of shares means a beneficial owner of shares that is,
for United States federal income tax purposes:
. an individual citizen or resident of the United States;
. a corporation (or other entity taxable as a corporation) created or
organized in or under the laws of the United States or any state thereof
or the District of Columbia;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust if it (1) is subject to the primary supervision of a court within
the United States and one or more U.S. persons have the authority to
control all substantial decisions of such trust or (2) has a valid
election in effect under applicable Regulations to be treated as a U.S.
person.
A "non-U.S. Shareholder" of shares means a beneficial owner of shares that
is not a U.S. Shareholder.
If a partnership or other entity or arrangement treated as a partnership for
United States federal income tax purposes holds shares, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. If you are a partner of a partnership holding shares, we
urge you to consult your own tax adviser.
No statutory, administrative or judicial authority directly addresses the
treatment of shares or instruments similar to shares for United States federal
income tax purposes. As a result, we cannot assure you that the IRS or the
courts will agree with the tax consequences described herein. A different
treatment from that described below could adversely affect the amount, timing
and character of income, gain or loss in respect of an investment in the
shares. If you are considering the purchase of shares, we urge you to consult
your own tax adviser concerning the particular United States federal income tax
consequences to you of the purchase, ownership and disposition of shares, as
well as any consequences to you arising under the laws of any other taxing
jurisdiction.
Status of the Fund
In the opinion of Bell, Boyd & Lloyd LLC, tax counsel to the Fund and the
Master Fund ("Tax Counsel"), under current law and based on the assumptions and
facts set forth in the opinion, the Fund will not be classified as an
association taxable as a corporation. The Fund intends to take the position
that it is a grantor trust for Federal income tax purposes, although it is
possible that the IRS might disagree and choose to treat it as a partnership or
disregarded entity. While such recharacterization would impact the manner in
which income is reported to shareholders, it should not materially impact the
tax treatment of shareholders as described herein. If the manager determines,
based on a challenge to the Fund's tax status or otherwise, that the existence
of the Fund results or is reasonably likely to result in a material tax
detriment to shareholders, then the manager may, among other things, agree to
dissolve the Fund and transfer the Master Fund interests to shareholders in
exchange for their shares. No amount included in income received with respect
to a share will be eligible for the corporate dividends-received deduction, nor
will the lower tax rates applicable to certain corporate dividends received
after December 31, 2002 apply to such income.
59
Status of the Master Fund
Under current law and assuming full compliance with the terms of the LLC
Agreement (and other relevant documents) and based upon factual representations
made by the Master Fund, in the opinion of Tax Counsel, the Master Fund will be
taxed as a partnership for United States federal income tax purposes.
A partnership is not a taxable entity and incurs no United States federal
income tax liability. Section 7704 of the Code provides that a PTP such as the
Master Fund will, as a general rule, be taxed as a corporation. However, an
exception exists with respect to PTPs of which 90% or more of the gross income
during each taxable year consists of "qualifying income" within the meaning of
Section 7704(d) of the Code (the "qualifying income exception"). Qualifying
income includes dividends, interest, capital gains from the sale or other
disposition of stocks and debt instruments and, in the case of a partnership
(such as the Master Fund) a principal activity of which is the buying and
selling of commodities, futures or forward contracts with respect to
commodities, income and gains derived from commodities, or futures, forward
contracts with respect to commodities. The Master Fund anticipates that at
least 90% of its gross income for each taxable year will constitute qualifying
income within the meaning of Section 7704(d) of the Code.
There can be no assurance that the United States Internal Revenue Service
(the "IRS"), will not assert successfully that the Master Fund should be
treated as a PTP taxable as a corporation. No ruling has been or will be sought
from the IRS, and the IRS has made no determination, as to the status of the
company for United States federal income tax purposes or whether the Master
Fund's operations generate "qualifying income" under Section 7704(d) of the
Code. Whether the Master Fund will continue to meet the qualifying income
exception is a matter that will be determined by the Master Fund's operations
and the facts existing at the time of future determinations. However, the
Master Fund's manager will use its best efforts to cause the operation of the
Master Fund in such manner as is necessary for the Master Fund to continue to
meet the qualifying income exception.
If the Master Fund fails to satisfy the qualifying income exception
described above (other than a failure which is determined by the IRS to be
inadvertent and which is cured within a reasonable period of time after the
discovery of such failure), the Master Fund will be treated as if it had
transferred all of its assets, subject to its liabilities, to a newly formed
corporation, on the first day of the year in which it failed to satisfy the
exception, in return for stock in that corporation, and then distributed that
stock to the shareholders in liquidation of their interests in the Master Fund.
This contribution and liquidation generally should be tax-deferred to
shareholders and the Master Fund so long as the Master Fund, at that time, does
not have liabilities in excess of its tax basis in its assets. Thereafter, the
Master Fund would be treated as a corporation for United States federal income
tax purposes.
If the Master Fund were taxable as a corporation in any taxable year, either
as a result of a failure to meet the qualifying income exception described
above or otherwise, its items of income, gain, loss and deduction would be
reflected only on its tax return and would not flow through to the
shareholders, and the Master Fund's net income would be taxed to it at the
income tax rates applicable to domestic corporations. In addition, any
distribution made by the Master Fund to the Fund would be treated as taxable
dividend income, to the extent of the Master Fund's current or accumulated
earnings and profits, or, in the absence of current and accumulated earnings
and profits, a nontaxable return of capital to the extent of each shareholder's
tax basis in its shares, or taxable capital gain, after the shareholder's tax
basis in its shares is reduced to zero. Taxation of the Master Fund as a
corporation could result in a material reduction in a shareholder's cash flow
and after tax return and thus could result in a reduction of the value of the
shares.
The discussion below is based on Tax Counsel's opinion that the Master Fund
will be classified as a partnership that is not subject to corporate income tax
for United States federal income tax purposes.
60
U.S. Shareholders
Treatment of the Master Fund Income
A partnership does not incur United States federal income tax liability.
Instead, each partner of a partnership is required to take into account its
share of items of income, gain, loss, deduction and other items of the
partnership. Accordingly, each shareholder will be required to include in
income its allocable share of the Master Fund's income, gain, loss, deduction
and other items for the Master Fund's taxable year ending with or within its
taxable year. In computing a partner's United States federal income tax
liability, such items must be included, regardless of whether cash
distributions are made by the partnership. Thus, shareholders may be required
to include income without a corresponding current receipt of cash if the Master
Fund generates taxable income but does not make cash distributions to the Fund.
The Master Fund's taxable year will end on December 31 unless otherwise
required by law. The Master Fund will use the accrual method of accounting.
Fund shareholders will take into account their share of ordinary income
realized by the Master Fund from accruals of interest on debt instruments held
as collateral in the Master Fund portfolio. The Master Fund may hold debt
instruments with "original issue discount", in which case Fund shareholders
would be required to include accrued amounts in taxable income on a current
basis even though receipt of those amounts may occur in a subsequent year. The
Master Fund may also acquire debt instruments with "market discount." Upon
disposition of such obligations, gain would generally be required to be treated
as interest income to the extent of the market discount and Fund shareholders
would be required to include as ordinary income their share of such market
discount that accrued during the period the obligations were held by the Master
Fund.
The Code generally applies a "mark to market" system of taxing unrealized
gains and losses on, and otherwise provides for special rules of taxation with
respect to, Section 1256 Contracts. A Section 1256 Contract includes certain
regulated futures contracts, certain non-equity options, and certain non-U.S.
currency forward contracts. It is expected that the majority of the futures and
forward contracts and options on futures and forward contracts held by the
Master Fund will constitute Section 1256 Contracts. Section 1256 Contracts held
by the Master Fund at the end of a taxable year of the Master Fund will be
treated for United States federal income tax purposes as if they were sold by
the Master 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 Master
Fund's obligations under such contracts), must be taken into account by the
Master Fund in computing its taxable income for the year. If a Section 1256
Contract held by the Master Fund at the end of a taxable year is sold in the
following year, the amount of any gain or loss realized on the sale will be
adjusted to reflect the gain or loss previously taken into account under the
mark to market rules.
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. Thus, 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
Master Fund. If a noncorporate taxpayer incurs a net capital loss for a year,
the portion of the loss, if any, which consists of a net loss on Section 1256
Contracts may, at the election of the taxpayer, be carried back three years. A
loss carried back to a year by a noncorporate taxpayer may be deducted only to
the extent (1) the loss does not exceed the net gain on Section 1256 Contracts
for the year and (2) the allowance of the carry-back does not increase or
produce a net operating loss for the year.
With respect to options and contracts not subject to treatment as
Section 1256 Contracts, the Master Fund will recognize gain or loss at the time
those options or contracts are exercised or cancelled, as the case may be.
Depending on the circumstances, loss may be deferred pursuant to special rules
applicable to straddles if the Master Fund holds an offsetting gain position in
the property underlying the expired put option. If property underlying a
written call option or purchased put option is sold, the option premium will be
taken into account as an addition to, or offset against, the sale price of the
transferred property, respectively.
61
In general, Section 1256 contracts are not subject to the straddle rules
described above. Where the positions of a straddle are comprised of both
Section 1256 and non-Section 1256 contracts, the Master Fund will be subject to
the mixed straddle rules of the Code and the regulations promulgated
thereunder. The appropriate tax treatment of any gains and losses from trading
in mixed straddles will depend on what elections the Master Fund makes.
The Master Fund may elect to treat Section 1256 positions as non-Section
1256 positions, and the mixed straddle would be subject to the rules governing
non-Section 1256 straddles. Alternatively, the Master Fund may identify the
positions of a particular straddle as an "identified mixed straddle" under
Section 1092(b)(2) of the Code and, thereby, net the capital gain or loss
attributable to the offsetting positions. The net capital gain or loss is
treated as 60% long-term and 40% short-term capital gain or loss if
attributable to the Section 1256 positions, or all short-term capital gain or
loss if attributable to the non-Section 1256 positions. Alternatively, the
Master Fund may place the positions in a "mixed straddle" account which is
marked-to-market daily. Under a special account cap, not more than 50% of net
capital gain may be long-term capital gain, and not more than 40% of net
capital loss may be short-term capital loss. If the Master Fund does not make
any of the aforementioned three elections, any net loss attributable to either
the Section 1256 or to the non-Section 1256 positions will be treated as 60%
long-term and 40% short-term capital loss, while any net gain will be treated
as 60% long-term and 40% short-term capital gain, or all short-term capital
gain, depending upon whether the net gain was attributable to Section 1256
positions or non-Section 1256 positions.
Allocation of the Master Fund's Profits and Losses
For United States federal income tax purposes, a shareholder's share of the
Master Fund's income, gain, loss, deduction and other items will be equal to
such shareholder's proportionate interest in the items allocated by the Master
Fund to the Fund and shall be determined by the Master Fund's LLC Agreement,
unless an allocation under the agreement does not have "substantial economic
effect," in which case the allocations will be determined in accordance with
the "partners' interests in the partnership." The Master Fund believes that,
subject to the discussion below, the allocations pursuant to the Master Fund's
LLC Agreement should be considered to have substantial economic effect.
If the allocations provided by the Master Fund's LLC Agreement were
successfully challenged by the IRS, the amount of income or loss allocated to
the Fund and passed through to the shareholders for United States federal
income tax purposes under the agreement could be increased or reduced or the
character of the income or loss could be modified.
As described in more detail below, the U.S tax rules that apply to
partnerships are complex and their application is not always clear.
Additionally, the rules generally were not written for, and in some respects
are difficult to apply to, publicly traded partnerships. The Master Fund will
apply certain assumptions and conventions intended to comply with the intent of
the rules and to report income, gain, deduction, loss and credit to the Fund
and, indirectly the shareholders in a manner that reflects the economic gains
and losses, but these assumptions and conventions may not comply with all
aspects of the applicable Treasury regulations. It is possible therefore that
the IRS will successfully assert that assumptions made and/or conventions used
do not satisfy the technical requirements of the Code or the Treasury
regulations and will require that tax items be adjusted or reallocated in a
manner that could be adversely impact you.
Monthly Allocation and Revaluation Conventions
In general, the Master Fund's taxable income and losses will be determined
monthly and will be allocated to the Fund and apportioned among the holders of
Fund shares in proportion to the number of shares owned by each of them as of
the close of the last trading day of the preceding month. By investing in Fund
shares, a U.S. Shareholder agrees that, in the absence of an administrative
determination or judicial ruling to the contrary, it will report income and
loss under the monthly allocation and revaluation conventions described below.
62
Under the monthly allocation convention, whoever owns shares as of the close
of the last trading day of a month will be treated as continuing to hold the
shares until immediately before close of the last trading day of the following
month. As a result, a holder who has disposed of shares prior to the close of
the last trading day of a month may be allocated income, gain, loss and
deduction realized after the date of transfer.
The Code generally requires that items of partnership income and deductions
be allocated between transferors and transferees of partnership interests on a
daily basis. It is possible that transfers of shares, and corresponding
indirect transfers of Master Fund units, could be considered to occur for U.S.
federal income tax purposes when the transfer is completed without regard to
the Master Fund's monthly convention for allocating income and deductions. If
this were to occur, the Master Fund's allocation method might be deemed to
violate that requirement. If such a contention were sustained, the holders'
respective tax liabilities would be adjusted to the possible detriment of
certain holders. The manager is authorized to revise the Master Fund's
allocation and revaluation methods in order to comply with applicable law or to
allocate items of partnership income and deductions in a manner that reflects
more accurately the shareholders' interests in the Master Fund.
Section 754 Election
The Master Fund intends to make the election permitted by Section 754 of the
Code. Such an election, once made, is irrevocable without the consent of the
IRS. The making of this election will generally have the effect of requiring a
purchaser of shares to adjust its proportionate share of the basis in the
Master Fund's assets, or the inside basis, pursuant to Section 743(b) of the
Code to fair market value (as reflected in the purchase price for the
purchaser's shares), as if it had acquired a direct interest in the Master
Fund's assets. The Section 743(b) adjustment will be attributed solely to a
purchaser of shares and not added to the bases of the Master Fund's assets
associated, indirectly through the Fund, with any of the other shareholders.
Depending on the relationship between a holder's purchase price for shares and
its unadjusted share of the Master Fund's inside basis at the time of the
purchase, the Section 754 election may be either advantageous or
disadvantageous to the holder as compared to the amount of gain or loss a
holder would be allocated absent the Section 754 election.
The calculations under Section 754 of the Code are complex, and there is
little legal authority concerning the mechanics of the calculations,
particularly in the context of publicly traded partnerships. Therefore,
pursuant to the election under Code Section 754, the Master Fund will likely
apply certain conventions in determining and allocating the Section 743 basis
adjustments to help reduce the complexity of those calculations and the
resulting administrative costs to the Master Fund. It is possible that the IRS
will successfully assert that some or all of such conventions utilized by the
Master Fund do not satisfy the technical requirements of the Code or the
Regulations and, thus, will require different basis adjustments to be made.
In order to make the basis adjustments pursuant to Section 754, the Master
Fund will be required to obtain information regarding each holder's secondary
market transactions in shares. The Master Fund will seek such information from
the Fund which, in turn, will seek such information from the record holders of
shares, and, by purchasing shares, each beneficial owner of shares will be
deemed to have consented to the provision of such information by the record
owner of such beneficial owner's shares. Notwithstanding the foregoing,
however, there can be no guarantee that the Fund and the Master Fund will be
able to obtain such information from record owners or other sources, or that
the basis adjustments that the Master Fund will make based on the information
it is able to obtain will be effective in eliminating disparity between a
holder's outside basis in its Fund shares and its share of inside basis in the
Master Fund's Assets.
Constructive Termination
The Master Fund will be considered to have terminated for tax purposes if
there is a sale or exchange of 50% or more of the total shares within a
12-month period. A constructive termination results in the closing of the
Master Fund's taxable year for the Fund and, indirectly, all holders of shares.
In the case of a holder of shares reporting on a taxable year other than a
fiscal year ending December 31, the closing of the Master Fund's taxable
63
year may result in more than 12 months of its taxable income or loss being
includable in his taxable income for the year of termination. The Master Fund
would be required to make new tax elections after a termination. A termination
could also result in penalties if the Master Fund were unable to determine that
the termination had occurred.
Treatment of Cash Distributions
Distributions of cash by a partnership are generally not taxable to the
distributee to the extent the amount of cash does not exceed the distributee's
tax basis in its partnership interest. Thus, any cash distributions made by the
Master Fund will be taxable to a Fund shareholder only to the extent such
distributions exceed the Fund shareholder's tax basis in the Master Fund units
it is treated as owning as a result of its ownership of shares (see "--Tax
Basis in Partnership Interests" below). Any cash distributions in excess of a
shareholder's tax basis generally will be considered to be gain from the sale
or exchange of those Master Fund units (see "--Disposition of shares" below).
Disposition of Shares
If a U.S. Shareholder transfers shares, it will be treated for United States
federal income tax purposes as transferring its pro rata share of the Master
Fund units held by Fund. If such transfer is a sale or other taxable
disposition, the U.S. Shareholder will generally be required to recognize gain
or loss measured by the difference between the amount realized on the sale and
the U.S. Shareholder's adjusted tax basis in the Master Fund units deemed sold,
which will be equal to such Shareholder's basis in the Fund shares sold. The
amount realized will include the U.S. Shareholder's share of the Master Fund's
liabilities, as well as any proceeds from the sale. The gain or loss recognized
will generally be taxable as capital gain or loss. Capital gain of
non-corporate U.S. Shareholders is eligible to be taxed at reduced rates where
the Master Fund units deemed sold are considered held for more than one year.
Capital gain of corporate U.S. Shareholders is taxed at the same rate as
ordinary income. Any capital loss recognized by a U.S. Shareholder on a sale of
shares will generally be deductible only against capital gains, except that a
non-corporate U.S. Shareholder may also use such losses to offset up to $3,000
per year of ordinary income.
Tax Basis in Master Fund Units
A U.S. Shareholder's initial tax basis in the Master Fund units it is
treated as holding as a result of its ownership of Fund shares will equal the
sum of (a) the amount of cash paid by such U.S. Shareholder for its shares and
(b) such U.S. Shareholder's share of the Master Fund's liabilities. A U.S.
Shareholder's tax basis in the Master Fund units it is treated as holding will
be increased by (a) the U.S. Shareholder's share (through its interest in the
Fund) of the Master Fund's taxable income, including capital gain, (b) the U.S.
Shareholder's share (through its interest in the Fund) of the Master Fund's
income, if any, that is exempt from tax and (c) any increase in the U.S.
Shareholder's share (through its interest in the Fund) of the Master Fund's
liabilities. A U.S. Shareholder's tax basis in the Master Fund units it is
treated as holding will be decreased (but not below zero) by (a) the amount of
any cash distributed (or deemed distributed) to the U.S. Shareholder, (b) the
U.S. Shareholder's share (through its interest in the Fund) of the Master
Fund's losses and deductions, (c) the U.S. Shareholder's share (through its
interest in the Fund) of the Master Fund's expenditures that are neither
deductible nor properly chargeable to its capital account and (d) any decrease
in the U.S. Shareholder's share of the Master Fund's liabilities.
Limitations on Interest Deductions
The deductibility of a non-corporate U.S. Shareholder's "investment interest
expense" is generally limited to the amount of that Shareholder's "net
investment income." Investment interest expense would generally include
interest expense incurred by the Master Fund, if any, and investment interest
expense incurred by the U.S. Shareholder on any margin account borrowing or
other loan incurred to purchase or carry Fund shares. Net investment income
includes gross income from property held for investment and amounts treated as
portfolio
64
income, such as dividends and interest, under the passive loss rules, less
deductible expenses, other than interest, directly connected with the
production of investment income. For this purpose, any long-term capital gain
or qualifying dividend income that is taxable at long-term capital gains rates
is excluded from net investment income unless the U.S. Shareholder elects to
pay tax on such capital gain or dividend income at ordinary income rates.
Organization, Syndication and Other Expenses
In general, expenses incurred that are considered "miscellaneous itemized
deductions" may be deducted by a U.S. Shareholder that is an individual, estate
or trust only to the extent that they exceed 2% of the adjusted gross income of
such U.S. Shareholder. The Code imposes additional limitations (which are
scheduled to be phased out between 2006 and 2010) on the amount of certain
itemized deductions allowable to individuals, by reducing the otherwise
allowable portion of such deductions by an amount equal to the lesser of:
. 3% of the individual's adjusted gross income in excess of certain
threshold amounts; or
. 80% of the amount of certain itemized deductions otherwise allowable for
the taxable year.
In addition, these expenses are also not deductible in determining the
alternative minimum tax liability of a U.S. Shareholder. The Master Fund
intends to account for management fees and other expenses related to its
activity in commodities as deductible ordinary and necessary business expenses,
and does not intend to report such expenses separately as miscellaneous
itemized deductions. However, the IRS could challenge this treatment, and to
the extent the IRS was successful in recharacterizing such expenses as
miscellaneous itemized deductions, a U.S. Shareholder's ability to deduct his
or her allocable share of them would be reduced accordingly.
Under Section 709(b) of the Code, amounts paid or incurred to organize a
partnership may, at the election of the partnership, be treated as deferred
expenses, which are allowed as a deduction ratably over a period of not less
than 180 months. The Master Fund has not yet determined whether it will make
such an election. Expenditures in connection with the issuance and marketing of
shares (so called "syndication fees") are not eligible for the 180-month
amortization provision and are not deductible.
Passive Activity Income and Loss
Individuals are subject to certain "passive activity" rules under
Section 469 of the Code. Under these rules, losses from a passive activity
generally may not be used to offset income derived from any source other than
passive activities. Losses that cannot be currently used under this rule may
generally be carried forward. Upon an individual's disposition of an interest
in the passive activity, the individual's unused passive losses may generally
be used to offset other (i.e., non passive) income. Under temporary
Regulations, income or loss from the Master Fund's investments generally will
not constitute income or losses from a passive activity. Therefore, income or
gains from the Master Fund's investments will not be available to offset a U.S.
Shareholder's passive activity losses or passive activity income from other
sources.
Transferor/Transferee Allocations
In general, the Master Fund's taxable income and losses will be determined
monthly and will be apportioned among the Fund's shareholders in proportion to
the number of Master Fund units treated as owned by each of them as a result of
their ownership of shares as of the close of the last trading day of the
preceding month. With respect to any Master Fund unit that was not treated as
outstanding as of the close of the last trading day of the preceding month, the
first person that is treated as holding such Master Fund unit (other than an
underwriter or other person holding in a similar capacity) for United States
federal income tax purposes will be treated as holding such Master Fund unit
for this purpose as of the close of the last trading day of the preceding
month. As a result, a shareholder transferring its shares may be allocated
income, gain, loss and deduction realized after the date of transfer.
65
Section 706 of the Code generally requires that items of partnership income
and deductions be allocated between transferors and transferees of partnership
interests on a daily basis. It is possible that transfers of shares could be
considered to occur for United States federal income tax purposes when the
transfer is completed without regard to the Master Fund's convention for
allocating income and deductions. In that event, the Master Fund's allocation
method might be considered a monthly convention that does not literally comply
with that requirement.
If the IRS treats transfers of shares as occurring throughout each month and
a monthly convention is not allowed by the Regulations (or only applies to
transfers of less than all of a shareholder's shares) or if the IRS otherwise
does not accept the Master Fund's convention, the IRS may contend that taxable
income or losses of the Master Fund must be reallocated among the shareholders.
If such a contention were sustained, the shareholders' respective tax
liabilities would be adjusted to the possible detriment of certain
shareholders. The Master Fund's manager is authorized to revise the Master
Fund's methods of allocation between transferors and transferees (as well as
among shareholders whose interests otherwise vary during a taxable period).
Tax Reporting by the Fund and the Master Fund
Information returns will be filed with the IRS, as required, with respect to
income, gain, loss, deduction and other items derived from the Fund's shares.
The Master Fund will file a partnership return with the IRS and intends to
issue a Schedule K-1 to the manager and the trustee on behalf of the
shareholders. If you hold your shares through a nominee (such as a broker), we
anticipate that the nominee will provide you with an IRS Form 1099, which will
be supplemented by additional tax information relating to the Master Fund's tax
status as a partnership that we will make available directly to you. The tax
information provided to you will include basis adjustments associated with the
election under Section 754 that the Master Fund intends to make. See "--Section
754 Election." Each holder of shares hereby agrees to allow brokers and
nominees to report to the Master Fund its name and address and such other
information as may be reasonably requested by the Master Fund for purposes of
complying with its tax reporting obligations. We note that, given the lack of
authority addressing structures similar to that of Fund and the Master Fund, it
is not certain that the IRS will agree with the manner in which tax reporting
by Fund and the Master Fund will be undertaken. Furthermore, shareholders
should be aware that Regulations have been proposed which, if finalized, could
alter the manner in which tax reporting by the Fund and any nominee will be
undertaken.
Treatment of Securities Lending Transactions involving Shares
A shareholder whose shares are loaned to a "short seller" to cover a short
sale of shares may be considered as having disposed of those shares. If so,
such shareholder would no longer be a beneficial owner of a pro rata portion of
the Master Fund units with respect to those shares during the period of the
loan and may recognize gain or loss from the disposition. As a result, during
the period of the loan, (1) any of Master Fund's income, gain, loss, deduction
or other items with respect to those shares would not be reported by the
Shareholder, and (2) any cash distributions received by the shareholder as to
those shares could be fully taxable, likely as ordinary income. Accordingly,
shareholders who desire to avoid the risk of income recognition from a loan of
their shares to a short seller are urged to modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their shares.
Audits and Adjustments to Tax Liability
Any challenge by the IRS to the tax treatment by a partnership of any item
must be conducted at the partnership, rather than at the partner, level. A
partnership ordinarily designates a "tax matters partner" (as defined under
Section 6231 of the Code) as the person to receive notices and to act on its
behalf in the conduct of such a challenge or audit by the IRS.
66
Pursuant to the Master Fund's LLC Agreement, the manager will be appointed
the "tax matters partner" of the Master Fund under the Code. The tax matters
partner, which is required by the Master Fund's LLC Agreement to notify all
U.S. Shareholders of any United States federal income tax audit of the Master
Fund, will have the authority under the LLC Agreement to conduct any IRS audits
of the Master Fund's tax returns or other tax related administrative or
judicial proceedings and to settle or further contest any issues in such
proceedings. The decision in any proceeding initiated by the tax matters
partner will be binding on all U.S. Shareholders. As the tax matters partner,
the manager will have the right on behalf of all holders of Master Fund units
to extend the statute of limitations relating to the shareholders' United
States federal income tax liabilities with respect to Master Fund items.
A United States federal income tax audit of the Master Fund's information
return may result in an audit of the returns of the U.S. Shareholders, which,
in turn, could result in adjustments of items of a Shareholder that are
unrelated to the Master Fund as well as to the Master Fund related items. In
particular, there can be no assurance that the IRS, upon an audit of an
information return of the Fund or the Master Fund or of an income tax return of
a U.S. Shareholder, might not take a position that differs from the treatment
thereof by the Master Fund. A U.S. Shareholder would be liable for interest on
any deficiencies that resulted from any adjustments. Potential U.S.
Shareholders should also recognize that they might be forced to incur
substantial legal and accounting costs in resisting any challenge by the IRS to
items in their individual returns, even if the challenge by the IRS should
prove unsuccessful.
Tax Shelter Disclosure Rules
There are circumstances under which certain transactions must be disclosed
to the IRS in a disclosure statement attached to a taxpayer's United States
federal income tax return (a copy of such statement must also be sent to the
IRS Office of Tax Shelter Analysis). In addition, the Code imposes a
requirement on certain "material advisers" to maintain a list of persons
participating in such transactions, which list must be furnished to the IRS
upon written request. These provisions can apply to transactions not
conventionally considered to involve abusive tax planning. Consequently, it is
possible that such disclosure could be required by the Master Fund or the
shareholders if, for example, (1) a shareholder incurs a loss (in each case, in
excess of a threshold computed without regard to offsetting gains or other
income or limitations) from the disposition (including by way of withdrawal) of
shares, or (2) the Master Fund's activities result in certain book/tax
differences. The tax shelter disclosure rules could also apply in other
circumstances. Furthermore, the Master Fund's material advisers could be
required to maintain a list of persons investing directly or indirectly in the
Fund or the Master Fund pursuant to the Code. While the tax shelter disclosure
rules generally do not apply to a loss recognized on the disposition of an
asset in which the taxpayer has a qualifying basis (generally a basis equal to
the amount of cash paid by the taxpayer for such asset), such rules will apply
to a taxpayer recognizing a loss with respect to interests in a pass through
entity (such as the shares) even if its basis in such interests is equal to the
amount of cash it paid. In addition, under recently enacted legislation,
significant penalties may be imposed in connection with a failure to comply
with these reporting requirements. U.S. Shareholders are urged to consult their
tax advisers regarding the tax shelter disclosure rules and their possible
application to them.
Non-U.S. Shareholders
Except as described below, the Fund anticipates that a non-U.S. Shareholder
will not be subject to United States federal income tax on such Shareholder's
distributive share of the Master Fund's income, provided that such income is
not considered to be income of the Shareholder that is effectively connected
with the conduct of a trade or business within the United States. In the case
of an individual non-U.S. Shareholder, such Shareholder will be subject to
United States federal income tax on gains on the sale of shares in the Master
Fund's or such Shareholder's distributive share of gains if such Shareholder is
present in the United States for 183 days or more during a taxable year and
certain other conditions are met.
67
If the income from the Master Fund is "effectively connected" with a U.S.
trade or business carried on by a non-U.S. Shareholder (and, if certain income
tax treaties apply, is attributable to a U.S. permanent establishment), then
such Shareholder's share of any income and any gains realized upon the sale or
exchange of shares will be subject to United States federal income tax at the
graduated rates applicable to United States citizens and residents and domestic
corporations. Non-U.S. Shareholders that are corporations may also be subject
to a 30% U.S. branch profits tax (or lower treaty rate, if applicable) on their
effectively connected earnings and profits that are not timely reinvested in a
U.S. trade or business.
With respect to derivative transactions, based on current law it is
uncertain whether entering into derivative transactions may cause the Fund, and
therefore any non-U.S. taxpayer Shareholders, to be treated as engaged in a
trade or business within the U.S. However, the Treasury Department has issued
proposed regulations which, if finalized in their current form, would provide
that foreign limited partners should not be deemed to be engaged in a U.S.
trade or business solely by virtue of an investment in the Fund even if the
Fund enters into derivative transactions. These regulations are proposed to be
effective for taxable years beginning 30 days after the date final regulations
are published in the Federal Register but also allow the Fund to elect to apply
the final regulations retroactively once they are finalized.
To the extent any interest income allocated to a non-U.S. Shareholder is
considered "portfolio interest," neither the allocation of such interest income
to the non-U.S. Shareholder nor a subsequent distribution of such interest
income to the non-U.S. Shareholder will be subject to withholding, provided
that the non-U.S. Shareholder is not otherwise engaged in a trade or business
in the U.S. and provides the Fund with a timely and properly completed and
executed IRS Form W-8BEN or other applicable form. In general, "portfolio
interest" is interest paid on debt obligations issued in registered form,
unless the "recipient" owns 10% or more of the voting power of the issuer.
Interest income earned by the Fund on its margin account with Lehman and
allocated to such a foreign shareholder as well as interest earned by such a
Shareholder on escrow deposits will, as a general rule, likewise not be subject
to the U.S. federal income tax or withholding, but may be subject to tax in
other jurisdictions to which such foreign shareholder is connected.
Non-U.S. Shareholders will be subject to United States federal estate tax on
the value of United States situs property owned at the time of their death. It
is unclear whether grantor trust or partnership interests (such as the
interests of the Fund and The Master Fund) will be considered United States
situs property. Accordingly, non-U.S. Shareholders may be subject to U.S.
federal estate tax on all or part of the value of the shares owned at the time
of their death.
Non U.S. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
shares.
Regulated Investment Companies and Tax-Exempt Organizations
Changes made to the Code by the American Jobs Creation Act of 2004 allow
regulated investment companies ("RICs") to invest up to 25% of their assets in
qualified PTPs and to treat amounts received as qualifying income under asset
diversification and income source tests applicable to entities seeking to
qualify for the special tax treatment available to RICs under the Code. The
Master Fund anticipates that it will be a qualified PTP and that at all times
such RIC investors may treat their respective shares of its income as
qualifying income under these rules. RIC investors must consult their own tax
advisors.
An organization that is otherwise exempt from United States federal income
tax is nonetheless subject to taxation with respect to its "unrelated business
taxable income," or UBTI, to the extent that its UBTI from all sources exceeds
$1,000 in any taxable year. Except as noted below with respect to certain
categories of exempt income, UBTI generally includes income or gain derived
(either directly or through a partnership) from a trade or business, the
conduct of which is substantially unrelated to the exercise or performance of
the organization's exempt purpose or function.
68
UBTI generally does not include passive investment income, such as
dividends, interest and capital gains, whether realized by the organization
directly or indirectly through a partnership (such as the Master Fund) in which
it is (or is deemed to be) a partner. This type of income is exempt, subject to
the discussion of "unrelated debt financed income" below, even if it is
realized from securities trading activity that constitutes a trade or business.
UBTI includes not only trade or business income or gain as described above,
but also "unrelated debt financed income." This latter type of income generally
consists of (1) income derived by an exempt organization (directly or through a
partnership) from income-producing property with respect to which there is
"acquisition indebtedness" at any time during the taxable year and (2) gains
derived by an exempt organization (directly or through a partnership) from the
disposition of property with respect to which there is acquisition indebtedness
at any time during the twelve-month period ending with the date of the
disposition.
To the extent the Master Fund recognizes gain from property with respect to
which there is "acquisition indebtedness," the portion of the gain that will be
treated as UBTI will be equal to the amount of the gain times a fraction, the
numerator of which is the highest amount of the "acquisition indebtedness" with
respect to the property during the twelve month period ending with the date of
their disposition, and the denominator of which is the "average amount of the
adjusted basis" of the property during the period such property is held by the
Master Fund during the taxable year. In determining the unrelated debt financed
income of the Master Fund, an allocable portion of deductions directly
connected with the Master Fund's debt financed property will be taken into
account. In making such a determination, for instance, a portion of losses from
debt financed securities (determined in the manner described above for
evaluating the portion of any gain that would be treated as UBTI) would offset
gains treated as UBTI. A charitable remainder trust will not be exempt from
United States federal income tax under the Code for any year in which it has
UBTI; in view of the potential for UBTI, the shares are not a suitable
investment for a charitable remainder trust. Tax exempt investors must consult
their own tax advisors.
Certain State and Local Taxation Matters
Prospective shareholders should consider, in addition to the United States
federal income tax consequences described, potential state and local tax
considerations in investing in the shares.
State and local laws often differ from United States federal income tax laws
with respect to the treatment of specific items of income, gain, loss,
deduction and credit. A shareholder's distributive share of the taxable income
or loss of the Master Fund generally will be required to be included in
determining its reportable income for state and local tax purposes in the
jurisdiction in which the shareholder is a resident. The Master Fund may
conduct business in one or more jurisdictions that will subject a shareholder
to tax (and require a shareholder to file an income tax return with the
jurisdiction in respect to the shareholder's share of the income derived from
that business). A prospective shareholder should consult its tax adviser with
respect to the availability of a credit for such tax in the jurisdiction in
which the shareholder is resident.
Back-up Withholding
Pursuant to special "back-up withholding" rules, the Fund is required in
certain circumstances to withhold on certain payments paid to noncorporate
shareholders of Fund shares who do not furnish us with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your United
States federal income tax liability, if any, provided that the required
information is furnished to the IRS.
Shareholders should be aware that certain aspects of the United States
federal, state and local income tax treatment regarding the purchase, ownership
and disposition of shares are not clear under existing law. Thus,
69
shareholders are urged to consult their own tax advisers to determine the tax
consequences of ownership of the shares in their particular circumstances,
including the application of United States federal, state, local and foreign
tax laws.
-------------------------
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS BEFORE DECIDING
WHETHER TO INVEST.
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PART TWO: STATEMENT OF ADDITIONAL INFORMATION
Nuveen Commodities Income and Growth Fund
(This prospectus is in two parts: a disclosure document and a statement of
additional information. These parts, both dated , 2006, are bound
together, and both contain important information)
Page
----
The Commodity Markets. 71
Debt Instruments...... 78
The Commodity Markets
General. The CEA governs the regulation of commodity interest transactions,
markets and intermediaries. In December 2000, the CEA was amended by the
Commodity Futures Modernization Act of 2000, or CFMA, which substantially
revised the regulatory framework governing certain commodity interest
transactions and the markets on which they trade. The CEA, as amended by the
CFMA, now provides for varying degrees of regulation of commodity interest
transactions depending upon the variables of the transaction. In general, these
variables include (1) the type of instrument being traded (e.g., contracts for
future delivery or options contracts), (2) the type of commodity underlying the
instrument (distinctions are made between instruments based on agricultural
commodities, energy and metals commodities and financial commodities), (3) the
nature of the parties to the transaction (retail, eligible contract
participant, or eligible commercial entity), (4) whether the transaction is
entered into on a principal-to-principal or intermediated basis, (5) the type
of market on which the transaction occurs, and (6) whether the transaction is
subject to clearing through a clearing organization. Information regarding
commodity interest transactions, markets and intermediaries, and their
associated regulatory environment, is provided below.
Futures Contracts. A futures contract is a standardized contract traded on,
or subject to the rules of, an exchange that calls for the future delivery of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, bond, stock
index, interest rate, currency, energy and metals markets. The size and terms
of futures contracts on a particular commodity traded on the same or linked
exchange are identical and are not subject to any negotiation, other than with
respect to price and quantity between the buyer and seller.
The contractual obligations of a buyer or seller may be satisfied by taking
or making physical delivery of an approved grade of commodity or by making an
offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The difference between
the price at which the futures contract is purchased or sold and the price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts settle in
cash (reflecting the difference between the contract purchase or sale price and
the contract settlement price) rather than by delivery of the underlying
commodity.
In market terminology, a trader who purchases a futures contract is long in
the market and a trader who sells a futures contract is short in the market.
Before a trader closes out his long or short position by an offsetting sale or
purchase, his outstanding contracts are known as open trades or open positions.
The aggregate amount of long open positions held by traders in a particular
contract is referred to as the open interest in such contract.
Forward Contracts. A forward contract is a contractual obligation to
purchase or sell a specified quantity of a commodity at or before a specified
date in the future at a specified price and, therefore, is economically similar
to a futures contract. Although most forward contracts are generally not traded
on exchanges, the Master Fund intends to invest in exchange-traded forward
contracts. Forward contracts for a given commodity are generally available in a
range of sizes and maturities and are subject to individual negotiation between
the parties involved. Moreover, generally there is no direct means of
offsetting or closing out a forward contract by taking
71
an offsetting position as one would a futures contract on a U.S. exchange. If a
trader desires to close out a forward contract position, he generally will
establish an opposite position in the contract but will settle and recognize
the profit or loss on both positions simultaneously on the prompt date, or the
delivery date. Thus, unlike in the futures contract market where a trader who
has offset positions will recognize profit or loss immediately, in the forward
market a trader with a position that has been offset at a profit will generally
not receive such profit until the prompt date, and likewise a trader with a
position that has been offset at a loss will generally not have to pay money
until the prompt date. In recent years, however, the terms of forward contracts
have become more standardized, and in some instances such contracts now provide
a right of offset or cash settlement as an alternative to making or taking
delivery of the underlying commodity.
Options on Futures Contracts. Options on commodity futures contracts are
standardized contracts traded on an exchange. An option on a futures contract
gives the buyer of the option the right, but not the obligation, to take a
position at a specified price (the exercise price) in the underlying futures
contract on or before a specified date. The buyer of a call option acquires the
right, but not the obligation, to purchase or take a long position in the
underlying futures contract, and the buyer of a put option acquires the right,
but not the obligation, to sell or take a short position in the underlying
futures contract.
The seller, or writer, of an option is obligated to take a position in the
underlying contract at a specified price on or before a specified date opposite
to the option buyer if the option is exercised. Thus, the writer of a call
option must stand ready to take a short position in the underlying contract at
the exercise price if the buyer should exercise the option. The seller of a put
option, on the other hand, must stand ready to take a long position in the
underlying contract at the exercise price.
A call option is said to be "in-the-money" if the exercise price is below
current market levels and "out-of-the-money" if the exercise price is above
current market levels. Conversely, a put option is said to be "in-the-money" if
the exercise price is above the current market levels and "out-of-the-money" if
the exercise price is below current market levels.
Options have limited life spans, usually tied to the delivery or settlement
date of the underlying contract. The purchase price of an option is referred to
as its premium, which consists of its intrinsic value plus its time value if
any. As an option nears its expiration date, the time value shrinks and the
market and intrinsic values move into parity. An option that is
"out-of-the-money" at the time it expires becomes worthless. On certain
exchanges, in-the-money options are automatically exercised on their expiration
date, but on others, unexercised options simply become worthless after their
expiration date.
Regardless of how much the market swings, the most an option buyer can lose
is the option premium. The option buyer deposits his premium with his broker,
and the money goes to the option seller. Option sellers, on the other hand,
face risks similar to participants in the futures markets. For example, since
the seller of a call option on futures is assigned a short futures position if
the option is exercised, his risk is the same as someone who initially sold a
futures contract. Because no one can predict exactly how the market will move,
the option seller posts margin to demonstrate his ability to meet any potential
contractual obligations.
Options on Forward Contracts. Options on commodity forward contracts
operate in a manner similar to options on commodity futures contracts. An
option on a forward contract gives the buyer of the option the right, but not
the obligation, to take a position at a specified price in the underlying
forward contract. However, similar to forward contracts, options on forward
contracts are individually negotiated contracts between counterparties and are
typically traded in the over-the-counter market. Similar to exchange-traded
forwards, some options on forwards trade on exchanges. The Master Fund intends
to invest in exchange-traded options on forward contracts.
Options on forward contracts and physical commodities possess many of the
same characteristics of forward contracts with respect to offsetting positions
and credit risk that are described above.
72
Over-the-Counter Options. OTC options operate in a manner very similar to
options on futures contracts insofar as they represent rights but not
obligations of the purchasers. They have fixed expiration dates and exercise
prices. They are differentiated between calls and puts; OTC options usually
settle in cash against a reference index. In the case of the Master Fund, the
most probable reference index will be either the portfolio returns of a
fully-collateralized basket of long commodities or a publicly available index
based on the performance of commodities. The cash settlement would be a
function of how much the option was "in-the-money" compared to the reference
index at the option's expiration date times a multiplier tied to the option's
notional value. An OTC option usually requires the purchaser to pay a premium
at the initiation of the contract. The nature of options limits the purchaser's
obligation to the payment of that premium. Credit considerations determine
whether changes in an OTC option's valuation can be withdrawn during the
option's lifetime via a mark-to-market process. When the purchaser has better
credit than the seller, the purchaser will demand that the seller's obligations
be solidified by marking the position to market. When the seller has better
credit than the purchaser, the option will usually be settled at expiration.
The Master Fund does not intend to sell OTC options. The valuation of OTC
options depends at any time on the value of the reference index, the time until
the option's expiration, the exercise price of the option, prevailing interest
rates, and the volatility of the reference index between the time of valuation
and the option's expiration. Because the future volatility of the reference
index is unknown, there can be disagreement over the value of the option before
its expiration. In cases where the value of the option must be calculated
before expiration for mark-to-market or portfolio valuation purposes, the
appropriate volatility is usually resolved via a negotiation between the
purchaser and seller of the option. In cases where the reference index is one
on which many counterparties transact OTC options, additional counterparties
can be polled for consensus. Independent pricing sources can also be used to
provide valuations.
Following changes enacted as part of the CFMA, over-the-counter derivative
instruments such as forward contracts and OTC options began to be traded on
lightly-regulated exchanges or electronic trading platforms that may, but are
not required to, provide for clearing facilities. Exchanges and electronic
trading platforms on which over-the-counter instruments may be traded and the
regulation and criteria for that trading are more fully described below under
"Futures Exchanges and Clearing Organizations." Nonetheless, absent a clearing
facility, the Master Fund's trading in foreign exchange and other forward
contracts is exposed to the creditworthiness of the counterparties on the other
side of the trade.
Participants. The two broad classes of persons who trade commodities are
hedgers and speculators (or investors). Hedgers include financial institutions
that manage or deal in interest rate-sensitive instruments, foreign currencies
or stock portfolios, and commercial market participants, such as farmers and
manufacturers, that market or process commodities. Hedging is a protective
procedure designed to lock in profits that could otherwise be lost due to an
adverse movement in the underlying commodity, for example, the adverse price
movement between the time a merchandiser or processor enters into a contract to
buy or sell a raw or processed commodity at a certain price and the time he
must perform the contract. In such a case, at the time the hedger contracts to
buy the commodity at a future date and price he will simultaneously buy a
futures or forward contract for the necessary equivalent quantity of the
commodity. At the time for performance of the contract, the hedger may accept
delivery under his futures contract or he may buy the actual commodity and
close out his position by making an offsetting sale of a futures contract.
The commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger is to protect the profit that
he expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives.
Unlike the hedger, the speculator generally expects neither to make nor take
delivery of the underlying commodity. Instead, the speculator risks his capital
with the hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedger
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their
73
positions prior to the delivery date. Because the speculator may take either a
long or short position in commodities, it is possible for him to make profits
or incur losses regardless of whether prices go up or down.
Futures Exchanges and Clearing Organizations. Futures exchanges provide
centralized market facilities in which multiple persons have the ability to
execute or trade contracts by accepting bids and offers from multiple
participants. Futures exchanges may provide for execution of trades at a
physical location utilizing trading pits and/or may provide for trading to be
done electronically through computerized matching of bids and offers pursuant
to various algorithms. Members of a particular exchange and the trades executed
on such exchanges are subject to the rules of that exchange. Futures exchanges
and clearing organizations are given reasonable latitude in promulgating rules
and regulations to control and regulate their members. Examples of regulations
by exchanges and clearing organizations include the establishment of initial
margin levels, rules regarding trading practices, contract specifications,
speculative position limits, daily price fluctuation limits, and dispute
resolution procedures.
Clearing organizations provide services designed to mutualize or transfer
the credit risk arising from the trading of contracts on an exchange or other
electronic trading facility. Once trades made between members of an exchange or
electronic trading facility have been confirmed, the clearing organization
becomes substituted for the clearing member acting on behalf of each buyer and
each seller of contracts traded on the exchange or trading platform and in
effect becomes the other party to the trade. Thereafter, each clearing member
party to the trade looks only to the clearing organization for performance. The
clearing organization generally establishes some sort of security or guarantee
fund to which all clearing members of the exchange must contribute; this fund
acts as an emergency buffer that enables the clearing organization, at least to
a large degree, to meet its obligations with regard to the other side of an
insolvent clearing member's contracts. The clearing organizations do not deal
with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers. Furthermore, the clearing organization requires margin
deposits and continuously marks positions to market to provide some assurance
that their members will be able to fulfill their contractual obligations. Thus,
a central function of the clearing organization is to ensure the integrity of
trades, and members effecting transactions on an exchange need not concern
themselves with the solvency of the party on the opposite side of the trade;
their only remaining concerns are the respective solvencies of their own
clearing broker and the clearing organization.
U.S. Futures Exchanges. Futures exchanges in the U.S. are subject to
varying degrees of regulation by the CFTC based on their designation as one of
the following: a designated contract market, a derivatives transaction
execution facility, an exempt board of trade or an electronic trading facility.
A designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers on
an unrestricted basis. To be designated as a contract market, the exchange must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the U.S. are
the Chicago Board of Trade ("CBOT"), the Chicago Mercantile Exchange ("CME")
and the New York Mercantile Exchange ("NYMEX"). Each of the designated contract
markets in the U.S. must provide for the clearance and settlement of
transactions with a CFTC-registered derivatives clearing organization.
A derivatives transaction execution facility, or DTEF, is a new type of
exchange that is subject to fewer regulatory requirements than a designated
contract market but is subject to both commodity interest and participant
limitations. DTEFs limit access to eligible traders that qualify as either
eligible contract participants or eligible commercial entities for futures and
option contracts on commodities that have a nearly inexhaustible deliverable
supply, are highly unlikely to be susceptible to the threat of manipulation, or
have no cash market, security futures products, and futures and option
contracts on commodities that the CFTC may determine, on a case-by-case basis,
are highly unlikely to be susceptible to the threat of manipulation. In
addition, certain
74
commodities excluded or exempt from the CEA may be traded on a DTEF. There is
no requirement that a DTEF use a clearing organization, except with respect to
trading in security futures contracts, in which case the clearing organization
must be a securities clearing agency. However, if futures contracts and options
on futures contracts on a DTEF are cleared, then it must be through a
CFTC-registered derivatives clearing organization, except that some excluded or
exempt commodities traded on a DTEF may be cleared through a clearing
organization other than one registered with the CFTC.
An exempt board of trade is also a new category of trading market. An exempt
board of trade is substantially unregulated, subject only to CFTC anti-fraud
and anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to be
traded on an exempt board of trade include contracts on interest rates,
exchange rates, currencies, credit risks or measures, debt instruments,
measures of inflation, or other macroeconomic indices or measures. There is no
requirement that an exempt board of trade use a clearing organization. However,
if contracts on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing to
operate as an exempt board of trade must file a written notification with the
CFTC.
An electronic trading facility, or ETF, is a new form of exchange that
operates by means of an electronic or telecommunications network and maintains
an automated audit trail of bids, offers, and the matching of orders or the
execution of transactions on the ETF. The CEA does not apply to, and the CFTC
has no jurisdiction over, transactions on an ETF in certain excluded
commodities that are entered into between principals that qualify as eligible
contract participants, subject only to CFTC anti-fraud and anti-manipulation
authority. In general, excluded commodities include interest rates, currencies,
securities, securities indices or other financial, economic or commercial
indices or measures.
The manager intends to monitor the development of and opportunities and
risks presented by the less-regulated exchanges and exempt boards and may, in
the future, allocate a percentage of the Master Fund's assets to trading in
products on these platforms. Provided the Master Fund maintains assets
exceeding $5 million, the Master Fund would qualify as an eligible contract
participant and thus would be able to trade on such exchanges.
Non-U.S. Futures Exchanges. Non-U.S. futures exchanges differ in certain
respects from their U.S. counterparts. Importantly, non-U.S. futures exchanges
are not subject to regulation by the CFTC, but rather are regulated by their
home country regulator. In contrast to U.S. designated contract markets, some
non-U.S. exchanges are principals' markets, where trades remain the liability
of the traders involved, and the exchange or an affiliated clearing
organization, if any, does not become substituted for any party. Due to the
absence of a clearing system, such exchanges are significantly more susceptible
to disruptions. Further, participants in such markets must often satisfy
themselves as to the individual creditworthiness of each entity with which they
enter into a trade. Trading on non-U.S. exchanges is often in the currency of
the exchange's home jurisdiction. Consequently, the Master Fund is subject to
the additional risk of fluctuations in the exchange rate between such
currencies and U.S. dollars and the possibility that exchange controls could be
imposed in the future. Trading on non-U.S. exchanges may differ from trading on
U.S. exchanges in a variety of ways and, accordingly, may subject the Master
Fund to additional risks.
Speculative Position Limits. The CFTC and U.S. designated contract markets
have established limits, referred to as speculative position limits or position
limits, on the maximum net long or net short speculative position that any
person or group of persons under common trading control (other than a hedger,
which the Master Fund is not) may hold, own or control in many commodities.
Among the purposes of speculative position limits is to prevent a corner or
squeeze on a market or undue influence on prices by any single trader or group
of traders. The position limits established by the CFTC apply to certain
agricultural commodity positions, such as grains (oats, barley, and flaxseed),
soybeans, corn, wheat, cotton, eggs, rye, and potatoes. In addition,
U.S. exchanges may set position limits for all commodity interest investments
traded on that exchange. Certain
75
clearing organizations also set limits on the total net positions that may be
held by a clearing broker. In general, no position limits are in effect in
forward or other over-the-counter contract trading or in trading on
non-U.S. futures exchanges, although the principals with which the Master Fund
and the clearing brokers may trade in such markets may impose such limits as a
matter of credit policy. For purposes of determining position limits, the
Master Fund's commodity investments will not be attributable to investors in
their own commodity trading.
Daily Price Limits. Most U.S. futures exchanges (but generally not
non-U.S. exchanges or, in the case of forward or over-the-counter contracts,
banks or dealers) may limit the amount of fluctuation in some futures contracts
or options on futures contract prices during a single trading day. Exchange
rules specify what are referred to as daily price fluctuation limits or more
commonly, daily limits. The daily limits establish the maximum amount that the
price of a futures or options on futures contract may vary either up or down
from the previous day's settlement price. Once the daily limit has been reached
in a particular futures or options on futures contract, no trades may be made
at a price beyond the limit. Positions in the futures or options contract may
then be taken or liquidated, if at all, only at inordinate expense or if
traders are willing to effect trades at or within the limit during the period
for trading on such day. Because the daily limit rule governs price movement
only for a particular trading day, it does not limit losses and may in fact
substantially increase losses because it may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved the
daily limit for several consecutive trading days, thus preventing prompt
liquidation of positions and subjecting the trader to substantial losses for
those days.
Commodity Prices. Commodity prices are volatile and, although ultimately
determined by the interaction of supply and demand, are subject to many other
influences, including the psychology of the marketplace and speculative
assessments of future world and economic events. Political climate, interest
rates, treaties, balance of payments, exchange controls and other governmental
interventions as well as numerous other variables affect the commodity markets,
and even with comparatively complete information it is impossible for any
trader to reliably predict commodity prices.
Regulation. Futures exchanges in the U.S. are subject to varying degrees of
regulation under the CEA depending on whether such exchange is a designated
contract market, DTEF, exempt board of trade or ETF. Derivatives clearing
organizations are also subject to the CEA and CFTC regulation. The CFTC is the
governmental agency charged with responsibility for regulation of futures
exchanges and commodity interest trading conducted on those exchanges. The
CFTC's function is to implement the CEA's objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.
The CFTC possesses exclusive jurisdiction to regulate the activities of
commodity pool operators and commodity trading advisors and has adopted
regulations with respect to the activities of those persons and/or entities.
Under the CEA, a registered commodity pool operator, such as the manager, is
required to make annual filings with the CFTC describing its organization,
capital structure, management and controlling persons. In addition, the CEA
authorizes the CFTC to require and review books and records of, and documents
prepared by, registered commodity pool operators. Pursuant to this authority,
the CFTC requires commodity pool operators to keep accurate, current and
orderly records for each pool that they operate. The CFTC may suspend the
registration of a commodity pool operator (1) if the CFTC finds that the
operator's trading practices tend to disrupt orderly market conditions, (2) if
any controlling person of the operator is subject to an order of the CFTC
denying such person trading privileges on any exchange, and (3) in certain
other circumstances. Suspension, restriction or termination of the manager's
registration as a commodity pool operator would prevent it, until that
registration were to be reinstated, from managing the Fund and the Master Fund,
and might result in the termination of the Fund and the Master Fund. The Fund
and the Master Fund are not required to be registered with the CFTC in any
capacity.
76
The CEA gives the CFTC similar authority with respect to the activities of
commodity trading advisors. If a trading advisor's commodity trading advisor
registration were to be terminated, restricted or suspended, the trading
advisor would be unable, until the registration were to be reinstated, to
render trading advice to the Master Fund.
The CEA requires all futures commission merchants, such as the Master Fund's
clearing brokers, to meet and maintain specified fitness and financial
requirements, to segregate customer funds from proprietary funds and account
separately for all customers' funds and positions, and to maintain specified
books and records open to inspection by the staff of the CFTC. The CFTC has
similar authority over introducing brokers, or persons who solicit or accept
orders for commodity interest trades but who do not accept margin deposits for
the execution of trades. The CEA authorizes the CFTC to regulate trading by
futures commission merchants and by their officers and directors, permits the
CFTC to require action by exchanges in the event of market emergencies, and
establishes an administrative procedure under which customers may institute
complaints for damages arising from alleged violations of the CEA. The CEA also
gives the states powers to enforce its provisions and the regulations of the
CFTC.
The Fund's investors are afforded prescribed rights for reparations under
the CEA. Investors may also be able to maintain a private right of action for
violations of the CEA. The CFTC has adopted rules implementing the reparation
provisions of the CEA, which provide that any person may file a complaint for a
reparations award with the CFTC for violation of the CEA against a floor broker
or a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, and their respective associated persons.
Pursuant to authority granted in the CEA, the NFA has been formed and
registered with the CFTC as a futures association. At the present time, the NFA
is the only self-regulatory organization for commodity interest professionals,
other than futures exchanges. The CFTC has delegated to the NFA responsibility
for the registration of commodity trading advisors, commodity pool operators,
futures commission merchants, introducing brokers, and their respective
associated persons and floor brokers. The manager, Gresham, and the Master
Fund's commodity brokers are members of the NFA. As such, they are subject to
NFA standards relating to fair trade practices, financial condition and
consumer protection. The Fund and the Master Fund are not required to become
members of the NFA. As the self-regulatory body of the commodity interest
industry, the NFA promulgates rules governing the conduct of professionals and
disciplines those professionals that do not comply with these rules. The NFA
also arbitrates disputes between members and their customers and conducts
registration and fitness screening of applicants for membership and audits of
its existing members.
The regulations of the CFTC and the NFA prohibit any representation by a
person registered with the CFTC, or by any member of the NFA, that registration
with the CFTC, or membership in the NFA, in any respect indicates that the CFTC
or the NFA, as the case may be, has approved or endorsed that person or that
person's trading program or objectives. The registrations and memberships of
the parties described in this summary must not be considered as constituting
any such approval or endorsement. Likewise, no futures exchange has given or
will give any similar approval or endorsement.
The regulation of commodity interest trading in the U.S. and other countries
is an evolving area of the law. The various statements made in this summary are
subject to modification by legislative action and changes in the rules and
regulations of the CFTC, the NFA, the futures exchanges, clearing organizations
and other regulatory bodies.
The function of the CFTC is to implement the objectives of the CEA of
preventing price manipulation and other disruptions to market integrity,
avoiding systemic risk, preventing fraud and promoting innovation, competition
and financial integrity of transactions. As mentioned above, this regulation,
among other things, provides that the trading of commodity interest contracts
generally must be upon exchanges designated as contract markets or DTEFs and
that all trading on those exchanges must be done by or through exchange
members. Under the CFMA, commodity interest trading in some commodities between
sophisticated persons may take place on a trading facility not regulated by the
CFTC. As a general matter, trading in forward contracts
77
or options on forward contracts or commodities between eligible contract
participants is not within the jurisdiction of the CFTC and may therefore be
effectively unregulated. The commodity subadvisor and the collateral subadvisor
may engage in those transactions on behalf of the Master Fund in reliance on
this exclusion from regulation.
In general, the CFTC does not regulate the interbank and forward foreign
currency markets with respect to transactions in contracts between certain
sophisticated counterparties, such as the Master Fund, or between certain
regulated institutions and retail investors. Although U.S. banks are regulated
in various ways by the Federal Reserve Board, the Comptroller of the Currency
and other U.S. federal and state banking officials, banking authorities do not
regulate the forward markets.
While the U.S. government does not currently impose any restrictions on the
movements of currencies, it could choose to do so. The imposition or relaxation
of exchange controls in various jurisdictions could significantly affect the
market for that and other jurisdictions' currencies. Trading in the interbank
market also exposes the Master Fund to a risk of default since failure of a
bank with which the Master Fund had entered into a forward contract would
likely result in a default and thus possibly substantial losses to the Master
Fund.
The CFTC is prohibited by statute from regulating trading on
non-U.S. futures exchanges and markets. The CFTC, however, has adopted
regulations relating to the marketing of non-U.S. futures contracts in the
U.S. These regulations permit certain contracts traded on non-U.S. exchanges to
be offered and sold in the U.S., subject to certain exceptions, and in
accordance with various requirements.
Debt Instruments
Obligations Issued by the U.S. Government, its agencies and
instrumentalities. Obligations issued or guaranteed by the U.S. government,
its agencies and instrumentalities include bills, notes and bonds issued by the
U.S. Treasury, as well as certain "stripped" or "zero coupon" U.S. Treasury
obligations representing future interest or principal payments on U.S. Treasury
notes or bonds. Stripped securities are sold at a discount to their "face
value" and may exhibit greater price volatility than interest-bearing
securities since investors receive no payment until maturity. Obligations of
certain agencies and instrumentalities of the U.S. government are supported by
the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the U.S. Treasury; others are supported by
the discretionary authority of the U.S. government to purchase the agency's
obligations; still others, though issued by an instrumentality chartered by the
U.S. government, are supported only by the credit of the instrumentality. The
U.S. government may choose not to provide financial support to U.S.
government-sponsored agencies or instrumentalities if it is not legally
obligated to do so. Even where a security is backed by the full faith and
credit of the U.S. Treasury, it does not guarantee the market price of that
security, only the payment of principal and/or interest.
Asset-Backed Securities. Asset-backed securities represent direct or
indirect participations in, or are secured by and payable from, pools of assets
such as, among other things, motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal
property, and receivables from revolving credit (credit card) agreements or a
combination of the foregoing. These assets are securitized through the use of
trusts and special purpose corporations. Credit enhancements, such as various
forms of cash collateral accounts or letters of credit, may support payments of
principal and interest on asset-backed securities. Although these securities
may be supported by letters of credit or other credit enhancements, payment of
interest and principal ultimately depends upon individuals paying the
underlying loans or accounts, which payment may be affected adversely by
general downturns in the economy.
78
SUPPLEMENTAL PERFORMANCE TABLE
Notes to Supplemental Performance Table
A summary of the significant accounting policies that have been followed in
preparing the accompanying performance table are set forth below.
Supplemental Performance Table reflects results of extracted data from a
proprietary account traded by Dr. Jarecki, Mr. Spencer and Gresham for a family
trust using TAP/SM/, from January 1987 through December 31, 2005. (Prior to
June 1998 TAP/SM /was called the GVI Program.) The overall actual trading
results from which the extracted results were drawn are not disclosed because
the results would be misleading.
Due to the nature of the account, actual funds were provided as necessary,
but only to cover minimum margin requirements. However, for performance
reporting purposes, the Table has been presented based upon the amount of funds
that would have been committed to the trading program by a nonaffiliated
client. Committed funds represent what an independent investor would have been
requested to deposit or withdraw at the beginning of each month, based on level
of trading.
Until September 2004, management and incentive fees were not actually
charged to this account, but pro forma fees have been computed and are
presented as a deduction from the net asset value as if they had been charged.
Interest was not actually allocated to the funds committed to trading. However,
since it is expected that actual client funds would earn interest on actual
cash balances, interest has been computed and included on a pro forma basis.
1. Beginning Equity equals the Ending Equity from the previous month, if
applicable, [and] is equal to the notional value of the futures and forward
contracts in the account.
2. Additions is the net notional value of the futures and forward contracts
acquired during the month in connection with an addition to, or reduction
of, the allocation to TAP by the account, as well as in connection with a
scaling up or scaling down of positions. Additions are assumed to take place
at the beginning of the month.
3. Withdrawals is the net notional value of the futures and forward contracts
liquidated during the month in connection with an addition to, or reduction
of, the allocation to TAP by the account, as well as in connection with a
scaling up or scaling down of positions. Withdrawals are assumed to take
place at the beginning of the month.
3a. Pro Forma Equity Adjustment represents amounts subtracted from equity to
offset Pro Forma Interest Income and Pro Forma Trading Adviser's Fees. This
adjustment results in each month's Ending Equity equaling the actual ending
equity of the account.
4. Gross Realized Profit (Loss) is the gross realized gain (loss) on closed
futures and forward contracts for the month. It is not reduced by Brokerage
Commissions.
5. Brokerage Commissions represent the commissions actually charged by the
respective futures commission merchants and charges by certain exchanges and
self-regulatory organizations. Brokerage Commissions reduce Ending Equity,
and are reflected in Pro Forma Monthly Rates of Return.
6. Net Realized Profit (Loss) represents the sum of Gross Realized Profit
(Loss) less Brokerage Commissions.
7. Inc. (Dec.) in Unrealized Profit (Loss) represents the total increase
(decrease) from the preceding month-end open futures and forward positions.
Unrealized gains (losses) on futures and forward contracts are calculated at
the end of each month based on contract sizes and the differences between
the contract closing price and the price at which the contract was initially
purchased or sold.
8. Pro Forma Interest Income is computed by multiplying Beginning Equity plus
Additions minus Withdrawals times the average 3 Month U.S. Treasury Constant
Maturity Discount Rate calculated by the Board of Governors of the Federal
Reserve, converted to a yield, divided by 365 times the number of days in
the month.
79
9. Pro Forma Trading Adviser's Fees include management fees. Pro forma
management fees are accrued monthly at a rate of 1.25% annually applied to
the Beginning Equity plus Additions minus Withdrawals plus Net Realized
Profit/(loss) plus the Increase/Decrease in Unrealized Profit/(loss).
10. Pro Forma Net Performance equals Net Realized Profit (Loss) plus/minus Inc.
(Dec.) in Unrealized Profit (Loss) plus Pro Forma Interest Income Brokerage
Commissions and Pro Forma Trading Adviser's Fees are deducted.
11. Ending Equity equals the sum of Beginning Equity plus Additions minus
Withdrawals less Pro Forma Equity Adjustments plus/minus Pro Forma Net
Performance minus Brokerage Commissions and Pro Forma Trading Adviser's
Fees.
12. Pro Forma Monthly Rates of Return is determined by dividing Pro Forma Net
Performance for a month by the sum of Beginning Equity plus Additions less
Withdrawals.
13. Continuous Index is included for informational purposes only and represents
the estimated monthly value of an initial investment of $1,000 assumed to
have been made as of the beginning of the period presented. Continuous
Index is calculated as (1 plus the Pro Forma Monthly Rates of Return) times
the prior month's Index. Continuous Index is not intended to reflect the
performance of any account. Continuous Index may not be an accurate
indicator of performance because it is based on the compounded performance
of the account using the Pro Forma Monthly Rates of Return, and assumes a
continuous investment with no subsequent additions, withdrawals or
distributions of accumulated profits.
13a. Reset Index is included for informational purposes only and represents the
estimated monthly value of an initial investment of $1,000 assumed to have
been made as of the beginning of the period presented, reset to $1,000 at
the beginning of each year. Reset Index is calculated as (1 plus the Pro
Forma Monthly Rates of Return) times the prior month's Index. Reset Index
is not intended to reflect the performance of any account. Reset Index may
not be an accurate indicator of performance because it is based on the
compounded performance of the account using the Pro Forma Monthly Rates of
Return, and assumes a continuous investment throughout the year with no
subsequent additions, withdrawals or distributions of accumulated profits.
14. Compound Rate of Return is the annual compounded rate of return based upon
Pro Forma Monthly Rates of Return.
80
GLOSSARY OF DEFINED TERMS
In this prospectus, each of the following terms have the meanings set forth
after such term:
Book Entry System: The Federal Reserve Treasury Book Entry System for U.S.
and federal agency securities.
CFTC: Commodity Futures Trading Commission, an independent agency with the
mandate to regulate commodity futures and options in the United States.
Clearing Broker: The entity responsible for assuring that futures and
option trades are properly processed and recorded or "cleared" by the
clearinghouse affiliated with the exchange on which the trades took place.
Code: The Internal Revenue Code of 1986, as amended.
Commodity Broker: The entity responsible for holding the client's funds
deposited with it as margin for trades and, if the commodity broker is also a
clearing commodity broker, for assuring that futures and options trades for a
client are properly processed and recorded or "cleared" by the clearing house
affiliated with the exchange on which the trades took place. In the U.S.,
commodity brokers are registered under the Commodity Exchange Act as futures
commission merchants.
Commodity Pool: An enterprise in which several investors contribute funds
in order to trade commodity futures contracts or options on commodity futures
contracts, collectively.
Commodity Pool Operator: Any person engaged in a business which is of the
nature of an investment trust, syndicate, or similar form of enterprise, and
who, in connection therewith, solicits, accepts, or receives from others,
funds, securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or otherwise,
for the purpose of trading in any commodity for future delivery or commodity
option on or subject to the rules of any contract market.
Commodity Trading Advisor: Any person who for compensation or profit
engages in the business of advising others, either directly or through
publications or writing, or electronic media, as to the value or the
advisability of trading in any contract of sale of a commodity for future
delivery or commodity option thereon made on or subject to the rules of any
contract market.
DTC: The Depository Trust Company. It is anticipated that DTC will act as
the securities depository for the shares.
Forward Contract: A supply contract between principals, not necessarily
traded on an exchange, to buy or sell a specified quantity of a commodity at or
before a specified date at a specified price.
Fund: Nuveen Commodities Income and Growth Fund, a Delaware statutory trust.
Futures Contract: A standardized contract traded on an exchange that calls
for the future delivery or cash settlement of a specified quantity of a
commodity at a specified time and place.
Gresham: Gresham Investment Management, LLC, a Delaware limited liability
company, registered as a commodity trading advisor and serving as a subadvisor
to the Fund.
Investor: Beneficial owner of the shares.
81
Limited Liability Company (LLC): A type of business ownership combining
several features of corporation and partnership structures.
LLC Agreement: Form of the Limited Liability Company Agreement.
Manager: Nuveen Commodities Asset Management, LLC, a Delaware limited
liability company, which is registered as a Commodity Pool Operator and
Commodity Trading Advisor, and which controls the investments and other
decisions of the Fund and the Master Fund.
Margin: A good faith deposit to secure the performance under a futures
contract.
Margin Call: A demand for funds in addition to the initial good faith
deposit required to maintain a customer's account in compliance with the
requirements of a particular commodity exchange or commodity broker.
Master Fund: Nuveen Commodities Income and Growth Master Fund LLC, a
Delaware LLC.
Master Fund Units: Unit of fractional undivided beneficial interest in and
ownership of the Master Fund.
NASAA: North American Securities Administrators Association, Inc.
Net Asset Value: Net Asset Value of the Fund and/or the Master Fund.
NFA: National Futures Association, a self-regulatory membership
organization that regulates the commodity industry.
NSCC: National Securities Clearing Corporation.
Option on Futures: The right, but not the obligation, to buy or sell a
futures contract or forward contract at a specified price on or before a
specified date.
Over-the-Counter (OTC) Contract: A financial contract, whose value is
designed to track the return on stocks, bonds, currencies, commodities, or some
other benchmark, that is traded over-the-counter or off organized exchanges.
SEC: United States Securities and Exchange Commission.
Secondary Market: The stock exchanges and the over-the-counter market.
Securities are first issued as a primary offering to the public. When the
securities are traded from that first holder to another, the issues trade in
the secondary markets.
Shares: Unit of fractional undivided beneficial interest in and ownership
of the Fund.
Subadvisors: A collective term to refer to both the collateral subadvisor
and the commodity subadvisor.
Treasuries: Short-term securities issued by the U.S. Treasury.
Treasury Regulations: Treasury Regulations promulgated under the Code.
Valuation Day: Any day as of which the Fund calculates its net asset value.
You: The owner of shares.
82
REPORT OF THE INDEPENDENT AUDITORS
[To be furnished by amendment]
Where You Can Find More Information
The manager has filed on behalf of the Fund a registration statement on
Form S-1 with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement
(including the exhibits to the registration statement), parts of which have
been omitted in accordance with the rules and regulations of the SEC. For
further information about the Fund, the Master Fund or the shares, please refer
to the registration statement, which you may inspect, without charge, at the
public reference facilities of the SEC at the below address or online at
www.sec.gov, or obtain at prescribed rates from the public reference facilities
of the SEC at the below address. Information about the Fund, the Master Fund
and the shares can also be obtained from the Fund's website, which is
www.nuveen.com. The Fund's website address is only provided here as a
convenience to you and the information contained on or connected to the website
is not part of this prospectus or the registration statement of which this
prospectus is part. The Fund is subject to the informational requirements of
the Exchange Act and the manager and the Fund will each, on behalf of the Fund,
file certain reports and other information with the SEC (including annual and
quarterly reports) and with the CFTC (including monthly shareholder
statements). The reports and other information filed with the SEC can be
inspected at the public reference facilities of the SEC located at 100 F
Street, N.E., Washington, D.C. 20549 and online at www.sec.gov. You may also
obtain copies of such material from the public reference facilities of the SEC
at 100 F Street, N.E., Room 1580 Washington, D.C. 20549, at prescribed rates.
You may obtain more information concerning the operation of the public
reference facilities of the SEC by calling the SEC at 1-800-SEC-0330 or
visiting online at www.sec.gov.
83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Shares
Nuveen Commodities Income and Growth Fund
Nuveen Commodities Income and Growth Master Fund LLC
______ Common Stock
--------
P R O S P E C T U S
[ ,] 2006
--------
Nuveen Investments, LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
Information Not Required in the Prospectus
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate (except as indicated) of the amount of fees
and expenses (other than underwriting commissions and discounts) payable by the
registrant in connection with the issuance and distribution of the Shares
pursuant to the prospectus contained in this registration statement.
Amount
-----------------
SEC registration fee (actual) $ 2,675
NASD filing fees 3,000
Blue Sky expenses *
Accountants' fees and expenses *
Legal fees and expenses *
Printing and engraving expenses *
Miscellaneous expenses *
-----------------
Total $ *
=================
* To be provided by amendment
Item 14. Indemnification of Directors and Officers
The Declaration of Trust provides that the Fund will indemnify and hold
harmless the Manager and each officer, director, employee and agent thereof and
their respective legal representatives and successors (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of an alleged act or
omission as a manager or officer thereof or by reason of its being or having
been such a manager or officer.
However the Fund will not indemnity a Covered Person with respect to any
matter as to which such Covered Person shall have been finally adjudicated in
any such action, suit or other proceeding not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interest of
the Fund, and except that no Covered Person shall be indemnified against any
liability to the Fund or shareholders to which such Covered Person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office.
Item 15. Recent Sales of Unregistered Securities
Not Applicable.
II-1
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1* Underwriting Agreement.
4.1* Form of the Declaration of Trust of the Fund.
4.2* Form of the LLC Agreement of the Master Fund.
5.1* Opinion of ____________ relating to the legality of the
Shares
8.1* Opinion and consent of Bell, Boyd & Lloyd LLC with respect
to federal income tax consequences.
10.1* Form of Investment Management Agreement.
10.2* Form of Investment Sub-Advisory Agreement.
10.3* Form of Custodian Agreement.
10.4* Form of Shareholder Transfer Agency and Service Agreement.
23.1* Consent of ___________ (included in Exhibit 5.1).
23.3* Consent of Accountant.
24.1 Power of Attorney.
* To be filed by amendment.
(b) Financial Statement Schedules
Financial statement schedules are not applicable because the registrant has
no operating history and no assets.
Item 17. Undertakings
II-2
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
and Co-Registrant have duly caused this pre-effective amendment no. 1 to the
registration statement on Form S-1 to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, state of
Illinois, on March 10, 2006.
Nuveen Commodities Income and Growth Fund
By: Nuveen Commodities Asset Management, LLC
its managing owner
By: /s/ John P. Amboian
----------------------------------------
Director and Principal Executive Officer
Nuveen Commodities Income and Growth Master
Fund LLC
By: Nuveen Commodities Asset Management, LLC
its managing owner
By: /s/ John P. Amboian
----------------------------------------
Director and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
pre-effective amendment no. 1 to the registration statement on Form S-1 has been
signed by the following persons on behalf of the managing owner of the
Registrant and Co-Registrant in the capacities and on the dates indicated.
Nuveen Commodities Asset Management, LLC
Managing Owner of Registrant and Co-Registrant
/s/ John P. Amboian Director and Principal Executive Officer March 10, 2006
- -------------------------------
___________________
II-4
EXHIBIT INDEX
1.1* Underwriting Agreement.
4.1* Form of the Declaration of Trust of the registrant.
4.2* Form of LLC Agreement of the Master Fund.
5.1* Opinion of ____________ relating to the legality of the
Shares.
8.1* Opinion and consent of Bell, Boyd & Lloyd LLC with respect
to federal income tax consequences.
10.1* Form of Investment Management Agreement.
10.2* Form of Investment Sub-Advisory Agreement.
10.3* Form of Custodian Agreement.
10.4* Form of Shareholder Transfer Agency and Service Agreement.
23.1* Consent of ___________ (included in Exhibit 5.1).
23.3* Consent of Accountant.
24.1 Power of Attorney.
* To be filed by amendment.
II-5