Standard & Poor’s Commodity Trends Indicator - continued

Generally, prices of these sectors and any underlying components are cyclical in nature. Each of the 6 sectors (with the exception of the Energy sector, which is either long or flat but never short) will be positioned either long or short based on its price behavior relative to its moving average. This long/short aspect enables the S&P CTI to potentially capture profits in both up and down markets.

These are the approximate market sectors and sector weightings included in the S&P CTI as of January 1, 2008. The S&P CTI individual market components, sectors, and related weightings, as well as other aspects of the calculation of the S&P CTI, are subject to change at any time.

Key Attributes:

Reflects Trends and Volatility
The S&P CTI is a long/short indicator designed with the aim of capturing both up and down price trends in futures markets on traditional, physical commodities. Additionally, it seeks to benefit from the volatility of an aggregate of major commodity (non-financial) price movements.

Long: Seeks to Provide a Hedge when Prices are Rising
Many investors consider commodity futures markets useful to offset inflation risk in portfolios. In markets with rising prices, the S&P CTI is long in those futures contracts and therefore has the potential to reflect the impact of those markets on the Consumer Price Index (CPI) over extended periods. However, positions are changed only monthly, and there is no “necessary” correlation between the S&P CTI and inflation.

Short: Seeks to Profit from Futures Cyclicality
Since commodities tend to behave in extended trends, simple “long only” ownership of commodity futures could result in extended and significant drops in value. The S&P CTI seeks to mitigate the “long only” risk by shorting futures contracts (with the exception of the Energy sector) that show falling price trends. However, positions are changed only monthly.

Long/Short Seeks to Provide a Low Volatility Indicator
The S&P CTI, with its long/short nature, aims to create a smooth and relatively low volatility return over rolling 12-month periods (despite potential for short-term volatility), compared to “long only” commodity measures, in order to earn the risk transfer premia that is present in the futures market.

Diversification
Historically, the sectors comprising the S&P CTI and their underlying components have demonstrated little correlation to each other. For example, cotton typically has a very weak relationship with hogs, silver, etc. However, internal correlations are often higher in an equity model because equities are often affected by the same fundamentals (i.e., interest rates and GDP), which can result in positive correlations during both periods of gain and loss.

“Spread Characteristics” of the Futures Market
The S&P CTI aims to benefit from long exposure to up-trending commodities and short exposure to down-trending commodities. This “spread” characteristic is fundamental to the mechanics of futures markets. The model is designed with the aim of benefiting from rising (long position) and falling (short position) prices as well as price fluctuations within the futures markets, presenting profit opportunities to investors who are willing to bear risks on either side of the market. However, non-directional, or flat markets can at times cause underperformance.

One of the risks associated with the S&P CTI is the complexity of the different factors which contribute to the results of the S&P CTI, as well as to the correlation or non-correlation of such results to each other and to other assets classes. Indicators that switch from long to short positions according to a rules-based methodology are unusual. The S&P CTI could decline in a wide range of different market scenarios, including ones in which other commodity indices (both all long and long/short) rise substantially. Over the long-term, there is a greater likelihood that the performance potential suggested by the simulated and actual performance records may be realized. Over the short-term, on the other hand, there is a much greater possibility that the S&P CTI and other asset classes may be highly positively correlated as well as both decline substantially, causing significant declines.

For more details please visit the following link S&P CTI: Standard & Poor’s Commodity Trends Indicator. AFT has no affiliation with S&P. However, AFT receives a license fee from S&P on both the S&P DTI and the S&P CTI. Such license fee is based, in part, on the assets managed in products using these two indicators.

AFT does not provide any form of investment advice and receives no compensation from any client or clients. Rather, AFT solely receives a license fee from S&P. None of the information or material on this website is intended, or should be used, as any form of advice or recommendation. In particular, AFT does not direct client accounts or provide commodity trading advice based on or tailored to the commodity interests or cash markets or other circumstances of a particular client.