Item 1. Business.
Summary
The
iShares
®
Diversified Alternatives Trust (the Trust) is a Delaware statutory trust formed on
July 30, 2009. The Trust issues units of beneficial interest (Shares) representing fractional undivided beneficial interests in its net assets. The Trust holds long and/or short positions in foreign currency forward contracts and
exchange-traded futures contracts involving assets such as commodities, currencies, interest rates or certain eligible stock and/or bond indices. Investments for the Trusts portfolio are selected by BlackRock Fund Advisors (the
Advisor), following investment strategies that utilize quantitative methodologies to identify potentially profitable discrepancies in the relative values or market prices of one or more assets.
iShares
®
Delaware Trust Sponsor LLC, a Delaware limited liability company, is the Sponsor of the Trust. BlackRock Institutional Trust Company, N.A. is the Trustee of the Trust. The Trust is a commodity pool, as defined in the
Commodity Exchange Act (the CEA) and the applicable regulations of the Commodity Futures Trading Commission (the CFTC) and is operated by the Sponsor, a commodity pool operator registered with the CFTC. The Advisor serves as
the commodity trading advisor of the Trust and is registered under the CEA. The Trust has delegated some of the administration of the Trust to State Street Bank and Trust Company (the Trust Administrator). Wilmington Trust Company, a
Delaware corporation with trust powers, serves as the Delaware Trustee of the Trust.
The Trust offers Shares on a continuous
basis. The Trust issues and redeems Shares only in one or more blocks of 100,000 Shares (Baskets). These transactions take place only with certain broker-dealers with whom the Trust has entered into written arrangements regarding the
issuance and redemption of Shares (we refer to these broker-dealers as Authorized Participants), in each case in exchange for a consideration per Share equal to the net asset value per Share announced by the Trust on the first Business
Day after the purchase or redemption order is received by the Trust. A Business Day is defined as any day other than: (a) a Saturday or a Sunday; or (b) a day on which NYSE Arca, Inc. (NYSE Arca) is closed for
regular trading. Only institutions that enter into an agreement with the Trust to become Authorized Participants may purchase or redeem Baskets. The Trust has delegated the processing of creation and redemption orders of Baskets to SEI Investments
Distribution Co. (the Processing Agent).
The activities of the Trust are limited to:
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(1)
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issuing Baskets in exchange for cash
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(2)
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paying out of Trust assets any Trust expenses and liabilities not assumed by the Sponsor
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(3)
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delivering proceeds consisting of cash in exchange for Baskets surrendered for redemption
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(4)
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depositing any required margin in the form of cash or other eligible assets with domestic futures commission merchants, foreign futures brokers or other financial
intermediaries or dealers and
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(5)
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investing its cash, at the direction of the Advisor, in a portfolio of foreign currency forward contracts and exchange-traded futures contracts that may involve
commodities, currencies, interest rates and certain eligible stock or bond indices.
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The Trust is a passive investor in the cash
or U.S. Treasury securities and other short-term securities (Short-Term Securities) posted as margin to collateralize the portfolio of futures and/or forward contracts, cash and other investments held by the Trust (the
Portfolio). The Trust does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the value of Short-Term Securities posted as margin.
The Sponsor maintains an Internet website at www.ishares.com, through which monthly account statements and the registrants annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), can
be accessed free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Additional information regarding the Trust may also be found
on the SECs EDGAR database at www.sec.gov.
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Investment Objective of the Trust
The investment objective of the Trust is to maximize absolute returns from its investments in certain futures and/or forward contracts that the Advisor selects, following strategies that utilize
quantitative methodologies to identify potentially profitable discrepancies in the relative values or market prices of one or more commodities, currencies, interest rates or certain eligible stock and/or bond indices, and seek to control the risks
and volatility inherent in these investments by taking long and short positions in historically correlated assets. The Trust also expects to earn interest on some or all of the assets used to collateralize its trading positions. The return on assets
in the Trust, if any, is not intended to track the performance of any index or other benchmark.
Secondary Market Trading
While it is anticipated that the price of the Shares will fluctuate in a manner that reflects changes in the Trusts net asset value over time, at
any given time the Shares may trade at, above or below their NAV (as defined below). The NAV will fluctuate with changes in the market value of the Portfolio. The trading price of the Shares will fluctuate in accordance with changes in their NAV,
intraday changes in the value of the Portfolio, market supply and demand and other factors. The amount of the discount or premium in the trading price relative to the NAV may be influenced by non-concurrent trading hours between NYSE Arca, on which
the Shares trade, and the principal markets on which the futures and forward contracts in the Portfolio trade. For example, while the Shares trade on NYSE Arca until 4:00 p.m. (New York time), liquidity in the markets for the derivative instruments
or the assets underlying the instruments held by the Trust may be reduced after the close of the principal markets for these instruments or underlying assets. As a result, trading spreads, and the resulting premium or discount on the Shares, may
widen during this gap in market trading hours.
Computation of Trusts Net Asset Value
On each Business Day, as soon as practicable after the close of regular trading of the Shares on NYSE Arca (normally 4:00 p.m., New York time), the
Trustee determines the net asset value of the Trust, the NAV and the amount equal to the product of the NAV and the number of Shares constituting a Basket (Basket Amount) as of that date. The NAV is the net asset value of the
Trust divided by the number of outstanding Shares.
Net asset value of the Trust means the total assets of the Trust including all
cash and cash equivalents or other debt securities less total liabilities of the Trust, each determined on the basis of accounting principles generally accepted in the United States of America (U.S. GAAP), consistently applied under the
accrual method of accounting. In particular, net asset value of the Trust includes any unrealized profit or loss on open forward contracts and futures contracts, and any other credit or debit accruing to the Trust but unpaid or not received by the
Trust.
On each day on which the Trustee must determine the net asset value of the Trust and the NAV, the Trust Administrator must value all
futures and forward trading positions and other Short-Term Securities and non-cash assets in the Portfolio and communicate such valuation to the Trustee for use by the Trustee in the determination of the Trusts net asset value.
The current market value of all open futures contracts, whether traded on a United States exchange or a non-United States exchange, is determined by the
Trust Administrator based upon the settlement price for that particular futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a futures contract could not be
liquidated on such day, due to the operation of daily limits (if applicable) or other rules, procedures or actions of the exchange upon which that position is traded or otherwise, the settlement price on the most recent day on which the position
could have been liquidated may be the basis for determining the market value of the position for that day.
The current market value of all
open forward contracts is based upon the prices determined by the Trust Administrator utilizing data from an internationally recognized valuation service for those types of assets.
The Trustee may in its discretion (and, under extraordinary circumstances, will) value any asset of the Trust pursuant to other principles that it deems fair and equitable so long as those principles are
consistent with industry standards. In this context, extraordinary circumstances includes, for example, periods during which a valuation price for a forward contract or a settlement price of a futures contract is not available due to
events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance or due to a trading or other restriction imposed by a relevant futures
exchange.
On each Business Day, the Trustee subtracts the Trusts accrued fees (other than fees computed by reference to the value of
the Trust or its assets), expenses and other liabilities on that day from the value of the Trusts assets as of the close of trading on that day. The difference is the Trusts Adjusted Net Asset Value. Fees computed by
reference to the value of the Trust or its assets are calculated based on the Adjusted Net Asset Value. The Trustee subtracts the fees of the Trust calculated on an Adjusted Net Asset Value basis to determine the Trusts net asset value.
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The Trust Administrator may be replaced if, in the judgment of the Trustee, it ceases to provide regular or
accurate valuations.
Trust Expenses
The Sponsor is obligated under the trust agreement to pay the following administrative, operational and marketing expenses:
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(1)
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the fees of the Trustee, the Advisor, the Delaware Trustee, the Trust Administrator and the Processing Agent
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(2)
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NYSE Arca listing fees
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(3)
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printing and mailing costs
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(5)
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fees for registration of the Shares with the SEC
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(6)
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tax reporting costs and
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(7)
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legal expenses up to $100,000 annually.
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In
recognition of it paying these expenses, the Sponsor is entitled to receive as the Sponsors Fee an allocation that accrues daily at an annualized rate equal to 0.95% of the Adjusted Net Asset Value of the Trust and is payable by
the Trust monthly in arrears.
The Sponsor and the Trustee may amend or terminate the Sponsors obligation to pay certain expenses of the
Trust pursuant to the trust agreement.
The Trust is responsible for paying any applicable brokerage commissions and similar transaction fees
out of its assets.
The following expenses are also paid out of the assets of the Trust:
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any expenses of the Trust that are not assumed by the Sponsor;
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any taxes and other governmental charges that may fall on the Trust or its property;
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any expenses of any extraordinary services performed by the Trustee or the Sponsor on behalf of the Trust or expenses of any action taken by the
Trustee or the Sponsor to protect the Trust or the rights and interests of holders of the Shares; and
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any indemnification of the Sponsor or the Advisor.
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The Trustee is also entitled to charge the Trust for all expenses and disbursements incurred by the Trustee, with the consent of the Sponsor, in connection with actions it deems necessary or desirable to
protect the Trust or the rights and interests of holders of the Shares, including fees and disbursements of its legal counsel;
provided
that the Trustee is not entitled to charge the Trust for (1) expenses and disbursements by it prior
to the commencement of the trading of Shares on NYSE Arca and (2) fees of agents for performing services that the Trustee is required to perform under the trust agreement.
The Trustee, at the direction of the Sponsor, may liquidate the Trusts property from time to time as necessary to permit payment of the fees and expenses that the Trust is required to pay. The
Trustee is not responsible for any depreciation or loss incurred by reason of the liquidation of Trust property made in compliance with the trust agreement.
Creation of Baskets
The Trust offers Baskets on a continuous basis to Authorized
Participants. To order the issuance of a new Basket, an Authorized Participant must submit a purchase order to the Processing Agent prior to 4:00 p.m. (New York time) on a Business Day which does not immediately precede two or more days on which
there is no scheduled exchange trading session for one or more of the futures contracts purchased or sold, or that may be purchased or sold, by the Trust on such day (Eligible Business Day). Purchase orders received after 4:00 p.m. (New
York time) on an Eligible Business Day, or on a day that is not an Eligible Business Day will be treated
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as received on the next following Eligible Business Day. A purchase order received on an Eligible Business Day that immediately precedes a day on which there is no scheduled exchange trading
session for one or more of the futures contracts purchased or sold, or that may be purchased or sold, by the Trust on such day is referred to as a Special Purchase Order.
After submitting a purchase order on an Eligible Business Day, the purchasing Authorized Participant must deposit with the Settlement Agent, by 6:00 p.m. (New York time) on the same day, an amount equal
to 105% (110% in the case of a Special Purchase Order) of the Basket Amount announced by the Trust on the immediately preceding Business Day (the Deposit Amount). If the Settlement Agent does not receive the deposit, the purchase order
is automatically cancelled.
To receive the Shares comprising a new Basket, the purchasing Authorized Participant must pay to the Trust
Administrator the sum of (i) the Basket Amount announced by the Trust on the first Business Day immediately following the day when the purchase order was received by the Processing Agent, as purchase price of such new Shares, plus (ii) a
transaction fee of $800 per purchase order, plus (iii) in the case of a Special Purchase Order, any extraordinary losses, costs or expenses incurred in connection with the execution of trades related to such Special Purchase Order (such sum,
the Purchase Order Execution Price).
If the Deposit Amount received from the purchasing Authorized Participant is equal to, or
greater than, the Purchase Order Execution Price, the Trust issues the new Basket on the second Business Day (the third Business Day, in the case of a Special Purchase Order) following the day when the purchase order was received by the Processing
Agent and returns to the purchasing Authorized Participant the excess (if any) of the Deposit Amount over the Purchase Order Execution Price (without any interest thereon). In all other cases, the Trust only issues the new Shares when the purchasing
Authorized Participant has deposited with the Settlement Agent immediately available funds in an amount equal to the difference between (i) the Purchase Order Execution Price and (ii) the Deposit Amount.
Only Authorized Participants are able to transfer the required consideration and receive Baskets in exchange. Authorized Participants may act for their
own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Baskets. An Authorized Participant has no obligation to create or redeem Baskets for itself or on behalf of other
persons. An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. The Sponsor and the Trustee maintain a current list of Authorized Participants. As of the date of this report, Barclays Capital Inc.,
Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Knight Clearing Services LLC and UBS Securities LLC are the only Authorized Participants.
The Trust has the absolute right to reject any creation order, including, without limitation, (1) creation orders that the Trust determines are not in proper form, (2) creation orders that the
Trust determines would have adverse tax or other consequences to the Trust or its shareholders, (3) creation orders the acceptance of which would, in the opinion of counsel to the Trust or the Sponsor, result in a violation of law,
(4) creation orders in respect of which the Settlement Agent has not received the corresponding Deposit Amount by 5 p.m. on the date the creation order was received, or (5) during any period in which circumstances make transactions in, or
settlement or delivery of, Shares or components of the Portfolio impossible or impractical. Neither the Trustee nor the Sponsor nor any of their agents will be liable to any person for the Trusts rejection of a creation order.
Redemption of Baskets
The Trust redeems
Baskets on a continuous basis from Authorized Participants. To redeem a Basket, an Authorized Participant must submit its redemption order to the Processing Agent prior to 4:00 p.m. (New York time) on a day that is an Eligible Business Day.
Redemption orders received after 4:00 p.m. (New York time) on an Eligible Business Day, or on a day that is not an Eligible Business Day will be treated as received on the next following Eligible Business Day. A redemption order received on an
Eligible Business Day that immediately precedes a day on which there is no scheduled exchange trading session for one or more of the futures contracts purchased or sold, or that may be purchased or sold, by the Trust on such day is referred to as a
Special Redemption Order.
After submitting a redemption order on an Eligible Business Day, the redeeming Authorized Participant
must, not later than 6:00 p.m. (New York time) on the same day, either:
(i) confirm in writing to the Settlement Agent that the Shares
comprising the Baskets to be redeemed have been transferred by the redeeming Authorized Participant from its account at the Depository Trust Company (DTC) to the Settlement Agents account at
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DTC, or (ii) deposit with the Settlement Agent an amount per Basket to be redeemed equal to 105% (110% in the case of a Special Redemption Order) of the Basket Amount announced by the Trust on
the immediately preceding Business Day (the Deposit Amount).
If such confirmation or deposit is not received, the redemption
order is automatically cancelled.
The amount of cash that a redeeming Authorized Participant is entitled to receive from the Trust
Administrator in exchange for a Basket surrendered to the Trust Administrator for redemption is an amount equal to (i) the Basket Amount announced by the Trust on the first Business Day immediately following the day when the redemption order
was received by the Processing Agent, minus (ii) a transaction fee of $800 per redemption order, minus (iii) in the case of a Special Redemption Order, any extraordinary losses, costs or expenses incurred in connection with the execution
of trades related to such Special Redemption Order (such amount, the Redemption Order Execution Price).
Once the redeeming
Authorized Participant has transferred to the Settlement Agents account at DTC the total number of Shares comprising the Baskets to be redeemed, the Trust Administrator will credit the redeeming Authorized Participants account at DTC
with an amount equal to the sum of (i) the Redemption Order Execution Price and (ii) the Deposit Amount (if any) deposited by the redeeming Authorized Participant; the payment to the redeeming Authorized Participant will take place not
earlier than on the second Business Day (the third Business Day, in the case of a Special Redemption Order), and (in the discretion of the Trust) not later than the fourth Business Day, following the date when the redemption order was received by
the Processing Agent.
The Trust has the absolute right to reject any redemption order, including, without limitation, (1) redemption
orders that the Trust has determined are not in proper form, (2) redemption orders the acceptance of which would, in the opinion of counsel to the Trust or the Sponsor, result in a violation of law, or (3) during any period in which
circumstances make transactions in, or settlement or delivery of, Shares or components of the Portfolio impossible or impractical. Neither the Trustee nor the Sponsor nor any of their agents will be liable to any person for the Trusts
rejection of a redemption order.
Custody of Certain Trust Assets
The creation and redemption of Baskets is effected through cash transactions, which involve contemporaneous transfers. To the extent the Trust has property that requires a custodian, the Trustee will
appoint an agent qualified to maintain the property of the Trust.
The Trust has entered into a futures customer account agreement with a
futures commission merchant (the Clearing FCM) that provides for the execution and clearing of transactions in futures, payment of commissions, custody of assets and other standard provisions. Barclays Capital Inc. is the Clearing FCM of
the Trust. The Trust may employ other futures commission merchants or foreign brokers for the execution of futures transactions.
Item 1A. Risk Factors.
Risks Relating to Regulatory Requirements
Changes to the regulatory regime applicable to futures contracts and market participants may have an adverse effect on the ability of the Trust to pursue its strategies and, therefore, may result in a
decreasing value of the Shares.
The U.S. futures markets and market participants are subject to comprehensive regulation, not only by the
CFTC but also by self-regulatory organizations, including the National Futures Association (the NFA) and the exchanges on which the futures contracts are traded. As with any regulated activity, changes in the regulations may have
unexpected results. For example, changes in the amount or quality of the collateral that traders in futures contracts are required to provide to secure their open positions, or in the limits on the number or size of positions that a trader may have
open at a given time, may adversely affect the ability of the Trust to enter into certain transactions that could otherwise present lucrative opportunities.
Bills containing proposed legislative changes are from time to time introduced to the U.S. Congress in response to actual or perceived market inefficiencies or other problems. These bills often target
perceived excessive speculation in commodities and commodity indices, including by institutional index funds, on regulated futures markets and in the over-the-counter derivatives markets. These bills include a broad range of measures
intended to limit speculation, including possible increases in the margin levels required for regulated futures contracts; imposing, or tightening existing speculative position limits applicable to regulated futures and over-the-counter derivatives
positions; providing the CFTC authority to establish or modify certain speculative position limits; imposing aggregate speculative position limits across regulated U.S. futures, over-the-counter positions and certain futures contracts traded on
non-U.S. exchanges; eliminating or narrowing existing exemptions from speculative position limits; restricting the access of certain classes of investors to futures markets and over-the-counter derivatives markets; and imposing additional reporting
requirements on market participants, such as the Trust.
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While it is impossible to predict which measures will be adopted or precisely how they will affect the value
of your shares, any such measures could increase the costs of the Trust, could result in significant direct limitations on the maximum permitted size of the Trusts futures positions and therefore on the size of the Trust or the number or type
of strategies available to the Trust; and could also affect liquidity in the market for the Shares and the correlation between the price of the Shares and the net asset value of the Trust.
Regulatory and exchange position limits may restrict the creation of Baskets and the operation of the Trust.
Prior to the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law on July 21, 2010, position limits with respect to
most U.S. futures contracts have been set by U.S. commodities exchanges and boards of trade. The Dodd-Frank Act required the CFTC to establish federal position limits on futures and options on contracts in physical commodities (including energy) and
on economically equivalent over-the-counter derivatives. As mandated by the Dodd-Frank Act, in October 2011 the CFTC finalized regulations that imposed federal position limits with respect to 28 physical delivery commodity futures and options
contracts traded across various exchanges as well as to swaps that are economically equivalent to such contracts and directed the U.S. commodities exchanges and boards of trade to adopt corresponding position limits in futures, options and swaps not
to exceed the limits adopted by the CFTC. The final rule significantly limited the availability of the bona fide hedging exemption to hedging of physical commodity positions or transactions and did not extend to financial hedging or risk management.
In September 2012, a federal district court in Washington D.C. vacated the new CFTC position rules and in November 2012 the CFTC decided to
file an appeal against the courts decision. As of the date of this filing it is not clear if the 2011 rules will eventually become effective.
In addition to the federal position limits established by the CFTC, many U.S. and foreign futures exchanges impose speculative position limits or accountability levels on the
maximum net long or short futures positions that any person may hold or control in contracts traded on such exchanges. Under the exchange rules and CFTC regulations, all accounts owned or managed by commodity trading advisors, such as the Advisor,
their principals and their affiliates would be combined for position limit purposes.
Many U.S. futures exchanges and boards of trade also
limit the amount of fluctuation permitted in futures contract prices during a single trading day by regulations referred to as daily price fluctuation limits or daily limits. Once the daily limit has been reached in a
particular futures contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Trust to substantial losses.
In order to comply with the position limits established by the CFTC and the relevant exchanges, the Advisor may in the future be required to reduce the size of outstanding positions, not enter into new
positions that would otherwise be taken for the Trust or not trade certain markets on behalf of the Trust. Modification of trades made by the Trust, if required, could adversely affect the Trusts operations and profitability and significantly
limit the Trusts ability to reinvest income in additional contracts, create additional Baskets, or add to existing positions in the desired amount.
In addition, a violation of position limits by the Advisor could lead to regulatory action resulting in mandatory liquidation of certain open positions held on behalf of the Advisors accounts in
order to ensure compliance with the position limits. There can be no assurance that the Advisor will liquidate positions held on behalf of all the Advisors accounts, including any proprietary accounts, in a proportionate manner or at prices
favorable to the Trust. In the event the Advisor chooses to liquidate a disproportionate number of positions held on behalf of any of the Trust at unfavorable prices, the Trust may incur substantial losses and the value of the Shares may be
adversely affected.
Further, in October 2012 a new CFTC rule became effective which requires each registered futures commission merchant,
such as the Clearing FCM, to establish risk-based limits on position and order size. As a result, the Trusts Clearing FCM may be required to reduce its internal limits on the size of the positions it will execute or clear for the Trust, and
the Trust may seek to use additional clearing FCMs, which may increase the costs of clearing for the Trust and adversely affect the value of the Shares.
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The Trust may apply to the CFTC or to the relevant exchange for relief from certain position limits. If the
Trust applies and is unable to obtain such relief, the Trusts ability to issue new Baskets, or the Trusts ability to reinvest income in additional futures contracts, may be limited to the extent these activities would cause the Trust to
exceed applicable position limits. Limiting the size of the Trust may affect the correlation between the price of the Shares, as traded on the applicable U.S. futures exchange, and the net asset value of the Trust. Accordingly, the inability to
create additional Baskets or add to existing positions in the desired amount could result in Shares trading at a premium or discount to NAV. See Risk FactorsRisks Relating to the Trust and Investment in the SharesThe NAV may not
always correspond to the market price and, as a result, Baskets may be created or redeemed at a value that differs from the market price of the Shares.
Changes in the margin requirements set by the relevant futures exchanges and over-the-counter market participants may limit the Trusts ability to meet its investment objectives.
The Trust is required to deposit margin securing its exposure to one or more positions in the Portfolio. Futures contracts are customarily bought and
sold on margins that represent a very small percentage (ranging upward from less than 2% to 5%) of the purchase price of the contract being traded. The exchanges or futures commission merchants, however, may raise the margin requirements at any time
at their own discretion, particularly during the periods of perceived market volatility, and the Trust may be required to deposit additional funds in order to satisfy the additional margin requirements with respect to its open futures contract
positions.
Commercial banks participating in trading over-the-counter derivative contracts often do not require margin deposits, but rely
upon internal credit limitations and their judgments regarding the creditworthiness of their counterparties. In recent years, however, many over-the-counter market participants in foreign exchange trading have begun to require that their
counterparties post margin. In addition, the Dodd-Frank Act subjects the Trusts foreign exchange derivatives trading to a retail foreign exchange regime promulgated by a relevant regulator of the Trusts counterparty. Upon effectiveness
of the new retail foreign exchange regulations applicable to the Trust, the Trust would be required to post margin in the amount required under the regulations (between 2% and 5% depending on a currency pair).
If any of the relevant futures exchanges or over-the-counter market participants imposes substantially higher margin requirements or if margin
requirements under the new retail foreign exchange regulations are substantially higher than those presently imposed by the Trusts counterparties, the Trust may be unable to either realize expected returns or to fully implement its trading
strategies as a result of substantially greater margin obligations.
Risks Relating to Commodities Markets
The price of the Shares fluctuates as a result of fluctuations in the prices of any commodities underlying the futures contracts owned by the Trust.
Commodity prices may be volatile, thereby creating the potential for losses, regardless of the length of time you intend to hold your Shares.
The price of the Shares depends on the value of the investments in the Portfolio. To the extent that the Portfolio includes long or short positions in futures contracts the value of which is linked to the
price of an underlying commodity, the Trust, and therefore the Shares, are exposed to fluctuations in the price of one or more underlying commodities. The prices of certain physical commodities have been extremely volatile at times during the past
several years. Depending on the level and type of fluctuation of these commodities, and whether the Portfolio includes long or short positions with respect to those assets, the value of commodity futures contracts that may be held by the Trust, and
consequently the value of the Shares, may be adversely affected. Commodities prices are affected by, among other factors, the cost of producing, transporting and storing commodities, changes in consumer or commercial demand for commodities, the
hedging and trading strategies of producers and consumers of commodities, speculative trading in commodities by commodity pools and other market participants, disruptions in commodity supply, weather, political and other global events, global
macroeconomic factors, and government regulation of commodities or commodity futures markets. These factors cannot be controlled by the Trust, the Sponsor or the Advisor. Accordingly, the price of the Shares could change substantially and in a rapid
and unpredictable manner. This exposes you to a potential loss if you need to sell your Shares when the value of the commodity futures contracts held by the Trust is lower than it was when you made your investment. These fluctuations can affect your
investment, regardless of the length of time you intend to hold your Shares.
The following events would generally result in a decline in the
price of any underlying commodities represented in the Portfolio:
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A significant increase in hedging activity by producers of the underlying commodities.
Should producers of the underlying commodities
represented in the Portfolio increase their hedging of their future production through forward sales or other short positions, this increased selling pressure could depress the price of one or more of the underlying commodities, which could
adversely affect the price of the Shares.
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A significant change in the attitude of speculators and investors toward the underlying commodities.
Should the speculative or investment
community take a negative view towards one or more of the underlying commodities, it could cause a decline in the value of commodity-linked derivative contracts held by the Trust, which could reduce the price of the Shares.
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Conversely, several factors may trigger a temporary increase in the price of the underlying commodities. The price of a
commodity underlying a commodity-linked futures contract held by the Trust may be affected by several other factors, including:
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Large purchases or sales of physical commodities by the official sector.
Governments and large institutions have large commodities holdings or
may establish major commodities positions. For example, a significant portion of the aggregate world gold holdings is owned by governments, central banks and other institutions of the official sector. Similarly, nations with centralized or
nationalized oil production and organizations such as OPEC control large physical quantities of crude oil. If one or more of these or similar institutions decides to buy or sell any commodity in amounts large enough to cause a change in world
prices, the value of any trading positions held by the Trust and the price of the Shares could be adversely affected.
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Other political factors
. In addition to the organized political and institutional trading-related activities described above, peaceful political
activity such as imposition of regulations or entry into trade treaties, as well as political disruptions caused by societal breakdown, insurrection or war may greatly influence commodities prices.
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Significant increases or decreases in the available supply of a physical commodity due to natural or technological factors
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Natural
factors would include depletion of known cost-effective sources for a commodity or the impact of severe weather on the ability to produce or distribute the commodity. Technological factors, such as increases in availability created by new or
improved production, extraction, refining and processing equipment and methods or decreases caused by failure or unavailability of major production, refining and processing equipment (for example, shutting down or constructing oil refineries), also
materially influence the supply of commodities.
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Significant increases or decreases in the demand for a physical commodity due to natural or technological factors.
Natural factors would include
such events as unusual climate conditions impacting the demand for energy commodities. Technological factors may include such developments as substitutes for energy or other commodities.
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Prospective investors in the Shares should also keep in mind that the change in the price of the Shares that follows a change in the price of a commodity
underlying futures contracts owned by the Trust will not always be in the same direction as the change in the price of that underlying commodity. Depending upon the nature of the Trusts position with respect to the underlying commodity, it may
be the case that a decrease in the price of the underlying commodity has a positive impact on the price of the Shares, or that an increase in the price of the underlying commodity has a negative impact on the price of the Shares. The Trusts
use of leverage has the potential to magnify the impact of fluctuations in the price of underlying commodities on the value of the Trusts assets. See Risk FactorsRisks Relating to Derivative ContractsThe Trusts use of
leverage and/or short positions involves certain risks, including potentially high volatility and magnified losses in the underlying assets, and should be considered to be speculative.
Historical performance of specific commodities or commodity indices is no guide to their future performance or to the future performance of the Shares.
At any given time, the Trust may be exposed to changes in the prices of one or more commodities. Even at a time when the prices of some or most
commodities are increasing, it is possible for the price of the Shares to decrease as a result of lack of exposure to such commodities, mistaken anticipation by the Advisor of the direction in which the price of the commodity would move or many
other factors. Therefore, there are no external indicators of how the Shares will perform. Because the Trust does not track or seek to replicate any commodity index or other similar benchmark, the past performance of any commodity index is not
necessarily indicative of the future performance of the Shares. You may lose some or all of your investment in the Shares, even during times when commodities indices are showing positive returns.
Commodity futures trading may be illiquid. In addition, suspensions or disruptions of market trading in the commodities markets and related
derivatives markets may adversely affect the value of your Shares.
The commodity, commodity futures and commodity derivatives markets are
subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity, congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and
intervention, technical and operational or system failures, nuclear accident, terrorism, riots and acts of God. In addition, forward contracts may entail breakage costs if terminated prior to their final maturity and futures positions cannot always
be liquidated at the desired prices.
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Further, U.S. futures exchanges and some foreign exchanges have regulations that limit position, size and/or
the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as daily price fluctuation limits, and the maximum or minimum price of a contract on any given day
as a result of these limits is referred to as a limit price. Once the limit price has been reached in a particular contract, no trades may be made at a different price. It is not certain how long these price limits may remain in effect.
Limit prices may have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices, and possibly having a negative effect on the investment strategies of the Trust and/or the
value of commodity-linked futures contracts held by the Trust. These circumstances could thereby adversely affect the price of your Shares. In addition, these circumstances could limit trading in commodity-linked futures contracts, which could
affect the investment strategies of the Trust and/or the calculation of the NAV and the trading price of the Shares. Accordingly, these limits may result in an NAV that differs, and may differ significantly, from the NAV that would prevail in the
absence of these limits. If Baskets are created or redeemed at a time when these price limits are in effect, the creation or redemption price will reflect the price limits as well.
Furthermore, exchanges may take steps, such as requiring liquidation of open positions, in the case of disorderly markets, market congestion and other market disruptions. These actions could require the
Trust to limit or forego a desired investment strategy. This could adversely affect the NAV and the Trusts performance.
In addition,
during periods of reduced market liquidity or in the absence of readily available market quotations for a particular commodity-linked futures contract in the Portfolio, the ability of the Trust Administrator to assign an accurate daily value to
these investments may be diminished and the Trust Administrator may be required to value these investments at prices other than market prices.
During a period when commodity prices are fairly stationary, backwardation or contango in the prices of the commodity-linked
futures contracts held by the Trust may cause the price of your Shares to decrease.
As the futures contracts that are held by the Trust
near expiration, the Trust may replace them with contracts that have a later expiration. For example, a contract purchased and held in March may specify a June expiration. As that contract nears expiration, the Trust may replace it by selling the
June contract and purchasing the contract expiring in September. This process is referred to as rolling. Historically, the prices of some futures contracts (generally those relating to physical commodities that are typically consumed
immediately rather than stored) have frequently been higher for contracts with shorter-term expirations than for contracts with longer-term expirations, which is referred to as backwardation. In these circumstances, absent other factors,
the sale of the June contract would take place at a price that is higher than the price at which the Trust would have purchased the September contract, thereby allowing the Trust to purchase a greater quantity of the September contract.
Some of the commodities underlying the commodity-linked futures contracts held by the Trust may historically exhibit contango markets rather
than backwardation. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months due to the costs of long-term storage of a physical commodity prior to delivery or other
factors. In addition, the forward price of a commodity may fluctuate between backwardation and contango. In the case of a contango market, the purchase price of the underlying asset of the futures contract being traded by a trader upon the sale of
futures contracts about to expire will be higher than the amount realized in the sale.
The presence or absence of backwardation, or the
existence or non-existence of contango in the commodity markets could result in losses, which could adversely affect the investment strategies of the Trust and/or the value of the commodity-linked futures contracts held by the Trust and,
accordingly, decrease the price of your Shares.
Furthermore, when the Trust rolls futures contracts close to their expiration into futures
contracts expiring at a later date, it is possible that the Trust may incur significant costs in connection with the roll, whether due to actions of market participants or otherwise. This adverse effect may be increased due to the actions of the
market participants who are aware of the composition of the Trusts Portfolio, which is published daily on the Trusts website.
Risks Relating to Currency Markets
As a multinational currency, the euro may experience greater price volatility due to the influence of multiple and uncoordinated political and fiscal
regimes.
The euro is a multinational currency and its price may be affected by political, social, economic or financial events occurring
in any of the seventeen euro zone countries. While the euro is the currency of a union of these countries, the union is economic and not political. The lack of a single fiscal policy and a central economic authority coordinating the response to
events that may adversely affect the price of the euro creates uncertainties that do not exist in the case of a single-state currency. If the value of the euro is
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threatened by events or circumstances arising in localized areas of the euro zone and the euro zone members are not able to coordinate a successful response to such events, the value of the euro
may decline and you may sustain a loss on your investment in the Shares.
A countrys decision to abandon the euro zone could have
adverse consequences for the value of the Shares.
In the wake of the financial difficulties experienced by Greece, Ireland and Portugal
there has been speculation about a possible breakup of the euro zone. If one or more nations decide to leave the euro zone, it is impossible to predict the effect of such a decision on the value of the euro and any of the other foreign currencies in
which the Portfolio holds positions at any time. Similarly, the departure of one of the stronger economies (Germany, for example) could have devastating consequences for the value of the euro and adversely affect foreign currency positions in the
Portfolio. Under these circumstances, the value of the Shares would decrease and you could sustain losses on your investment.
The price of
the Shares fluctuates as a result of fluctuations in the exchange rates of currencies underlying any currency-linked futures or forward contracts owned by the Trust. Exchange rates may be volatile, thereby creating the potential for losses,
regardless of the length of time you intend to hold your Shares.
The price of the Shares depends on the value of the investments in the
Portfolio. To the extent that the Portfolio includes forward or other derivative contracts linked to or affected by the price of a foreign currency, the Trust, and therefore the Shares, are exposed to fluctuations in the price of that foreign
currency. The prices of various foreign currencies have been extremely volatile at times during the past several years. Some foreign currency prices have recently experienced sharp fluctuations and there is no certainty that these prices will remain
at their current levels. If they move in directions that the Advisor does not anticipate, the investment strategies of the Trust and/or the value of the Shares may be adversely affected.
The value of the foreign currencies and, in turn, the currency-linked instruments held by the Trust, may be affected by several factors, including, but not limited to:
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debt level and trade deficit of the United States and/or the relevant non-U.S. countries;
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inflation or deflation rates of the United States and the relevant non-U.S. countries and investors expectations concerning inflation or
deflation rates generally;
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interest rates of the United States and the relevant non-U.S. countries and investors expectations concerning interest rates generally;
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investment and trading activities of mutual funds, hedge funds and currency funds;
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global or regional political, economic or financial events and situations; and
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sovereign action to set or restrict currency conversion.
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These factors cannot be controlled by the Trust, the Sponsor or the Advisor. Accordingly, the price of the Shares could change substantially and in a rapid and unpredictable manner. This exposes you to a
potential loss if you need to sell your Shares when the value of the currency-linked instruments held by the Trust is lower than it was when you made your investment. These fluctuations can affect your investment regardless of the length of time you
intend to hold your Shares.
Substantial transactions in a currency by any official sector market participant could adversely affect an
investment in the Shares.
The official sector consists of central banks, other governmental agencies and/or other multi-lateral
institutions that buy, sell or hold foreign currencies as part of their reserve assets. The official sector holds a significant amount of foreign currencies that can be traded in the open market. In the event that future economic, political or
social conditions or pressures require members of the official sector to sell their currency simultaneously or in an uncoordinated manner, the demand for the currency might not be sufficient to accommodate the sudden increase in the supply of the
currency to the market. Consequently, the price of the currency could decline, which would adversely affect an investment in the Shares.
Conversely, unusual purchases of a currency by members of the official sector may have the effect of increasing the price of that currency, which could
adversely affect the value of Trust investments linked to that currency and, consequently, the performance of the Shares.
A countrys
decision to abandon its current currency and adopt a new one could have adverse consequences for the value of any positions related to the old currency that the Trust may hold at the time.
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A countrys decision to abandon its currency at a time when the Trust has investments in futures and/or
forward contracts, the value of which depend on the value of such currency, could have adverse effects for the value of the Trusts contracts and, therefore, for the Trusts investment strategy and/or the price of the Shares. For example,
as members of the European Union, the United Kingdom and Sweden have the option to adopt the euro as their currency in lieu of the British Pound Sterling and the Swedish Krona, respectively. Similarly, although Switzerland is not currently a
member of the European Union, it may in the future decide to join. If Switzerland joins the European Union, it will have the option to adopt the euro as its currency in lieu of the Swiss Franc. If any of the United Kingdom, Sweden or Switzerland
adopt the euro as its currency by official act, the value of its currency could depreciate, depending on, among other things, the relative value of its currency and the euro, the conversion ratio of its currency per euro and the timing of the
adoption of the euro. If the British Pound Sterling, the Swedish Krona or the Swiss Franc declines in value at a time when the Trust has investments linked to that currency, the value of the currencies-linked derivative instruments held by the
Trust and, in turn, the price of the Shares may be adversely affected.
Risks Relating to U.S. Government and Sovereign Debt Markets
Investing in debt obligations of the U.S. government creates exposure to credit and interest rate risk.
The Trust may invest in U.S. government debt instruments, which are U.S. Treasury bills, notes and bonds of varying maturities that are backed by the full
faith and credit of the United States government. The U.S. government debt instruments in which the Trust invests may be subject to credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be
unable to make interest payments and/or repay the principal on its debt. Interest rate risk refers to the fluctuations in the value of a fixed-income security resulting from fluctuations in the general level of interest rates. While the credit risk
associated with U.S. government securities was, in the past, generally considered to be minimal, the possibility of a default by the U.S. government on its debt obligations has lately been the subject of speculation as the U.S. congress has labored
to raise the statutory limit on public indebtedness and to address the budget deficit. Reflecting these concerns, both Moodys and Fitch have placed a negative outlook on their triple-A ratings of U.S. government securities, while
Standard & Poors has downgraded the long-term sovereign credit rating on the United States of America to AA+ but maintained the A-1+ short-term rating.
In addition, the interest rate risk associated with U.S. government securities can be substantial, and such risks may vary unpredictably over time. U.S. government securities generally offer lower yields
than other fixed-income securities, making them more susceptible to changes in interest rates. Thus, a rise in the general level of interest rates may cause the value of the Portfolios U.S. government securities or U.S. government
securities-linked derivative contracts to fall substantially. In addition, recent historically high deficit spending by the U.S. government has necessitated additional issuances of U.S. government securities, which may result in a significant
decline in yields. A continuing rise in the level of the U.S. government deficit may lead to a further increase in the U.S. government borrowings and could be associated with an increase in the interest rates paid on U.S. government securities. Any
such increase would adversely affect the value of U.S. government securities held by the Trust and, therefore, the value of the Shares. In addition, the Trust may become exposed to a greater credit risk with respect to U.S. government securities,
which may cause a considerable decline in the value of the Portfolio.
Investing in futures and/or forward contracts linked to sovereign
debt instruments creates exposure to the direct or indirect consequences of political, social or economic changes in the countries in which the issuers are located and the creditworthiness of the sovereign.
The Trust may trade in futures and forward contracts involving debt instruments issued or guaranteed by non-U.S. governments and their political
subdivisions (such instruments, sovereign debt instruments). An investment in sovereign debt instruments involves special risks and creates exposure to the direct and indirect consequences of political, social or economic changes in the
countries in which the issuing governments are located. The ability and willingness of the non-U.S. issuers of the sovereign debt or the non-U.S. governmental authorities that control repayment of their external debt to pay principal and interest on
that debt when due may vary unpredictably and may depend on general economic and political conditions within the relevant country.
The
non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Trust may have limited recourse in the event of a
default. During periods of economic uncertainty, the market prices of non-U.S. sovereign debt instruments may be more volatile than prices of debt obligations of the U.S. government or other obligations. In the past, certain non-U.S. issuers of
sovereign debt have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debt. In some cases, remedies must be
pursued in the courts of the defaulting party itself, and the ability of the holder of sovereign debt instruments to obtain recourse may be subject to the political climate in the relevant country and other unpredictable factors.
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While the Trust is not directly exposed to these risks because it does not invest directly in sovereign debt
instruments, the value and/or liquidity of the positions taken by the Trust that involve sovereign debt instruments may be adversely affected by the occurrence of any of the events discussed above.
Investing in futures and/or forward contracts linked to non-U.S. sovereign debt instruments creates exposure to non-U.S. interest rate fluctuations.
Interest rate movements directly affect the price of the sovereign bond-related positions held by the Trust and indirectly the value of
the Portfolio. Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Trusts profitability. The Trusts primary interest rate exposure is expected to be to interest
rate fluctuations in the United States and other major industrialized, or Group of Seven countries (Canada, France, Germany, Italy, Japan, United Kingdom and United States, collectively, G-7). However, the Trust also may take positions
in futures contracts on the government debt of other nations.
Risks Relating to Interest Rate Derivatives Markets
Investing in interest rate futures contracts creates exposure to interest rate fluctuations in one country as well as relative interest rate movements
between countries.
Interest rate movements directly affect the price of the interest rate futures positions held by the Trust and
indirectly the value of its security index futures and currency forward positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Trusts profitability. Because
interest rates move up and down, interest rate futures contracts held by the Trust may trade at a premium some of the time and at a discount at other times. The Trusts primary interest rate exposure is to interest rate fluctuations in the
United States and other G-7 countries. However, the Trust may also take futures positions in the interest rates and currencies of other nations.
Risks Relating to Security Index Futures Markets
Investing in security index futures
contracts creates exposure to the performance of the underlying index.
The Trust may trade in certain stock or bond index futures that are
designed to track the value of broader market indices (such as the Dow Jones Industrial Average, the NASDAQ 100 Index or the Barclays Aggregate Bond Index). The value of the stock and bond index futures contracts and the underlying broader market
index may vary due to disruptions in the markets for the relevant index assets, the imposition of speculative position limits (as discussed in Risk FactorsRisks Relating to Regulatory RequirementsRegulatory and exchange position
limits may restrict the creation of Baskets and the operation of the Trust.), or due to other extraordinary circumstances. Further, some or a significant part of the securities (stocks or bonds) in the underlying index may in turn be subject
to specific risks that may affect the performance of the index and, consequently, the value of the Shares. In particular, to the extent that some or a significant part of the securities (stocks or bonds) in the index are subject to risks associated
with emerging markets (either because their issuers are from, or are located or have extensive operations in emerging market countries), the performance of the index may be subject to the uncertainties that characterize an investment in an emerging
market economy (such as political risks, lack of transparency, and different regulatory and legal systems). These risks may have an adverse effect on the index and the price of the Shares.
In addition, stock index futures products are typically traded on electronic trading platforms and are subject to risks related to system access, varying response time, security and system or component
failure.
Risks Relating to Derivative Contracts
The Trusts use of leverage and/or short positions involves certain risks, including potentially high volatility and magnified losses in the underlying assets, and should be considered to be
speculative.
The Trust uses leveraged investment techniques in seeking to achieve its investment objectives. Leverage may cause the value
of the Shares to be more volatile than if the Trust did not use leverage. The more the Trust invests in leveraged instruments, the more this leverage will magnify any losses on those investments. In addition, derivatives contracts have a high degree
of price variability and are subject to occasional rapid and substantial changes, which will be magnified by the leveraged positions of the Trust. Certain types of leveraging transactions, such as short sales, could theoretically be subject to
unlimited losses in cases where the Trust, for any reason, is unable to close out the transaction. Consequently, you could lose all or substantially all of your investment in the Trust.
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The Trust is subject to credit risks and other risks associated with U.S. exchange-traded futures
contracts.
The Trust may trade in U.S. exchange-traded futures contracts as a means to achieve its investment objectives. Futures
exchanges in the United States are subject to regulation under the CEA by the CFTC, the governmental agency currently responsible for regulation of futures exchanges and trading on those exchanges.
The risks associated with the Trusts use of U.S. exchange-traded futures contracts include:
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Due to market conditions there may not always be a liquid secondary market for a futures contract. As a result, the Trust may be unable to close out
its futures contracts at a desired price and at a time which is advantageous.
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Trading restrictions or limitations may be imposed by an exchange, and government regulations may restrict trading in futures contracts.
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Further, the counterparty to a U.S. exchange-traded futures contract is generally a clearing organization backed by a group
of financial institutions. Each futures exchange in the United States has an associated clearing house. Once trades between members of an exchange have been confirmed, the clearing house becomes substituted for each buyer and each seller
of contracts traded on the exchange and, in effect, becomes the other party to each traders open position in the market. Thereafter, each party to a trade looks only to the clearing house for performance. However, the obligations of the
clearing house with respect to any open positions do not run to customers. There can be no assurance that the clearing house, or its members, will satisfy its obligations to the Trust. In addition, in the event of a bankruptcy or insolvency of any
exchange or a clearing house, the Trust could experience a loss of the funds deposited through its U.S. futures commission merchant as margin with the exchange or clearing house, a loss of any profits on its open positions on the exchange, and the
loss of unrealized profits on its closed positions on the exchange.
In addition, U.S. futures exchanges have rules that limit position, size
and/or the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as daily price fluctuation limits, and the maximum or minimum price of a contract on any
given day as a result of these limits is referred to as a limit price. Once the limit price has been reached in a particular contract, no trades may be made at a different price. It is not certain how long any such price limits may
remain in effect. Limit prices may have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices, possibly having a negative effect on the investment strategies of the Trust
and/or the value of the futures contracts held by the Trust. These circumstances could thereby adversely affect the price of your Shares. In addition, these circumstances could also limit trading in futures contracts, which could affect the
investment strategy of the Trust and/or the calculation of the NAV and the trading price of the Shares. Accordingly, these limits may result in an NAV that differs, and may differ significantly, from the NAV that would prevail in the absence of
these limits. If Baskets are created or redeemed at a time when these price limits are in effect, the creation or redemption price will reflect the price limits.
Furthermore, exchanges may take steps, such as requiring liquidation of open positions, in the case of disorderly markets, market congestion or other market disruptions. These actions could require the
Trust to limit or forego a desired investment strategy. This could adversely affect the NAV and the Trusts performance.
In addition,
during periods of reduced market liquidity or in the absence of readily available market quotations for particular futures contracts in the Portfolio, the ability of the Trust Administrator to assign an accurate daily value to these investments may
be diminished and the Trust Administrator may be required to value these investments at prices other than market prices.
Trading on
futures exchanges outside the United States is not subject to U.S. regulation.
The Trust may conduct trading on futures exchanges located
outside of the United States. In that event, trading on those exchanges is not regulated by any United States governmental agency and may involve certain risks not applicable to trading on United States exchanges, including different or diminished
investor protections. In trading contracts denominated in currencies other than U.S. dollars, Shares are subject to the risk of adverse exchange-rate movements between the dollar and the functional currencies of those contracts. You could incur
substantial losses from trading on non-U.S. exchanges to which you would not otherwise have been subject had the Trusts trading been limited to U.S. markets.
When entering into foreign currency forward contracts, the Trust assumes the risk that its counterparties may become unable or unwilling to pay any amounts owed to the Trust.
Certain foreign currencies markets in which the Trust effects its transactions are over-the-counter or interdealer markets. Unlike
exchange-traded futures contracts, the counterparty to an over-the-counter forward contract is generally a single bank or other
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financial institution, rather than a clearing organization backed by a group of financial institutions. Participants in over-the-counter markets are typically not subject to the same credit
evaluation and regulatory oversight as are members of exchange-based markets. To the extent that the Trust trades in over-the-counter transactions, the Trust may take a credit risk with regard to parties with which it trades and also may
bear the risk of settlement default. These risks may differ materially from those involved in exchange-traded futures transactions, which generally are characterized by clearing organization guaranties, daily marking-to-market and settlement, and
segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from these protections, which in turn may subject the Trust to the risk that a
counterparty will not settle a transaction in accordance with agreed terms and conditions because of a dispute over the terms of the contract or because of a credit or liquidity problem. This counterparty risk is increased for contracts with longer
maturities when events may intervene to prevent settlement. The ability of the Trust to transact business with any one or any number of counterparties, the lack of any independent evaluation of the counterparties or their financial capabilities, and
the absence of a regulated market to facilitate settlement may increase the potential for losses by the Trust.
Further, if a counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Trust may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Trust may obtain only limited
recovery or may obtain no recovery in such circumstances. In addition, the Trust may enter into agreements with a limited number of counterparties, which may increase the Trusts exposure to counterparty credit risk. As evidenced by the
upheaval of the credit markets leading to and following the 2008 bankruptcy of Lehman Brothers, counterparty credit exposure may surge unexpectedly or as a result of events which may or may not relate to the credit standing of the counterparties to
the Trust.
Over-the-counter derivatives contracts have terms that make them less marketable than futures contracts. They are less marketable
because they are not traded on an exchange, do not have uniform terms and conditions, and are entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, are not
transferable without the consent of the counterparty.
The Advisor, on behalf of the Trust, trades in forward contracts that are not traded
on regulated exchanges and, therefore, offer different or lower levels of protections to investors.
As a means to achieve its investment
objectives, the Trust may from time to time enter into forward contracts. These investment vehicles are typically traded on a principal-to-principal basis through dealer markets that are dominated by major money center and investment banks and other
institutions and are subject to lesser degrees of regulation or, in some cases, no substantive regulation. With respect to these contracts, the Trust and investors in the Shares do not receive the protections of the regulatory and statutory scheme
of the CEA. The forward markets rely upon the integrity of market participants in lieu of the additional regulation imposed by the exchanges or the CFTC on participants in the futures markets. The lack of regulation in these markets could expose
investors to significant losses under certain circumstances including in the event of trading abuses or financial failure by participants.
In
addition, the Trust may trade in forward contracts traded on electronic trading facilities rather than in the over-the-counter market. Many electronic trading facilities have only recently initiated trading and do not have significant trading
histories. As a result, the trading of contracts on these facilities and inclusion of these contracts in the Portfolio may be subject to risks not presented by most exchange-traded futures contracts, including risks related to the liquidity and
price histories of the relevant contracts.
Failure of the Clearing FCM to segregate assets or the insolvency of the Trusts prime
broker may increase losses.
The CEA requires a futures commission merchant, such as the Clearing FCM, to segregate all funds received from
customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts from its proprietary assets. Similarly, the CEA requires each futures commission merchant to hold in a separate secure account all funds received from
customers with respect to any orders for the purchase or sale of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by the
Clearing FCM from its customers are held by the Clearing FCM on a commingled basis in an omnibus account and may be freely accessed by the Clearing FCM, which may also invest any such funds in certain instruments permitted under the applicable
regulation. There is a risk that assets deposited by the Trust with the Clearing FCM as margin for the purchase of domestic or foreign futures contracts may, in certain circumstances, be used to satisfy losses of other clients of the Clearing FCM.
In addition, the assets of the Trust might not be fully protected in the event of the Clearing FCMs bankruptcy, as the Trust would be limited to recovering only a pro rata share of all available funds segregated on behalf of the Clearing
FCMs combined domestic customer accounts.
Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives
clearing organization to segregate all funds and other property received from a clearing members clients in connection with domestic futures and options contracts from
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any funds held at the clearing organization to support the clearing members proprietary trading. Nevertheless, all customer funds held at a clearing organization in connection with any
futures or options contracts are held in a commingled omnibus account and are not identified to the name of the clearing members individual customers. With respect to futures and options contracts, a clearing organization may use assets of a
non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a defaulting customer of the clearing member to the clearing organization. As a result, in the event of a default or the Clearing
FCMs other clients or the Clearing FCMs failure to extend own funds in connection with any such default, the Trust would not be able to recover the full amount of assets deposited by the Clearing FCM on behalf of the Trust with the
clearing organization.
In addition, the Trust will depend on the services of one or more prime brokers to carry out certain foreign currency
forward transactions. At any time, a substantial portion, or all, of the Trusts cash and securities may be held as collateral by the prime broker against margin obligations or deposited with the prime broker for safekeeping. Unlike futures
commission merchants, prime brokers are not required to segregate all funds received from customers from prime brokers proprietary assets. In addition, the prime brokerage agreements permit the prime broker to pledge or otherwise hypothecate
the Trusts investment securities subject to certain limitations. As such, in the event of the insolvency of a prime broker, the Trust might not be able to recover equivalent assets in full, as the Trust may rank among the prime brokers
unsecured creditors in relation to assets which the prime broker owns, borrows, lends or otherwise uses.
Risks Relating to the Advisor and
its Trading Strategies
The lack of experience of the Advisor and its principals in actively managing an entity like the Trust and
applying quantitative investment strategies similar to those that are used in the selection of investments for the Trust may result in substantial trading losses for the Trust and, as a result, you could lose some or all of the value of your Shares.
Although the Advisor has been registered under the CEA as a commodity trading advisor since April 5, 1993,
before the inception of the Trust, it had never been responsible for an actively managed commodity pool other than the Trust. To date, the Advisors only experience as a commodity trading advisor to a registered commodity pool other than the
Trust has been as advisor to the iShares
®
S&P GSCI
Commodity-Indexed Investment Pool LLC, a company that seeks to track the performance of the iShares
®
S&P GSCI Total Return Index by investing in one specified futures contract the performance of which is
intended to correspond to changes in such index. When directing investments for the iShares
®
S&P GSCI
Commodity-Indexed Investment Pool LLC, the Advisor does not exercise the type of discretion, or apply the types of strategies that are necessary for the success of the investments in the Trusts Portfolio; to the contrary, its responsibilities
are limited to directing the acquisition of a single futures contract on the same terms that are available to any other investor purchasing the same futures contract at the same time.
In contrast, with respect to the Trust, the Advisor does not have the same limited role; as explained elsewhere in this report, the Advisor is responsible for the application of quantitative methodologies
in connection with the selection of investments for the Trust and for all determinations regarding which Trust positions are held to maturity and which positions are liquidated early (either in response to market conditions or in order to meet the
liquidity needs of the Trust).
In addition, Reza Estilaei and Russ Koesterich, the individuals that are primarily responsible for Portfolio
management decisions with respect to the Trust, have never managed an investment vehicle other than the Trust that applies strategies similar to those used by the Trust. Accordingly, they may not be relied upon to compensate for the Advisors
institutional lack of experience with investment vehicles like the Trust.
To the extent that the Advisors, and the Advisors
principals, lack of prior experience in the application of the methodologies used by the Trust and the making of investment decisions similar to those required to generate Trust profits, produce losses to the Trust, the value of your Shares
will be adversely affected and you will sustain a loss in your investment in the Shares.
The Advisor makes decisions regarding investments
for the Trust relying on quantitative models that may be defective or not adequate to analyze market conditions at the time the investment decisions are made; as a result, the returns expected from those investments may not materialize.
The Advisor identifies and evaluates potential investment opportunities for the Trust using proprietary analytical and business models
that have been built and are updated on the basis of historical data collected or derived from several sources that track the performance of different variables across markets deemed relevant to its investment decisions by the Advisor. In the
process of building these models, the Advisor has relied and will rely on assumptions that the Advisor deems reasonable under the circumstances. Although the Advisor is expected to take reasonable care to ensure the reliability of the sources used,
the accuracy of the information derived from such sources and the reasonableness of its assumptions, the possibility for error remains. In addition, even in circumstances in which the sources are reliable, the information is accurate and the
assumptions are reasonable, it is possible
15
for a model to fail to perform as expected in the face of new market conditions, changing economic or regulatory environments or other unanticipated circumstances not built into the model.
Investors in the Shares should be aware that, if the models used by the Advisor in its investment decisions prove to be defective or become inadequate in light of the circumstances prevailing at the time they are used in connection with investment
decisions for the Trust, the returns anticipated by the Advisor may fail to materialize, substantial losses may occur and as a result, the price of the Shares could be adversely affected. Consequently, you could lose all or substantially all of your
investment in the Trust.
The strategies used by the Advisor to identify investment opportunities for the Trust may fail to deliver the
desired returns.
The Advisor utilizes specialized investment strategies, follows allocation methodologies, applies investment models and
assumptions, and enters into other strategies intended, among other things, to affect the Trusts performance while targeting risk levels. There can be no assurance that the Advisor will succeed in achieving any goal related to these practices.
The Advisor may be unable or may choose in its judgment not to seek to achieve these goals. Consequently, you could lose all or substantially all of your investment in the Trust.
Relative value strategies used by the Advisor to identify investment opportunities for the Trust are subject to certain risks.
The Advisor utilizes, among others, relative value trading strategies which are composed of positions in contracts relating to two or more assets the prices of which are expected to either converge or
diverge and, in theory, mitigate the absolute price risk associated with taking an outright, unhedged position in respect of a single asset, and may be based upon historical price relationships and intended to neutralize the adverse (and positive)
price effects of macro-economic events and trends. However, relative value strategies are subject to certain risks. The success of the Advisors trading activities depends, among other things, on the Advisors ability to identify
unjustified or temporary discrepancies between the fundamental value and the market price of an asset or between the market prices of two or more assets whose prices are expected to move in relation to each other and to exploit those discrepancies
to derive a profit to the extent that the Advisor is able to anticipate in which direction the relative values or prices will move to eliminate the identified discrepancy. For example, a relative value strategy may fail to profit fully or at all or
may suffer a loss or a greater loss due to a failure of the component contract prices to converge or diverge as anticipated. This may occur with respect to prices relating to all or only certain contract maturities and may result from an
unanticipated backwardation or contango of contract prices or other reversal of historic or expected relationships. See Risk FactorsRisks Relating to Commodities MarketsDuring a period when commodity prices are fairly stationary,
backwardation or contango in the prices of the commodity-linked futures contracts held by the Trust may cause the price of your Shares to decrease.
Identification and exploitation of the investment opportunities to be pursued by the Advisor involve a high degree of uncertainty. If what the Advisor perceives to be an unjustified or temporary price or
value discrepancy posing an investment opportunity is nothing more than a price differential due to reasons not likely to disappear within the time horizon of an investment made by the Trust, if the Advisor fails to anticipate the direction in which
the relative prices or values will move to eliminate a discrepancy, or if the Advisor has incorrectly evaluated the extent of the expected spread relationships, so that, for example, the value of the Trusts long positions appreciates at a
slower rate than the value of the Trusts short positions in related assets, then the expected returns for the Trust will not materialize, and the Trust may sustain a loss that will adversely affect the price of the Shares.
The discrepancies that the Advisor seeks to identify and turn into profit opportunities for the Trust may arise due to a variety of circumstances. Some
may be due to uneven flows of information to the relevant markets, with the market for one asset reflecting the impact of specified items of information before or after the same information has an impact on the market for a related asset. Others may
be the result of regulatory or legal restrictions applicable to one type of asset, but not to a functionally equivalent asset (which occurs, for example, when regulated financial institutions are prohibited from investing in a particular type of
asset, but are free to take, via derivative arrangements, positions that leave them exposed to the performance of the same asset). A reduction in the volatility and market inefficiencies that create the opportunities in which the Advisor may seek to
invest, as well as other market factors, will reduce the scope for the Advisors investment strategies, limit the Trusts opportunities for profit and adversely affect the price of the Shares.
Various actual and potential conflicts of interest involving the Advisor may be detrimental to Shareholders.
The Trust is subject to actual and potential conflicts of interest involving the Sponsor, the Trustee and the Advisor. The relationships existing among
the Advisor, the Trustee and the Sponsor are described under Conflicts of Interest. Because of these relationships, the Sponsor may have a disincentive to replace the Trustee or the Advisor, regardless of their performance.
A conflict of interest may also arise where the Advisor finds that futures positions established for the benefit of the Trust, when aggregated with the
Advisors positions in other accounts of the Advisor (or the proprietary or other positions of its principals or affiliates), approach or exceed the position limits set by the CFTC or the relevant futures exchange in a particular asset. All
futures
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contracts managed by the Advisor and its affiliates in respect of a particular futures contract may be combined for position limit purposes. It is possible that the Advisor will approach or reach
position limits and, if so, will have a conflict of interest among the various accounts it manages as to which accounts are allocated the limited contracts available. The Trust may be forced to forego certain opportunities as a result of those
limitations. In addition, if in the opinion of the CFTC or other regulating body, exchange or board of trade the Advisor (or its principals or affiliates) exceed position limits, the Advisor may be forced to liquidate certain positions in order to
comply with the aggregate applicable position limit requirements. In liquidating positions held on behalf of its accounts, however, the Advisor may choose not to liquidate positions held on behalf of the Trust in proportion to other accounts under
its management. The result to the Trust would be a reduction in the potential for profit and/or potentially substantial losses should the exit of positions be at unfavorable prices by virtue of position limits.
In addition, the Sponsor and the Advisor may, from time to time, have conflicting demands in respect of their obligations to the Trust and, in the
future, to other commodity pools and accounts. The Advisor may be effecting trades for its own accounts and for others (including other commodity pools in competition with the Trust) on a discretionary basis. It is possible that positions taken by
the Advisor for other accounts may be taken ahead of or opposite positions taken on behalf of the Trust. In addition, the Advisor and certain of its affiliates may currently or in the future offer products or pursue investment strategies that may
utilize or include some or all of the strategies and/or exposures targeted by the Trust, or which may compete or conflict with the Trusts activities. Further, a conflict of interest may also arise where the Advisor receives an incentive-based
fee in lieu of, or in addition to, an asset-based fee for its advisory services in respect of certain accounts, other than the Trust, and may choose to devote greater resources and allocate more investment opportunities to those accounts. In the
event the Sponsor or the Advisor trades for its own account, neither of them would make those trading records available for inspection. The result to the Trust would be, among others, a reduction in the potential for profit should the entry of
positions be at unfavorable prices by virtue of entry of other trades in front of the Trusts trades.
The Sponsor has not established
any formal procedure to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. Although the Sponsor attempts to monitor these conflicts,
it is extremely difficult, if not impossible, for the Sponsor to ensure that these conflicts do not, in fact, result in adverse consequences to the owners of beneficial interests in the Shares (Shareholders).
Risks Relating to the Trust and Investment in the Shares
The Trust is subject to the risks associated with being a new type of investment vehicle.
The Trust is a new type of investment vehicle. The success of the Trust will depend on a number of conditions that are beyond its control. These
conditions include the level of acceptance by the investor community of an investment vehicle such as the Trust, which has not been offered to retail investors before, the Trusts ability to raise sufficient funds to be able to efficiently
engage in derivatives trading and the Advisors ability to identify profitable trading opportunities for the Trust. There is a substantial risk that the investment objectives of the Trust will not be met. Neither the Sponsor nor the Advisor has
been responsible for an actively managed, publicly offered commodity fund other than the Trust. If the experience of the Sponsor and the Advisor and their principals is not adequate or suitable to manage investment vehicles such as the Trust, the
operations of the Trust may be adversely affected.
The lack of an active trading market for the Shares may result in losses on your
investment at the time of disposition of your Shares.
Although the Shares are listed for trading on NYSE Arca, 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, will likely
be lower than that you would receive if an active market did exist.
The Shares of the Trust are new securities products and their value
could decrease if unanticipated operational or trading problems arise.
The mechanisms and procedures governing the creation, redemption
and offering of the Shares have been developed specifically for these securities products. Consequently, there may be unanticipated problems or issues with respect to the mechanics of the operations of the Trust and the trading of the Shares that
could have a material adverse effect on an investment in the Shares. In addition, because the Trust is actively managed, to the extent that unanticipated operational or trading problems or issues arise, the Sponsors or the Advisors past
experience and qualifications may not be suitable for solving these problems or issues.
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You may not rely on past performance in deciding whether to buy the Shares.
The Trust commenced trading on November 16, 2009; consequently, there is only a limited performance history you can use to evaluate your investment
in the Trust. Although past performance is not necessarily indicative of future results, if the Trust had a longer performance history, that history might provide you with more information on which to evaluate an investment in the Trust. In
addition, given the Advisors decision to increase the maximum targeted annualized volatility of the Trusts portfolio from 8% to 10%, which is expected to become effective during the first quarter of 2013, the limited performance history
developed by the Trust since its inception may be even less relevant to a decision to invest in the Shares.
The Trust is subject to the
costs and risks associated with being actively managed. These costs and risks may cause your investment in the Shares to result in losses that you might have avoided if you had invested in products not exposed to those costs and risks.
There is limited market history for actively-managed exchange-traded funds, and it is not known how well the Trust will perform in the
marketplace. Until a few years ago, most exchange-traded funds, including exchange-traded commodity funds, have attempted to replicate or track an index. There is no index that the Trust attempts to replicate or track. Instead, the Advisor has
discretion to select the Trusts investments, and the ability of the Trust to meet its investment objectives is directly related to the Advisors portfolio allocation of the Trusts assets. The Advisors judgments, based on its
investment strategy, about the attractiveness and potential appreciation of the particular investments in which the Trust invests may prove to be incorrect and the value of your Shares may be adversely affected.
The price you receive upon the sale of your Shares may be less than their NAV.
Shares may trade at, above or below their NAV. The NAV fluctuates with changes in the market value of the Trusts assets. The trading prices of Shares are expected to fluctuate in accordance with
changes in the NAV, intraday changes in the value of the investment portfolio held by the Trust and market supply and demand. The amount of the discount or premium in the trading price of the Shares relative to their NAV may be influenced by
non-concurrent trading hours between NYSE Arca, on which the Shares trade, and markets for the instruments, or the assets underlying the instruments, held by the Trust. While the Shares trade on NYSE Arca until 4:00 p.m. (New York time), liquidity
in the markets for the derivative instruments, or the assets underlying the instruments, held by the Trust and trading on certain other exchanges or trading facilities during different time frames may be reduced after the close of the principal
markets for those instruments or underlying assets. Consequently, liquidity in the instruments held by the Trust may be reduced at the close of trading at the applicable underlying market. As a result, trading spreads, and the resulting premium or
discount on Shares, may widen during the time when NYSE Arca is open and certain other applicable markets are closed.
The NAV may not
always correspond to the market price of the Shares and, as a result, Baskets may be created or redeemed at a value that differs from the market price of the Shares.
The NAV of the Shares of the Trust changes as fluctuations occur in the market value of its Portfolio. You should be aware that the public trading price of a number of Shares of the Trust otherwise
amounting to a Basket may be different from the NAV of an actual Basket (
i.e.
, 100,000 individual Shares may trade at a premium over, or a discount to, net asset value of a Basket) and similarly the public trading price per Share of the Trust
may be different from the NAV per Share of the Trust. Consequently, an Authorized Participant may be able to create or redeem a Basket at a discount or a premium to the public trading price per Share of the Trust. This 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 of the Trust are closely related, but not identical, to the same forces influencing the price of an underlying commodity at any point in
time. You also should note that the size of the Trust in terms of total assets and positions held may change substantially over time and from time to time as Baskets are created and redeemed.
Authorized Participants or their clients or customers may have an opportunity to realize a profit if they can purchase a Basket at a discount to the public trading price of the Shares or can redeem a
Basket at a premium over the public trading price of the Shares of the Trust. To the extent that Authorized Participants and their clients and customers may be able to exploit such arbitrage opportunities, the public trading price of the Shares
should track the NAV over time. Market participants that are not Authorized Participants may not be able to exploit any such arbitrage opportunity to the same degree, if at all.
None of the Sponsor, the Advisor or the Trustee can assure you that it will continue in its respective role. If any of them was no longer to act in those roles, the Trust and the value of the Shares
may suffer.
None of the Sponsor, the Advisor or the Trustee can assure you that it will be willing or able to continue to service the
Trust for any length of time. If any of them discontinues its activities on behalf of the Trust, the Trust may be adversely affected. For example,
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following the resignation of the Sponsor, the Advisor or the Trustee, the Trust may not be able to secure the services of a substitute sponsor, advisor or trustee on terms as favorable (including
in respect of compensation) as those in effect with the departing party, or on any terms at all. If the Trust is unable to secure the services of a new sponsor, advisor or trustee, it may be forced to terminate its activities at a time that is
disadvantageous for its Shareholders. If the Sponsors or the Advisors registrations under the CEA or memberships in the NFA were revoked or suspended, they would no longer be able to provide services to the Trust.
The Trust may incur additional transactional costs because the Portfolio is actively managed, and actively managed portfolios may have higher turnover
rates.
The Trust may engage in investment activity without regard to the effect on portfolio turnover. Portfolio turnover refers to the
rate at which the instruments held by the Trust are replaced. The higher the rate, the higher the transactional and brokerage costs associated with the turnover, which may adversely affect the Trusts net asset value and, in turn, the value of
your Shares. Historically, the Trusts annual turnover rate has ranged between 486% (for the calendar year ended December 31, 2011) and 583% (for the calendar year ended December 31, 2010). In connection with the increase in maximum
targeted annualized volatility of the Trust, the Trusts expected annual turnover rates range has been increased to 300% to 800%, although it may vary and be considerably higher under certain market conditions or due to other factors
including the term of a relevant futures contract. Transaction costs incurred by the Trust include commissions, futures exchange, futures regulatory and futures clearing fees, transaction fees of the prime broker and other fees or costs associated
with trading. Actively managed portfolios (like the Trust) may have higher transaction costs or fees than products that are passive, or products that do not transact based on events and factors that influence market prices. For example, an active
manager may trade more often during periods of high market volatility in an attempt to take advantage of price movements.
Several variables,
and expectations or announcements related to such variables, may lead to increased trading by the Trust, which in turn increases transaction costs. These variables potentially include changes in interest rates, changes in supply and demand for the
futures or currencies traded by the Trust, and macro economic factors, such as economic performance, inflation and growth. More frequent reallocation of investments across the Trusts strategies also may increase both Portfolio turnover and
transaction costs for the Trust.
Fees and expenses payable by the Trust are charged regardless of profitability and may result in a
depletion of its assets.
The Trust is subject to the fees and expenses described in this annual report, which are payable irrespective of
profitability. These fees and expenses include an allocation to the Sponsor, or Sponsors Fee, that accrues daily at an annualized rate equal to 0.95% of the adjusted net asset value of the Trust and is payable by the Trust monthly in arrears.
Additional charges may apply to the Trust. The Trust is expected to earn interest income. If interest income falls below the amount required to cover the Trusts fees and expenses, the Trust needs to have positive performance in order to break
even net of fees and expenses. Consequently, depending upon the interest rate environments, the expenses of the Trust could, over time, result in losses to your investment therein. You may never achieve any gains, significant or otherwise, on your
investment in the Shares.
It is not expected that the Trust will make any periodic distributions or dividend payments to its Shareholders.
Other than in connection with the redemption of Baskets or with the liquidation of the Trust, or as determined by the Sponsor in its
absolute discretion, it is not expected that the Trust will make any distributions or pay any dividends to its Shareholders. Consequently, any gain from an investment in the Shares would result from an increase in the price of the Shares realized
upon the sale of Shares by the Shareholder.
The Trust could be liquidated at a time when the disposition of its interests will result in
losses to investors in the Shares.
Under certain circumstances, the Trustee or the Shareholders could dissolve the Trust. Upon
dissolution, the Trust would liquidate its holdings and use the proceeds to pay all expenses of liquidation and any outstanding liabilities. Any remaining cash will be distributed among investors surrendering Shares. Any assets of the Trust
remaining in the possession of the Trustee after 90 days may be sold by the Trustee and the proceeds held uninvested and in a non-interest bearing account until claimed by any remaining Shareholders. Sales of derivative investment instruments in
connection with the liquidation of the Trust at a time of low prices will likely result in losses, or adversely affect your gains, on your investment in the Shares.
The Sponsor has broad discretion to liquidate the Trust at any time.
The trust agreement
provides the Sponsor with broad discretion to liquidate the Trust at any time the Sponsor determines that liquidation is advisable. It cannot be predicted when or under what circumstances, if any, the Sponsor would exercise its discretion to
liquidate the Trust. A liquidation could cause you to suffer a loss on your investment in the Shares.
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The Shares may not provide anticipated benefits of diversification from other asset classes.
Generally, the performance of physical commodity or currency markets has not been correlated with the performance of financial asset
classes, such as stocks and bonds. Non-correlation means that there is no statistically significant relationship, positive or negative, between the past performance of derivative contracts on physical commodities or currencies on the one hand, and
stocks or bonds on the other hand. Because of this lack of correlation, the Shares cannot be expected to be profitable during unfavorable periods for the stock or bond market, or vice-versa. The commodity and currency markets are fundamentally
different from the securities markets in that for every gain in commodity or currency derivatives trading, there is an equal and offsetting loss. If the performance of the Shares reflects positive or negative correlation to one or more financial
asset classes, however, investing in Shares for purposes of diversification of the investment risk from such other financial asset classes may be unsuccessful.
The liquidity of the Shares may be affected by the withdrawal from participation of Authorized Participants or by the suspension of issuance, transfers or redemptions of Shares by the Trust.
If one or more Authorized Participants withdraw from participation, creating or redeeming Baskets may become more difficult, which may
reduce the liquidity of the Shares. If creating or redeeming Baskets becomes more difficult, the correlation between the price of the Shares and the NAV may be affected, which may adversely affect the trading market for the Shares. Having fewer
participants in the market for the Shares could also adversely affect the ability to arbitrage any price difference between the derivative instruments held by the Trust and the Shares, which may affect the trading market and liquidity of the Shares.
In addition, the Trust may, at any time, suspend the delivery of Shares, the registration of transfers of the Shares, or the surrender of the
Shares for the purpose of withdrawing Trust property generally, or refuse a particular deposit, transfer or withdrawal if it determines that it is advisable for any reason. If any of these events were to occur, the liquidity of the Shares may be
adversely affected.
Creation and redemption of Baskets may be delayed when one or more of the exchanges where the Trust may need to trade,
either to establish new positions or to liquidate existing ones, are scheduled to be closed, and may be subject to postponement, suspension or rejection under certain circumstances, all of which may reduce the liquidity of the Shares.
Generally, upon the receipt of a request for the creation of one or more Baskets, the Trust has to establish one or more new positions
for its Portfolio. Similarly, upon the receipt of a request for the redemption of one or more Baskets, the Trust usually has to liquidate one or more of its existing positions to raise the funds required to pay the amounts due to the redeeming
Authorized Participant in respect of that redemption.
Because creation and redemption orders can be placed at any time before 4:00 p.m. (New
York time), it is possible that, by the time a creation or redemption order is received by the Trust, one or more of the futures exchanges on which the Trust would need to trade to establish new or to liquidate one or more existing positions may be
closed or about to close and that the Trust may need to wait until the following trading day. For this reason, if a creation or redemption order is communicated to the Trust on a Business Day that precedes two consecutive days when there is no
scheduled trading session in one or more of the futures exchanges that the Trust may need to trade on to establish new or liquidate existing positions, that creation or redemption order is not considered received by the Trust (and,
therefore, the time to deliver the Shares or to pay the redemption price to the Authorized Participant placing the order does not begin to run) until the first Eligible Business Day thereafter. This may result in the Trust settling creation or
redemption orders later than an Authorized Participant might have expected, and this delay may reduce the liquidity of the Shares. The Portfolio is expected to hold numerous futures contracts from time to time, potentially including those that trade
on the following exchanges: Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc., Eurex, Hong Kong Futures Exchange, ICE Futures US Softs, Intercontinental Exchange, Kansas City Board of Trade, Korea Exchange, London Metal
Exchange, Meff Renta Variable (Madrid), Montreal Exchange, New York Mercantile Exchange, NYSE LIFFEAmsterdam, NYSE LIFFELondon, NYSE LIFFEParis, NASDAQ OMX Nordic Exchange, Optivas Market Sweden, Singapore Exchange, South Africa
Futures Exchange, Sydney Futures Exchange, Tokyo Financial Exchange, and Tokyo Stock Exchange. These exchanges holiday schedules should therefore limit the ability to create and redeem Shares.
The Trust may suspend the creation or redemption of Baskets for as long as it considers necessary for any reason. In addition, the Trust has the absolute
right to reject any creation or redemption order, including (1) orders not in proper form, (2) orders received during any period in which circumstances make transactions in, or delivery of, Shares or any of the futures or forward contracts
in the Trusts portfolio impossible or impractical, and (3) if the acceptance of the creation or redemption order would, in the opinion of counsel to the Trust, result in a violation of law.
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Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant.
For example, the resulting delay may adversely affect the value of the redemption proceeds if the NAV declines during the period of the delay or may make the creation of Baskets more expensive if the NAV increases during the delay. Under each
Authorized Participant agreement, the Trust has disclaimed any liability that may result from any suspension, postponement or rejection.
Competition from other commodities-and currencies-related investments could limit the market for, and reduce the liquidity of, the Shares.
Demand for the Shares may be affected by the attractiveness of an investment in the Shares relative to other investment vehicles,
including other commodity or currency pools, hedge funds, traditional debt and equity securities issued by companies in the commodities or currencies industry, other securities backed by or linked to commodities or currencies and direct investments
in commodities or currencies or commodity or currency derivative contracts. Market, financial and other conditions or factors may make it more attractive to invest or trade in other investment vehicles or to invest in such commodities or currencies
directly, which could limit the market for, and reduce the liquidity of, the Shares.
As a Shareholder, you will not have the rights
normally associated with ownership of common shares.
Shareholders are not entitled to the same rights as owners of shares issued by a
corporation. By acquiring Shares, you are not acquiring the right to elect directors, to receive dividends, to vote on certain matters regarding the Trust or to take other actions normally associated with the ownership of common shares.
As a Shareholder, you will not have the protections normally associated with the ownership of shares in an investment company registered under the
Investment Company Act.
The Trust is not registered as an investment company for purposes of United States federal
securities laws, and is not subject to regulation by the SEC as an investment company. Consequently, Shareholders do not have the regulatory protections provided to investors in investment companies registered under the Investment Company Act of
1940, as amended (the Investment Company Act). For example, the provisions of the Investment Company Act that limit leverage and transactions with affiliates, prohibit the suspension of redemptions (except under limited circumstances)
and limit sales loads do not apply to the Trust. While iShares
®
Delaware Trust Sponsor LLC, as the Sponsor, is
registered under the CEA as a commodity pool operator, and BlackRock Fund Advisors, as the Advisor, is registered under the CEA as a commodity trading advisor, the nature and degree of the regulation to which they are subject differ from the
regulatory scheme imposed under the Investment Company Act.
Competing claims over ownership of relevant intellectual property rights could
adversely affect the Trust or an investment in the Shares.
While the Sponsor and the Advisor believe that they have all the intellectual
property rights needed to operate the Trust and make investments for the Portfolio in the manner described in this prospectus, third parties may allege or assert ownership of intellectual property rights that may be related to the design, structure
and operation of the Trust or to the computer models, processes or methodologies used by the Advisor for the selection of assets for the Portfolio. To the extent any claims of such ownership are brought or any proceedings are instituted to assert
such claims, the negotiation, litigation or settlement of such claims, the issuance of any restraining orders or injunctions, or the ultimate disposition of such claims in a court of law, may adversely affect the Trust and the value of the Shares.
The value of the Shares will be adversely affected if the Trust is required to indemnify the Sponsor or the Advisor or if the Sponsor is
required to indemnify the Trustee.
Under the trust agreement, the Sponsor has the right to be indemnified by the Trust for any liability
or expense the Sponsor incurs without negligence, bad faith or willful misconduct on its part and the Trustee, in turn, has the right to be indemnified by the Sponsor for any losses it incurs that are not the result of the Trustees negligence,
bad faith or material breach of the trust agreement. Similarly, under the advisory agreement the Advisor is entitled to indemnification from the Trust in certain events. That means that the assets of the Trust may have to be sold in order to cover
losses or liability suffered by the Sponsor or the Advisor for which the Trust is responsible, which would reduce the net asset value of the Trust and the value of the Shares.
NYSE Arca may halt trading in the Shares, which would adversely impact your ability to sell your Shares.
The Shares are listed for trading on NYSE Arca under the symbol ALT. Trading in the Shares may be halted due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the
view of NYSE Arca, make trading in the Shares inadvisable, or in the event certain information about the value of the Shares and the NAV is not made available as required by NYSE Arca. In addition, trading generally on NYSE Arca is subject to
trading halts caused by extraordinary market volatility pursuant to
21
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.
Risks Relating to Taxes
The Trusts classification as a publicly traded partnership not taxable as a corporation is not free from doubt, and if the Trust were to fail to
qualify as a partnership for U.S. federal income tax purposes, the Trusts income and items of deduction would not pass through to the Shareholders, the Trust would be required to pay tax at corporate rates on any portion of the Trusts
net income that does not constitute tax-exempt income, and distributions by the Trust to the Trusts Shareholders would be taxable dividends to the extent of the Trusts earnings and profits.
It is expected that the Trust will operate and be classified as a partnership for U.S. federal income tax purposes. So long as the Trust qualifies as a
partnership, it will be able to pass through its income, including the Trusts federally tax-exempt income, and deductions to the Shareholders. The Trusts qualification as a partnership for U.S. federal income tax purposes involves the
application of numerous technical provisions under which there is a lack of direct authority. In general, if a partnership is publicly traded (as defined in the United States Internal Revenue Code of 1986, the Code) it will
be treated as a corporation for U.S. federal income tax purposes. It is expected that the Trust will be treated as a publicly traded partnership. A publicly traded partnership will, however, be taxed as a partnership, and not as a corporation for
U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes qualifying income within the meaning of Section 7704(d) of the Code and the partnership is not required to register under
the Investment Company Act. This exception is referred to as the qualifying income exception. Qualifying income generally includes interest (other than certain contingent interest), gains from futures and/or forward contracts derived
from investing in foreign currencies and income from certain commodities transactions. In addition, qualifying income generally also includes income from a notional principal contract (such as a credit default swap) if the income from the reference
obligation would be qualifying income. In determining whether interest is treated as qualifying income for purposes of these rules, interest income derived from a financial business and income and gains derived by a dealer in
securities are not treated as qualifying income. The Trust takes the position that for purposes of determining whether the Trust is engaged in a financial business, portfolio investing activities that the Trust engages in do not and will not cause
the Trust to be engaged in a financial business or to be considered a dealer in securities.
If less than 90% of the Trusts
gross income constitutes qualifying income, for any reason, other than a failure that is determined to be inadvertent and that is cured within a reasonable time after discovery, or if the Trust is required to register under the Investment Company
Act, the Trusts items of income and deduction would not pass through to the Trusts Shareholders and the Trusts Shareholders would be treated for U.S. federal income tax purposes as stockholders in a corporation. The Trust would be
required to pay income tax at corporate rates on any portion of its net income that did not constitute tax-exempt income. Distributions by the Trust to its Shareholders would constitute dividend income taxable to such holders to the extent of the
Trusts earnings and profits and the payment of these distributions would not be deductible by the Trust. These consequences would have a material adverse effect on the Trust its Shareholders and the value of the Shares.
Shareholders tax liability could exceed cash distributions on the Shares.
You will be required to pay U.S. federal income taxes on your allocable share of the Trusts income, without regard to the receipt of cash distributions on the Shares. There is no obligation to make
distributions on the Shares and no such distribution is anticipated. Accordingly, you may not receive cash distributions sufficient to cover your allocable share of such taxable income or even the tax liability resulting from that income.
The IRS could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares if the IRS does not accept
the assumptions or conventions utilized by the Trust.
The U.S. tax rules that apply to partnerships are complex and their application is
not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded interests in partnerships. The Trust applies certain assumptions and conventions intended to comply with the intent
of the rules and to report income, gain, deduction, loss and credit to investors in a manner that reflects the investors 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 these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations and will require that items of income, gain,
deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to you.
22
Shareholders could become subject to FATCA withholding tax
Starting in 2014, U.S. withholding tax may be imposed on allocations of income to and distributions received by you with respect to your Shares and
starting in 2017, U.S. withholding tax may be imposed on disposition proceeds allocated or distributed by the Trust to you and disposition proceeds received by you upon a sale of your Shares. Prospective Shareholders should consult their own tax
advisors about this new regime, which is commonly referred to as FATCA.