Managed futures: An alternative investment strategy in which futures contracts are used as part of the investment strategy. 2

Transcription

1 WisdomTree Managed Futures Strategy Funds WTMF MANAGED FUTURES CAN PROVIDE MULTI-LEVEL DIVERSIFICATION Institutional investors have long utilized managed futures strategies as a way to achieve diversification 2 and performance potential in almost any market. Not only do managed futures provide diversification at the asset class and investment strategy levels, they may also help lower portfolio risk 3, reduce long-term volatility 4 and enhance returns. Consider this: + Representing contracts to buy or sell commodities, currencies or interest rates 5 (at a future date), managed futures are usually non- or negatively correlated 6 to traditional assets. + Unlike long-only investments, managed futures employ long/short 7 strategies designed to profit from rising and falling markets. + The ability to long or short commodities, non-u.s. currencies and U.S. Treasuries gives managed futures strategies the potential to perform in inflationary 8 and deflationary 9 environments. THE WISDOMTREE MANAGED FUTURES INDEX: AN INTRODUCTION As of July, 206, the WisdomTree Managed Futures Strategy Fund (WTMF 0 ) began tracking a new, proprietary WisdomTree Index, the WisdomTree Managed Futures Index. Managed futures strategies typically incorporate a price momentum signal to determine long and short positions. When a commodity rises with positive trends, a managed futures strategy typically goes long that commodity. Conversely, a managed futures strategy can short a declining commodity with deteriorating trends. In developing its new Index methodology, WisdomTree brings innovation to trend signaling to determine which commodities should receive exposure and weighting those positions depending on the uniformity or conviction in the underlying price trends. Managed futures: An alternative investment strategy in which futures contracts are used as part of the investment strategy. 2 Diversification: Diversification does not eliminate the risk of experiencing investment losses. 3 Risk: Also standard deviation, which measures the spread of actual returns around an average return during a specific period. Higher risk indicates greater potential for returns to be farther away from this average. 4 Volatility: A measure of the dispersion of actual returns around a particular average level. 5 Interest rates: The rate at which interest is paid by a borrower for the use of money. 6 Correlation: Statistical measure of how two sets of returns move in relation to each other. Correlation coefficients range from - to. A correlation of means the two subjects of analysis move in lockstep with each other. A correlation of - means the two subjects of analysis have moved in exactly opposite directions. 7 Short (or short position): The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value; the opposite of long (or long position). Long (or long position): The buying of a security, such as a stock, commodity or currency, with the expectation that the asset will rise in value; the opposite of short (or short position). 8 Inflation: Characterized by rising price levels. 9 Deflation: The opposite of inflation, characterized by falling price levels. 0 Formerly ticker symbol WDTI through December 5, 207. Momentum: Principle that past price behavior could have potential to explain future price behavior.

2 WTMF MANAGED FUTURES STRATEGY FUND 2 Figure : Methodology of the WisdomTree Managed Futures Index Investment Universe Contract Eligibility 6 Commodities 8 Financials Volatility Energy Commodities Cannot Be Short Crude Oil, Natural Gas, Heating Oil, Gasoline, Copper, Gold, Silver, Soybeans, Corn, Wheat, Coffee, Sugar, Cotton, Cocoa, Live Cattle, Lean Hogs EURUSD, JPYUSD, GBPUSD, CHFUSD, AUDUSD, CADUSD, 0-Year U.S. Note, 30-Year U.S. Bond The 4 most volatile contracts are removed. Any eligible Energy contract that is either signaled for being fully short or two-thirds short is removed, with other eligible contracts receiving proportionately more weight. Monthly Rebalance Signal Composite Momentum Signal (CMS) 3-month, 6-month and 2-month contract returns are monitored. All positive means a (+3) full long allocation. All negative means a (-3) full short allocation. Mixed signals can lead to values of (+2) or (-2) and mean two-thirds long or short allocations, which is what we reference as scaled position sizes for when the trend is not strong enough to warrant a full allocation in either the long or short direction. Weighting Maximum Number Minimum Number 20 contracts. Full allocation is equally weighted at 5%. Two-thirds allocation is 3.33%. 6 contracts are included if all 4 energy components are not eligible for the Index due to a short signal in them. Equal weighted allocation across 6 contracts is then 6.25% and two-thirds allocation is 4.7%. Source: WisdomTree. EURUSD: Euro vs. U.S. dollar exchange rate. JPYUSD: Japanese yen vs. U.S. dollar exchange rate. CHFUSD: Swiss franc vs. U.S. dollar exchange rate. AUDUSD: Australian dollar vs. U.S. dollar exchange rate. CADUSD: Canadian dollar vs. U.S. dollar exchange rate. Determining Long/Short Signal s Time Horizon: Many managed futures strategies focus on one specific time horizon say the trailing six- or 2-month periods for determining long and short allocations. There are benefits and drawbacks to this methodology. WisdomTree s composite momentum signal incorporates three time horizons: a short-term horizon (three months), a medium-term horizon (six months) and a longterm horizon (2 months). The three signals are evaluated, and when two or all three signals agree, the position will be established as either long or short the asset in question. Bottom Line: A rising trend on this composite momentum signal indicates a long position, while a falling trend on this composite momentum signal indicates a short position.

3 WTMF MANAGED FUTURES STRATEGY FUND 3 Figure 2: Incorporating Multiple Time Horizons: Scaling Position Size According to Conviction in Trend Bullish Momentum Signals Bearish Momentum Signals Total agreement. Fully invested Composite Momentum Signal Illustration Short Term Medium Term Long Term Source: WisdomTree. Hypothetical illustration to indicate scaling component of the composite momentum signal framework. Composite signal values will be +3 (fully long), +2 (two-thirds long), -2 (two-thirds short) or -3 (fully short). + Full Investment: Intuitively, we recognize that some trends are stronger than others. If three-, six- and 2-month returns are all positive or all negative, this becomes indicative of stronger trends, resulting in full long or full short allocations. + Two-Thirds Investment: If only two out of the three returns are moving in the same direction either positive or negative this indicates that the signals are in partial agreement. If two out of the three signals are positive, then two-thirds of the weight in a particular contract is long. If two out of the three signals are negative, then two-thirds of the weight is short.

4 WTMF MANAGED FUTURES STRATEGY FUND 4 MITIGATION OF WHIPSAW RISK Our research shows that a vulnerability of managed futures strategies is whipsaw risk 2, which occurs when a position is established based on recent trends but commodity volatility quickly swings in a different direction. Scaling position size based on the composite momentum framework (CMS) 3 described above reduces that risk. WisdomTree s proprietary methodology further mitigates whipsaw risk by removing the commodities with the highest 36-month trailing volatility. Although there are 24 commodities in the investment universe, a maximum of 20 will be included, as the four most volatile would be consistently removed as part of the rebalance 4 process. The chart below reveals the standard deviation, or volatility, over the last 36 months of the various commodities, currencies and interest rates included in the WisdomTree Managed Futures Index. The four highest-volatility commodities cocoa, wheat, lean hogs, and sugar are excluded from the Index for the upcoming month. Figure 3: Removing the Four Most Volatile Commodities 30% 25% 20% 8% 6% 6% 9% 9% 20% 2% 22% 25% 25% 26% 5% 0% 7% 8% 8% 8% 8% 9% 9% % % 2% 2% 2% 5% 4% 0 0Y Note 30Y Bond AUDUSD CHFUSD GBPUSD EURUSD JPYUSD CADUSD Heating Oil Gasoline Natural Gas Crude Oil Gold Cotton Live Cattle Soy Beans Corn Silver Coffee Copper Cocoa Wheat Lean Hogs Sugar When rebalancing for December 207, Cocoa, Lean Hogs, Wheat and Sugar were excluded due to their higher realized volatilities. Source: Bloomberg, as of 2/3/7. BRINGING IT ALL TOGETHER: POSITIONING OF THE WISDOMTREE MANAGED FUTURES INDEX AS OF THE DECEMBER 207 REBALANCE The key is how all these principles and findings came together in the December 207 rebalance, as this will give investors a sense of how this approach will be consistently applied on a monthly basis going forward. 2 Whipsaw risk: A position is established based on recent trends but volatility whipsaws in a different direction. 3 Composite momentum framework: A framework that incorporates three momentum signals across different time horizons to create a composite momentum signal. 4 Rebalance: An index is created by applying a certain set of selection and weighting rules at a certain frequency. WisdomTree rebalances, or reapplies its rulesbased selection and weighting process, on a monthly basis for this Index in particular.

5 WTMF MANAGED FUTURES STRATEGY FUND 5 Figure 4: Illustrating the Contract Selection and Weighting Included Weight If Fully Invested Scaled/ Effective Weight Composite Crude Oil Yes 5.26% 5.26% 3 Natural Gas No 0.00% 0.00% -3 Heating Oil Yes 5.26% 5.26% 3 Gasoline Yes 5.26% 5.26% 3 Copper Yes 5.26% 5.26% 3 Gold Yes 5.26% 3.5% 2 Silver Yes 5.26% -3.5% -2 Soybeans Yes 5.26% -3.5% -2 Corn Yes 5.26% -5.26% -3 Wheat No 0.00% 0.00% -3 Coffee Yes 5.26% -5.26% -3 Sugar No 0.00% 0.00% 2 Cotton Yes 5.26% 5.26% 3 Cocoa No 0.00% 0.00% -2 Latest Rebalance: 9 Futures Contracts selected due to: + 24 Contract Starting Universe + Remove 4 Most Volatile Futures + Crude Oil, Heating Oil, and Gasoline were included due to their long signals + Weight if Fully Invested = 00%/9 (5.26%) + Scaled / Effective Weight = Weight if Fully Invested *2/3 Live Cattle Yes 5.26% 5.26% 3 Lean Hogs No 0.00% 0.00% 3 EURUSD Yes 5.26% 5.26% 3 JPYUSD Yes 5.26% -3.5% -2 GBPUSD Yes 5.26% 3.5% 2 CHFUSD Yes 5.26% -3.5% -2 AUDUSD Yes 5.26% 3.5% 2 CADUSD Yes 5.26% 3.5% 2 30Y Bond Yes 5.26% 5.26% 3 0Y Note Yes 5.26% -3.5% % 84.2% Sources: WisdomTree, Bloomberg, as of 2/3/7. A negative scaled/effective weight indicates a short position. The total scaled/effective weight is a sum of the absolute value of all weights. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. Subject to change.

6 WTMF MANAGED FUTURES STRATEGY FUND 6 Which Contracts Were Eligible? Figure 3 shows cocoa, lean hogs, wheat and sugar were the four most volatile commodities and were therefore excluded, bringing the total from the initial 24 to 20. Looking at the four contracts in energy, we can see three positions are long, which means that the total becomes 9. + When Can an Energy Contract Signal Short? If an energy contract were to indicate a short position, it would mean that particular contract would not be eligible and the total number of eligible contracts for the coming month would change from 20 to 9. It does not matter if the short was signaled at two-thirds or full, the result going from 20 contracts to 9 would be the same. This impacts the weighting for ALL the other included contracts, which would adjust proportionately higher. How Were Weights Determined? First, the total number of contracts is set at 9. What we refer to as the weight if fully invested is set at 5.26%, an equal weighting across the 9 contracts. One of our key innovations came from the composite momentum signal leading to a scaling of position sizes. If a full investment weight is 5.26% (composite of three), that would mean that a two-thirds weight (composite of two) would be 3.5%. + Scaled Position Sizes: If we add up what we refer to as the scaled or effective weights, which account for both the number of contracts being set at 9 AND the scaling of either a two or a three coming from the CMS, we get 84%. That means 84% of the notional index weight of the WisdomTree Managed Futures Index is exposed to long and short exposures in futures contracts. 5 If every composite value were a three, then 00% of the Index would be exposed to the futures contracts; if all composite values were two, then 66.67% of the index would be exposed to futures contracts. + Bottom Line: Weaker trends lead to a lower percentage of the Index exposed to futures contracts. 5 Futures contract: Reflects the expected future value of a commodity, currency or Treasury security.

7 WTMF MANAGED FUTURES STRATEGY FUND 7 WTMF A SMART WAY TO ACCESS A MANAGED FUTURES STRATEGY + No K- filings 6 + No redemption fees + No sales load + No investment minimums + The Fund is not leveraged 7 + Low fees of only 65 basis points 8 + Full transparency of strategy and holdings + A consistent, rules-based strategy + Intraday liquidity + Registered under the Investment Company Act of Schedule K-: A tax document issued for an investment in partnership interests. 7 Leverage: Total assets divided by equity. Higher numbers indicate greater borrowing to finance asset purchases; leverage can tend to make positive performance more positive and negative performance more negative. 8 Refers to the net expense ratio, which includes a contractual waiver of 0 basis points expiring 2/3/8. Ordinary brokerage commissions apply. 9 Investment Company Act of 940: Indicates the registration and structuring of the fund. At WisdomTree, we do things differently. We build our ETFs with proprietary methodologies, smart structures and uncommon access to provide investors with the potential for income, performance, diversification and more. For more information about WTMF, contact your WisdomTree representative or visit WisdomTree.com. Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. To obtain a prospectus containing this and other important information, call WISE (9473) or visit wisdomtree.com. Read the prospectus carefully before you invest. There are risks associated with investing, including possible loss of principal. An investment in this Fund is speculative and involves a substantial degree of risk. One of the risks associated with the Fund is the complexity of the different factors that contribute to the Fund s performance, as well as its correlation (or noncorrelation) to other asset classes. These factors include use of long and short positions in commodity futures contracts, currency forward contracts, swaps and other derivatives. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The Fund generally does not make intramonth adjustments and therefore is subject to substantial losses if the market moves against the Fund s established positions on an intramonth basis. The Fund is actively managed; thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund s prospectus for specific details regarding the Fund s risk profile. WisdomTree Managed Futures Index: A long/short, rules-based index designed to provide exposure to a portfolio consisting of diversified futures contracts for commodities, currencies and interest rates. On a monthly basis, assets with lower realized volatility will be selected, and a determination to go long or short the futures contracts of the selected assets under a proprietary composite momentum framework will be made. The composite momentum framework incorporates multiple momentum signals to decide the direction and weight in the Index. WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only. WTGM-0409