Altegris Managed Futures Strategy Fund

Transcription

1 Altegris Managed Futures Strategy Fund Market + portfolio Commentary Q Market Commentary Much like the first quarters of 2010 and 2011, Q saw signs of improving global economic prospects. Whether it was the longterm refinancing operations program in Europe or mildly positive economic data out of the US, risk-on assets such as energy futures, stock indices, commodities and the commodity currencies appeared to have some wind at their back. The optimism garnered over Q1 simply led to a false start, as it became clear in Q2 that policy responses from global governments were not enough to overcome worsening fundamentals, including the deterioration of Europe, a weak economic recovery in the US and a generally tenuous situation worldwide. As markets react to the continued risk-on to risk-off environment, investor resilience is being put to the test. Despite continued uncertainty, we believe the flexibility that is the hallmark of managed futures strategies should continue to serve investors well. In fact, it is because of this uncertainty that it is paramount for investors to remain resolute, be proactive and invest for the long-term. Fund Performance For the quarter, the Fund s A (without load), C and I shares returned 2.01%, 1.71%, and 2.00%, respectively. During the quarter, the Altegris 40 Index and the S&P 500 TR Index returned -1.36% and -2.75%, respectively. The Fund delivered on its goal of providing diversification benefits of managed futures across an array of time frames and markets during a period when traditional markets stumbled. Fund Performance As of June 30, 2012 Quarter to Date Year to Date Since Inception * 1-Year A (NAV) 2.01% -1.33% 0.21% -1.85% A (max load)** -3.89% -7.05% -5.59% -4.95% I (NAV) 2.00% -1.23% 0.42% -1.61% BofA Merrill Lynch 3-Month T-Bill Index 0.02% 0.04% 0.05% 0.10% Altegris 40 Index -1.36% -2.90% -2.43% -0.02% S&P 500 TR Index -2.75% 9.48% 5.44% 17.81% 02/01/11 06/30/12 * C (NAV) 1.71% -1.85% -0.63% -6.83% *The inception date of A and I is 08/26/10; the inception date of C is 02/01/11. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Returns for periods longer than one year are annualized. The Altegris 40 Index is a monthly index; its since inception performance is shown from 08/31/10. ** The maximum sales charge (load) for A is 5.75%. A Share investors may be eligible for a reduction in sales charges. This agreement may be terminated by the Fund s Board of Trustees on 60 days written notice to the adviser. The total annual Fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 3.76% for A, 4.52% for C, and 3.50% for I. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. The Fund s adviser has contractually agreed to reduce its fees and to reimburse expenses, at least until October 31, 2013, to ensure that total annual Fund operating expenses after fee waiver and reimbursement (exclusive of any taxes, interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, indirect expenses, expenses of other investment companies or Underlying Pools in which the Fund may invest, or extraordinary expenses such as litigation) will not exceed 1.90%, 2.65% and 1.65% of average daily net assets attributable to A, C and I shares, respectively, subject to possible recoupment in future years. Please review the Prospectus for more detail. Results shown reflect the waiver, without which the results could have been lower. A Fund s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. For performance information current to the most recent month end, please call (888) The referenced indices are shown for general market comparisons and are not meant to represent any particular Fund. Trusted Alternatives. Intelligent Investing. 1[1]

2 Portfolio Performance Review The transition from a risk-on environment in Q1 to a risk-off environment in Q2 was not swift. Q1 optimism slowly shifted to Q2 pessimism, with initial cracks surfacing in the last two weeks of March. Entering Q2, the trend following managers accessed by the Fund through its investment portfolio* were modestly exposed to positive economic assets such as long positions in stock index futures, long positions in commodity futures, and long Australian dollar positions. As the reversion from risk-on to risk-off occurred, these managers worked to keep investors from being overexposed to early Q1 optimism, particularly in April and May, by reducing positions in risk-on assets. Additionally, these trend following managers capitalized on risk-off trades such as long positions in bonds (notably US and German) and short positions in euro currency, as these long-term trends reasserted themselves. True to the unpredictable nature of recent markets, risk-on assets rallied on the last trading day of June as stock index futures climbed, the euro appreciated and commodity futures rallied substantially on the heels of yet another European bailout announcement. The unfortunate result for the Fund was that some of April and May s trend following gains were given back by the end of June. The greatest contributor to the Fund s strong performance over Q2 came from QIM. The manager had a particularly successful quarter navigating and adeptly trading stock indices, interest rates and currencies. QIM generated strong returns in April, May and June, leading to its best quarter since the program s inception. Overall, the Fund s combination of diverse strategies successfully delivered uncorrelated returns this quarter. Despite being predominately long stock indices in an ultimately negative quarter for equities, the blend of managers accessed by the Fund profited from a mix of positions ranging from long developed market fixed income, to short the euro, to long soybean futures. Manager Performance Review Trend following managers that moved quickly in April to increase long exposures to bonds and short exposures to the euro generally reaped the benefits of very strong May performance, while those who retained Q1 s long energy, equity index and commodity currency positions suffered. Both Abraham and Lynx were up more than 2% for the second quarter, due largely to long fixed income positions while maintaining reduced exposure sets to both long stock index and energy futures; Altis was ostensibly flat over the period. WNTN was the last to transition its models out of Q1 s risk-on trades due to the longer-term focus of its trend following models. Accordingly, WNTN was the least profitable manager for the quarter. Despite having several shorter-term models in its program, Welton experienced similar losses from its Q1 s risk-on positions, particularly those in the energy sector in June, while at the same time not having enough exposure to risk-off themes. June as a whole was a difficult month for all of the trend following managers accessed by the Fund, especially given the dramatic rally of risk-on assets on the final day. In previous quarters, specialized managers had been at the mercy of non-market participants (e.g., government intervention). The behavioral tendencies that many of their models are designed to detect struggled as a result. However, throughout Q2 government forces had a muted impact on market prices, as in the case of the market s subdued reaction to the Fed s Twist Part II. As a result, more (although not all) specialized managers such as QIM had been having a banner year as they nimbly navigated choppy and indecisive markets. In May alone, QIM was up approximately 7%, profiting from short euro currency, short crude oil and short E-mini S&P futures. We are particularly pleased with QIM s recent performance given our decision in March of 2011 to increase Fund exposure from 15% to 25% due to concern that markets were becoming increasingly volatile. At the time of the allocation change, the manager was in the midst of a 21-month drawdown. Since that decision, however, QIM is up more than 13%. The manager has recovered that drawdown and provided uncorrelated returns through tough market cycles. Portfolio Allocations As of June 29, 2012, allocations were as follows: 35% to WNTN, 20% to QIM, 10% to CFM DTP, 7.5% to Abraham, 7.5% to Altis, 7.5% to Lynx, 7.5% to Welton and 5.0% to CCP. Fund holdings are classes of the Alternative Strategies Ltd, an Underlying Pool in which the Fund invests through a wholly-owned subsidiary. The Fund may invest up to 25% of its total assets in a wholly-owned subsidiary, which will invest in the classes of the managed futures securities shown on page 4 as issued by an Underlying Pool. Each class corresponds to the performance of a managed account at the Underlying Pool with the aim of providing aggregate exposure to the managed futures programs selected by Altegris Advisors as if 100% of the Fund s net assets were invested in the programs. The Fund also holds fixed income securities, cash, and cash equivalents. This commentary reflects the views of the portfolio managers through June 30, The managers views are subject to change as market and other conditions warrant. This commentary is provided for informational purposes only and should not be construed as investment advice. No forecasts are guaranteed. There is no guarantee that any investment will achieve its objectives, generate profits or avoid losses. 2[2]

3 The Fund provides managed futures exposure via investments between two primary managed futures sub-strategies: trend following and specialized. Amounts allocated among sub-strategies will typically vary between % for trend following and 0-40% for specialized sub-strategies. The Fund added exposure to two managers near the end of the quarter, both of which fall into the specialized sub-strategy: Capital Fund Management s (CFM) Discus Program received a 10% allocation via the Fund s investment in DTP and Cantab Capital Partners (Cantab) Aristarchus Program received a 5% allocation via the Fund s investment in CCP. Backed by what we believe to be a strong organization and a cohesive management team, CFM s Discus Program has one of the longest track records of any alternative manager, dating back to It is a preeminent short-term systematic strategy that Altegris has known and researched for over a decade. CFM s Discus Program only recently became available again to select investors. Like CFM, Cantab is a prominent systematic CTA with what Altegris considers an exemplary track record. With roots in Goldman Sachs Quantitative Strategies Group, Cantab s founders created a unique specialized approach with an institutional pedigree. While these managers were certainly added for their individual merits, they were also added deliberately in order to diversify and increase the specialized component within the Fund. With the addition of both DTP at 10% and CCP at 5%, we have reduced the Fund s allocation to QIM by 5% (from 25% to 20%), Welton by 5% (from 12.5% to 7.5%) and Abraham by 5% (from 12.5% to 7.5%). The reduction to QIM was simply to provide diversification within the specialized component, and reductions to both Welton and Abraham were a continuation of the goal we set forth in Q of reducing portfolio volatility while increasing profit potential for our investors. As of quarter-end, the Fund has 65% exposure to trend following and 35% to specialized sub-strategies. We believe that the additions of CFM and Cantab to the Fund represent the latest examples of unique access to market-leading alternative managers made available by Altegris funds. Portfolio Positioning In summary, Q2 brought a shift back to a skeptical outlook and defensive positioning among the Fund s managers. By the end of Q2, the Fund s trend following managers had embraced risk-off positioning in line with economic fundamentals that point to yet another slow-growth environment. At the same time, markets could be analogous to a well coiled spring, waiting to take off with even the slightest of good news. Because we are still in a transition environment, which way economic sentiment goes and just how markets will react remain uncertain. Indeed, the dramatic risk-relief rally on the last day of the quarter was certainly impactful on manager returns, but lasting effects appear to be unlikely. Despite an unclear economic picture, we remain confident that our portfolio management process and the resulting blend of managers provides the best way to access managed futures as an asset class and its enhanced diversification benefits. The Fund outperformed traditional equity markets by nearly 500 basis points this quarter; however, it is important to note that that the best way to utilize the strategy in a portfolio is not to time the allocation decision, but rather to maintain a steady allocation throughout full market cycles. 3[3]

4 Fund Objective The Fund seeks to achieve positive absolute returns in rising and falling equity markets while experiencing less volatility than major equity market indices. Index Managed Futures Securities Exposure 1 Securities Holding 2 WNTN QIM DTP Abraham Altis Lynx Welton CCP Allocation 3 35% 20% 10% 7.5% 7.5% 7.5% 7.5% 5.0% 1 Fund holdings are classes of the Alternative Strategies Ltd, an Underlying Pool in which the Fund invests through a wholly-owned subsidiary. 2 Managed futures exposures are subject to change at any time. Reference to the specific holdings should not be construed as a recommendation by the Fund or its Adviser. 3 As a percentage of managed futures strategy allocation, excludes cash, cash equivalents and fixed income securities. The Fund may invest up to 25% of its total assets in a wholly-owned subsidiary, which will invest in the classes of the managed futures securities shown above as issued by an Underlying Pool. Each class corresponds to the performance of a managed account at the Underlying Pool with the aim of providing aggregate exposure to the managed futures programs selected by Altegris Advisors as if 100% of the Fund s net assets were invested in the programs. The Fund also holds fixed income securities, cash, and cash equivalents which are excluded from the manager allocation shown above. These holdings and allocations are presented to illustrate examples of the securities that the Fund has bought and the diversity of areas in which the Fund may invest, and may not be representative of the Fund s current or future investments. Index Descriptions An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product based on the index, which may materially affect the performance data presented. BofA Merrill Lynch 3-month T-Bill Index. An unmanaged index that measures returns of three-month Treasury Bills. Managed Futures. The Altegris 40 Index tracks the performance of the 40 leading managed futures programs, by ending monthly equity (assets) for the previous month, as reported to Altegris Investments, Inc. The Altegris 40 Index represents the dollar-weighted average performance of those 40 programs. The Index started in July 2000; data is available back to US Stocks. The S&P 500 Total Return Index is the total return version of S&P 500 index. The S&P 500 index is unmanaged and is generally representative of certain portions of the U.S. equity markets. For the S&P 500 Total Return Index, dividends are reinvested on a daily basis and the base date for the index is January 4, All regular cash dividends are assumed reinvested in the S&P 500 index on the ex-date. Special cash dividends trigger a price adjustment in the price return index. Representative Index Characteristics Key Risks Treasury Bills BofA Merrill Lynch 3-month T-Bill Index Short-term debt obligations of the US government with a 3-month maturity Interest rate risk. Value will decline if interest rates rise. Managed Futures Altegris 40 Index 40 top AUM managed futures programs, monthly, as reported to Altegris Market risk. Prices may decline. Leverage risk. Volatility and risk of loss may magnify with use of leverage. Country / regional risk. World events may adversely affect values. US Stocks S&P 500 Total Return (TR) Index 500 US stocks Weighted towards large capitalizations Stock market risk. Stock prices may decline. Country / regional risk. World events may adversely affect values. Based upon the analysis of long-term historical returns and volatility of various asset classes, the Fund will allocate approximately twenty five percent of its assets to the managed futures strategy and approximately seventy five percent of its assets to the fixed income strategy. However, to stay flexible and to respond to various changes in market conditions, the allocation ranges to each strategy may be higher or lower. 4[4]

5 Risks and Important Considerations Investors should carefully consider the investment objectives, risks, charges and expenses of Altegris Managed Futures Strategy Fund. This and other important information is contained within the individual Fund s Prospectus, which can be obtained by calling (888) The Fund Prospectus should be read carefully before investing. Altegris alternative strategy mutual funds are distributed by Northern Lights Distributors, LLC member FINRA. Altegris Advisors, J.P. Morgan Investment Management Inc., and Northern Lights Distributors are not affiliated. MUTUAL FUNDS INVOLVE RISK INCLUDING POSSIBLE LOSS OF PRINCIPAL. The Fund is non-diversified for purposes of the Investment Company Act of 1940, which means that the Fund may invest in fewer securities at any one time than a diversified fund. When the Fund invests in fixed income securities or derivatives, the value of your investment in the Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of fixed income securities or derivatives owned by the Fund. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter term securities. Other risk factors include credit risk (the debtor may default) and prepayment risk (the debtor may pay its obligation early, reducing the amount of interest payments). These risks could affect the value of a particular investment by the Fund possibly causing the Fund s share price and total return to be reduced and fluctuate more than other types of investments. To respond to adverse market, economic, political or other conditions, the Fund may invest 100% of its total assets, without limitation, in high-quality short-term debt securities and money market instruments. The Fund s indirect and direct exposure to foreign currencies subjects the Fund to the risk that those currencies will decline in value relative to the U.S. Dollar, or, in the case of short positions, that the U.S. Dollar will decline in value relative to the currency that the Fund is short. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates and the imposition of currency controls or other political developments in the U.S. or abroad. In addition, the Fund may incur transaction costs in connection with conversions between various currencies. The Fund will invest a percentage of its assets in derivatives, such as futures and options contracts. The use of such derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities and commodities underlying those derivatives. The Fund may experience losses that exceed losses experienced by funds that do not use futures contracts and options. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures. Although futures contracts are generally liquid instruments, under certain market conditions there may not always be a liquid secondary market for a futures contract. As a result, the Fund may be unable to close out its futures contracts at a time which is advantageous. Trading restrictions or limitations may be imposed by an exchange, and government regulations may restrict trading in futures contracts and options. Because option premiums paid or received by the Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities. Over-the-counter transactions are subject to little, if any, regulation and may be subject to the risk of counterparty default. A portion of the Fund s assets may be used to trade OTC commodity interest contracts, such as forward contracts, option contracts in foreign currencies and other commodities, or swaps or spot contracts. A substantial portion of the trades of the programs are expected to take place on markets or exchanges outside the United States. Some foreign markets present additional risk, because they are not subject to the same degree of regulation as their U.S. counterparts. Trading on foreign exchanges is subject to the risks presented by exchange controls, expropriation, increased tax burdens and exposure to local economic declines and political instability. An adverse development with respect to any of these variables could reduce the profit or increase the loss earned on trades in the affected international markets. International trading activities are subject to foreign exchange risk. The Fund may employ leverage and may invest in leveraged instruments. The more the Fund invests in leveraged instruments, the more this leverage will magnify any losses on those investments. Leverage will cause the value of the Fund s shares to be more volatile than if the Fund did not use leverage. The Fund may take short positions, directly and indirectly through the Subsidiary, in derivatives. If a derivative in which the Fund has a short position increases in price, the underlying Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Structured notes involve leverage risk, tracking risk and issuer default risk. Taxation Risk involves investing in commodities indirectly through the Subsidiary, through which the Fund will obtain exposure to the commodities markets within the federal tax requirements that apply to the Fund. However because the Subsidiary is a controlled foreign corporation, any income received from the Subsidiary s investments in Underlying Funds/Pools will be passed through to the Fund as ordinary income, which may be taxed at less favorable rates than capital gains. Underlying Funds/Pools in which the Subsidiary invests will retain investment managers and be subject to investment advisory and other expenses which are indirectly paid by the Fund. As a result, the cost of investing in the Fund may be higher than other mutual funds that invest directly in stocks and bonds. Each Underlying Fund/Pool will pay management fees, brokerage commissions, operating expenses and performance based fees to each manager it retains. Performance based fees will be paid without regard to the performance of any other managers retained or to the overall profitability of the Underlying Fund/Pool. Underlying Funds/Pools are subject to specific risks, depending on the nature of the managers they retain. There is no guarantee that any of the trading strategies used by the managers retained by an Underlying Fund/Pool will be profitable or avoid losses. Altegris Advisors Altegris Advisors, LLC is an SEC-registered investment adviser that advises alternative strategy mutual funds that may pursue investment returns through a combination of managed futures, equities, fixed income and/or other investment strategies _ NLD-7/20/2012 5[5]