Why Managed Futures 2017
EVOLVING WITH INVESTORS NEEDS IN MIND ABOUT EQUINOX FUNDS Founded in 2003, Equinox Funds has progressed from a specialist in multi-strategy managed futures investing to a comprehensive alternative investment provider with multiple offerings across global managed futures, commodities and hedged equity asset classes. Of course, not every investment works for every investor. With a wide-ranging selection of alternative investment options, Equinox Funds encourages investors to work with their advisors to determine which alternative investments may work best within their overall portfolios. help meet the unique goals of each investor. 2
INVESTMENTS IN MANAGED FUTURES ARE SPECULATIVE, INVOLVE RISK, AND ARE NOT SUITABLE FOR ALL INVESTORS. IN ADDITION TO NORMAL INVESTMENT RISKS, MANAGED FUTURES INVESTMENTS ENTAIL CERTAIN RISKS, INCLUDING, IN ALL OR SOME CASES: Managed futures often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. Managed futures can be highly illiquid. Managed futures are not required to provide periodic pricing or valuation information to investors. Managed futures may involve complex tax structures and delays in distributing important tax information. Managed futures are not subject to the same regulatory requirements as mutual funds. Managed futures often charge high fees. 3
Managed Futures AGENDA What are they? History Potential Benefits CTAs and the case for active management Market environment Investing in Managed Futures Liquidity and transparency No directional bias Diversification Recap 4
Managed Futures MANAGED FUTURES is an alternative asset class in which Commodity Trading Advisors (CTAs) seek to generate returns using primarily futures contracts on financial instruments, such as currencies, treasury bonds, equity indices, & physical commodities such as corn, oil, gold, & sugar. Definitions of Terms and Indices can be found on page 28. Financial Instruments Physical Commodities Currencies Energy US Dollar Euro British Pound Japanese Yen Natural Gas Crude Oil Gasoline Heating Oil Equity Indices # Agricultural Products 500 S&P DAX (German) CAC-40 (French) FTSE (British) Corn Soybeans Coffee Cattle Interest Rates Metals Two-Year Notes (US) Ten-Year Notes (US) German Bund Eurodollar Gold Silver Copper Lead There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Past results do not guarantee future 5
MANAGED FUTURES History Managed Futures: An alternative asset class in which Commodity Trading Advisors (CTAs) seek to generate returns using primarily futures contracts on financial instruments and physical commodities. Potential for attractive long-term, risk-adjusted returns Different drivers of returns, which historically has resulted in low correlations to traditional asset classes Efficient global diversification across multiple sectors and markets Potential safety and liquidity of exchange-traded futures contracts Have historically shown the ability to provide crisis alpha Managed Futures Assets Under Management 1980 2016 2016 AUM as of 9/30/2016 No amount of diversification or correlation can ensure profits or prevent losses. Source: BarclayHedge Alternative Investment Database, 2016. 6
MANAGED FUTURES THE POTENTIAL BENEFITS Potential to provide attractive long-term risk-adjusted returns Ability to dampen equity drawdowns Distinct drivers of returns, hence low correlations to traditional asset classes Ability to add alpha during times of equity crisis Efficient global diversification across multiple sectors and markets Potential safety and liquidity of exchange-traded futures contracts Ability to employ notional leverage without the need to borrow additional funds Reduced correlation and/or diversification does not ensure profit or prevent losses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Past results do not guarantee future results. There is a risk of loss. You can lose money in any investment program. 7
MANAGED FUTURES CTAs and the Case for Active Management Who are Commodity Trading Advisors? Trade mainly exchange-listed futures in six sectors and 150+ markets on global exchanges Use mainly quantitative models to identify trend-formation and trade entry and exit Using both long and short positions, seek to profit from both bullish and bearish trends in prices (unlike long-only strategies) Trade over multiple timeframes (from intra-day to long-term) Encompass a multitude of trading styles (systematic, discretionary, relative value, contrarian, etc.) Employ rigorous position sizing, stop-loss limits, volatility targets, and other tools that seek to mitigate risk 8
MANAGED FUTURES CTAs and the Case for Active Management CTA trading styles are represented by the distance from an axis. CTA target volatility is represented by the distance from the origin. Other CTA TRADING STYLE Diversified trend-following Discretionary/Systematic Global Macro Relative Value FORT Systematica Other TARGET VOLATILITY 5% 10% 15% 20% 25% Discretionary/ Global Macro H2O IPM QIM Quantmetrics Crabel Aspect BH-DG WNTN J E Moody QMS Chesapeake KeyQuant Quantica Campbell QTI Diversified Trend-following Emil van Essen Relative Value
MANAGED FUTURES Market Environment The Inverse Relationship Between Interest Rates and Stocks January 1970 December 2016 Equity markets are at or near all-time highs Interest rates are at or near all-time lows Strategists have expressed concerns about the sustainability of the run in equities given that real economies are growing slowly Expansive monetary and fiscal policies are igniting fears of inflation Past performance does not guarantee future results. Source: www.barclayhedge.com Displayed indices are for informational purposes only and are not meant to represent the Fund. As it is not possible to invest in the indices, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. 10
MANAGED FUTURES Market Environment The past returns on managed futures exhibit low correlations to returns of more traditional asset classes, such as stocks and bonds. Given the global economic environment, it may be difficult to justify increasing, or even maintaining current investor portfolio allocations to the equity and fixed income sectors. Past performance does not guarantee future results. Reduced correlation and/or diversification does not ensure profit or prevent losses. * Source: Prospects for CTAs in a Rising Interest Rate Environment by Campbell & Company, January 2013. Studies* over longer time periods have shown that unlike equities and bonds, the performance of managed futures has not been interest rate-dependent Rising interest rates offer CTAs the potential to earn returns through short positions in fixed income and also to earn higher interest income on cash positions. However, there is no assurance the investment objective will be achieved or maintained. Given their low correlation to bonds and other traditional asset classes, along with the relative non-dependence of their historical performance on interest-rate regimes, managed futures offer investors an interesting alternative in today s environment 11
INVESTING IN MANAGED FUTURES LIQUIDITY AND TRANSPARENCY NO DIRECTIONAL BIAS DIVERSIFICATION Managed futures are subject to liquidity risk. Investments in illiquid securities or derivative instruments may lead to the risk of being unable to sell the security or derivative instrument or sell it at a reasonable price. Diversification does not ensure profit or prevent losses. 12
INVESTING IN MANAGED FUTURES LIQUIDITY AND TRANSPARENCY Access to opportunities in a broad range of global liquid markets CAD Canadian Dollar UKX FTSE 100 SX5E Euro Stoxx SMI Swiss Mkt Idx DAX German Stk Indx PD Palladium BZ Brent Crude CL Crude Light NYMEX Natural Gas RBOB Gasoline WTI Crude Oil AL Aluminum HG Copper PA Palladium INMEX Mxn Stock Ex MXN Mexican Peso HE Lean Hogs LE Live Cattle ZC Corn ZS Soybeans ZW Wheat SI Silver USD US Dollar SPX S&P 500 NQ Nasdaq DJIA Dow Jones EMD Midcap 400 UB Ultra T-Bond ZT 2-Yr US Treasury ZF 5-Yr US Treasury ZN 10-Yr US Treasury ZN 30-Yr US Treasury C Coffee GBP British Pound EUR Euro GE Eurodollar CHF Swiss Franc HKD Hong Kong Dollar JPY Japanese Yen NKY Nikkei 225 TPX Tokyo Stock Ex BJPN Bank of J Sov. Bond JGB10 Japanese 10-Yr SB Sugar IBOV Brazil Stock Ex BRL Brazilian Real KEY Agricultural commodities PD Palladium Currencies ASX Australian Ex SI Silver GC Gold GC Gold JSE So. African Ex Energy Equity indices AUD Australian Dollar Interest rates Metals For illustrative purposes only. 13
INVESTING IN MANAGED FUTURES LIQUIDITY AND TRANSPARENCY TRADITIONAL VERSUS ALTERNATIVE INVESTMENTS TRADITIONAL STOCKS BONDS LONG ONLY STOCKS + BONDS CONSTRAINED MARKET DIRECTION SENSITIVE COMMODITIES ALTERNATIVES STOCKS BONDS CURRENCIES LONG + SHORT A BROAD RANGE OF ASSET CLASSES UNCONSTRAINED MARKET DIRECTION AGNOSTIC For illustrative purposes only. 14
INVESTING IN MANAGED FUTURES No Directional Bias Worst Historical Losses Among Asset Classes January 1998 December 2016 Compound ROR (A) Max Drawdown Standard Deviation (A) 40% 20% 0% -20% -40% -60% -80% -100% Barclays Aggregate Bond Index Bonds Barclay BTOP50 Index Managed Futures HFRX Global Hedge Fund Index (HFR98) Hedge Funds S&P 500 Total Return Index Equities DJ US Real Estate TR USD Real Estate S&P GSCI Total Return Long/Short Equity The above chart demonstrates the past performance differences in the indices of various asset classes and is not intended to represent any Equinox Funds. Each asset class has its own set of investment characteristics and risks and investors should consider these risks carefully prior to making any investment decisions. Displayed time periods in this chart have the benefit of hindsight and there is no assurance the performance will behave the same There is no guarantee that any investment strategy will way achieve in the future. its objectives, The indices generate shown are profits for informational avoid losses. purposes Past results only and do are not not guarantee reflective future of any investment. results. Definitions There of Terms is a risk and of Indices loss. can You be can found lose money in As any it is investment not possible program. to invest in the indices, the data shown does not reflect or compare features of an actual 15 on page 28. investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features.
INVESTING IN MANAGED FUTURES No Directional Bias Performance of Managed Futures During Equity Declines Equity declines of at least 5% per month 2000 2016 Equities Managed Futures 10% 5% 0% -5% -10% -15% -20% Equities are represented by the S&P 500 Total Return Index. Managed Futures are represented by the Barclay BTOP50 Index. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Source: PerTrac Financial Solutions. The selected periods are used for illustrative purposes only and may not correspond with the precise starting and ending dates surrounding any particular period of crisis, real or perceived. Each of these asset classes has its own set of investment characteristics and risks, and investors should consider these risks carefully prior to making any investments. 16
INVESTING IN MANAGED FUTURES No Directional Bias Performance of Managed Futures During Positive Equity Markets Equity returns of at least 5% per month 2000 2016 Equities Managed Futures 15% 10% 5% 0% -5% -10% Equities are represented by the S&P 500 Total Return Index. Managed Futures are represented by the Barclay BTOP50 Index. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Source: PerTrac Financial Solutions. The selected periods are used for illustrative purposes only and may not correspond with the precise starting and ending dates surrounding any particular period of crisis, real or perceived. Each of these asset classes has its own set of investment characteristics and risks, and investors should consider these risks carefully prior to making any investments. 17
INVESTING IN MANAGED FUTURES Diversification Historical Correlation of Various Asset Classes to Managed Futures January 2000 December 2016 1.00 Correlation Coefficient 0.80 0.60 0.40 0.20 0.00-0.20-0.40 Currency Equities Currency Equities Int'l Equities REITs Long-Only CMDTY Cash Equity L/S Hedge Funds Bonds Managed Futures -0.12-0.17-0.12-0.17-0.05-0.02 0.04 0.08 0.08 0.21 0.25 1.00 The ICE Futures US Dollar Index (USDX ) S&P 500 Total Return Index MSCI EAFE Index Dow Jones REIT Composite Index SM HFRX Equity Hedge Index 3-Month T-Bill Rate S&P GSCI Total Return Index HFRX Global Hedge Fund Index Barclays Capital US Aggregate Bond Index Barclays BTOP50 Index * 18
INVESTING IN MANAGED FUTURES Diversification Managed Futures volatility has decreased January 2000 December 2016 Barclay BTOP50 Index S&P 500 Total Return Index S&P GSCI Total Return Annualized standard deviation 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Illustration based on rolling 12-month periods. Managed Futures are represented by the Barclay BTOP50 Index. Equities are represented by the S&P 500 Total Return Index. Long-only Commodities are represented by the S&P GSCI Total Return Index. Source: PerTrac Financial Solutions. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. 19
INVESTING IN MANAGED FUTURES Diversification Growth of a $10,000 Investment in Managed Futures, Stocks, and Long-Only Commodities January 2000 January 2016 Managed Futures Equities Long-Only Commodities $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $21,167 $19,837 $8,727 $- Illustration based on rolling 12-month periods. Managed Futures are represented by the Barclay BTOP50 Index. Equities are represented by the S&P 500 Total Return Index. Long-only Commodities are represented by the S&P GSCI Total Return Index. Source: PerTrac Financial Solutions. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. 20
INVESTING IN MANAGED FUTURES Diversification Managed Futures Performance During Equity Drawdowns January 1987 December 2016 Managed Futures Equities 50% 9/00-9/02 Historical drawdowns in equity markets have been substantial Adding diversifying assets to a portfolio offers the potential to mitigate this effect Monthly Percentage (%) 40% 30% 20% 10% 0% -10% -20% -30% 9/87-11/87 8.46% -29.72% 6/90-10/90 7/98-8/98 13.79% 5.42% -14.69% -15.38% 38.97% 11/07-2/09 14.47% -40% -50% -44.73% -50.95% -60% Managed Futures are represented by the Barclay BTOP50 Index. Equities are represented by the S&P 500 Total Return Index. Long-only Commodities are represented by the S&P GSCI Total Return Index. Source: PerTrac Financial Solutions. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. 21
INVESTING IN MANAGED FUTURES Diversification Managed Futures may improve the characteristics of most traditional portfolios Portfolio Drawdown Analysis January 2000 December 2016 Managed Futures Equities 50% Equities, 40% Bonds, 10% Int l Equities (Rebalanced monthly) 0-0.1 40% Equities, 40% Bonds, 10% Int l Equities, 10% Managed Futures (Rebalanced monthly) -0.2-0.3-0.4-0.5-0.6 Managed Futures are represented by the Barclay BTOP50 Index. Equities are represented by the S&P 500 Total Return Index. International Equities are represented by the MSCI World Index. Bonds are represented by The Barclays Capital US Aggregate Bond Index. Source: PerTrac Financial Solutions. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. 22
INVESTING IN MANAGED FUTURES: A RECAP MANAGED FUTURES CTAs INVESTING IN MANAGED FUTURES Definitions of Terms and Indices can be found on page 24. Managed futures are subject to liquidity risk. Investments in illiquid securities or derivative instruments may lead to the risk of being unable to sell the security or derivative instrument or sell it at a reasonable price. Diversification does not ensure profit or prevent losses. 23
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EQUINOX FUNDS DEFINITIONS OF TERMS AND INDICES Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund s alpha. 1 Annualized Rate of Return is the geometric average return for a period greater than or equal to one year, expressed on an annual basis or as a return per year. Annualized Standard Deviation (Volatility) measures the degree of variation of monthly returns around the mean (average) return. The higher the volatility of the investment returns, the higher the annualized standard deviation will be. Bonds The Barclays Capital US Aggregate Bond Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS sectors. Correlation indicates both the strength and direction of the relationship between the independent and dependent variables. Values of r range from -1.0, a strong negative relationship, to +1.0, a strong positive relationship. When r=0, there is no relationship between variables x and y. Currency The ICE Futures US Dollar Index (USDX ) is a leading benchmark for the international value of the US dollar and the world s most widely recognized, publicly traded currency Index. A Drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity. Equities are a stock or any other security representing an ownership interest. Derivative Contract is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the underlying. Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages). There is no assurance that the a Fund s investment in a derivative instrument with leveraged exposure to certain investments and markets will enable the Fund to achieve its investment objective. Discretionary Trading is a trading approach that uses fundamental analysis of underlying economic factors. Diversified Trend-Following is a Trend-Following Strategy (Page 37) that encompasses all three horizons short, medium, and long-term. Equities The S&P500 Total Return Index is widely regarded as the best single gauge of the US equities market. This world-renowned Index includes 500 leading companies in leading industries of the US economy. Although the S&P500 focuses on the large cap segment of the market, with approximately 75% coverage of US equities, it is also an ideal proxy for the total market. Equity Long/Short The HFRX Equity Hedge Index is an index comprised of both long and short positions in primarily equity and equity derivative securities. A Futures Contract is a standardized contract between two parties to buy or sell a specified asset of standardized quality and quantity for a price agreed upon today (the futures price or strike price) with delivery and payment occurring at a specified date, the delivery date. Hedge Funds The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is composed of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. International Equities The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. 25
EQUINOX FUNDS DEFINITIONS OF TERMS AND INDICES Long Only Commodities The S&P GSCI Total Return Index is widely recognized as a leading measure of general price movements and inflation in the world economy. It provides investors with a reliable and publicly available benchmark for investment performance in the commodity markets, and is designed to be a tradable index. 1 Managed Futures The Barclay BTOP50 Index ( BTOP50 ) seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. Market Agnostic investing seeks to earn profits by taking long or short positions depending on whether markets or instruments are trending up or down, respectively. This is in contrast to directional (or long only) investing, which is generally constrained to holding only long positions. Notional Leverage refers to the total value of a leveraged position s assets. An Option is a contract that gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller incurs a corresponding obligation to fulfill the transaction that is to sell or buy if the owner elects to "exercise" the option prior to expiration. The buyer pays a premium to the seller for this right. An option that conveys to the owner the right to buy something at a specific price is referred to as a call; an option that conveys the right of the owner to sell something at a specific price is referred to as a put. Both are commonly traded, but for clarity, the call option is more frequently discussed. REITS The Dow Jones REIT Composite Index SM aims to represent all publicly traded real estate investment trusts (REITs) included in the Dow Jones Indices US stock universe and covers approximately 100% of the total REIT market value Risk-Adjusted Return is a concept that refines an investment s return by measuring how much risk is involved in producing that return, generally expressed as a number or a rating. Spread Trading Spread Traders simultaneously purchase of one security and sell a related security. Spread trades are usually executed with options or futures contracts, but other securities are sometimes used. They are executed to yield an overall net position whose value, called the spread, depends on the difference between the prices of the securities. Spread trades are executed to attempt to profit from the widening or narrowing of the spread, rather than from movement in the prices of the securities directly. Spreads are either bought or sold depending on whether the trade will profit from the widening or narrowing of the spread. Relative Value. Trend-Following is a strategy that seeks to capitalize on momentum or price trends across global asset classes by taking either long or short positions as a trend is underway. Price trends are created when investors are slow to act on new information or sell prematurely and hold on to losing investments to long. Price trends continue when investors continue to buy and investment that is going up in price or sell an investment that is going down in price. Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Worst Historical Loss is the measure of risk (also known as Maximum Drawdown) that illustrates the largest peak-to-valley decline, based on monthly rates of return, during a given time period. The Worst Historical Loss depicted in this presentation is not the maximum loss that can occur in an individual s managed account. There is no guarantee that managed futures or any particular investment will meet its intended objective; accordingly, investors could lose a substantial portion, or even all, of their investments. 26
Equinox Funds Sales Team 1.866.276.6010 equinoxfunds.com The material provided herein has been provided by Equinox Fund Management, LLC and is for informational purposes only. Equinox Fund Management, LLC is the adviser to one or more mutual funds distributed through Northern Lights Distributors, LLC member FINRA/SIPC. Northern Lights Distributors, LLC and Equinox Fund Management, LLC are not affiliated entities. 5124-NLD-02/15/2017 PRES-2-1116 27