Millennium Wave Advisors 3204 Beverly Drive Dallas, Texas 75205 [email protected]NOVEMBER 2012 Endgame: Global Crisis Presents Opportunities A Time for Global Macro Investing IN THIS ISSUE Endgame: Global Macro Matters More than Ever Why Global Macro? The Big Picture Matters What is Global Macro? Global Macro Performance During Crisis Periods Diversification in Times of Crisis Economics has always been called the dismal science. Writing about global economics has indeed been dire these past few years. The huge macroeconomic volatility we have lived through in the past several years since the Lehman Brothers bankruptcy has triggered crises. However, wherever there is crisis, there is opportunity. Today we are going to look at global macro investing, one of my favorite investment strategies, and the opportunities it presents. I’ll also introduce you to a mutual fund launched in 2011 by my friends at Altegris Advisors that I believe approaches the problem of how to navigate the uncertain global economic outlook and greater volatility. Please note this letter is not personal investment advice. Only you and your advisors can decide the appropriateness of any individual investment. That being said, I am pleased to tell you about this actively managed mutual fund which doesn’t require investors to be “accredited” to access a professionally managed “global macro” portfolio. Let’s jump right in… By John Mauldin
Endgame: Global Macro Matters More than EverWhy Global Macro? The Big Picture Matters
What is Global Macro?Global Macro Performance During Crisis Periods
Diversification in Times of Crisis
Economics has always been called the dismal science. Writing about global economics has indeed been dire these past few years. The huge macroeconomic volatility we have lived through in the past several years since the Lehman Brothers bankruptcy has triggered crises. However, wherever there is crisis, there is opportunity. Today we are going to look at global macro investing, one of my favorite investment strategies, and the opportunities it presents. I’ll also introduce you to a mutual fund launched in 2011 by my friends at Altegris Advisors that I believe approaches the
problem of how to navigate the uncertain global economic outlook and greater volatility.
Please note this letter is not personal investment advice. Only you and your advisors can decide the appropriateness of any individual investment. That being said, I am pleased to tell you about this actively managed mutual fund which doesn’t require investors to be “accredited” to access a professionally managed “global macro” portfolio.
Let’s jump right in…
By John Mauldin
2 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
Endgame: Global Macro Matters More than EverGlobal macro is a strategy that is dear to my heart. For the past few years I have written about the changing global economy and how investors can profit from the changes we would see in the world around us.
In 2004 I wrote a book titled Bull’s Eye Investing. I argued that the era of buying and holding stocks was gone — and would not return for some time. (Indeed, I also argued the same in my first book in 1999.) The key to successful investing would be knowing where the markets and economy were going, not where they have been, and focusing on absolute returns. I argued that the US was entering a “muddle through economy”. The economy would indeed be growing, but the growth would be below the long-term trend for the rest of the decade. The muddle through economy would be more susceptible to recession. It would be an economy that would move forward burdened with the heavy baggage of old problems while facing the strong headwinds of new challenges. The description of the world was accurate then, and, in my opinion, it is even more accurate now.
In 2010 I wrote another book called Endgame, which described the post-Lehman Brothers crisis. I described the massive household deleveraging and historic shift of private debt onto government balance sheets now underway all over the world and how this represents the end of a sixty-year global Debt Super-cycle. I argued that we have now entered the Endgame, a time when bankrupt-cies and defaults will not be of households and companies, but of governments.
In Endgame I argued that the Great Financial Crisis is not a typical business cycle recession. It is a balance sheet recession. It is the end of the Debt Super-cycle that started more than 60 years ago. The recovery time in much of the developed world is going to be measured not in months but in years, perhaps decades for some. It will be a much more volatile economy with more frequent recessions. For some countries, this will be very deflationary; for others, not so much. And for some, the risk of high inflation is very real.
Given my well known views on global macroeconomic vola-tility and crises, I want to introduce you to global macro, a
strategy that seeks to profit from anticipating the impact of global macroeconomic events across asset classes and markets during both bull and bear markets.
Why Global Macro? The big picture mattersFor many years equity investors bought or sold stocks and corporate bonds based on their views of individual compa-nies. They didn’t really care what happened to the US or global economy. This type of investing worked very well for a select few the likes of Warren Buffett, but it hasn’t worked as well for many investors with time frames that are less than decades long or who don’t have the financial ability to weather significant downturns.
One of the greatest hedge fund managers of the past two decades recently admitted the importance of under-standing global macroeconomics and knowing what is happening from a top down perspective. Let’s see what David Einhorn from Greenlight has to say:
“At the May 2005 Ira Sohn Investment Research Conference in New York, I recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky than its peers and would hold-up better in a down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about forty percent of his investment, instead of the seventy percent that the homebuilding sector lost.”1
Einhorn could not be more right. Buying cheap companies in a dreadful sector, or betting on cyclical stocks before a recession, poses a great chance of incurring losses no matter how good the stock picking.
1 Value Investing Congress 2009, Speech by David Einhorn
NOVEMBER 2012 3
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Figure 1: Macro Forces Have Played a Dominant Role in Equity Returns % of S&P 500 Returns Explained by Macro vs. Micro Factors | 1969 – 2011
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. Although this performance attribution is true for the past there is no guarantee that these relationships will persist in the future. Source: Welton Investment Corporation.
When you buy a publicly traded stock, the returns on the stock can come from some combination of the micro factors of the specific company and the macro factors affecting whether the market goes up or down. Many inves-tors have become aware that many studies in recent years have concluded that the macro factors may at times impact the direction of any particular stock much more than the micro factors. This is where global macro comes in.
One of the beautiful things about economics is that a simple chart or graph can say a lot more than a lot of words. The following chart [FIGURE 1] shows exactly why macro is so important. You can see that over time macro forces have become the dominant factor in equity returns.
4 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
Not only has macro become more important in explaining stock returns, but it is harder to pick stocks for their own sake. The following chart [FIGURE 2] shows that almost all stocks have become increasingly correlated, meaning more and more stocks are following similar returns paths. With the correlation among stocks being near all-time high levels, the importance of top-down strategy has become increasingly important. You can’t simply go out and blindly buy any given stock and hope it will do well. If you don’t have a view on the global economy, buying an individual stock likely won’t get you very far. Of course, correlations by nature will change and these relationships may not hold true in the future. There may come a day when correlations fall and stock selection is in favor again.
What is Global Macro? Global macro is a top-down global approach to investing. The global macro strategy has one of the widest mandates of all alternative investment strategies. Global macro is an opportunistic investment strategy that allows managers to scour the whole world and look at all asset classes to find attractive investment opportunities. Managers can find opportunities in equities, fixed income, currency, and commodities futures markets in any country in the world. Using macroeconomic data as well as in-depth knowledge of the geopolitical landscape, managers seek to predict what investments and trades are most likely to profit from changes in prices in oil, currencies, bonds and equity indices.
Figure 2: Rising Stock Correlations: Correlations vs. US Large Stocks 1991–2011
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. 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. Correlation is a statistical measure of how returns of two strategies move together over time; a correlation of 1 indicates the two returns move perfectly together, 0 indicates movements are random, and -1 indicates opposite movements. INDICIES: US Large Stocks: S&P 500; US Small Stocks: Russell 2000 Index; International Stocks: MSCI EAFE TR USD Index; Emerging Stocks: MSCI Emerging Markets USD Index; US Value Stocks: Russell 1000 Value Index; US Growth Stocks: Russell 1000 Growth Index. Source: Factor Advisors “Market Insights” January 6, 2012.
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The macro part of the global macro name comes from the use of macroeconomic principles to identify opportunities in asset prices, while the global part indicates that oppor-tunities can be found anywhere in the world.
Typically, global macro is a strategy that tries to make money by trading large liquid markets like currencies, bonds or equity indices. Think of global macro managers as professionals who are not tied to a specific investment strategy, for example buying stocks, but rather can choose to put their money in whatever asset class or strategy is best in their opinion (and that is a critical observation!) at any point in time. Portfolio managers in global macro funds typically worry about liquidity risk and only trade in deep, liquid markets. However, world events may create market conditions that may make some or all markets and invest-ment instruments illiquid for an indeterminable time.
The following chart from Altegris Advisors [FIGURE 3] high-lights how global macro managers can choose to go long or short any variety of markets in any geography. This gives you some idea of the inherent flexibility in the global macro strategy.
Investors who buy and sell stocks analyze company-specific information and look through their income state-ments, cash flow statements and balance sheets. Global macro managers on the other hand analyze countries by looking at a wide variety of things:
• Country-specific economic data such as interest rates, levels of unemployment, spending rates, monetary flows, fiscal policy, and monetary policy
• The impact of central bank decision making
• The impact of the macroeconomic landscape on financial market prices
• The effect of geopolitical events on global growth
For much of the past few years I have written about the many factors that drive currencies, commodities, stocks and bonds. If you’ve read my letters and read Endgame, you will have a good idea of just how complex the world is and how broad of a canvas macro managers have to cover.
Figure 3: Flexible Investment Opportunities
Not all managers trade across all asset classes. Short: selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, covering the short position at a higher price may result in a loss. Positions in shorted securities and derivatives are speculative and more risky than long positions because the cost of the replacement security or derivative is unknown. Therefore, the potential loss on an uncovered short is unlimited, whereas the potential loss on a long position is limited to the original purchase price. Long: buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price. Source: Altegris.
LONG OR SHORT MULTIPLE ASSET CLASSES GLOBAL MARKETS
6 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
Global Macro Performance During Crisis PeriodsOne of the great things about alternative investments is the potential benefit of diversification. The benefit of diversifi-cation is that it may cushion the blow when any one asset class, industry or fund manager goes through a bad period. Diversification allows you the potential to capture some of the peaks while possibly smoothing many of the troughs. While individual asset classes experience ups and downs, a diversified portfolio may iron out the extreme highs and lows to provide the potential for smoother upward growth. If equities are suffering, bonds might be doing well. If one investment is underperforming, another might be going up. Also, these managers have the ability to short, which
means they can profit from falling prices, though run the risk of loss if prices increase. Of course, diversification does not ensure profit nor protect against loss in a positive or declining market.
An example of the value that can be added by having exposure to the global macro asset class in your portfolio comes from the following chart [FIGURE 4]. The chart shows the Barclay Global Macro Index for the past fifteen years. As you can see, despite two recessions and enormous volatility in the S&P, the Barclay Global Macro Index had much higher returns and lower volatility, with a standard deviation of 6% versus 16% for that of the S&P.
Figure 4: Value of an initial $1,000 investment January 1997–September 2012
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. The total return of an investment is only one measure of performance. Performance should never be the sole consideration when making an investment decision. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. The performance shown reflects the performance of a global macro index, and not the performance of the Altegris Macro Strategy Fund or any other fund. The actual performance of the Altegris Macro Strategy Fund is set out fully on page 11 of this letter, along with information regarding associated fees and expenses. 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. Date range based on common period of available data. Standard deviation is a statistical measure of how consistent returns are over time; a lower standard deviation indicates historically less volatility. INDICES: US Stocks: S&P 500 TR Index — total return version of S&P 500 index, weighted towards large capitalizations; Global Macro: Barclay Global Macro Index — ~175 global macro programs by monthly values as reported to Barclay. Source: Altegris.
You can also see the strong performance over the long term of a major global macro index through the following chart [FIGURE 5]. The global macro strategy has done well over various time periods, but the further out you go the better the performance has historically been relative to other asset classes. Of course, as with any investment strategy, global macro will also have losing periods.
Diversification in Times of CrisisIn a previous letter, I used indices to show how managed futures strategies had been successful at particular points in time and behaved in an uncorrelated way relative to traditional stock and bond portfolios. Indices representing global macro strategies’ historical risk-adjusted returns illustrate how this strategy too has the potential to add
Figure 5: Annualized Returns Over Various Time Periods As of September 2012
It is important to note that each of these asset classes is subject to various risks that affect their performance in different market cycles. Equity securities are subject to the risk of decline due to adverse news or general economic decline; bonds are subject to credit risk and interest rate risk; when interest rates rise, bond prices fall; international stocks are often more risky than domestic stocks due to adverse economic, social and political factors; commodities are affected by adverse weather, geopolitical, and regulatory conditions; global macro is subject to foreign investment risks, market risk, and volatility due to speculative trading and use of leverage.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. The performance shown reflects the performance of a global macro index, and not the performance of the Altegris Macro Strategy Fund or any other fund. The actual performance of the Altegris Macro Strategy Fund is set out fully on page 11 of this letter, along with information regarding associated fees and expenses. 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. INDICES: US Stocks: S&P 500 TR Index; US Bonds: Barclays US Aggregate Bonds Index; International Stocks: MSCI EAFE Net Index USD; Commodities: S&P GSCI Total Return Index; Global Macro: Barclay Global Macro Index. Source: Altegris.
Annualized Return: October 2009 – September 2012
Annualized Return: October 2007 – September 2012Annualized Return: October 2002 – September 2012
8 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
value to a portfolio during a drawdown and help investors accumulate more in the long run. By a drawdown, I mean a strategy’s losing period from the very highest level of price, or peak, to the lowest level, or valley.
Diversification doesn’t mean chasing high returns through many strategies. It is essentially a risk management tool that is intended (with varying degrees of success over time) to help preserve wealth. Think of diversification this way: the less that any single blow up or drawdown in any given strategy can affect your portfolio, the more diversified you
are. By this standard, adding global macro strategies to your portfolio has the potential to provide increased returns and lower volatility in bad times. Of course, as we all know there are no guarantees that an investment will always achieve its objectives, generate profits or avoid losses. As I keep writing, I continue to be reminded that past perfor-mance is not always an indicator of future results.
The following chart [FIGURE 6] of a well-known index shows managed futures and global macro together. The index is called the HFRI Macro (Total) Index. It shows that this
Figure 6: Crisis Period Performance
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. The performance shown reflects the performance of various market indices, and not the performance of the Altegris Macro Strategy Fund or any other fund. The actual performance of the Altegris Macro Strategy Fund is set out fully on page 11 of this letter, along with information regarding associated fees and expenses. 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. INDICES: US Stocks: S&P 500 Total Return Index; International Stocks: MSCI EAFE Net Index USD; Hedge Funds: HFRI Fund Weighted Composite Index; Global Macro + Managed Futures: HFRI Macro (Total) Index. Source: Altegris.
US Stocks 8.50% 15.09% 8.01% 15.14% 1.05% 18.97% 30.18% 13.20%
International Stocks 10.64% 19.25% 8.20% 18.47% -5.24% 23.32% 13.75% 19.05%
Performance over various time periods | As of September 2012
NOVEMBER 2012 9
index has outperformed global stocks as well as the HFRI Fund Weighted Composite Index, a proxy for the hedge fund universe, during a period of very volatile stock market returns. Despite the tech bust and the global financial crisis, the global macro / managed futures index did a very good job of providing lower volatility and higher returns.
One reason some global macro indices have done well in crises is that global macro strategies are attuned to crises. Every investment manager operates differently based on their investment mandate, but typically risk managers use stress tests and scenario analyses to stress the portfolio. Current positions are looked at through the lens of previous crises: for example, the Russian default in 1998, Mexican Peso Crisis in 1994, the 2000 Tech Wreck, etc. The data is available for how different asset classes performed. For global macro, which is predicated on using macro events, including crises, to form their investment thesis, these tests can be hugely useful.
One of the key potential diversification benefits that may be provided by global macro can be expressed in a different way. If you look at the 12-month rolling correlations of US stocks and global macro during bear markets [FIGURE 7], you can see that during times of crisis, correlations to global markets were the lowest. That is a real benefit of diversification. Past perfor-mance is not indicative of future results. And as I noted above, correlations can change over time, so if I update this piece in 2017 (as an example), the chart might (will!) look different.
But an allocation to global macro isn’t only for periods of crisis. A long-term allocation to global macro has histori-cally produced positive relative performance in good times as well as in market “tails” (market crisis periods) providing potential portfolio diversification. When added to a port-folio where equities are the dominant risk, global macro can increase returns and dampen portfolio volatility. Of course, there’s no guarantee that any investment will achieve its objectives, generate profits, or avoid losses.
Figure 7: 12-month Rolling Correlation of US Stocks and Global Macro January 1997 – September 2012
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. There is no guarantee that any investment product will achieve its objectives, generate profits or avoid losses. The performance shown reflects performance of a global macro index and not the performance of the Altegris Macro Strategy Fund or any other fund. 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. Correlation is a statistical measure of how returns of two strategies move together over time; a correlation of 1 indicates the two returns move perfectly together, 0 indicates movements are random, and -1 indicates opposite movements. INDICIES: US Stocks: S&P 500; Global Macro: Barclay Global Macro Index. Source: Altegris.
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John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), a FINRA registered broker-dealer. MWS is also a Commodity Pool Operator and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Intro-ducing Broker. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other non-affiliated firms such as Altegris, Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisory services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend and/or market, they may only recommend or market products with which they have been able to negotiate fee arrangements.
Opinions expressed in this report may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC may be invested in the Altegris Macro Strategy Fund (MCRAX). Millennium Wave Securities, LLC provides marketing related services to the fund’s advisor and distributor and is paid by the advisor.
More about Altegris Macro Strategy FundThe adviser of the Altegris Macro Strategy Fund (Altegris Advisors) conducts research around the world to identify what it believes are the best of breed* global macro managers available for investment by the Fund. The Fund is designed to potentially achieve capital appreciation by investing in global macro strategies.
In this letter, I won’t specifically name or promote to you the managers currently accessed through the Fund’s portfolio investments. But suffice it to say, the managers that this Fund accesses are good, in my opinion, and they have what I view as time tested track records, some of which go back as far as 10 years, and in my view are among the leaders in the field of global macro investing.
You can go to www.altegris.com/mcrax for additional infor-mation about these managers and the Fund.
Word to the WiseA final note of warning. No investment only goes up, and all strategies do better in some environments and worse in others. So when can the global macro strategy be expected to underperform? Global macro may underperform when the world is in an extremely low volatility environment and there is little price movement. Also, the strategy struggles when
governments intervene unexpectedly and cause extreme, unanticipated market movements. In environments where markets respond to events other than fundamentals, it is difficult for managers to be appropriately positioned to provide diversification and potentially strong returns.
Parting ThoughtsWhy am I pounding on the table about global macro and the Altegris Macro Strategy Fund? I don’t usually recommend investment vehicles so strongly, but I think the possibility for outperformance, lower volatility and positive skew can, over time, create significant risk-adjusted return potential for investors. I hope you will give serious thought to allo-cating even a small part of your portfolio to this strategy. I will certainly be doing so myself. I encourage you to go to www.altegris.com/mcrax to learn more about the Fund and the overall global macro strategy. As always, please read the prospectus carefully.
Your always looking for a better way analyst,
John Mauldin
*Altegris defines “best of breed” as managers which in their opinion have demonstrated success in terms of sustained investment edge, effective risk management processes and established operations infrastructure.
NOVEMBER 2012 11
Altegris Macro Strategy Fund Performance Returns As of 09/30/2012
Since Q3 2012 YTD 2012 1-year 5-year Inception*
Class A (NAV) -0.21% -3.74% -5.27% NA -3.55%
Class A (max load)** -5.92% -9.24% -10.68% NA -7.75%
Class I (NAV) 0.00% -3.53% -4.97% NA -3.25%
Class N (NAV) -0.11% -3.74% -5.27% NA -3.55%
BofA Merrill Lynch 3 Month T-Bill Index 0.03% 0.07% 0.07% NA 0.07%
10/20/11-09/30/12
Class C (NAV) -0.42% -4.25% NA NA -4.82%
* The inception date of Class A, N and I was 06/01/11. The inception date of Class C was 10/20/11. Performance longer than one year is annualized.
** The maximum sales charge (load) for Class A is 5.75%. Class A Share investors may be eligible for a reduction in sales charges. The total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 4.75% for Class A, 5.50% for Class C, 4.50% for Class I, and 4.75% for Class N.The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. 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 toll-free (888) 524-9441.The Fund’s investment advisor has contractually agreed to reduce its fees and/or reimburse expenses of the fund, at least until October 31, 2013, to ensure that the net annual fund operating expenses will not exceed 1.95% for Class A, 2.70% for Class C, 1.70% for Class I, and 1.95% for Class N, subject to possible recoupment from the Fund in future years. Please review the Fund’s Prospectus for more detail on the expense waiver. Results shown reflect the waiver, without which the results could have been lower. This agreement may be terminated by the Fund’s Board of Trustees on 60 days written notice to the adviser.
12 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
MUTUAL FUND RISK
Investors should carefully consider the investment objectives, risks, charges and expenses of the Altegris Macro Strategy Fund. This and other important information about the Fund is contained in the Prospectus, which can be obtained by calling (888) 524-9441. The Prospectus should be read carefully before investing. The Altegris Macro Strategy Fund is distributed by Northern Lights Distributors, LLC member FINRA. Altegris Advisors, J.P. Morgan Investment Management 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.
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IMPORTANT CONSIDERATIONS
Alternative investments involve a high degree of risk and can be illiquid due to restrictions on transfer and lack of a secondary trading market. They can be highly leveraged, speculative and volatile, and an investor could lose all or a substantial amount of an investment. Alternative investments may lack transparency as to share price, valuation and portfolio holdings. Complex tax structures often result in delayed tax reporting. Alternative investment managers typically exercise broad investment discretion and may apply similar strategies across multiple investment vehicles, resulting in less diversification. Trading may occur outside the United States which may pose greater risks than trading on U.S. exchanges and in U.S. markets. There are substantial risks and conflicts of interests associated with managed futures and commodities accounts, and you should only invest risk capital. The success of an investment is dependent upon the ability of a commodity trading advisor (CTA) to identify profitable investment opportunities and successfully trade. The identification of attractive trading opportunities is difficult, requires skill, and involves a significant degree of uncertainty. CTAs have total trading authority, and the use of a single CTA could mean a lack of diversification and higher risk. The high degree of leverage often obtainable in commodity trading can work against you as well as for you, and can lead to large losses as well as gains. Returns generated from a CTA’s trading, if any, may not adequately compensate you for the business and financial risks you assume.
GLOSSARY
Correlation. A statistical measure of how two securities move in relation to each other.
Long. Buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price.
Short. Selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, covering the short position at a higher price may result in a loss.
Standard Deviation. A statistical measure of how consistent returns are over time; a lower standard deviation indicates historically less volatility.
14 ENDGAME: GLOBAL CRISIS PRESENTS OPPORTUNITIES — A TIME FOR GLOBAL MACRO INVESTING
INDEX DEFINITIONS
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.
Commodities. The S&P GSCI Total Return Index measures a fully collateralized commodity futures investment. Currently, the S&P GSCI includes 24 commodity nearby futures contracts.
Emerging Stocks. The MSCI Emerging Markets Daily Gross USD Index, a sub-index of the MSCI Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Stocks from a nation that is progressing toward becoming advanced. Investments in emerging markets come with much greater risk due to political instability, domestic infrastructure problems, currency volatility and limited equity opportunities (large companies may still be “state-run” or private) but also have the potential for high returns.
Global Macro. The Barclay Global Macro Index tracks the performance of approximately 175 global macro funds. Only funds that provide net returns are included and ranked by ending monthly values.
Global Macro + Managed Futures. The HFRI Macro (Total) Index is composed of managers who trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods.
Hedge Funds. The HFRI Fund Weighted Composite Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies, which is currently more than 2000 constituents; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage.
International Stocks. The MSCI EAFE Index is a capitalization-weighted index widely accepted as a benchmark of non-US stocks compiled by Morgan Stanley. It represents an aggregate of 21 individual country indices that collectively represent many of the major markets of the world.
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 1990.
US Bonds. The Barclays Capital U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denomi-nated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. These specific indices include the Government/Credit Index, Government Index, Treasury Index, Agency Index, and Credit Index.
US Growth Stocks. The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity universe. Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.
US Small Stocks. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. U.S. compa-nies with a market capitalization value between $300M - $2 billion.
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, 1988. 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.
US Value Stocks. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. A stock that tends to trade at a lower price relative to it’s fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
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Representative Index Characteristics Key Risks
Commodities S&P GSCI Total Return Index
24 principal physical commodities that are the subject of active, liquid futures markets
Market risk. Prices may decline.Derivative risk. May be subject to higher volatility.Leverage risk. Volatility and risk of loss may magnify with use of leverage.
Emerging Stocks
MSCI Emerging Markets Daily Gross USD Index
Stocks from nations progressing toward becoming advanced
Market risk. Prices may decline.Country / regional risk. World events may adversely affect values.Currency risk. Unfavorable exchange rates may occur.
Global Macro Barclay Global Macro Index
~175 global macro programs by monthly values as reported to Barclay
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.
Global Macro + Managed Futures
HFRI Macro (Total) Index
Variety of strategies that employ both discretionary and systematic analysis
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.
Hedge Funds HFRI Fund Weighted Composite Index
Variety of hedge fund strategies with currently more than 2,000 constituents
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.
International Stocks
MSCI EAFE Index 1,000+ stocks from 20+ developed markets in Europe and the Pacific Rim
Stock market risk. Stock prices may declineCountry / regional risk. World events may adversely affect values.Currency risk. Unfavorable exchange rates may occur.
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 Bonds Barclays Capital US Aggregate Bond Index
Wide spectrum of taxable, investment-grade US fixed income
Interest rate risk. Bond prices will decline if rates rise.Credit risk. Bond issuer may not pay.Income risk. Income may decline.
US Growth Stocks
Russell 1000 Growth Index
Large-cap growth segment of the US equity universe
Market risk. Prices may decline.Country / regional risk. World events may adversely affect values.
US Small Stocks Russell 2000 Index Small-cap ($300M – $2B market cap) segment of the US equity universe
Market risk. Prices may decline.Country / regional risk. World events may adversely affect values.
US Stocks S&P 500 Total Return (TR) Index
500 US stocksWeighted towards large capitalizations
Stock market risk. Stock prices may decline.Country / regional risk. World events may adversely affect values.
US Value Stocks Russell 1000 Value Index
Large-cap value segment of the US equity universe
Market risk. Prices may decline.Country / regional risk. World events may adversely affect values.
