Principle Capital Management LLC : Principle Commodity Futures Fund

Summary

The Principle Commodity Futures Program is a discretionary strategy combining both fundamentals analysis and technical analysis. The investment strategy’s objective is to generate consistent returns by capturing inefficiency in energy commodity markets. The strategy will focus on trading opportunities in natural gas, crude oil, and refined products.

Investment Strategy

Our investment strategy starts with intensive fundamental research, collecting and analyzing historical data of production and consumption of each commodity and factors that affect the supply and demand of each commodity. We use statistical programs and other proprietary models to identify investment opportunities that arise from the imbalance between supply and demand. We make discretionary investment decisions on the basis of our judgments on the output of the proprietary models. We also employ a combination of top-down and bottom-up fundamental analysis. The top-down approach will use macro data to gauge underlying growth trends and forecast future supply and demand balance due to economic activities. The bottom-up analysis will collect data on individual pipelines, power plants and refineries to assess fundamental conditions in individual locations and aggregate them to generate the overall picture of supply and demand balance. We trade the following strategies: 1) Spreads - which involve holding simultaneous long and short futures; 2) Opportunistic trading - which generally involves purchasing options to create directional exposure.

Risk Management

Our risk management strategy covers four major areas: 1. Market risk: We manage risk by building a portfolio with trades with favorable risk-reward payoffs. We quantify the downside risks and measure risk by VaR and tail stress. We simulate, stress test and back-test to avoid damage from negative tail events, and limit risk through stop-loss and drawdown limits. 2. Liquidity risk: We only take positions in liquid markets and products. The duration of trades is typically within 6 to 12 months depending on products' liquidity. 3. Credit risk: All trades are futures and options listed on national futures exchanges to minimize credit risk. 4. Operational risk: We adopt leading practices in our internal operations.