covenant capital management of tennessee, llc

Transcription

DISCLOSURE DOCUMENT OF
COVENANT CAPITAL MANAGEMENT
OF TENNESSEE, LLC
COMMODITY TRADING ADVISOR
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE
COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT.
THE DELIVERY OF THIS DISCLOSURE DOCUMENT AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION IT CONTAINS IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE SHOWN BELOW.
The date of first intended use of this document is July 31, 2015.
RISK DISCLOSURE STATEMENT
THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE
SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER
SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL
CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE
SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE
FOLLOWING:
IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS
OF THE PREMIUM AND OF ALL TRANSACTION COSTS.
IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A
COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY
TRADING YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS
OR SECURITY DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT
WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE
MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY
YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL
MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR
POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE
PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND
YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE,
WHEN THE MARKET MAKES A ‘‘LIMIT MOVE.’’
THE PLACEMENT OF CONTINGENT
ADVISOR, SUCH AS A ‘‘STOP-LOSS’’
NECESSARILY LIMIT YOUR LOSSES
MARKET CONDITIONS MAY MAKE
ORDERS.
ORDERS BY YOU OR YOUR TRADING
OR ‘‘STOP-LIMIT’’ ORDER, WILL NOT
TO THE INTENDED AMOUNTS, SINCE
IT IMPOSSIBLE TO EXECUTE SUCH
A ‘‘SPREAD’’ POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ‘‘LONG’’ OR
‘‘SHORT’’ POSITION.
THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN
COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR
YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS
GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES
TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR
EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS,
AT PAGE 11, A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO
YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER
SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU
SHOULD THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND
COMMODITY INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT
PAGE 6.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR
MAY ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS.
TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES,
INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET
MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR
DIMINISHED PROTECTION. FURTHER, UNITED STATES REGULATORY
AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE
YOU TRADE YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR
PARTICULAR CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH
WHICH YOU INTEND TO TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS
AVAILABLE IN BOTH YOUR LOCAL AND OTHER RELEVANT JURISDICTIONS.
THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM
ACCEPTING FUNDS IN THE TRADING ADVISOR’S NAME FROM A CLIENT FOR
TRADING COMMODITY INTERESTS. YOU MUST PLACE ALL FUNDS FOR
TRADING IN THIS TRADING PROGRAM DIRECTLY WITH A FUTURES
COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER, AS
APPLICABLE.
TABLE OF CONTENTS
Page
Covenant Capital Management of Tennessee, LLC
1
Principals and Background
1
Original Program
2
Aggressive Program
3
Optimal Program
4
Long Commodity Program
5
Principal Risk Factors
6
Special Disclosure for Notionally-Funded Accounts
9
Cash Additions and Withdrawals
11
Options
11
Fees
11
Actual and Potential Conflicts of Interest
12
Administrative, Civil, or Criminal Actions
13
Privacy Policy
13
Past Trading Performance
13
Original Program-Customer Performance
15
Aggressive Program-Customer Performance
16
Long Commodity Program-Customer Performance
17
Optimal Program-Customer Performance
18
Covenant Capital Management of Tennessee, LLC
Covenant Capital Management of Tennessee, LLC which also does business as Covenant Capital
Management may be referred to in this document as “CCM”. CCM is a Limited Liability
Company organized June 1, 1999, originally existing under the laws of the state of Delaware as
Covenant Capital Management of Tennessee, LLC. It is registered to do business in the state of
Tennessee as Covenant Capital Management, LLC. CCM was reorganized in the state of
Tennessee on August 29, 2000. At this time it dissolved its organization in the state of
Delaware. Its principal business address and telephone are 3100 West End Avenue, Suite 1090,
Nashville, TN 37203, and (615) 678-6742. Brince Wilford, Scot Billington and Jonah Hescock
are the only principals of CCM. CCM is registered with the Commodity Futures Trading
Commission (CFTC) as a Commodity Trading Advisor (CTA) and became a member of the
National Futures Association (NFA) in such capacity on July 30, 1999. CCM became registered
with the CFTC as a Commodity Pool Operator (CPO) on July 30, 2013. This document will be
used beginning July 31, 2015 through July 31, 2016. No person is authorized by Covenant
Capital Management to give any information or to make any representation not contained herein.
CCM’s past trading performance can be found on pages 13-18 of this document.
Principals and Backgrounds
Brince Wilford is the Secretary and is a 45.05% equity holder of CCM. He is registered with the
CFTC as a principal and associated person of CCM. Mr. Wilford shares control of CCM with
his co-founder, Scot Billington (see below) and together they jointly lead the operations, trading,
research, and compliance functions of the company. Mr. Wilford and Mr. Billington codeveloped the trading models employed by CCM and are both actively involved in every aspect
of CCM’s business and trading. Prior to, and during the early years of forming CCM, Mr.
Wilford worked for Healthcare Realty Trust, Inc. in the Investments Department from August of
2002 through January of 2006 where his primary responsibilities included business development,
financial modeling, consulting and acquisitions work. Healthcare Realty Trust is a publicly
traded Real Estate Investment Trust (NYSE:HR). Mr. Wilford resigned from Healthcare Realty
in 2006 to focus full time on the advisory. He returned to Healthcare Realty in January of 2008
when he assumed the role of Senior Vice President of Investments until December of 2010 at
which time his affiliation with Healthcare Realty ended. Mr. Wilford is an equity partner in
Rubicon Equities, LLC a Delaware based company that invests in corporate real estate but does
not participate in the day to day operations of that company. Mr. Wilford currently manages all
CCM business activity at the home office in Nashville, TN and has been registered as a principal
and associated person of the advisor since co-founding the company on July 30, 1999.
Scot Billington is the Chief Manager and a 45.05% equity holder of CCM. Mr. Billington is
registered with the CFTC as a principal and associated person of CCM. Mr. Billington and Mr.
Wilford share control of CCM and they jointly lead the operations, trading, research, and
compliance functions of the company. Mr. Billington and Mr. Wilford co-developed the trading
systems that are employed by CCM. Mr. Billington is actively involved in every aspect of
CCM’s business and trading. Mr. Billington worked as an assistant trader for Bradford & Co.,
Incorporated, a Futures Commission Merchant (FCM) and division of J. C. Bradford & Co. from
July 1993 until May 1999 when he began forming CCM. At J.C. Bradford he was responsible
Page 1 of 17
for executing client orders, advising clients, and developing systems. Beginning in April of 2002,
Mr. Billington worked for Ronin Capital, an Option Trading Investment Company at the
Chicago Board Options Exchange where his main function was making markets in the OEX 100
Index options market. Mr. Billington was a member of the Chicago Board Options Exchange
and a Market Maker at Ronin Capital in OEX 100 Index options until January 4, 2005. Mr.
Billington has been a principal and associated person of the advisor since inception on July 30,
1999 and he became a branch office manager of the advisor at its branch office in Chicago, IL on
July 13, 2005.
Jonah Hescock is the Trading Director and Fund Manager for CCM. He has been registered with
the CFTC as an Associated Person of CCM since July 2, 2012 and a principal since June 16,
2015. Mr. Hescock directs the trading and fund management operations of CCM under the
supervision and direction of Brince Wilford and Scot Billington. In the furtherance of his
responsibilities, Mr. Hescock is directly supported by various trading and back office personnel
employed by CCM. In addition to his primary responsibilities Mr. Hescock plays a significant
role in the marketing and research efforts of CCM and he assists CCM’s Compliance Officer
with regulatory compliance and risk management on a regular basis.
Mr. Hescock began his tenure with CCM on May 1, 2012. Prior to that he was employed by
Healthcare Realty Trust, Inc., a publicly traded Real Estate Investment Trust, where he served as
an Investments Analyst. His responsibilities included developing financial models, conducting
investment analysis on acquisitions and proprietary developments as well as leading due
diligence efforts on acquisitions totaling over $350 million. Mr. Hescock began his employment
at Healthcare Realty Trust on June 1, 2010 and remained there until joining CCM in May of
2012. He holds a M.S. in Finance from Vanderbilt University, as well as a B.A. and B.S. in
Finance and Accounting from the University of Kentucky. He holds the Series 3 registration.
Mr. Billington and Mr. Wilford both spend a limited amount of time volunteering in consulting
roles or as board members for non-profit organizations and may continue to do so in the future.
Original Trading Program
CCM takes positions based on a long-term, technical, trend following system created by CCM.
Discretion is used only in extremely rare cases to interpret the existing rules of the system.
Technical analysis uses the theory that a study of the markets themselves will provide a means of
anticipating price changes. The system attempts to participate in long-term market trends. It
does not try to predict trends. The system does not try to predict when a trend will start, how
long it will last, or how high or low it will move. After a trend has occurred, CCM does not seek
to explain why a trend may have occurred or why it behaved as it did. The only prediction made
is that trends will continue to exist as a phenomenon of the market place.
CCM can only recognize a trend after some, most or all of it has already occurred. The system
identifies when a trend may be beginning and begins entering the market at that point. The same
technical analysis indicates when the trend may be ending, and signals to exit the market at that
point. Both entering and exiting of positions is done incrementally, at slightly different price
levels and possibly over an indeterminate period of time. The system is designed to minimize
Page 2 of 17
commissions and the number of trades per market when compared to other futures trading
systems. Stop losses will be placed in the market as soon as entries are made, and they will be
modified periodically as dictated by the trading model. A stop may, or may not necessarily be
changed from week to week. Initial trade risk is targeted to a percentage of the account’s total
value. The percentage risked is a dynamic variable that incorporates current levels of
retracement from the most recent all-time high value for the account. As profits accumulate in a
position, the model will allow risk in that position to increase significantly from the amount of
risk initially allocated to the trade. However, at a constant pre-determined level, CCM may use
options or may decrease the position size to reduce risk. Exits are generally executed on trailing
stops. Position size may be dramatically reduced to lower risk, but a position will not be exited
until the market hits the pre-determined trailing stop level. In rare occurrences in which large
gains in accumulate rapidly in a position and the statistical expectation for further gains is
depleted, CCM will exit positions on new highs. The program will also reduce exposure to given
markets on a regular basis in keeping with limitations placed on the total amount of risk carried
by all positions in the account. Aggregate open position risk is continuously monitored and the
model disallows total risk in the account to exceed pre-determined levels.
CCM trades a diverse portfolio of markets and market sectors including but not limited to,
metals, meats, grains, energies, softs, foreign currencies, domestic and foreign interest rates, and
domestic and foreign stock indices. By broadly diversifying across a wide array of markets,
CCM attempts to diminish the importance of any one position in the portfolio. Prospective
clients should be aware that CCM may trade markets on foreign exchanges and may trade
options as well as futures contracts. The individual positions are designed to be relatively small
and the stops are designed to be relatively wide to avoid multiple entries and exits that increase
the commission burden on an account. Larger initial risks per contract minimize the effects of
large gap moves through the stop levels as a percentage of the original risk. Clients should only
invest in this program if they have a minimum investment horizon of at least 3-5 years and
should expect annual drawdowns of at least 10-15% in this program. CCM targets maximum
drawdowns in the Original Program of 25%. However, we cannot and do not ensure that such a
target will not be dramatically exceeded. Clients should be aware that total losses may be much
larger than anticipated and may greatly exceed expectations. Please review the Risk Disclosure
Statement provided at the beginning of this Disclosure Document.
CCM conducts continuing research to improve its trading methodology and risk management
parameters. Markets may be added to or subtracted from the portfolio. CCM may make changes
to its investment strategies without notifying current investors. Prospective clients should be
aware that CCM may trade markets on foreign exchanges and may trade options as well as
futures contracts.
The Original Program began trading September 1, 1999 with both proprietary and client funds.
The minimum investment for the Original Program is $5,000,000.
Aggressive Program
This program will take the same positions as the Original Program; however, it will allocate a
larger amount of risk at trade inception and will allow for risk in a given account to accumulate
to a level approximately 20% higher than the maximum risk tolerated by the Original Program.
Page 3 of 17
This will result in considerably larger swings in account equity. This program has lower
minimum account sizes. Participants in this program must be prepared for larger drawdowns and
greater volatility than the Original Program. Annual drawdowns of greater than 20% from daily
peaks to valleys are expected and should be incorporated into a client’s decision to invest in the
Aggressive Program. Clients should only invest in this program if they have a minimum
investment horizon of at least 3-5 years.
CCM targets maximum drawdowns in the Aggressive Program of 30%. However, we cannot
ensure that such a target will not be dramatically exceeded. As always, clients should be aware
that total losses may be much larger than anticipated and may greatly exceed expectations.
Please review the Risk Disclosure Statement provided at the beginning of this Disclosure
Document.
Prospective clients should be aware that CCM may trade markets on foreign exchanges and may
trade options as well as futures contracts.
This program began trading January 15, 2004. The minimum investment for the Aggressive
Program is $3,000,000.
Optimal Program
The Optimal Program is designed to give an investor the highest return and risk adjusted
return. This program seeks volatility. This program should only be considered as component of
a “barbell” investment strategy, placing the majority of assets in “safe” investments and a small
minority in very aggressive investments. This program will take the same trading signals as the
Original Program; however, it will allocate much larger risk to each new trade taken. This will
result in extremely volatile swings in account equity. Participants in this program must be
prepared for vastly larger drawdowns and greater volatility of than either the Original Program or
Aggressive Program. Annual drawdowns of greater than 80% from daily peaks to valleys are
expected and should be incorporated into a client’s decision to invest in the Optimal Program.
Clients should only invest in this program if they have a minimum investment horizon of at least
3-5 years.
CCM does not limit or target maximum drawdowns in the Optimal Program. Clients should be
aware that drawdowns and volatility will be extreme with maximum drawdowns exceeding 90%.
Clients should be aware that total losses may be much larger than anticipated and may greatly
exceed expectations. Please review the Risk Disclosure Statement provided at the beginning of
this Disclosure Document.
Prospective clients should be aware that CCM may trade markets on foreign exchanges and may
trade options as well as futures contracts.
The Optimal Program is available for client participation and the minimum investment is
$500,000.
Page 4 of 17
This program is a Custom Program designed for a specific client to attempt to achieve specific
outcomes. Like all currently offered CCM programs, this program follows similar position entry
and exit parameters as CCM’s Original Program for the given market basket traded by this
program. The Long Commodity Program differs from the Original Program in trades taken, trade
size, and portfolio composition. This program only trades commodities and does not trade any
currency, stock index, or interest rates. This program takes only long signals and will take some
long signals not taken by the other programs.
This program began trading in March of 2009. As stated previously, the Long Commodity
Program is a Custom Program and is unavailable to new investment. The minimum investment
for any CCM Custom Program is $25 million.
Page 5 of 17
Principal Risk Factors
A prospective client interested in opening a managed account with CCM should carefully
consider the highly speculative nature of trading commodity interests and the possibility
that he may lose more than the amount of money initially deposited in his commodity
brokerage account.
CCM will lose money during periods without sustained market trends. Open trade profits will be
reduced, sometimes significantly or entirely, when markets change trend. If many of the markets
in the portfolio are not trending, losses will be substantial. If there are several significant
reversals of trend simultaneously, much of the profits generated from those trends may be lost.
Drawdowns of 10%-15% or more are not unusual. Additional risk factors covered below and
elsewhere in this document should be seriously considered before investing funds with Covenant
Capital Management. There can be no assurances made that CCM's methods will be
successful. Futures and forward trading is a highly speculative zero sum endeavor in
which there is an equal offsetting loss for every gain. After various commissions and fees
are paid, the trading of futures and forwards becomes a negative sum game in which the
losers lose more than the winners profit.
A client's account may incur certain risks relating to the initial investment of its assets. Due to
market conditions, CCM may take several days (or months) before a new account is fully
invested. A new account may enter markets that have already been in sustained trends;
therefore, incurring more initial risk than would have been taken had the account entered the
trade at the original signal.
Commodity contract prices can be highly volatile. Price movements may be influenced by
domestic or foreign factors, changes in supply and demand relationships, weather, trade policies
and programs, fiscal policies, monetary policies, political events, rates of inflation, currency
devaluation, and many other known or unknown factors. In addition governments from time to
time intervene, directly and indirectly, in certain markets. Such intervention is often intended to
influence price. A client is also subject to the risk of the failure of any of the exchanges on
which CCM trades or any of their clearinghouses. The client is also at risk of a bankruptcy or
failure of the FCM that holds the assets of the account. None of these factors can be controlled
by CCM, and no assurance can be given that CCM's advice will result in profitable trades for a
client or that a client will not incur substantial losses.
The low margin deposits required to trade commodities permit a high degree of leverage. Initial
margin in futures is a performance bond that the investor will comply with the terms of the
contract; it is not a borrowing. Usually only 2%-18% of the contract's value is required on
deposit. Relatively small price movements in the contract can cause large percentage losses to
the investor. A trade can easily lose more than the original margin deposit. When the market
value of a particular open position changes to a point where the margin on deposit in a client's
account does not satisfy the maintenance margin requirement, the client, not CCM, will receive a
margin call from the FCM. If the margin call is not met within the time set by the FCM, the
FCM has the right to close out the position.
Page 6 of 17
Most U. S. commodity exchanges limit daily price fluctuations ("daily limits"). During a trading
day, no trades can take place beyond these daily limits. Once the price reaches the daily limit,
positions cannot be taken or liquidated beyond that limit. Occasionally, trading will in effect halt
at the limit price creating a situation called "locked limit". Prices have traded locked limit for
several days in a row. This situation could prevent CCM from liquidating losing positions and
subject a client to substantial losses beyond the margin initially committed to such trades. Under
some conditions, a client may be required to take delivery of the physical commodity. The
CFTC could suspend or limit trading in a particular contract, order immediate liquidation and
settlement of a particular contract, or order that trading in a particular contract be conducted for
liquidation only.
CCM will occasionally engage in trading on commodity exchanges outside of the U. S. Trading
on such exchanges is not regulated by any U. S. governmental agency and may involve certain
risks not applicable to trading on U. S. exchanges. For example, some foreign exchanges, in
contrast to U. S. exchanges are "principals' markets" in which performance is the responsibility
only of the individual member with whom the trader has entered into a futures contract and not
of an exchange or clearing corporation. Moreover, such trading may be subject to whatever
regulatory provisions are applicable to transactions effected outside the U. S., whether on foreign
exchanges or otherwise. Trading on foreign exchanges involves the additional risks of
expropriation, burdensome or confiscatory taxation, moratoriums, and investment controls or
political or diplomatic events that might adversely affect CCM's trading activities. Engaging in
trading on foreign exchanges is also subject to the risk of changes in the exchange rate between
United States Dollars and the currencies in which contracts traded on such exchanges are settled.
Although the CFTC is prohibited by statute from promulgating rules which govern in any
respect, any rule, contract term or action of any foreign commodity exchange, the CFTC has full
authority to regulate the sale of foreign futures contracts within the U. S. It has adopted
regulations, which may restrict the clients for whom, or with whom CCM may trade and the
contracts, and markets on which CCM trades, which may have an impact on future performance
results.
CCM uses stops to limit risk in given positions. These stops do not guarantee an exit at the price
or even at all. THE PLACEMENT OF CONTINGENT ORDERS BY CCM, SUCH AS A
"STOP-LOSS" OR "STOP-LIMIT" ORDER, WILL NOT NECESSARILY LIMIT
YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS
MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
The CFTC and United States exchanges have established limits referred to as "position limits" on
generally the maximum net long or net short speculative position which any person or group of
persons may hold or control in particular commodity interest contracts. In addition, the CFTC
requires U. S. exchanges to set position limits on all contracts that do not have such limits. All
accounts managed and controlled by CCM (including the accounts of clients) are aggregated for
position limit purposes. It is possible from time to time that the trading decisions of CCM may
have to be modified and position held or controlled by it may have to be liquidated in order to
avoid exceeding applicable position limits. Such modification or liquidation, if required, could
adversely affect the performance of the accounts of clients.
Page 7 of 17
Participating customer’s FCM may fail. Under CFTC regulations, FCM’s are required to
maintain customer’s assets in a segregated account. If a customer’s FCM fails to do so, the
customer may be subject to risk of loss of funds in the event of its bankruptcy. Even if such
funds are properly segregated, the customer may still be subject to a risk of a loss of his funds on
deposit with the FCM should another customer of the FCM or the FCM itself fail to satisfy
deficiencies in such other customer’s accounts. Bankruptcy law applicable to all U.S. futures
brokers requires that, in the event of the bankruptcy of such a broker, all property held by the
broker, including certain property specifically traceable to the customer, will be returned,
transferred or distributed to the broker’s customers only to the extent of each customer’s pro-rata
share of all property available for distribution to customers. If any futures broker retained by the
customer were to become bankrupt, it is possible that the customer would be able to recover
none or only a portion of its assets held by such futures broker.
The Internal Revenue Code of 1986, as amended, provides that investment advisory fees are to
be aggregated with unreimbursed employee business expenses and other expenses of producing
income collectively called "Aggregate Investment Expenses". The aggregate amount of such
expenses will be deductible only to the extent such amount exceeds 2% of a taxpayer's adjusted
gross income. In addition, Aggregate Investment Expenses in excess of the 2% threshold, when
combined with certain other deductions, are subject to a reduction, generally equal to 3% of the
taxpayer's adjusted gross income in excess of a threshold amount. Such limitation could
substantially reduce the deductibility for federal income tax purposes on any amounts deemed to
constitute "investment advisory fees". The incentive fees payable to Covenant Capital
Management may be characterized as investment advisory fees subject to the above limitation.
EACH CLIENT, THEREFORE, MAY PAY TAX ON MORE THAN THE NET PROFITS
GENERATED IN THEIR ACCOUNT. EACH PROSPECTIVE CLIENT MUST CONSULT
AND DEPEND ON HIS OWN TAX ADVISOR REGARDING THE FEDERAL, STATE,
LOCAL, AND FOREIGN TAX CONSEQUENCES OF PARTICIPATING IN CCM'S
TRADING PROGRAM.
CCM IS HIGLY PROPRIETARY IN ITS TRADING METHODOLOGIES. CCM does not
reveal details of our trading model, its risk management techniques, nor any other material aspect
of what we deem, in our own discretion, to be material aspects of our trading. As such, clients
will not fully understand the strategies and techniques that impact the performance of their
account. Clients should be aware that there will always be a significant lack of awareness
regarding material factors in CCM’s trading models.
Regulatory Failure is a possibility. Despite the efforts of government and industry regulators,
no assurances can be made that regulations monitored and enforced by such entities will limit the
possibility of fraud, theft, or any other malfeasance perpetrated by CCM or any third party
associated with accounts managed by CCM.
Page 8 of 17
SPECIAL DISCLOSURE FOR NOTIONALLY-FUNDED ACCOUNTS
YOU SHOULD REQUEST YOUR COMMODITY TRADING ADVISOR TO ADVISE
YOU OF THE AMOUNT OF CASH OR OTHER ASSETS (ACTUAL FUNDS) WHICH
SHOULD BE DEPOSITED TO THE ADVISOR'S TRADING PROGRAM FOR YOUR
ACCOUNT TO BE CONSIDERED "FULLY-FUNDED". THIS IS THE AMOUNT
UPON WHICH THE COMMODITY TRADING ADVISOR WILL DETERMINE THE
NUMBER OF CONTRACTS TRADED IN YOUR ACCOUNT AND SHOULD BE AN
AMOUNT SUFFICIENT TO MAKE IT UNLIKELY THAT ANY FURTHER CASH
DEPOSITS WOULD BE REQUIRED FROM YOU OVER THE COURSE OF YOUR
PARTICIPATION IN THE COMMODITY TRADING ADVISOR'S PROGRAM.
YOU ARE REMINDED THAT THE ACCOUNT SIZE YOU HAVE AGREED TO IN
WRITING (THE "NOMINAL" OR "NOTIONAL" ACCOUNT SIZE) IS NOT THE
MAXIMUM POSSIBLE LOSS THAT YOUR ACCOUNT MAY EXPERIENCE.
YOU SHOULD CONSULT THE ACCOUNT STATEMENTS RECEIVED FROM YOUR
FUTURES COMMISSION MERCHANT IN ORDER TO DETERMINE THE ACTUAL
ACTIVITY IN YOUR ACCOUNT, INCLUDING PROFITS, LOSSES AND CURRENT
CASH EQUITY BALANCE. TO THE EXTENT THAT THE EQUITY IN YOUR
ACCOUNT IS AT ANY TIME LESS THAN THE NOMINAL ACCOUNT SIZE YOU
SHOULD BE AWARE OF THE FOLLOWING:
ALTHOUGH YOUR GAINS AND LOSSES, FEES AND COMMISSIONS MEASURED
IN DOLLARS WILL BE THE SAME, THEY WILL BE GREATER WHEN EXPRESSED
AS A PERCENTAGE OF ACCOUNT EQUITY.
YOU MAY RECEIVE MORE FREQUENT AND LARGER MARGIN CALLS.
Further Disclosure for Notionally-Funded Accounts
The following is not a recommendation by CCM to clients to fund accounts notionally. All
clients should understand that the agreed upon account size is the amount upon which CCM
will determine the number of contracts traded in your account. Drawdowns do occur and
should be expected by any investor. Please review the implications of drawdowns on a
notionalized account and consult with CCM before considering this investment strategy. We
wish to emphasize that any account opened with CCM must be considered to be an investment
the full nominal amount by the client. In the event of a severe drawdown, the client should be
prepared to increase his deposit in a notionalized account in order to maintain the account. It
is important to realize that gains or losses from trading do not affect the amount of notional
funding in the account.
Page 9 of 17
Notional funds in a client’s account are funds not actually held in the account, but which a client
has committed to the trading activity of the account. The tables on the following page are
provided to help disclose the effects notionalizing has on returns and drawdowns.
Rates of Return for Various Funding Levels
Actual ROR
50%
40%
30%
20%
10%
-10%
-20%
-30%
50%
40%
30%
20%
10%
-10%
-20%
-30%
100%
67%
53%
40%
27%
13%
-13%
-27%
-40%
75%
100%
80%
60%
40%
20%
-20%
-40%
-60%
50%
200%
160%
120%
80%
40%
-40%
-80%
-120%
25%
Notionalization
Account Size
On Deposit
Notionalized
Notionalized Amount
Rate of Return
Profit
Effective Return on Amount Deposited
$ 10,000,000
$ 10,000,000
0%
$ -‐
24%
$ 2,400,000
24%
$ 10,000,000
$ 7,500,000
25%
$ 2,500,000
24%
$ 2,400,000
32%
$ 10,000,000
$ 5,000,000
50%
$ 5,000,000
24%
$ 2,400,000
48%
Effect of a 10% Drawdown
Effective Drawdown on Amount Deposited
Amount Remaining i n Account
$ 1,000,000
10%
$ 9,000,000
$ 2,000,000
20%
$ 8,000,000
$ 3,000,000
30%
$ 7,000,000
$ 1,000,000
13%
$ 6,500,000
$ 2,000,000
27%
$ 5,500,000
$ 3,000,000
40%
$ 4,500,000
$ 1,000,000
20%
$ 4,000,000
$ 2,000,000
40%
$ 3,000,000
$ 3,000,000
60%
$ 2,000,000
Page 10 of 17
Cash Additions/Withdrawals
Any cash additions or withdrawals can affect the nominal account size at the client’s discretion
by increasing, maintaining, or decreasing the level of notionalization. The client should state in
writing the level of notionalization to be applied to any new funds deposited.
Example:
Nominal account size
$10,000,000
Funds on deposit
$2,500,000
Notional %
75%
Cash deposit
$2,500,000
New nominal account size $12,500,000
New funds on deposit
$5,000,000
New notional %
60%
The client has decreased his/her leverage by trading his new deposit on a 1:1 basis rather than the
4:1 basis used on his previous funds.
Options
An option on a future gives the purchaser the right but not the obligation to take a position in the
underlying commodity at the specified strike price. A 'call' gives the purchaser the right to take a
long position, and a "put" gives the purchaser the right to take a short position. The purchase
price of the option is called the "premium". The seller of the option is credited the premium, but
is obligated to take a futures position opposite the options buyer if the option is exercised by the
buyer. The buyer of an option has risk limited to the premium paid plus commissions and fees,
but the seller of an option has unlimited risk.
Fees
CCM charges a 20% incentive fee. The client may elect, with CCM’s approval, to have their
incentive fee payable either annually or quarterly “fee period”. The annual fee payment is based
on performance during the calendar year, January 1 – December 31st. The quarterly fee periods
are standard financial quarters. This determination as to which fee period is appropriate is made
mutually between the client and CCM and all terms of the fee structure are specified in the
Advisory Agreement signed by the client and by CCM. Regardless of whether a client chooses a
quarterly or annual incentive fee period the process for calculating and assessing the fee is the
same. The incentive fee is calculated as 20% of net new trading profits generated during such
fee period. These profits include net gains or losses on closed out positions plus net open
position from the first business day of the fee period to the last business day of the fee period.
These profits must be over and above the aggregate of previous fee period profits as of the end of
any fee period after deducting incentive fees paid. The incentive fee is calculated on trading
profits net of any management fees. Interest earned in the account is not subject to incentive
fees. If net new trading profits for a calendar year are negative, it shall constitute a “carryforward loss” for the beginning of the next fee period. To the extent any funds are withdrawn
from a client’s Account, any loss attributed to those funds shall be deducted from the carryforward loss. Accounts closed before the end of a fee period will pay any fees due at the time
the account is closed. Accounts opened after the beginning of a fee period will pay incentive
Page 11 of 17
fees generated due at the end of the fee period. Incentive fees that have been paid will not be
returned even if losses are incurred in subsequent periods. The incentive fee will be charged
from CCM directly to the managed account through the clearing broker unless otherwise
requested by the account holder. CCM also charges a 2% annual management fee, 0.167% of
each month’s beginning total account size, charged monthly, and assessed on the account size at
the beginning of the month. Account size is determined by adding the total equity (cash, cash
instruments plus open trade equity) of the account to any notional funds. The management fee
may be waived or negotiated at manager’s discretion.
Fees are usually calculated and billed by CCM, with the billing sent directly to a client’s
commodity broker to be paid out of the trading account. Clients are required to execute a fee
payment authorization directing the commodity broker to deduct the fees from the account upon
presentation to the broker by CCM of a certificate setting forth the amount of the fees payable to
it. Certain institutional clients have elected to calculate their own fees and then send the
calculations to CCM for review and confirmation. These clients may calculate fees differently
than CCM does, which may result in them paying slightly lower fees. There may also be
situations where their calculations may result in higher fees for CCM. In either situation, CCM
does not expect such differences to be material.
Actual and Potential Conflicts of Interest
CCM will trade capital for its principals and their family members. These accounts will be
directed exactly like other client accounts. Most orders will be entered as blocks, and the FCM
executing such orders shall allocate the fill prices to each account according to an equitable
allocation method. The highest priced fills will go to the highest account number, thus
benefiting the high account numbers on sales and low account numbers on buys. Any partial
fills will be allocated on a rotating basis. This may result in a principal of CCM receiving a
superior price compared to a client. In case of a partial fill of a block order, CCM or its
principals may not receive the same trade as a client. CCM may also direct proprietary trading in
new or existing programs. CCM generally will permit clients or prospective clients to examine
the trading records of its proprietary accounts. CCM may manage various accounts according to
different fee structures.
CCM may enter into a fee sharing agreement with individual associated persons, FCM’s, or IB’s
in return for raising assets. This arrangement will pay the outside entity a share of the fees
generated. CCM will NOT charge any extra fees to an account placed by an outside party. CCM
is not involved in or responsible for any extra commissions or fees charged to the account by the
outside party.
CCM does not receive and is not entitled to receive a share in any commissions paid to any FCM
or Introducing Broker (IB) or any principal thereof in connection with the establishment or
continuation of a client's account with such FCM or IB. The size of the account may result in
different commission levels for different clients within the same FCM. CCM's proprietary
accounts may pay lower commission rates.
Page 12 of 17
Because an incentive fee is earned by the CTA, the CTA could take on riskier, or more risk
averse, positions in the client’s account.
Clients are free to select the FCM or IB of their choice; however, CCM will control the selection
of the executing broker and the client will be responsible for any "give up" fees. Said “give up”
fees may be as much as $4 round-turn per contract.
Administrative, Civil, or Criminal Actions
There have not been any administrative, civil, or criminal actions against CCM or its principals
at any time preceding the date of this disclosure document.
Privacy Policy
Covenant Capital Management obtains nonpublic personal information about clients from their
account documentation as well as in the course of processing redemption requests. None of such
information is disclosed except as necessary in the course of processing subscriptions and
redemptions and otherwise administering or trading the account without express consent of the
client.
1. CCM obtains names, addresses, social security numbers, financial information,
investing history as well as account numbers, account sizes, and account performance as
well as other sensitive personal information.
2. Paper and electronic documents are held in the offices of CCM, which are reasonably
protected from intruders. Only officers and employees of CCM have access to this
information.
Past Trading Performance
The past performance of customer accounts traded by CCM in the Original Program is displayed
beginning on page 15. The past performance of the Aggressive Program is found on page 16.
Past performance for the Long Commodity Program is found on page 17. Past performance for
the Optimal Program is on page 18.
When reviewing the performance tables, you should understand that different accounts, even
though they are traded according to the same trading program, can have varying investment
results. Results among accounts will vary depending on several factors, such as commission
rates and advisory fees charged the accounts, the date the accounts started trading, split fills
received on block orders, the liquidity of the futures contracts traded, the order in which trades
for the various accounts were entered and the size of the accounts. The size of an account may
affect the relative size of positions taken, the degree of diversification and the particular
commodities traded.
One particular factor that greatly impacts the difference in performance between client accounts
is the date the accounts started trading. Due to market conditions, CCM may take up to several
months before a new account is fully invested. For example, the Optimal Program achieved a
Page 13 of 17
composite rate of return of 1.79% in June 2014 and 0.33% in July 2014. Some accounts
included in the composite achieved a rate of return better than the composite figures and some
accounts achieved a lessor return. The most profitable account (based on rate of return) achieved
an individual rate of return of 6.33% in June 2014 and 2.71% in July 2014. The least profitable
account achieved an individual rate of return of -2.08% in June 2014 and -1.41% in July 2014.
Please note that the least profitable account for the June and July period started trading in June
2014. It was not as profitable because it was not at full portfolio during that period.
Another example would be the August through October 2014 period for the Optimal Program.
Such program achieved a composite rate of return of 19.20% in August 2014 with the least
profitable account having a return of 15.08%. Please note that the least profitable account in
August started trading in August. In the months of September and October 2014, the Optimal
Program achieved a composite rate of return of 79.67% and 8.36%, respectively. The most
profitable accounts achieved an individual rate of return of 90.34% in September and 10.54% in
October. The least profitable account achieved an individual rate of return of 10.36% in
September and -5.35% in October. Again, please note that least profitable account during the
September and October period started trading in September. Please also note that the least
profitable account for the June and July period was the most profitable account for the August
through October period.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Page 14 of 17
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Original Program -‐ Customer Past Performance Name of CTA: Covenant Capital
Management
of Tennessee,
LLC
Trading Program:
Original Program
CTA Inception:
09/01/99
Program Inception:
09/01/99
program as
of 7/31/15:
Number
of accounts
in this
15
Number of customer accounts managed by CTA as of 7/31/15:
50
Total customer assets under management as of 7/31/15:
$286,889,509
Total customer assets under management excluding notional assets as of 7/31/15:
$21,116,116
Customer assets under trading program as of 7/31/15:
$85,020,031
Customer assets under trading program excluding notional assets as of 7/31/15:
$5,312,695
In the past five years:
Largest monthly drawdown*:
5/11
Worst peak-to-valley drawdown**:
-7.11%
6/13-1/14
-12.65%
Number of profitable accounts that have opened and closed:
4
Range of returns experienced by profitable accounts:
1.83% to 17.36%
Number of unprofitable accounts that have opened and closed:
2
Range of returns experienced by unprofitable accounts:
-6.91% to -3.67%
Lifetime:
Largest monthly drawdown:
11/01
Worst peak-to-valley drawdown:
06/01-1/02
Month
January
-0.98%
3.01%
0.76%
-4.66%
3.26%
-1.71%
-0.60%
0.64%
-2.28%
2.47%
-1.49%
-1.64%
4.48%
7.55%
-2.22%
2.55%
-0.94%
-2.25%
1.96%
-7.11%
0.83%
4.89%
-0.33%
-3.16%
1.14%
-2.33%
-3.96%
-5.00%
0.60%
0.98%
-2.94%
4.30%
8.02%
-1.65%
-0.13%
4.97%
3.05%
0.53%
0.57%
2.61%
6.38%
-1.59%
4.04%
-3.83%
12.37%
5.21%
-2.49%
-5.49%
0.77%
5.17%
-0.89%
0.61%
0.69%
-0.25%
6.40%
6.74%
-0.16%
1.70%
0.47%
1.68%
23.77%
2.70%
2.12%
0.56%
27.02%
-7.41%
RESULTS PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE February
March
April
May
June
July
August
September
October
November
December
Annual
2010
-3.25%
2011
-2.00%
2012
0.18%
2013
4.85%
2014
-4.04%
-9.67%
2015
-28.39%
0.21%
Please note that although all accounts in the above table were generally traded in parallel, not all accounts had
equal results. Please see pages 13 and 14 for further information.
*Largest monthly drawdown is the largest loss experienced in any calendar month expressed as a percentage of
total equity in the composite of accounts.
**Worst peak-to-valley drawdown is the percentage decline at month end (after eliminating deposits and
withdrawals) from any month end asset value without such value being exceeded as of a subsequent month end.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Page 15 of 17
-‐ Customer Aggressive Program Past Performance Name
of CTA: Covenant
Capital
Management
of Tennessee,
LLC Trading Program:
Aggressive Program
CTA Inception:
09/01/99
of 7/31/15: Number
of accounts
in this program as
Program Inception:
01/15/04
27
50
$286,889,509
$21,116,116
$64,425,326
$11,764,877
2/13
-7.57%
6/13-5/14
-16.05%
24
0.11% to 39.85%
30
-18.02% to -0.18%
Lifetime:
3/07 and 8/07 -9.69%
2/06-3/07
Month
January
February
March
April
May
June
July
August
September
October
November
December
Annual
-5.88%
-2.05%
-1.42%
6.87%
-5.78%
0.78%
0.09%
2.40%
2.74%
-7.57%
4.07%
-1.99%
-1.66%
-0.89%
-2.82%
2.59%
-2.27%
-2.29%
5.42%
5.51%
-4.02%
2.20%
-1.34%
-2.84%
-0.45%
-4.87%
2.36%
4.82%
-0.37%
-3.91%
0.44%
-2.53%
-5.89%
-7.53%
0.74%
1.00%
-0.34%
2.20%
11.94%
-2.20%
-0.37%
1.76%
2.08%
1.99%
0.51%
3.45%
10.54%
-0.54%
6.19%
-4.27%
15.56%
6.82%
-4.49%
-7.15%
1.28%
4.78%
-0.61%
1.14%
0.97%
0.36%
6.84%
7.08%
0.88%
2.79%
0.46%
2.28%
24.44%
-1.65%
6.32%
-3.53% 29.51%
-9.01%
RESULTS PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE 2010
2011
2012
2013
2014
-20.41%
2015
withdrawals) from any month end asset value without such value being exceeded as of a subsequent month
end.
Page 16 of 17
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Long Commodity Program -‐ Customer Past Performance Name of CTA:
Covenant Capital
Management
of Tennessee,
LLC
Trading Program:
09/01/9
9
03/01/0
9
CTA Inception:
Program Inception:
this program as of 7/31/15:
Number
of accounts in
2
50
$286,889,509
$21,116,116
$132,000,000
0
7/14
-8.06%
5/11-5/15
-32.32%
1
33.09%
0
NA
Lifetime:
7/14
5/11-5/15
Month
2010
January
-5.10%
-0.28%
0.49%
2.27%
-0.05%
-0.47%
February
0.66%
2.38%
2.39%
-5.57%
1.71%
-1.24%
March
-0.78%
1.33%
-1.50%
-1.09%
0.30%
-0.96%
April
2.00%
2.58%
0.80%
-1.36%
-1.17%
-0.46%
May
-2.60%
-6.61%
-5.62%
-0.51%
-2.65%
-1.66%
June
-0.67%
-3.45%
5.29%
-0.42%
0.07%
1.81%
July
-0.48%
1.86%
6.86%
0.19%
-8.06%
August
0.79%
2.37%
3.85%
1.04%
-1.94%
September 9.67%
-6.96%
0.85%
-1.40%
-0.71%
October
7.03%
-0.44%
-5.87%
-0.28%
-0.53%
Novembe
r
2.07%
0.27%
-0.89%
-0.04%
0.20%
2011
2012
2013
2014
2015
-32.32%
20.72%
-8.64%
3.08% -7.23%
-13.73%
-2.98%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS December 7.41%
Annual
-8.06%
-1.41%
-2.76%
-0.11%
-1.51%
Page 17 of 17
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Optimal Program -‐ Customer Past Performance Name
of CTA: Trading Program:
CTA Inception:
Program Inception:
Covenant
Capital
Management
of Tennessee,
LLC
Optimal
Program
09/01/9
9
05/01/0
8
Number of accounts in this program as of 7/31/15:
6
50
$286,889,509
$21,116,116
$5,444,152
$4,038,545
5/15
-18.94%
1/15-5/15
-35.56%
2
2.71% to 460.06%
0
NA
Lifetime:
5/15
1/15-5/15
Month
2010
2011
2012
2013
2014
2015
January
-
-
-
-
-
4.40%
February
-
-
-
-
29.82%
-4.71%
March
-
-
-
-
-10.82%
-7.86%
April
-
-
-
-
-6.23%
-9.46%
May
-
-
-
-6.69%
-18.94%
June
-
-
-
-
1.79%
6.86%
July
-
-
-
-
0.33%
August
-
-
-
-
19.20%
Septembe
r
-
-
-
-
79.67%
-
-18.94%
-35.56%
November
25.12%
December
8.74%
Annual
226.65% -28.12%
to January 2014.
CCM did not use the Optimal Program to trade client accounts from January 2009
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS October
-
-
-
-
8.36%
Page 18 of 17
END
THIS PAGE INTENTIONALLY LEFT BLANK
Page 19 of 17

covenant capital management of tennessee, llc

Transcription

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