commodities perspectives may 2012 pursuant to an exemption from the commodity futures trading...

Commodities Perspectives

May 2012

PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.

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Goldman Sachs Asset Management

Derivatives and commodity futures

Investing in commodity futures markets

Market Views

Appendix

Agenda

2


Derivatives and commodity futures


What are derivatives? An instrument that derives its value from an underlying security

The most common types of derivatives include:futures, forwards, swaps and options

The most common underlying assets include:stocks, bonds, commodities, currencies, interest rates and indexes

Some exotic underlying “assets” include:inflation, insurance, weather, freight and sports

Provide greater flexibility in structuring portfolios

Diversification (broadens opportunity set)

Risk management (hedging)

Speculation (generating potential alpha)

Arbitrage (capture market mispricings)

Efficiency (greater liquidity and lower transaction costs)

Weak risk management

Potential to create risks beyond guideline limits

Inadequate monitoring of derivatives’ effect on portfoliorisk characteristics

Inadequate monitoring of counterparty risk

What is a derivative?

Why use them?

What are the risks?

4


History – Derivatives date back more than 2,500 years

Thales of Miletus (624 – 547 BC)—a Greek philosopher, astronomer and farmer—had a premonition that he would grow a bumper crop of olives.

He paid farmers in the area (i.e., bought an option) to allow him first use of their olive presses when the harvest was due.

The investment paid off, he pressed his olives into oil ahead of the competition, and reaped a profit.

Thale’s investment skills were remarked on by Aristotle more than 200 years later.

Ancient Chinese rice farmers are also believed to have used options more than 2,000 years ago to agree on a future price of rice.

By the 17th century it was common practice to buy options on rice futures in Japan.

Source: Aristotle, Politics, c.a. 350 BC

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What are the various types of derivatives?

There are four major classes of derivatives:

Futures: A standardized obligation to buy or sell a certain underlying asset, at a certain date in the future (settlement date) and at a specified price (futures price).Examples include:

Interest rate, currency, index, commodity and bond

Forwards: A non-standardized obligation (i.e., the terms are customizable) to buy or sell a certain underlying asset, at a certain date in the future (settlement date) and at a specified price (forward price). Examples include:

Interest rate, currency and forward rate agreement

Options: A contract that gives its owner the right, but not the obligation, to buy or sell a certain underlying asset, at a certain date in the future (expiration date) and at a specified price (strike price). Examples include:

Interest rate, currency, index, cap, floor, call, put, bull spread, bear spread, butterfly spread, box spread, collar, straddle, swaptions, credit spread and credit default

Swaps: A customized agreement where two counterparties exchange a stream of cash flows (legs), on certain dates (settlement dates) over a certain time period (term).Examples include:

Interest rate, currency, equity, credit default, basket default, Nth to default,total return and basis

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Investing in commodity futures markets


Why commodities as an asset class? Commodities have historically realized positive returns

The S&P GSCI Commodity index returned 8.75% per annum (gross)2 from January 1973 to February 2012.

Commodities can be a meaningful portfolio diversifier

Historically low or negatively correlated with both bonds and equities1

Allocating a small percentage of commodities to a blended portfolio has the potential to positively impact risk-adjusted returns

Commodities can provide a hedge against inflation

Commodity prices have exhibited positive correlations to expected and unexpected inflation2

1 Based on the S&P Index and the Barclays US Aggregate Bond Index. 2 Source: Bloomberg.The S&P GSCI Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. Individual components qualify for inclusion in the S&P GSCI on the basis of liquidity and are weighted by their respective world production quantities. Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. Past performance is not indicative of future results, which may vary. For illustrative purposes only. 8


Index composition

The S&P GSCI uses a world production weighted approach and does not cap exposure to any one sector. It is estimated to be the most widely invested of the commodity indices.

The DJ UBS (Dow Jones UBS) commodity index is a popular commodity index amongst investors. It is meant to be a highly liquid and diversified benchmark.

The RJ CRB (Reuters Jefferies CRB) commodity index has the longest history of all the commodity indices. It has a four-tiered approach to allocating weights. Group I includes only petroleum products, and Groups II to IV are comprised of commodities in descending order of liquidity.

The DJ UBS and RJ CRB commodity indices both set an arbitrary 33% cap on related groups of commodities in the index. (Related groups are defined differently across the two indices).

The Rogers RMI (Raw Materials Index) is arbitrarily structured by a panel of experts who weight each commodity in relation to its importance to the global economy. It is for known for being one of the most diverse commodity indices

As of 29-Feb-2012. Source: UBS Dow Jones, GS. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

Index composition

9

14.1%

30.2%

71.0%31.3%

6.9%

19.7%

4.6%

5.9%

3.4%13.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

S&P GSCI DJ UBS

Agriculture Energy Industrial Metals

Livestock Precious Metals


Pure Beta

· No tracking error

· No excess return

Enhanced IndexStrategies

· Low tracking error

· Target low excess

returns

· Match commodity and

sector exposures of

benchmark

· Roll timing strategies

Active Indexed Strategy

· Active views on relative

value and other market

exposures

· Long only positioning

Pure Alpha

· No targeted Index

exposure

· All volatility from active

trading

· Typically unconstrained

· Long/short positioning

ActiveImplementation SpectrumPassive

For illustrative purposes only.

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Commodity investment implementation options


EnergyWTI Crude OilBrent Crude OilGasoline

Heating OilGasoilNatural Gas

Frequently inefficient

Highly volatile

Complex markets with unique technical factors

Liquid exchange traded futures and options

Tradable futures curves

Easily leverageable

Timing/Directional

Curve Shape

Relative Value

Volatility

Precious MetalsGold Silver

Industrial MetalsAluminum CopperNickel

ZincLead

AgricultureCornSoybeansWheat

SugarCotton

Sectors

Products

Market Characteristics

Trading Opportunities

PlatinumPalladium

Large universe of active trading opportunities

For illustrative purposes only. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

11


Active management positioning along the curve is crucial Spot Price Appreciation ≠ Investor Returns

12

1983 – 2003 average yearly returns 2004 – 2011 average yearly returns

Over time, price appreciation has been eroded by negative roll returns.

Source: Bloomberg. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. Past performance is not indicative of future results, which may vary.

12

13.5%

6.5% 7.0%6.1%3.0% 3.1%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Excess Returns Spot Returns Roll Returns

S&P GSCI Energy

S&P GSCI

2.7%

19.4%

-16.8%

2.3%

16.2%

-13.8%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Excess Returns Spot Returns Roll Returns

S&P GSCI Energy

S&P GSCI


Risk considerations: Simulation-based risk model illustration

In a fat-tailed probability distribution, large negative outcomes are more frequent than in a normal distribution (see charts)

The portfolio simulation attempts to quantify potential downside risk by identifying the 99th percentile negative outcome

Outcomes worse than the 99th percentile may occur

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For illustrative purposes only.1 A portfolio simulation is a set of portfolio outcomes generated using random numbers. Simulated performance results do not reflect actual trading and have inherent limitations. Please see

additional disclosures. 99th percentile negative outcome from simulations signifies that 99% of all outcomes were better and 1% of outcomes were worse than the 99 th percentile outcome.

99th Percentile Negative Outcomes

Extreme negative deviation from the mean

99th PercentileNormal Distribution

99th PercentileFat-Tailed Distribution

99th PercentilePortfolio Simulation

Normal

FatTail

Standard Deviation

Pro

bab

ilit

y D

ensi

ty F

un

ctio

n

Normal Fat-Tailed Simulation

Pro

ba

bil

ity

De

ns

ity

Fu

nc

tio

n


Market Views


Crude oil – supply/demand projections support higher prices

Source: PIRA This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

15


…but there are also bearish trading opportunities

16

Source: Genscape – Data for major pipeline tracked by Genscape. Data also does not include inflows / outflows using alternative means of oil transport.This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.


US refinery demand has been weak…

17

Seasonal effects combined with refinery closures have had an impact

Source: US Department of EnergyThis information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.


…as a result Cushing oil inventories have begun to rise

18

Source: Genscape.This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.


Research exampleWe track Cushing oil flows in a number of ways

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Source: GenscapeThis information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. For illustrative purposes only.


Research exampleBasin pipeline flow – From Permian Basin (Jal, New Mexico) to Cushing

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Research exampleInfrared images of storage facilities

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Since the crude oil in the tank and the vapor above the liquid have different heat conductivity, each layer exhibits a different heat footprint


US natural gas – dramatic production increase

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 22


US natural gas – Prices have declined

23

Source: US Department of EnergyThis information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

2

4

6

8

10

12

14

8/31/2005 8/31/2006 8/31/2007 8/31/2008 8/31/2009 8/31/2010 8/31/2011

Prompt natural gas futures contract ($/mmbtu)


DisclosuresThis material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Opinions expressed are current opinions as of the date appearing in this material only.

GSAM does not provide legal, tax or accounting advice and therefore expresses no view as to the legal, tax or accounting treatment of the information described herein or any related transaction, nor are we providing any assurance as to the adequacy or Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

The strategy may include the use of derivatives. Derivatives often involve a high degree of financial risk because a relatively small movement in the price of the underlying security or benchmark may result in a disproportionately large movement in the price of the derivative and are not suitable for all investors. No representation regarding the suitability of these instruments and strategies for a particular investor is made.

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

The sample portfolio provided herein has certain limitations. Such sample is hypothetical and does not represent actual trading, and thus may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on the Adviser's actual decision-making. This sample is shown for illustrative purposes only and is representative of Strategic Commodities. It does not purport to show the holdings or sector weightings of an actual account. This information is shown for illustrative purposes only and does not constitute a recommendation of exposures for any client account. The exposures for the sample portfolio will differ from the exposures for a client account because of specific client guidelines, objectives and restrictions.

Confidentiality

No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

This material has been prepared by GSAM and is not a product of Goldman Sachs Global Investment Research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.

This material has been issued or approved for use in or from Hong Kong by Goldman Sachs (Asia) L.L.C.

© 2012 Goldman Sachs. All rights reserved. 73036.STR.OTU 73046.STR.OTU

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