Q: Could you explain your diversified commodity products?

A: They are similar to the agricultural products. Over the last two years, one of our biggest is funds is DBC, the PowerShares DB Commodity Index Tracking Fund. With this product you get a basket of the futures it references, namely, oil and heating oil, gold, aluminum, corn, and wheat. Basically, it is a diversified investment across all the commodity sectors - precious metals, base metals, energy and agriculture. This product is for investors without a strong view on one commodity versus another, but recognizing the diversification benefit of investing in commodities. We reference the index with the most liquid futures contract rolled into global production. Instead of trading all the different oil contracts, we try to focus on the most liquid ones, such as oil and heating oil, because they will give the movement of that sector.

Alongside DBC, there is a long ETN, which should perform just like the DBC fund, but always giving the index and providing 1099 tax reporting. That’s important for investors with taxable accounts, and not that important for the investors with tax deferred accounts. The other diversified commodity products are single long, single short, double long, and double short ETNs.

Q: Are the commodities and the products priced in dollars? How do you deal with the currency issue?

A: All of these commodities and the underlying futures are priced in dollars. These are U.S. registered securities and there is no foreign currency element.

We do have currency exposure products, but not in a leverage form. We have PowerShares DB US Dollar Index Bullish & Bearish Funds, which provide the dollar moves against the basket of the G6 currencies. However, we don’t have an inverse strategy. If the dollar moves up and you are in the bearish fund, you will be moving down. That means placing a bearish view on the dollar, but we do not have leverage versions of those products yet.

Q: Many people lack understanding of how these markets work. How the rising oil and food prices are related to trading?

A: The press claims that the speculative money in the commodity markets is pushing up the prices. However, recent research on investable commodities versus commodities that don’t have a futures market, shows that there is a higher run up on the non-tradable commodities. That would lead you to the conclusion that investors in commodities actually help to bring prices slightly down.

Despite the sentiment that speculators are pushing the prices up, the majority of the economists feel that it is the fundamentals driving the markets. It is the excessive demand relative to the supply.

Q: What’s your approach towards investments in gold?

A: Most people usually invest in gold either as a hedge to inflation or as a counter investment against the dollar. The dollar is weakening and investors expect gold prices to go up. Over the last three to four years, $25 billion have flowed into the gold ETFs. Gold nearly has doubled its price, providing an annual return of approximately 17% over that period.

Now gold is 17% off the highs it hit in March, but it is flat on the year. We brought tools for investments in gold for the same reason as in other commodities—people like to take bullish and bearish views, and to leverage. We referenced a gold index that points to futures, but in this case, it is a single gold futures contract.

Q: What should investors expect from the ETNs and the ETFs? Would you like to warn investors about the possible pitfalls?

A: It is important to compare apples to apples. You have to know what exactly the ETF or the ETN is tracking, where is the underlying reference, when does it stop trading, etc. A lot can happen in a twohour period. Many times gold will close flat at 1:30 p.m., and then news will come out on the dollar. In the next two hours, the price of gold may go up. Depending on the product, your may not be able to move with that news, and there will be a difference between the futures closing price at 1:30 and the exchange closing price.

So, I would warn the investors to make sure that they know what they are investing in. The commodities have higher volatility than the equities or the fixed income products. That is why most people use them as part of their alternative investment allocation. They would allocate 1% to 10% depending on their view, recognizing that these investments will move in a more volatile fashion.

Q: What is your view and strategies on risk control?

A: Leverage is a difficult concept to grasp, and it is sometimes even more difficult to implement. You have to figure out how often you reset your levels to keep that leverage where it is. If you launched a double long at $25 and the price is rising, then your leverage levels decrease if you do not reset. If the price is decreasing, your leverage is increasing with the falling price, unless you reset. However, resetting the products daily may lead to strange compounding over a long-term period. We do a monthly reset to keep the leverage level in our double products at two to one.