Diversifying With Managed Futures May Help Investors Improve Risk-Adjusted Returns, Says New White Paper From Forward

SAN FRANCISCO, Aug. 6, 2012 /PRNewswire/ -- Historical analysis suggests that diversifying portfolios with managed futures may enable investors to earn better risk-adjusted returns, concludes a new white paper from Forward (Forward Management, LLC). 

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Titled Managed Futures: Stepping Up the Quest for Portfolio Diversification, Forward's white paper notes that managed futures strategies historically have maintained very low correlations to stock and bond indexes while producing equity-like returns.      

Over the 32-year period ending December 31, 2011, the Barclay CTA Index (the "CTA Index") achieved a compound annualized return of 11.16% versus annualized gains of 11.06% for the S&P 500 Index and 8.69% for the Barclays Capital U.S. Aggregate Bond Index. During the same period the CTA Index also experienced somewhat less overall volatility and substantially lower drawdowns than the S&P 500.    

Significantly, the CTA Index showed positive returns during the dot-com crash of 2000-2002 and the financial crisis of 2008, years when the S&P 500 sustained major losses. 

The paper cautions, however, that the performance and correlations of any specific managed futures strategy may vary substantially from that of the CTA Index, which tracks performance of a peer group of managed futures strategies. 

"While there may be no perfect all-weather strategy, managed futures strategies have a record of zigging when equity markets zag. As a group they have also maintained their low correlations to many other asset classes during a time when correlations have generally been rising," said Forward CEO Alan Reid.  "In light of this, it's not surprising that managed futures has been among the fastest-growing non-traditional investment categories."

Asset under management by Commodity Trade Advisors (CTAs), which historically have dominated managed futures investing, grew from $38 billion at the end of 2000 to $314 billion by the end of 2011.  CTAs are limited partnerships that are restricted to wealthy investors and charge hedge-fund-style performance fees.

Over the last five years, the availability of managed futures mutual funds has made the strategy more broadly accessible while lowering fees, relative to limited partnership vehicles, and providing daily liquidity, states the Forward white paper. Since the introduction of the first such mutual fund in 2007, the number of managed futures mutual funds has grown to 31 funds with total assets of nearly $9 billion, according to Strategic Insight as of May 31, 2012.   

Forward's white paper includes discussion of the various kinds of managed futures strategies, most of which use some type of systematic, trend-following approach. It also traces the use of futures contracts back to 17th century Japan and describes how managed futures strategies evolved from a commodity-focused approach to a dynamic, multi-asset-class strategy in the 1970s and '80s. 

"Because many investors are unfamiliar with how futures markets operate, managed futures are often assumed to be exotic, complex and risky. But given the track record and diversification potential of these strategies, we strongly believe it is worth the time it takes to explore them," said Norman Mains, a managing director of Forward and principal author of the white paper.    

"Managed futures" is a broad category of investment strategies that use futures contracts to invest long and short across commodities and financials such as currencies, interest rates, bonds and equities.

Earlier this year Forward launched the Forward Managed Futures Strategy Fund (FUTRX), which is designed to generate positive returns in varied market environments while maintaining low correlations to major stock, bond and commodity indexes. The fund employs a systematic, trend-following approach that provides both long and short exposure to liquid futures contracts in four global asset classes -- commodities, equities, bonds and currencies.

Including that fund, Forward now offers eight long/short strategies to help investors pursue non-correlated returns and address volatility. The firm's offerings in the long/short category span asset classes including global and domestic equity, fixed-income, commodities and real estate. 

Forward's new white paper is one of a series of publications and webcasts the firm produces under the banner of fwd thinking to help financial advisors and investors stay abreast of the latest in investment strategies and problem-solving approaches. Other recent white papers include Managing Correlation Risk with Alternative Investments, The 10% Problem, Inflection Point: The Start of a New Cycle in Real Estate? and Investing in the Global Infrastructure Boom. These and other Forward publications may be accessed at www.forwardinvesting.com/fwd-thinking/. 

About Forward
The world has changed, leading investors to seek new strategies that better fit an evolving global climate. Forward's investment solutions are built around the outcomes we believe investors need to be pursuing – non-correlated return, investment income, global exposure and diversification. With a propensity for unbounded thinking, we focus especially on developing innovative alternative strategies that may help investors build all-weather portfolios. An independent, privately held firm founded in 1998, Forward (Forward Management, LLC) is the advisor to the Forward Funds. As of June 30, 2012, we manage $5.4 billion in a diverse product set offered to individual investors, financial advisors and institutions. More information on Forward can be found at www.forwardinvesting.com.

You should consider the investment objectives, risks, charges and expenses of the Forward Funds carefully before investing. A prospectus with this and other information may be obtained by calling (800) 999-6809 or by downloading one from www.forwardinvesting.com. It should be read carefully before investing.

RISKS

There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate, and you may have a gain or loss when you redeem shares.

Exposure to the commodities markets may subject a fund to greater volatility than investing in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as natural disasters and international economic, political and regulatory developments.

Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things, increased volatility and transaction costs or a fund to lose more than the amount invested. 

Investing in Exchange-Traded Funds (ETFs) will subject a fund to substantially the same risks as those associated with the direct ownership of the securities or other property held by the ETFs.

Mortgage and asset-backed securities are debt instruments that are secured by interests in pools of mortgage loans or other financial instruments. Mortgage-backed securities are subject to, among other things, prepayment and extension risks.

Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio.

Futures contracts involve additional investment risks and transaction costs, and create leverage, which can increase the risk and volatility of a fund.

Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as mutual funds which focus on alternative strategies are not suitable for all investors.

Diversification does not assure profit or protect against risk.

The Barclays Capital U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. 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. One cannot invest directly in an index.

The Barclay CTA Index measures the composite performance of established programs, defined as those with four years or more documented performance history. Once a trading program passes this four-year hurdle, its subsequent performance is included in this unweighted index. As the Barclay CTA Index does not represent an actual investable portfolio, its performance should be viewed as hypothetical and used only for purposes of comparison. One cannot invest directly in an index.

Correlation is a statistical measure of how two securities move in relation to each other.

The S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy. One cannot invest directly in an index.

Norman Mains is a registered representative of ALPS Distributors, Inc.
Alan Reid is a registered representative of Forward Securities, LLC.
Forward Funds are distributed by Forward Securities, LLC.
Not FDIC Insured | No Bank Guarantee | May Lose Value
©2012 Forward Management, LLC. All rights reserved.
FWD004193 073113

Contact: Victoria Odinotska
Kanter & Company
(703) 534-3735

SOURCE Forward