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Forward Sees Big Leap in Alternative-Product Sales

Forward Management LLC has just introduced an alternative-strategy mutual fund, and the company's chief executive officer predicts demand for such funds will help fuel a huge leap in the firm's assets.

"The market is looking for a leader in the alternative space, and I think we've at least earned consideration on that front," said J. Alan Reid, Forward's CEO. "I think in five years, we'll see us beyond $20 billion in size."

The fund is the Forward Commodity Long/Short Strategy Fund, which aims to profit from both up and down movements of commodity prices and tracks the Credit Suisse Momentum and Volatility Enhanced Return Strategy Index. Forward said that while commodity mutual funds have been available since 1997, it is only one of three commodity long/short funds on the market.

"This strategy combines long and short positions to capitalize on price momentum of rising and falling commodity prices," Ried said. "Commodities have tremendous appeal for sophisticated investors, due to their very low correlation with other major asset classes and the rising global demand for commodities such as oil, copper and steel."

Reid added: "We believe that in this era of unpredictable returns, higher volatility and higher asset class correlations, investors and advisers will need more nimble investment solutions to achieve the outcomes they are seeking."

Forward now has $6.3 billion of assets under management-less than one-third of its $20 billion target-in mutual funds and separately managed accounts.

But Denise Valentine, a senior analyst at Aite Group LLC, said she does not doubt that Forward can reach $20 billion in assets under management, provided that its alternative funds perform well. In fact, she said, many observers believe investments in alternative vehicles will grow fast enough for Forward to reach its goal in three years.

"People are looking for what to do, and the results in the traditional markets are not conducive to retirement," Valentine said. "It's almost like you're compelled to try something different for some portion of your portfolio."

Forward now offers 10 mutual funds employing alternative strategies. The portfolios span the broad market, fixed-income, real estate and frontier markets.

Forward has sought to position itself as a provider of creative approaches suited to an environment of unpredictable returns, higher volatility and greater asset-class correlations.

The company faces a challenge, however, in the unremarkable performance of its overall fund lineup. Through mid-February, its fund family was collectively returning 6.43%. But its three-year performance is negative 6.57%, and its five-year performance is about flat, at negative 0.18%, according to Morningstar Inc.

Reid argued that the performance of the fund family partially reflected adverse factors assumed two years ago when Forward bought several portfolios from Kensington Investment Group Inc. Performance of the legacy Kensington funds has improved, he said, as their managers have worked with Forward's team.

For example, he said, the Forward Strategic Realty Fund has improved from a negative 4.82% return over three years to a 33.99% gain in the past 12 months. This long-short fund had no clear process for choosing its short positions before the acquisition, Reid said, but Forward's chief investment officer, Jim O'Donnell, "helped them put in place a process-driven, consistent short position," Ried said.

Forward owes much of its growth thus far to acquisitions. In addition to Kensington, recent deals include the purchases of Accessor Capital Management LP and the assets of Berkeley Capital Management LLC.

But Reid said that the company is now content to grow organically. "We don't have a real thirst to necessarily acquire firms," he said. "We have a number of products that certainly can grow considerably more."

At the same time, Forward wants to keep diversifying its alternative offerings, according to Reid. It is interested in adding emerging market income and equity dividend strategies, he said.

Forward is also looking to build up its institutional business, which is focused around banks. It has a niche in running dividend-strategy separate accounts for bank trust departments, and it also distributes its products through bank-owned brokerages.

About $1.5 billion of Forward's assets under management derive from banks, according to Clay Smudsky, a managing director at the company. Forward added six bank relationships last year and has more than 80 in all, he added.

The introduction of the Forward Commodity Long/Short Strategy Fund comes a month after Forward started its Tactical Enhanced Fund, a long/short absolute return equity fund designed for investors with higher-than-average return targets and risk tolerance.

"We are excited to be launching this new strategy enabling us to build on the success of the Forward Tactical Growth Fund we introduced 16 months ago," Ried said. The Tactical Growth Fund seeks to achieve capital preservation and attracted $850 million in the 15 months between its launch in mid-September 2009 and the end of 2010. The Tactical Enhanced Fund will take similar approaches as the Tactical Growth Fund and can leverage up to 200% net long and 100% net short and trade more frequently to take advantage of shorter-term market movements and find securities that the manager believes are undervalued or overvalued.


Steve Garmhausen is a contributor to American Banker.