Why are assets fl owing to managed futures? A history of low correlations and positive returns in down equity market years is part of the answer.

Inside:

The evolution of a diversifier

A 32-year track record

Understanding differences in strategies

Knowing the risks

How to access managed futures

www.forwardinvesting.com

Managed Futures: Stepping Up the Quest for Portfolio Diversifi cationby Norman Mains, Managing Director

Managed futures have historical performance characteristics that make the strategy highly relevant in a market environment of relatively low returns and generally rising asset class correlations. The strategy has long had a reputation as an “all-weather” investment choice, a characterization bolstered by its strong performance in the period of the dot-com collapse of 2000-2002 and during the brunt of the financial crisis in 2008 (Figure 1). Yet it remains an asset class unfamiliar to many investors—and one with an aura of risk despite its track record.

The Creation of a Portfolio Diversifi er

The use of futures contracts in the U.S. traces back to the 1800s, when farmers and food purveyors began using futures contracts to hedge crop and livestock prices. Traders eventually recognized that futures could also be used as a vehicle for generating long-term investment returns. The first publicly available managed futures fund was introduced in 1948. Then, and for some time afterward, managed futures strategies focused solely on commodities.

During the 1970s and ’80s, however, managed futures strategies morphed to encompass the various types of financial futures that were introduced during this period, beginning with currency futures in 1973. Reaching for better risk/return characteristics, investment managers expanded their universe to include financial instruments and indexes. By using futures contracts, they could efficiently invest in multiple asset classes. Today, the managed futures label generally refers to strategies that invest both long and short across currencies, interest rates, bonds and equities as well as commodities.

By transforming a commodities-focused strategy into one with broad multi-asset-class exposure and flexible, built-in diversification, this development began to turbocharge the growth of managed futures products. The assets under

Managed Futures www.forwardinvesting.com2

Positive returns in every year that the S&P 500 lost ground are a compelling feature for investors looking to diversify.

A Surge of Assets in Managed Futures ProgramsGrowth of CTA AUM from December 31, 2000 – December 31, 2011

FIGURE 2

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

% A

nnua

l Ret

urn

Barclay CTA Index S&P 500 TR

Source: BarclayHedge

20112010

20092008

20072006

20052004

20032002

20012000

$0

$50

$100

$150

$200

$250

$300

$38billion

$314 billion

CTA

Ass

ets

Und

er M

anag

emen

t (B

illio

ns)

Source: BarclayHedge

Managed Futures Have Zigged When Equities ZaggedBarclay CTA Index Annual Returns vs. S&P 500 from January 1, 2000 – December 31, 2011

FIGURE 1

management by Commodity Trading Advisors (CTAs), the licensed futures-trading specialists that historically dominated this space, mushroomed from an estimated $300 million in 1980 to $10.5 billion at the end of 1990 and $37.9 billion by the end of 2000.1

But it was during the first decade of the new millennium that managed futures’ potential as a portfolio diversifier came into sharper focus. While U.S. equity markets plunged during the dot-com bust of 2000-2002, the Barclay CTA

Index (“the CTA Index”) continued to deliver positive returns. Then, in 2008, investors again took notice as managed futures programs defied the global market downdraft, generating healthy returns (Figure 1). It should be noted that any single managed futures strategy is likely to be more volatile than the S&P 500 Index* (“the S&P 500”), and that a portfolio effect is dampening the volatility of returns shown here. Nevertheless, positive returns in every year that the S&P 500 lost ground are a compelling feature for investors looking to effectively diversify their portfolios.

* For purposes of this paper, all references to the S&P 500 are to the Total Return version of the index (the S&P 500 TR Index).

Not surprisingly, the growth of managed futures AUM has only accelerated since 2000. Total assets managed by CTAs increased more than eightfold from 2009 to 2011, at which point they stood at $314 billion (Figure 2).

During this period the managed futures strategy also migrated to the ’40 Act world with the introduction of the first managed futures mutual fund in 2007.2 Typically structured as limited partnerships, CTAs are generally restricted to accredited investors or Qualified Eligible Participants (QEPs) and charge hedge-fund-style performance fees. But with the creation of managed futures mutual funds, the strategy became widely available with a lower

fee structure. In this sphere, too, the strategy has taken off; the combined AUM of mutual funds in Morningstar’s managed futures category has risen to nearly $9 billion as of the end of May 2012.3

In light of investors’ concerns with rising correlations within and among asset classes (see Forward’s white paper, Managing Correlation Risk with Alternative Investments), the buzz around managed futures has been unabated. In a Cogent Research survey conducted in late 2011, financial advisors named managed futures as one of the alternative asset classes offering the greatest potential in the coming year.4

With the ability to efficiently invest both long and short across multiple asset classes, managed futures programs have characteristics that may help investors address the problem of rising asset class correlations. Managed futures may also add return potential to portfolios in varying environments.

These conclusions are based on the performance of managed futures as measured by the CTA Index, which is based on results of a peer group of managers (rather than on price changes in a given set of securities). Given the flexibility and diversity of strategies, it took some time for the industry to create a pure managed futures index. The CTA Index provides a perspective on the strategy’s history, as it is based on a lengthy series

of data from managed futures investment funds and covers the period since 1980. Several other managed futures indexes covering shorter time spans have been developed by Credit Suisse, JP Morgan and Morningstar, among others.

Strong track record

Historically, managed futures have performed well compared to both stocks and bonds. Over the 32-year period ending on December 31, 2011, the CTA Index achieved a compound annual return of 11.16%, comparing favorably to annualized gains of 11.06% for the S&P 500 and 8.69% for the Barclays Capital U.S. Aggregate Bond Index (“the BarCap Aggregate Bond Index”) (Figure 3).

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Able to efficiently invest long and short across multiple asset classes, managed futures may help investors address rising asset class correlations.

What’s the Appeal?

A Record of Equity-Like Returns with Lower VolatilityComparison of monthly returns by asset class, January 1, 1980 – December 31, 2011

FIGURE 3

Annualized Return

Standard Deviation

Max Monthly Decline

Correlation to S&P 500

Barclay CTA IndexManaged Futures

11.16% 15.07% -9.81% 0.01

S&P 500 Total Return Index U.S. Equities

11.06% 15.62% -21.54% 1.00

Barclays Capital U.S. Aggregate Bond IndexU.S. Investment Grade Bonds

8.69% 5.69% -5.92% 0.20

Source: BarclayHedge, Barclays Capital, Standard and Poor’s

Managed Futures www.forwardinvesting.com4

During the tumultuous period between January 1, 2000 and the end of 2011, the CTA Index gained an average of 5.21% annually while the S&P 500 rose by just 0.31% annually on average. But these figures obscure one of the most appealing features of managed futures—namely, how well they’ve done in some years when broad markets performed poorly. In 1990, 2002 and 2008, the CTA Index made double-digit gains while the S&P 500 lost ground.

Moderate volatility

As with returns, the overall volatility of the CTA Index has been close to that of the S&P 500 over the 32-year period ending on December 31, 2011. A standard deviation of 15.07% for monthly returns over that period is comparable to the 15.62% volatility exhibited by the S&P 500. (That result likely reflects some dampening of volatility due to the portfolio effect stemming from the fact that the CTA Index is a peer group measure.)

The difference in volatility is underscored when maximum monthly declines are compared. The CTA Index suffered its biggest loss of 32 years in June 1984, losing 9.81% of its value. The S&P 500, on the other hand, suffered a decline of 21.54% in October 1987 and produced five monthly drops in excess of 10% over the 32-year period.

Managed futures have displayed more volatility and a larger maximum drawdown than bonds since 1980. The BarCap Aggregate Bond Index was significantly less volatile than either the CTA Index or the S&P 500 during this period. It also

had a maximum monthly decline of -5.92% in February 1980—the smallest drawdown of the three asset classes.

Uncorrelated returns

Perhaps the most compelling attribute of managed futures is its pattern of very low or negative correlations to many asset classes. The CTA Index displays virtually no correlation to the S&P 500 or the BarCap Aggregate Bond Index over the 32-year time span shown in Figure 3. Managed futures exhibit very low correlations to other equity sectors as well. As seen in Figure 4, returns for the CTA Index over the past 20 years were not meaningfully correlated to large cap, small cap, international or emerging market stock indexes. Even commodities were only very weakly correlated to the CTA Index.

As previously noted, the managed futures strategy has also proved itself during recent periods of broad market downturns. Thus, the managed futures strategy offers strong portfolio diversification potential, although it is important to recognize that correlations of specific managed futures programs may vary from the averages.

Liquid markets

Managed futures strategies may invest in up to 150 different futures markets including currencies, interest rates, commodities, bonds and stock indexes.5 All of these markets are listed contracts on regulated futures exchanges that offer two-way markets to investors.

A History of Low CorrelationsAsset Class Correlations from January 1, 1992 to December 31, 2011

FIGURE 4

ManagedFixed

IncomeCom-

moditiesInt’l

EquityEmerging

MktLarge Cap

Small Cap

Barclay CTA Index 1.00 0.23 0.18 0.02 (0.02) (0.07) (0.09)

Barclay US Agg Bond TR USD 0.23 1.00 0.03 0.05 (0.04) 0.06 (0.04)

S&P GSCI TR 0.18 0.03 1.00 0.35 0.33 0.24 0.29

MSCI EAFE GR USD 0.02 0.05 0.35 1.00 0.75 0.78 0.71

MSCI EM GR USD (0.02) (0.04) 0.33 0.75 1.00 0.71 0.72

S&P 500 TR (0.07) 0.06 0.24 0.78 0.71 1.00 0.80

Russell 2000 TR USD (0.09) (0.04) 0.29 0.71 0.72 0.80 1.00

Sources: BarclayHedge, Barclays Capital, MSCI, Russell Investments, Standard and Poor’s

Managed futures strategies may invest in up to 150 different futures markets including currencies, interest rates, commodities, bonds and stock indexes.

Futures Trading, Demystified

5

Futures contracts came into being for good practical reasons. How many investors want to take delivery on 40,000 bushels of corn?

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It appears that many investors find futures markets to be intimidating and confusing despite their long history, which goes back to 17th century Japan, where rice futures were first traded. In the U.S., the trading of grain futures began at the Chicago Board of Trade (CBOT) in the mid-1800s.

Part of the problem may lie with the term derivative, as futures are often categorized—a word that has lately taken on negative connotations. Yet, when the jargon surrounding futures contracts is stripped away, they are actually quite simple. Futures contracts began by trading on perishable goods. They came into being for good practical reasons: Crops such as corn are grown on an annual cycle, and, once harvested, can only be stored for a finite period. Physical commodities are also hard to trade, given transportation, storage, insurance and other requirements. Futures contracts also give market participants a mechanism for price discovery.

Futures contracts typically evolved from forward contracts, which are bilateral agreements, meaning that counterparties must be willing to bear the risk of default by those on the other side of the agreement. This is why the CBOT’s corn contract began as a forward contract in 1848, but morphed into a futures contract in 1865. It became a futures contract when the exchange standardized the quantity and quality of corn in contracts and then began specifying months for trading of corn contracts based on factors such as time of harvest and patterns of demand. Beyond standardization, futures contracts also offered the assurance that the exchange’s clearinghouse would guarantee the counterparty risk of the transaction.

Until financial futures came onto the scene, every outstanding futures contract was ultimately settled by a delivery clause whereby the holder of the short position would deliver, say, 40,000 bushels of #3 corn to the holder of the long position at a specified delivery point. This insured that the futures contract price would converge with the spot market price, thereby reducing off the potential for arbitrage of the spot and futures markets.

But things changed once the Chicago Mercantile Exchange (CME) began trading contracts based on financial instruments—first foreign currencies and interest rates in the 1970s, then stock indexes in 1982. Moreover, in December, 1981, the CME gained regulatory approval for cash settlement of CME’s new three-month eurodollar contract. These financial futures traded in more or less the same way as 40,000 bushels of #3 corn, and cash settlement has been used for certain commodity futures contracts as well.

The new financial futures quickly became wildly popular for the same reason futures contracts became popular on commodities—namely, price. Just as it’s easier to trade a futures contract than 40,000 bushels of corn, it is much cheaper to trade one S&P 500 futures contract than to buy or sell all 500 of the individual stocks in the index. Most managed futures strategies employ programs engaged in relatively active trading, with holding periods generally varying from a few days to two or three weeks.

While managers could conceivably trade in the spot/cash markets, the costs of trading expenses and price slippage would be prohibitive, so they almost universally use futures contracts instead. Since every long futures contract must, by definition, be balanced by a short, managed futures traders can be as active in the markets as they wish without concern as to whether their positions are long or short.

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Perhaps the most important caveat regarding managed futures is that the performance of individual strategies may vary significantly from the historical performance of the CTA Index. As a peer group index, the CTA Index reflects the results of a representative group of investment managers who employ diverse strategies within the managed futures category—not the performance of a certain group of securities. Thus, results vary widely among strategies, and investment managers’ degree of success is dependent on their individual strategies as well as on market conditions. Futures prices can be highly volatile, and individual strategies are likely to be substantially more volatile than the CTA Index as a whole.

Because most managed futures strategies are trend following, as discussed below, they depend upon significant, sustained future price moves in

some of the markets traded. This means they tend not to do well in certain types of market environments, including periods without sustained moves in one or more of the markets traded, so-called whip-saw markets in which trends begin to develop but then reverse, or times when markets are driven by factors or events not reflected in technical analysis. In 2011 many markets were choppy and relatively directionless, and it was a year in which the CTA Index produced negative returns.

Investors should recognize that futures prices are difficult to predict and markets are influenced by many factors. Furthermore, individual managers may incur losses due to market illiquidity, counterparty risk or use of leverage. Thus, as with many forms of investment, investments in managed futures strategies are subject to potential loss.

As most managed futures strategies are trend following, they depend upon significant, sustained future price moves in some of the markets traded.

Risks To Keep in Mind

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.

More than 80% of managed futures assets are in systematic programs, and the great majority of those use a trend-following approach.

A Closer Look at Strategies

To understand what managed futures can—and cannot—contribute to a portfolio, investors need to look beyond the broad features of the category. Managed futures strategies are by no means all created equal, and it is important to know how individual strategies work and how they vary from one another.

Broadly speaking, managed futures strategies come in two flavors:

Fundamental (or discretionary) strategies based on managers’ analysis and judgment of factors such as supply and demand, macroeconomic indicators and geopolitical events.

Systematic strategies that employ a consistent methodology in an effort to capitalize on trends or patterns in futures pricing.

While both types of strategies are widely employed, more than 80% of managed futures assets are in systematic programs, and the great majority of those use a trend-following approach.6 All five of the largest managed futures programs and seven of the top ten are trend following.7 Such strategies generally refrain from trying to predict market trends. Rather, they aim to identify trends that have enough scale or persistence to give managers the opportunity to generate a profit.

Systematic methods

Most investment managers employing trend-following strategies operate by using various algorithms to signal when to buy or sell individual futures contracts, based on a time series of futures contract prices. They do not qualify as a passive approach, as they do not mirror an index. Instead, managers may assess trends based on moving averages, channel breakouts, exponential smoothing or any number of other quantitative factors. The active management component lies in the specifics of the methodology, which may vary in terms of factors including:

and generate long and short trading signals

Trend-following systems necessarily have at least three components: an algorithm to identify the trend, a methodology for capitalizing on it, and an algorithm to identify when the trend has run its course and a position should be exited.

Managers who use trend-following strategies often initiate a large number of positions with the expectation that a majority of them will be exited at no loss (a scratch trade) or at a small loss, relative to the capital being employed, if the trend is not confirmed. A manager using this approach may have a low “batting average,” but still profit overall if winning trades more than offset the losses from losing positions.

A continuing debate

Despite the popularity of trend-following strategies, and 50 years of studies on the informational content of securities price time series, the approach is not universally embraced. Researchers who subscribe to various forms of the random walk theory of financial markets maintain that the patterns of past securities prices have little or no bearing on subsequent prices.

Notwithstanding the continuing debate over the random walk theory, over the past 20 or so years a wide body of literature has been published to support the notion that securities prices can have identifiable periods of sustained momentum. A 2007 literature survey concluded that 56 of 90 modern studies mostly supported the validity of technical analysis.8 Research has also demonstrated that virtually all managed futures programs have return patterns with a high correlation to relatively simple trend-following models.9

Why do markets trend?

Even if we accept the premise that markets do trend, it is reasonable to ask why. Researchers have offered varied explanations, but, once again, no one answer is widely accepted as definitive.

Perhaps the most commonly posited cause is that investors tend to underreact to new information, causing new price estimates to remain somewhat tethered to old prices, and to overreact once new information is widely distributed. More investors hop on board as the trend is established, further extending the trend. Ultimately, as market conditions change, trends inevitably become

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8 Managed Futures www.forwardinvesting.com

overextended and begin slowing appreciably or reversing direction. This behavioral explanation implies that investors are less rational than many

market theories assume, a conclusion reached by a number of behavioral economists.10

A 2009 study found that as other asset classes became more correlated during the financial crisis, managed futures became less so.

As noted above, CTA programs historically have demonstrated the ability to produce equity-like returns with low correlations to stocks and, to a lesser extent, bonds. The full benefits of these characteristics become apparent when managed futures are added to a traditional stock and bond portfolio.

As a basis for comparison, let’s begin with a portfolio constructed of 60% U.S. stocks (as measured by the S&P 500) and 40% bonds (as measured by the BarCap Aggregate Bond Index). Portfolio theory suggests that combining them will produce a portfolio that is more efficient than either asset class alone in terms of its ability to produce risk-adjusted return, as measured by its Sharpe ratio. Indeed, this two-asset-class portfolio would have produced an annual return of 5.6%, with a standard deviation of 9.5%, over the 10-year period ending April 30, 2012 (Figure 5).

When managed futures, as measured by Morningstar’s Diversified Futures Index, are substituted for some of the equity portion of this portfolio, the improvement in performance is clearly illustrated. With a 10% allocation to managed futures, annualized returns climb to 5.9%. With a 20% allocation, annual returns reach 6.1%. The decline in volatility is even

more striking. The portfolio’s standard deviation falls to 7.7% with a 10% allocation. A 20% allocation reduces the standard deviation even further to 6.1%.

A number of academic studies support the notion that adding managed futures to a traditional portfolio may improve its risk-adjusted returns, due to the low correlations between managed futures and other asset classes. An early proponent of this view was Harvard Professor John Lintner, who authored the seminal paper in the field in 1983.11 Similar conclusions were reported in the Journal of Investment Management in 2004,12 and in an Ibbotson Associates study released in 2005.13 A 2009 study sponsored by the Chicago Board Options Exchange explored the impacts of the 2008 financial crisis on investment portfolios, and found that as other asset classes became more correlated during the crisis, managed futures became less so.14

Of course, there is no guarantee that managed futures will remain uncorrelated with other asset classes in the future. But in the meantime, historical evidence suggests that diversifying with managed futures may be one way investors can achieve better returns for the same level of risk or lower risks for a given level of return.

What Do Managed Futures Bring to Portfolios?

For many years, CTAs were the only vehicles through which investors could access managed futures. If a fund of hedge funds wanted to include managed futures in its asset mix, it would hire a CTA. To avoid confusion, it’s useful to know that managed futures are often defined as one type of hedge fund strategy. Morningstar, for example, includes CTAs in its hedge fund database. Investors may also see references to CPOs, which stands for Commodity Pool Operator and typically means a registered limited partnership that hires a licensed CTA to make investment decisions.

The managed futures strategy became considerably more accessible, however, with the introduction of the first managed futures mutual fund in 2007. Since then the number of managed futures mutual funds has quickly ballooned to 31 funds with total AUM of nearly $9 billion, according to Strategic Insight as of May 31, 2012.

As with CTAs, managed futures mutual funds overwhelmingly use some form of trend-following or momentum strategy, the Morningstar database shows. More than half the

The Evolution of Managed Futures Investment Vehicles

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The growth of managed futures mutual fund has made the strategy more broadly accessible with lower fees and daily liquidity.

www.forwardinvesting.com Managed Futures

The Impacts of Diversifying with Managed FuturesPortfolio Performance Comparison, May 1, 2002 – April 30, 2012

FIGURE 5

mutual funds use strategies that were developed specifically for that fund, while nearly one-third are organized as funds of funds where managers select and monitor other funds, typically CTAs, in a multi-fund structure.

CTAs and mutual funds have a number of important differences:

Accessibility

CTAs and hedge funds are generally open only to accredited or QEP investors. As of September 30, 2011, the median required initial investment is $250,000 for the single-manager managed futures hedge funds in Morningstar’s database and $50,000 for the median hedge fund of funds.15 However, Morningstar does note that a few registered commodity pools require minimum investments of as little as $1,000. In

contrast, managed futures mutual funds pose no qualification hurdle to investors, and the median minimum investment is $2,500.16

Fees

CTAs typically operate with a hedge-fund-style fee structure that combines an asset management fee with a performance fee, which is generally subject to a high water mark. The median fees for single-manager hedge funds employing managed futures strategies are a 2% management fee and 20% performance fee. Hedge funds of funds typically charge a 1.5% management fee and 10% on top of the fees for underlying funds.17

Fees charged by mutual funds employing managed futures strategies range from just over 1% to almost 6%. The median expense ratio is

Conclusion

10

2.1%.18 However, as with hedge fund vehicles, those managed futures mutual funds that are structured as funds of funds charge a double layer of fees.

As fees and expenses directly reduce the return from investment strategies, it is clear that a mutual fund structure may offer a performance advantage for comparable strategies.

Regulatory environment

Since Congress amended the 1936 U.S. Commodity Exchange Act in 1974, all CTAs have been regulated by the Commodities Futures Trading Commission (CFTC). They must also register with the National Futures Association (NFA), the industry’s self-regulatory group. Additionally, all account representatives who transact for their clients in futures and options must pass the CFTC’s Series 3 examination.19

With passage of new CFTC rules in February 2012, managed futures mutual funds are required to

register with the CFTC as CPOs, and remain subject to regulation by the U.S. Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA), the self-regulatory group for mutual funds.20 The CFTC and SEC have yet to harmonize their rules, which suggests that regulations will be in flux for some period of time. Managed futures mutual funds may be sold by brokers with a Series 6 or Series 7 license.

Transparency and liquidity

Being subject to SEC regulation, managed futures mutual funds are required to disclose their holdings to investors, publish a daily Net Asset Value (NAV) and provide daily liquidity for subscriptions and redemptions. CFTC regulations do not restrict CTAs from offering daily liquidity or transparency, but in practice, most have chosen to adopt practices similar to those of hedge funds, which may include restrictions on redemptions.21

With correlations rising among and within asset classes, geographic diversification may no longer be sufficient to help investors reduce portfolio risks. Those seeking new and potentially more effective ways of diversifying may wish to consider adding managed futures to their portfolios, given the strategy’s track record of low correlations coupled with its upside return potential. The introduction of managed futures mutual funds has made this option more broadly accessible while lowering fees, relative to limited partnership vehicles, and providing daily liquidity.

Managed Futures www.forwardinvesting.com

11

Definition of Terms

The Commodities Futures Trading Commission (CFTC) is a U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. It ensures the open and efficient operation of the futures markets and guards investors from manipulation, abusive trade practices and fraud.

Correlation refers to the statistical measure of how two securities move in relation to each other and is computed as the correlation coefficient, with ranges from -1 to +1.

A derivative is a security whose price is dependent upon or derived from one or more underlying assets.

Drawdown is the gradual decline in the price of a security or other investment between its high and low over a given period.

Futures contracts are contractual agreements, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future.

High water mark refers to a rule followed by most hedge funds that managers must earn back account losses before collecting further performance fees.

Managed futures are a type of alternative investment. Managed futures accounts can take both long and short positions in futures contracts and options on futures contracts in the global commodity, interest rate, equity and currency markets.

The Random Walk Theory is the theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

The Sharpe ratio is a ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate—such as that of the 10-year U.S. Treasury bond—from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

Spot price is the current price at which a particular commodity can be bought or sold at a specified time and place.

Standard deviation is the most common measure of statistical dispersion, measuring how widely spread the values in a data set are. If many data points are close to the mean, then the standard deviation is small; if many data points are far from the mean, then the standard deviation is large. If all the data values are equal, then the standard deviation is zero.

Definition of Indexes

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.

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.

The Morningstar Diversified Futures Index (DFI) is a fully collateralized futures index that offers diversified exposure to global markets through highly-liquid, exchange listed futures contracts in commodities, currencies and equities.

The MSCI Europe, Australasia and Far East (MSCI EAFE) Index is an unmanaged index of over 1,000 foreign common stock prices including the reinvestment of dividends. It is widely recognized as a benchmark for measuring the performance of international value funds.

The MSCI Emerging Markets (MSCI EM) Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global emerging markets.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the investable U.S. equity market.

The S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. Originally developed by Goldman Sachs, ownership transferred to Standard & Poor’s in 2007.

One cannot directly invest in an index.

www.forwardinvesting.com Managed Futures

1. BarclayHedge

2. Morningstar, Managed-Futures Category Handbook, 2011

3. Strategic Insight

4. http://www.advisorone.com/2011/12/12/advisors-roam-far-afield-in-search-of-alternative

5. Managed Funds Association

6. BarclayHedge, as of 12/31/11

7. Managedfutures.com, as of 11/30/11

8. Scott H. Irwin and Cheol-Ho Park, “What Do We know About the Profitability of Technical Analysis?,” Journal of Economic Surveys, vol. 21; 2007

9. Galen Burghardt, Ryan Duncan and Lianyan Lin, “Two Benchmarks for Momentum Trading,” AlternativeEdge Research Note, Newedge Prime Brokerage, August 26, 2010

10. Andrew Lo, Harry Mamaysky and Jiang Wang, “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference and Empirical Implementation”, Journal of Finance, vol. 25, (2000)

11. Lintner, John, “The Potential Role of Managed Commodity-Financial Futures Accounts in Portfolios of Stocks and Bonds,” delivered at the Annual Conference of the Financial Analysts Federation in May, 1983

12. “Managed futures and Hedge Funds: A Match Made in Heaven,” Journal Of Investment Management, Vol.2, No. 1 (2004)

13. Ibbotson Associates, “Managed Futures and Asset Allocation,” February 25, 2005

14. Edward Szado, CFA, “VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis”

15. Morningstar, Managed-Futures Category Handbook, 2011

16. Lipper

17. Morningstar, Managed-Futures Category Handbook, 2011

18. Strategic Insight

19. Managed Funds Association

20. National Law Review, “CFTC Adopts Final Amendments to Rule 4.5,” April 10, 2012; Futures Magazine, “Harmonize this,” March 1, 2012

21. http://www.iasg.com/articles/education/frequently- asked-questions-about-managed-futures

The new direction of investingThe 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 March 31, 2012, we manage more than $5.2 billion in a diverse product set offered to individual investors, financial advisors and institutions.

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