Forward Management, LLC (Forward) has launched the Forward Commodity Long/Short Strategy Fund (FCOMX), a mutual fund that seeks to profit from both up and down movements of commodity prices.
While commodity mutual funds have been available since 1997, the new fund is only the third pure commodity fund launched to date that uses an unbiased long/short strategy.
"This strategy combines long and short positions to capitalise on price momentum of rising and falling commodity prices," says J Alan Reid, Jr, CEO of Forward Management. "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."
All commodity mutual funds track an index in order to gain broad commodities exposure and control tracking error. Forward’s new fund uses the Credit Suisse Momentum and Volatility Enhanced Return Strategy (CS MOVERS) Index, an index that seeks to capitalise on the price momentum of major commodity futures. The fund uses a total return swap to gain exposure to the CS MOVERS Index.
Between 1998 and 2010, the CS MOVERS Index substantially outperformed two other major commodity indexes, the S&P GSCI Index and the Dow Jones UBS Commodity Index, producing lower volatility and smaller maximum drawdowns as well as higher annualised total returns over the 12-year period1, said Nathan Rowader, Forward’s director of investments and lead manager of the Forward Commodity Long/Short Strategy Fund.
The CS MOVERS Index uses a tactical approach to seek positive absolute returns at bullish and bearish points in the commodity cycle for each of the 24 single commodities, or sub-indexes, in the S&P GSCI Index. It employs a systematic process that uses volatility-adjusted momentum to invest long or short in commodities that rank highest in positive or negative returns over previous months, subject to diversification rules. Rankings are recalculated and the portfolio is rebalanced monthly.
Forward has worked with Credit Suisse to enhance the index with a strategy component seeking to increase total return by adding positive ?roll yield.? Unique to the futures market, roll yield is the difference in the price of futures contracts as the nearby contract approaches expiry and the position must be rolled to the next contract.
The fund pursues positive roll yield by allocating long positions to nearby, first deferred or second deferred futures contracts based on seasonally- and risk-adjusted performance. Based on portfolio modelling, the enhanced strategy increased annualised total return of the CS MOVERS Index from 18.7% to 20.6% over the 1998-2010 period.
"Roll yield has little to do with commodity price, but is important to commodity investors because it historically accounts for a big portion of the return; it can also detract from returns," says Rowader. "Most commodity funds buy nearby contracts, generating demand that can sometimes raise contract prices, resulting in a negative roll yield. For this reason, we believe our approach to positioning futures contracts is a significant advantage for Forward’s strategy."
The CS MOVERS strategy is available exclusively through Forward Management. The Forward Commodity Long/Short Strategy Fund is offered in investor and institutional share classes and is available through Charles Schwab, LPL Financial, Matrix Clearing, National Financial, and Pershing.
Forward’s commodity fund is the second alternative mutual fund the firm has introduced so far this year. In January the firm launched the Forward Tactical Enhanced Fund, a long/short equity fund designed for investors with higher-than-average return targets and risk tolerance. Forward now offers a total of ten mutual funds employing alternative strategies in asset classes including broad market, fixed income, real estate, and frontier markets.
"We believe that in this era of unpredictable returns, higher volatility, and higher asset class correlations, investor and advisors will need more nimble investment solutions to achieve the outcomes they are seeking. Forward is focused on providing fresh thinking and access to a wide range of portfolio building blocks, including creative approaches investors won’t find elsewhere," says Reid.