Fund name: Forward Long/Short Credit Analysis (FLSRX)

Objective: Seeks to maximize total return by investing primarily in a non-diversified portfolio of municipal bonds, corporate bonds, U.S. Treasury and Agency securities, sovereign debt, emerging market debt, floating rate or zero coupon securities and non-convertible preferred securities and derivatives. The fund, no surprise, can short anything in the portfolio and can, something of a surprise, leverage itself by 300% to maximize returns.

Manager: Cedar Ridge Partners, LLC of Greenwich CT (ground zero for the hedge fund industry) manages the fund as sub-advisor. As of December 31, 2008, Cedar Ridge had assets under management of $74 million. The actual managers are Alan Hart, Cedar Ridge’s CIO, and Guy Benstead, its Chief Compliance Officer. Mr. Hart does the heavy lifting for the fund. From 1996-2004, he was a Managing Director at Bear, Stearns & Co. Inc. where he also managed high-yield, structured transactions and advised issuers in private equity and distressed debt situations. Before that he worked for Goldman, Sachs. Since 2004 he and Mr. Benstead have run a hedge fund using the same strategy employed here. Mr. Benstead’s career spans years at Bear, Stearns & Co., Gruntal & Company, and Drexel Burnham Lambert.

Management’s Stake in the Fund: As of 12/30/08, virtually no one at the advisor or sub-advisor had committed a penny to the fund.

Opening date: The fund commenced operations on January 3, 2007 but its Investor and Institutional Class shares weren’t available until May 1, 2008.

Minimum investment: $4,000 for regular accounts and $2000 for education savings accounts. Forward reduces the minimum to $500 for accounts established with an automatic investment plan.

Expense ratio: 1.95% after waivers and reimbursements, on assets of $70 million. Those waivers are effective at least through the spring of 2010. Absent those provisions, the expense ratio is massive.

Comments: FLSRX is an intriguing fund with a number of appealing properties. Investors are understandably anxious to avoid participating in a repeat of the 2007-08 bloodbath. Unfortunately, most of the traditional alternatives to domestic equities are – at least at the beginning of 2010 – powerfully unattractive. Money market funds and bank deposits are returning a fraction of one percent. Investors conservative enough to tolerate such penurious payment have had their confidence shaken by waves of bank failures, depleted FDIC reserves and lingering – largely unwarranted – suspicions about the safety of money market funds. The bidding war caused by the panicky "flight to quality" in the past couple years and the federal government’s . . . how to put this politely?... lunatic addiction to debt (albeit bipartisan lunacy) makes Treasuries an asset class to be avoided.

Such concerns led to the migration of "long/short" and "absolute return" strategies from the mysterious jungle of "qualified investors", hedge funds and limited partnerships to the bright, sunlit meadows of the mutual fund. Such funds typically make one of two promises: (1) we’ll make a modest but worthwhile 6-10% a year for you even if the stock, bond, and commodity markets melt down simultaneously and (2) we’ll deploy magic ju-ju to make you lots of money while guarding against black swans and other creatures of the dark. You might think of the first strategy as "beta focused": it’s more concerned with downside than upside. The second strategy is "alpha focused:" it’s more concerned with (risk-adjusted) upside than downside protection.

FLSRX strikes me as an "alpha focused" fund with two special claims to your attention:

• It makes its money, primarily, in debt markets rather than equity markets. That is, among long/short mutual funds, a rarity.



• It’s positioned as an actual hedge fund, rather than as a "hedge-fund-like mutual fund." Forward’s president Alan Reid made the distinction clear when the fund was launched in 2007:

Unlike the "hedge fund light" mutual funds, this one is designed just like a hedge fund, but with daily pricing, daily liquidity, and mutual fund-like transparency.

Forward’s commitment to the fund’s hedge roots was so strong that it was initially available only to qualified investors: folks with a net worth over $1.5 million or at least $750,000 invested in the fund. Indeed, it may have been created for the benefit of a single investor – Gordon Getty – who liked the strategy, disliked the illiquidity of hedge funds (investors can only get their money back during one or two "windows" each year) and had $10 million to back up his preferences.

Forward went out and hired the Cedar Ridge Partners hedge fund team and offered to pay them hedge fund-like incentives ("We don’t mind paying performance fees but we hate [the tax reporting mess attendant to hedge funds]," Mr. Reid reports) to replicate their hedge fund’s strategy here. Cedar Ridge pursues three broad sets of strategies on the funds’ behalf:

• It typically holds long positions in high-yield munis, corporates and preferred shares.



• It typically holds short positions in U.S. government bonds, agency securities and some corporates.



• It uses leverage, and a lot of it, to magnify returns.

That having been said, there is abundant reason for caution in approaching the fund.

• Neither Forward nor Cedar Ridge is particularly anxious to explain what the managers are doing. The fund’s semi-annual report doesn’t comment on strategy, Forward’s description of the fund is limited to one passage on what "typically" happens, Cedar Ridge’s website contains the same passage, and the managers’ quarterly commentary at the Forward website discusses the state of the bond market (apparently, the issuance of "Build America Bonds" or BABs presents interesting arbitrage opportunities vis-à-vis muni bonds).



• The prospectus contains mostly quasi-magical descriptions of what these folks might be doing. The advisor’s strategy "incorporates certain ‘relative value’ elements," they hope to pursue "certain arbitrage opportunities," might well invest in "securities that are moral obligations of the issuers" while "it is possible that at certain times, the Fund may be approximately ‘100% short.’" Oh, that helps. Even when the language is clear – it may be entirely invested in munis, entirely invested in junk, might short either to hedge or to maximize returns, might leverage (apparently to 300%) – the managers’ strategies are not particularly transparent.



• Absent waivers and reimbursements, the fund’s gross expenses are bracingy high: 6.08%. Those expense limitations expire in April 2010. They might be extended, or extended with modifications, but that’s not guaranteed.



• The hedge fund on which FSLRX is based lost substantial money in both 2007 and 2008 (that’s the record for the Cedar Ridge Master Fund, per Morningstar’s hedge fund database). The fund reports only four years of operations: up 6% in 2005, up 24% in 2006, down 16% in 2007, and down 6% in 2008.



• There’s no decent peer group against which to measure FSLRX’s performance. Morningstar places it, reasonably enough, in the long-short category. Unfortunately, those funds tend to be long/short equity funds whose performance and risk-profiles might have very little to do with a long/short bond fund’s.

Bottom Line: Watch, but don’t touch. This fund may develop into a compelling opportunity, but there are enough dark spots now that investing would be more an act of faith and a response to due diligence.