While domestic stock mutual funds continue to bleed assets, demand for alternative strategy mutual funds has been growing by leaps and bounds.

That's very good news for Forward Management LLC. Forward, whose distribution channels include bank trust departments, has seen its assets under management double over the past year, to $7 billion. Driving the growth is its slate of alternative strategy funds, said Jeffrey Cusack, the San Francisco company's president.

"The real growth in the business is in the alternative space," he said. "It's the stuff that doesn't fit neatly in the style boxes that seems to be getting the flows."

Forward's Tactical Growth Fund is testament to that. The long-short fund, which is subadvised by Broadmark Asset Management, has gathered $1.6 billion of assets in its first year. Forward owns a minority interest in Broadmark, which is headquartered in New York City.

Money has gushed into long-short mutual funds, the biggest category of alternative funds, over the past couple of years. Annual net inflows jumped from about $3 billion in 2008, to $13 billion in 2009, Morningstar Inc. estimated. This year net flows were approaching $12 billion by the end of July, the research firm estimated.

Long-short funds use techniques that mimic those of hedge funds, including going short and using leverage. They have lower investment minimums than hedge funds and are more liquid than hedge funds, which frequently feature lock-up periods. However, they tend to have higher fees than conventional mutual funds.

Total assets under management in alternative mutual funds overall have jumped from $27 billion at the end of 2008 to about $52 billion through July of 2010, Morningstar says. U.S. stock funds, which had net outflows of $95 billion in 2008, are still slipping — investors yanked a net $28 billion out of such funds in the first seven months of this year.

Why have these mutual funds that mimic hedge funds broken out? A big reason is that investors are rethinking diversification, said Nadia Papagiannis, alternative investments strategist at Morningstar.

The portfolio devastation of 2008 made many conclude that conventional diversification approaches were no longer adequate; supposedly noncorrelated asset classes proved to be all too correlated. Even asset classes like real estate and private equity failed to provide protection, Papagiannis noted.

As a result, investors have realized they "really need to branch out into noncorrelated or low-correlated assets," Papagiannis said. "People are basically pouring their money into fixed income and alternatives right now."

Other fund companies successfully riding the alternative strategy fund wave include Natixis Global Asset Management LP, Hussman Funds and Rydex SGI. They don't include the biggest, best-known mutual fund names, Papagiannis noted.

Marquee firms have dabbled in alternative strategies but have not done well, she says. The more niche-oriented firms like Hussman, Natixis and Rydex simply have more experience with alternative strategies, and the big firms have been "trying to keep up with the Joneses," Papagiannis said. Thanks to its alternative offerings, Forward Management has made quick progress toward its goal of being a $20 billion-asset shop within a few years. "We're making great progress with a lot of wind in our face," Cusack said.

Forward's distribution includes more than 50 bank trust departments. Its Tactical Growth strategy has played well with them, Cusack said.

The strategy helps portfolio managers control their exposure to the market while remaining within their asset allocation guidelines, he said.

Forward became a player in the world of small and regional banks when it bought Accessor Capital Management LP about two years ago. Forward is working to expand its services for banks beyond consulting solutions and more into the investment sphere, Cusack said.

Forward also acquired the retail division of Berkeley Capital Management LLC last year, as well as Kensington Investment Group's Kensington Funds, and the firm is on the hunt for more acquisitions, particularly of firms that have alternative strategies in mutual fund packages, Cusack said.

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