1) Bullseye Highlights The Amnesia Effect S ometimes events happen that are so traumatic that the mind’s only way of coping is to erase all memory of the event, creating a period of short-term memory loss, or amnesia. It seems investors have a similar response to market crashes and suffer from The Amnesia Effect. Historical data shows that investors often retreat from the market while it is going down and are slow to return, missing many of the positive rebound returns. This pattern of failed market timing has been a frequent topic over the years, often illustrated by mutual fund asset flows published by the Investment Company Institute (ICI). Yet, the pattern continues. Looking at the end of the last decade, we can see that investors were fairly quick to react to the downside, but slow to re-engage on the upside. As 2010 came to a close, investor confidence in domestic stocks finally seemed to be showing signs of life. Of course, this was after a year and a half of negative asset flows despite the stock market showing substantial returns for six out of seven quarters. Clearly, fear-based market timing wasn’t working. $90,000 $70,000 ($ Milllions) Equity Fund Asset Flows $50,000 $30,000 $10,000 1.75 Years of Missed Opportunity 6 of 7 quarters with positive S&P rerturns, but negative asset flows 25% 20% 15% 10% 5% 0% -$10,000 -$30,000 -$50,000 -$70,000 -5% -10% S&P 500 Index Returns As we climbed out of the rubble created by the global financial crisis of 2008, investors seemed to be following the same strategy that got them in trouble before. Perhaps they forgot about other market declines of the past decade? If the recent events seem familiar, one only has to think back to the early 2000s and the internet bubble when asset flows told a similar story. By 2005, all was forgotten and equity fund assets were flowing as strongly as ever—of course, only after missing many of the gains from the early part of the recovery. -15% -20% Maybe this time would be different? Source: ICI, Bloomberg Year -$90,000 -25% After the financial market crash of 2008, some investors seemed like they were finally going to break the cycle as they Performance displayed represents past performance, which is no guarantee of future began to look for other investments. results. Index returns assume reinvestment of dividends and do not reflect any management Managed futures not only stood out as fees, transaction costs or expenses. Indexes are generally unmanaged and are not available a strong asset class during the market for direct investment. meltdown, but performed admirably during other time periods as well. So, many investors decided to add managed futures to their portfolio. Again, we see The Amnesia Effect kick in. When the stock market began doing well, people were suddenly disappointed in managed futures because the performance seemed mundane by comparison. Eventually it became all too easy to forget why they turned to managed futures in the first place—reasons like diversification, noncorrelation and the potential for gains in down markets. Instead, they chased equity performance based on gains which were likely already missed. 

2) 40.00% Internet Bubble Investors chase managed futures Investors chase (and miss) managed futures Investors forget the crash and begin to chase stocks Market Recovery Again, investors are late and chase stocks... 20.00% 10.00% 0.00% -10.00% -20.00% Stocks -vsManaged Futures -30.00% Year -40.00% 2000 Insurance sales often spike immediately after a disaster. But eventually sales begin to taper off and people let their policies lapse. The same could be said for portfolio management. Investors often think about risk management after the damage is done and turn to investments such as managed futures. But eventually they become enamored with the short-term upswing of the stock market and stop allocating to noncorrelated assets—even if they are doing well, just not as well as stocks. Financial Crisis Bull Market 30.00% Return The graph to the right shows the calendar year performance of domestic stocks versus managed futures during the 2000s. The table below the graph shows the risk/return statistics during the internet bubble, the financial crisis, and the subsequent recovery periods. Although the stock market had some years with large gains, the 10-year average shows that managed futures had seven times the performance of equities with roughly half the volatility. Regardless of any evidence to the contrary, many people still maintain the misconception that managed futures are always riskier than stocks. 2001 2002 2003 Crash & Recovery Market drawdown periods and equal recovery time following 2004 2005 2008 2009 2010 Managed Futures Return Risk Return Risk 17.6% 8.8% 21.0% 22.3% 17.0% 8.3% 23.0% -1.4% 7.3% 8.2% 14.7% 8.4% 16.4% 9.8% 8.5% Internet Bubble Recovery Period Financial Crisis Recovery Period Year 2009 -16.1% 17.2% -37.0% 26.5% 10 Year Average 2001-2010 1.4% Year 2008 2007 Stocks Apr 2000-Mar 2003 Apr 2003-Mar 2006 2006 Performance displayed represents past performance, which is no guarantee of future results. The index returns of Stocks (S&P 500 Index) and Managed Futures (Trader Vic Index) assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses. Indexes are generally unmanaged and are not available for direct investment. Data source: Bloomberg. Summary: Chasing returns simply hasn’t worked for many people. If an investor believes in the long-term merits of stocks as a core investment in their portfolio, it makes sense to consider holding them for the long-term. Managed futures are not without their own risks, including the potential for losses and/or underperformance relative to other investments. But since they have historically moved differently than stocks, as a part of a portfolio, they may provide diversification benefits. And if an investor believes in the merits of diversification, it doesn’t make sense to chase the returns of managed futures either. One purpose of diversification is to reduce volatility and offset the temptation of fear-based performance chasing. Is it amnesia or something else? Albert Einstein once said, “Insanity is doing the same thing over and over again and expecting a different result.” Investors should do their best to remember how they felt during the market crashes of the past decade and stop repeating the same failed behavior. They should try harder to remember their own investment objectives and not be so quick to forget about managed futures. Past performance is not indicative of future returns. Historical data is used for statistical illustration purposes only and should not be used as a predictive measure for the future return expectations of any investment. The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. Both traditional and alternative investments involve risks, including the potential for loss of principal. Managed futures investments may involve additional risks, including, but not limited to, geopolitical events, supply/ demand fluctuation, futures market speculation and regulatory changes. Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. Data source: ICI, Morningstar, and Bloomberg. Risk is represented by standard deviation, a statistical measurement of historical price volatility. The material herein has been provided by Arrow Investment Advisors and is for informational purposes only. Arrow Investment Advisors serves as investment advisor to one or more mutual funds distributed through Northern Lights Distributors, LLC (member FINRA). Northern Lights Distributors, LLC and Arrow Investment Advisors are not affiliated entities. 1654-NLD-8/2/2011