Absolute Return fundsAbsolute Return Funds - What’s it all about?

Absolute return funds are meant to be a ‘Jack of all trades’, being able to capture market growth whilst mitigating (and some would argue avoiding) losses on the downside.

In the falls of 2008 almost half of Absolute Return funds fell into negative territory and in the growth spurt of 2009 a third still returned losses.

There is a lot of jargon caught up with Absolute Return funds, making them harder for the investor to understand. Terms such as Generating Alpha (this is the element of fund performance that is attributable to the actions and skill of the manager) and Beta (this is the return that comes from simply being in a particular market or asset class).

The added problem for investors is that there is no single definition of what constitutes an Absolute Return fund. Funds are spread around several sectors and can also adopt widely differing investment strategies.

Within the Absolute Return sector alone there are equity funds, bond funds, currency funds and multi-asset funds, each with their own absolute return target.

Although some funds that now come under the general heading of ‘absolute’ or ‘total’ return funds have been around for some time, the dramatic recent growth in the number of funds following an absolute return strategy is as a direct result of the introduction of the European UCITS III directive. This directive gave authorised investment funds greater investment powers, including the ability to go ‘short’.

This basically means selling securities that have been borrowed from a third party with the intention of buying them back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the securities between the sale and the repurchase, meaning he will pay less to buy the assets than he received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises.

Because of the varying strategies, the key question for the investor to ask is, “Does the manager spell out what he is trying to do?”

There are some funds that are very clearly defined in what they do, but there are others that are run as multi-asset funds where you really don’t know what you are getting.

If you would like help with your absolute return funds, book a callback with me and we can go through everything.

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