Absolute Return and Target Return Funds

Published / Last Updated on 06/02/2020

Absolute return funds or Target return funds target specific investment growth whether markets are rising or falling using derivatives, futures, options, short selling, leverage and arbitrage (gearing) techniques rather than investing in traditional collective investment vehicles or markets.

Short selling means selling assets before you even own them e.g. sell in the morning and buy it in the afternoon at a lower price, meaning you have bought and sold the same stock, same day – but made a profit as it had fallen.

Gearing, leveraging and arbitrage e.g. using futures means buying financial derivatives that you only need pay for a deposit of either 10%, 20%, 30% or 50% etc to get 100% exposure to a market or stock.  Having say £10 deposit to buy £100 of market exposure means that if that market increases by just 5% in a day or two, you have made 5% with just 10% paid .  That means you actually made a 50% return on your original deposit investment.  This is extremely high risk and can mean significant losses as well as gains.

Absolute return and target return funds can therefore, depending upon their target growth and appetite for risk, be extremely volatile.  In a growing market they do well but when equity prices are top end – they may struggle a little as you can only bet on downwards swings and also market confidence then may impact as people withdraw and move to perceived safe haven or defensive funds.

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