Absolute return funds

by admin on November 4th, 2010

Achieving positive growth in bear as well as bull markets

During both bear as well as bull markets, absolute return funds aim to achieve positive growth. They offer ordinary investors access to a range of sophisticated investment techniques and seek to deliver a positive (or ‘absolute’) return every year regardless of what is happening in the stock market.

These funds deploy many of the same investment tools, such as futures, as those used by hedge funds, the objective being to provide a regular return above what is available through a cash savings account but with less risk than a standard stock market fund.

More adventurous investors use them as a core holding for their portfolio while buying more aggressive funds alongside them. With their potential to provide real growth, but more smoothly than traditional funds, they also appeal to more cautious investors.

Funds traditionally buy assets that they aim to sell later at a higher price, with any profit reinvested in the next idea. However, the stock market isn’t always rising. Two events in the last ten years, the dotcom crash and the credit crunch, caused significant setbacks in the markets, when most traditional funds fell in value.

Absolute return funds aim to make money when prices fall and reduce overall volatility by using more sophisticated investment techniques such as shorting. However, the success of this strategy is heavily dependent on the skill of the fund manager. Not only must they decide which stocks they think will rise in value, but also which will fall. The manager’s decisions will therefore have the greatest influence on returns, rather than the direction of the market.

Instead of just buying and holding shares that the fund manager thinks will increase in value, an absolute return manager is able to take positions that will make the fund money if a particular share actually falls in value. In addition, managers can invest in a mixture of shares, bonds or cash accounts, all with the aim of giving a smoothed return to the investor.

In a quickly rising stock market the majority of absolute return funds will underperform traditional funds but, when markets are tough, in theory they can still deliver annual gains. Performance between absolute return funds will vary as different managers employ different strategies and take their own view of the market. Some target higher returns than others and so necessarily take more risk, and not all absolute return funds are the same. ν

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

From → Financial News

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