MOST investors have found it difficult to navigate a safe course through the storms that have battered traditional investment markets this year. With several dark clouds remaining on the investment horizon, it is difficult for investors to gauge the depth and longevity of the current economic slowdown or when markets might look forward to better conditions.
Unsurprisingly, in this environment investors are drawn to the attractions of absolute return funds.
Absolute return funds (often referred to as hedge funds) aim to generate consistently positive returns regardless of whether markets are rising or
falling. This can be achieved by a skilled fund manager who has the mandate flexibility and sophisticated risk systems needed to manage a portfolio actively against a cash benchmark.
Managers employ many strategies and cover virtually all markets and investment instruments but, crucially, the mandate flexibility and range of investments available to absolute return fund managers allows them potentially to prosper (or at least to limit the downside) when markets are falling.
Diversification is a core aspect of successful investing so an absolute return fund that has a low or even inverse correlation to the main investment markets, and other asset classes, can be useful to investors who are looking to reduce the risk and volatility of their portfolio.
In the past, gaining exposure to absolute return funds was difficult for private investors without substantial funds to invest. However, this has changed in recent years and there are now two relatively simple ways to gain exposure to absolute return strategies. There are a growing number of fund of hedge funds listed on the London Stock Exchange and the purchase and sale of shares is made in the same way as for any other listed company or investment trust. In this case, investors gain access to a number of absolute return strategies and pass the complex task of fund selection to a team of specialist investment managers.
There are also a few single-strategy absolute return funds listed in this way, but investors might also consider one of the single-strategy absolute return funds that have recently been launched.
While it is easy to make a case for absolute return funds in the current environment, there are a few pitfalls that need to be considered.
Even among the listed funds of hedge funds, returns have varied considerably, with some not fulfilling what they set out to do. At the single-strategy fund level, there is now a range of absolute return funds on offer but it can be difficult comparing the merits and risks associated with each strategy. This task is made more difficult because most single-strategy funds currently only have a limited track record by which to judge the success of the fund manager. Most of these managers do have a track record of generating relative returns against a market index. This might be a reasonable guide but is certainly not a guarantee that they can manage to a cash benchmark. Above all else, it is the skill of the investment manager that is important with absolute return funds and, as with all investments, past performance is not a guide to future returns.
Absolute return funds are a useful addition to the retail investment landscape. Investors who are looking to diversify their exposure across a number of absolute return strategies should consider a listed fund of funds, while investors who want a more focused investment might consider a single-strategy fund. In either case, there is a reasonable chance that an investment in an absolute return fund strategy will produce healthy results in varied market conditions.
The full article contains 617 words and appears in The Scotsman newspaper.
