Definition of absolute return fund

This fund aims to deliver positive returns in all market conditions, with low volatility.

Absolute return funds sprang up following the new “Ucits III” European regulations in 2004. These allowed managers to introduce more sophisticated financial instruments such as derivatives into their portfolios and therefore protect against downside risk and to generate higher returns, rather than simply to reduce risk.  Also they aim to beat cash returns and tend not to guarantee a minimum return. 

However, many of these funds have so far failed to deliver.

One reason for the fluctuating performance of the funds is that the investments and management approach vary from one fund to the next.

At one end of the spectrum are managers of relatively straightforward funds who aim to protect capital by using bonds, where returns are less volatile. 

Threadneedle’s Absolute Return Bond, for example, invests in fixed interest such as UK gilts and corporate bonds to provide a more stable return.

Others such as the Newton Real Return fund spread investments across a range of asset classes in order to reduce volatility and look to achieve higher returns. This can be a more risky strategy and relies on the manager’s ability to judge the right time to shift a fund’s investment holdings in and out of asset classes such as equities or cash and bonds. [1]

Absolute return funds fail to deliver

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