ABSOLUTE RETURN FUNDS- Comments?

HGLTsuperstar

OK so apologies for long thread but thought would post the full article so those who didn't see it in yesterday's Daily Mail would be able to follow what I'm talking about:

FLEXIBLE BREED CHAES HIGH RETURNS
A new species of investment fund claims to make money both in rising and falling markets.
Absolute or Total Return funds have recently been launched by JP Morgan, Old Mutual and Threadneedle Investments.
Their attraction is flexible rules, which enable them to put money into a wider range of investments. While traditional unit trusts keep most of their assets in shares and bonds, absolute return funds can quickly switch out of these if markets are falling.
These funds aim to give you a return above what you would earn in a bank or builiding society. They also aim to keep your capital intact, although there is no guarantee of that.
Absloute return funds can invest in derivatives, which gamble on the future value of investments, to limit losses on shares and bonds that might temporarily fall. If the fund managers think a share price will fall in the short term, they can take out a Contract for Difference with a broker to sell the shares at today's price some time in the future.
So if shares drop from 100p to 90p, the fund managers can sell for 100p and make money in a falling market.
But if the managers get it wrong and the shares rise, they will lose on the contract. This is balanced by the fact that they still have the actual shares in the portfolio making money.
Complex? Yes, but at least the managers do not incur dealing costs selling the shares and buying them back again.
However, financial advisers warn that investors need to understand where their money is going. Clearly the costs could mount up. And it is still early days for the funds, with no meaningful performance figures yet.
Ben Yearlsey, at adviser Hargreaves Lansdown, says: "I think these funds are potentially great investment products for years to come but they need to prove themselves. Ideally they need to be road-tested through a bull and a bear run to see hoe they perform."
The funds differ considerably. JP Morgan's approach is to use bonds and equities. Old Mutual works with hedge funds and Credit Suisse mainly deals in bonds and currencies.
The Old Mutual Prosper 80 spreads your cash across eight hedge funds and keeps the rest in cash. The fund aims to reutrn about 8.5% (4% above money market rates). There is also capital protection at 80% of the highest-ever fund price.
But these funds will cost you- the annual management fee is hefty, about 3% depending on how your money is divided. Standard unit trusts charge between 1% and 1.5% a year.
END OF ARTICLE
There is also a table of funds, the most inviting on paper being Threadneedle with target return of 2.5-3.5% above BOE rate and no initial charge then 1%

any thoughts anyone? No mention if these can be taken in an ISA? Ideas on minimum amount and length to invest? Better to stick with a tracker or go for this? Thought this could be an interesting new topic to ponder?

deemy2004

They are called hedge funds.

Usually due to the high initial outlay only available to the rich, but there are now a few investment trust and unit trust type funds which apparently the above is.

Its high risk.. much higher then the above implies... as it does mention that derivatives trading is gambling which it is !

the target is just that, a target they could just as easily said 10% above base rates.

dunstonh

yesterday's Daily Mail

Typical Daily Mail article. The DM is so dangerous as a source of information on financial matters. They seem to have a complete disregard for risk. This isnt the first time. Before the tech stocks crashed, the DM compared them to corporate bond funds by placing the past performance in the same league table without mentioning that corporate bonds were low risk and have low volatility. I know people that came out of safer funds and moved into the funds mentioned in the DM and ended up losing lots of money by investing way above their risk profile. All because the DM gave insufficient information.

NEVER NEVER NEVER invest based on an article read in the Daily Mail.

HGLTsuperstar

Well I didnt want this to get into a slagging-off the Daily Mail forum, all I can say in thier favour is one of their share tips last year is now up 73% but that's really the own experience I have with them.
Anyway back to the issue in hand. dunstonh, haven't you just stated a general rule, people lose money if going above their risk profile, so that can hold for any plan.
What I'm thinking is, I have come into a modest sum unexpectedly, so in a way I can risk losing it as it wont make any difference to my current situation, but if in a year or two its increased then all the better. I do though want to wrap it in a ISA for obvious reasons, and this isn't mentioned here.
More thoughts please?

deemy2004

You'd have a better bet investing in say an indian or eastern european investment trust

HGLTsuperstar

deemy2004 wrote:

You'd have a better bet investing in say an indian or eastern european investment trust

Can you please elaborate on this comment?

deemy2004

That it carries a higher risk but potential of rewards in the hundreds of %, with a greater probability of success then dumping your cash in hedge funds,since there are fundemental reasons for why the funds have grown and should continue to grow in the multiple of 100%'s

deemy2004

Something else you may be interested in

Hedge funds are out of control - will they strangle the world's finances, asks Heather Connon

Sunday October 16, 2005
The Observer


The headline in the Guardian said it all: 'World's hedge funds face crisis as Refco suspends trading'. Underlying the stories was the worry that the troubles at a US futures broker few of us had ever heard of could herald the economic meltdown which the doom-mongers have been predicting ever since hedge funds became the masters of the universe.
Such fears are understandable. First, the hedge fund industry has been growing rapidly. According to the latest asset survey by Eurohedge, the bible for hedge funds in Europe, funds under management in Europe alone have trebled since 2003 and now stand at $279 billion (£159bn) while, worldwide, there is now more than $1,000bn invested in more than 8,000 hedge funds. Some are very big: 50 funds in Europe and almost 200 in the US have assets of more than $1bn.

http://observer.guardian.co.uk/business/story/0,6903,1592954,00.html

Not that I agree with the article that refco collapse is going to herald a financial meltdown

But it is amusing that just before a major collapse the press start promoting it and joe public becomes interested... ... nearly ALWAYS the case :rolleyes: ...

cheerfulcat

HGLTsuperstar wrote:

any thoughts anyone? No mention if these can be taken in an ISA? Ideas on minimum amount and length to invest? Better to stick with a tracker or go for this? Thought this could be an interesting new topic to ponder?

Hi,

According to the Key Features document, the Credit Suisse offering may be put in an ISA. Googling will give the information for the others.

http://www.csam-europe.com/dss/fundsamdi2/fs_uk_targetret.pdf

The CS fund seems to be a bond fund; in the small print it says that the fund may invest in non-investment grade bonds, which would make me a little uneasy. Non-investment grade bonds ( junk bonds ) have a greater likelihood of default than investment grade bonds.

The minimum investment is £5000.

I don't really see the attraction of these funds. There is no guarantee, and the " target return " is just that - a target. Yes, on the face of it an aspiration to return 2.5%-3.5% above base rate looks good, but I would prefer to wait until these funds have a bit of history behind them. In fact, according to the Mail, the DWS Ratebuster fund, target return 7.75% + capital guarantee, has closed with no growth...

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=404372&in_page_id=3

If they really are similar to hedge funds, I would worry that the fund manager may be allowed to borrow money to invest ( gear up ). I also don't like the fact that they may be allowed to short shares; this could go badly wrong.

All in all, I would say that these funds are riskier than they appear at first sight and, given the high cost and uncertain return, not a good investment.

dunstonh

Anyway back to the issue in hand. dunstonh, haven't you just stated a general rule, people lose money if going above their risk profile, so that can hold for any plan.

The important word is potentially. They can potentially lose more. The problem is that the articles do not present the risk and some people rely on them and only find out the risk when things go wrong.

Well I didnt want this to get into a slagging-off the Daily Mail forum

It wasnt meant as a slagging off debate. Daily Mail do have a reputation for failing to highlight the risk with investment areas. Often, there is nothing wrong with what they are saying about an investment area, apart from the fact they disregard risk or more usually understate it. In your first post, you didnt state what your risk profile was. So, it was more a warning about what you read than a slagging off. Knowing the risk of an investment is vital.

EdInvestor

Knowing the risk of an investment is vital.

The point about absolute returns funds though is that they are supposed to be less risky than ordinary ones, because the fund manager is not constrained by the type of fund in terms of what he can invest in.

For instance if you put your money in a fund which invests in Japanese equities, then it will do exactly what it says on the tin, buy Japanese stocks and shares with your money , regardless of what happens to the Japanese stockmarket even if it crashes and even if it stays resolutely in negative territory for years and years.

Whereas the manager of an Absolute Returns fund can, at the first sign of a market crashing, remove your money and put it in cash. Or in a different market that isn't crashing, but rather going up. Or he can add a quite different asset class - bonds or property for instance. [Indeed these AR funds look a bit like old style Withprofits funds without the guarantees - they also have some similarities to "Special Situations" funds.] A good absolute returns fund would remove the need for asset allocation and mean the investor doesn't have to pay any attention to what's happening to his money.

If run well, they could reduce risk of losing money. But there are a number of other risks that could have the reverse effect,in addition to the derivatives and the shorting : one is the much stronger reliance on the ability of the fund manager,the second is the generally high charges which could be made a lot worse by frequent dealing. The third is the lack of a track record , though of course part performance is no guide to the future , blah blah blah .....;).The fourth is the basic fact that if you take your eye off your money, the financial services industry tends to run off with it....

So I doubt these funds are really appropriate for retail investors.Better to stick with something with a good history like Fidelity Special Sits or Invesco Perpetual Higher Income, where the fund manager has been delivering the goods for years.[And yes I know Anthony Bolton is leaving, but not yet.]Or a tracker, or a portfolio of blue chip high yielding shares.