Absolute Return Funds

purch

The IMA has created a new sector just for Absolute Return funds.

The sector will initially contain 17 funds, although only 5 of them, including the Forum favourite Blackrock Absolute Alpha, are UK domiciled.

Absolute Return Funds typically seek to offer a positive annual absolute return (i.e. above zero) regardless of market conditions, although of course they don't/can't guarantee anything.

http://www.investmentuk.org/press/2008/20080428.asp


N.B. The non-domiciled funds will carry an exchange risk for the investor

P.S. Looks like I'll have to amend my siggy

meester

purch wrote: »

P.S. Looks like I'll have to amend my siggy

Nothing is guaranteed in life.....

There is certainly a lack of understanding of the risks that these funds carry.

purch

There is certainly a lack of understanding of the risks that these funds carry

Couldn't agree more.

Something our friend dunstonh calls 'fashion investing'

turbobob

meester wrote: »

Nothing is guaranteed in life.....

There is certainly a lack of understanding of the risks that these funds carry.

What do you think the risks are?

Could they "implode" or are we talking the usual risks associated with the investments (absolute returns not guaranteed, fund may not perform well in a rising market etc).

meester

The funds are, btw,

Insight Investment

1. ABSOLUTE INSIGHT

Absolute Insight, our multi-strategy absolute return fund, aims to generate consistent positive absolute returns under all market conditions. ‘Absolute Insight’ is actively managed by our specialist investment teams who invest across a broad range of investment assets and employ diverse strategies to capture alpha while maintaining low levels of volatility throughout market cycles.

Principally a fund of funds, ‘Absolute Insight’ takes advantage of UCITS III regulations to invest in five uncorrelated underlying Dublin-domiciled UCITS III funds managed by ourselves. The Fund’s portfolio managers use derivatives to invest on a short as well as long basis and aim to preserve capital and add value by hedging market risk to produce a net return of cash plus 4% per annum.

Broad opportunity set

Broadening the opportunity set does not mean just expanding the geographical reach of the manager or the universe of asset classes in which a product can invest. It also means allowing the manager to sell short overvalued assets, rather than just buying attractive ones. This immediately doubles the number of available opportunities.

Precision

Through the prudent use of derivatives we seek to identify more precisely which risks we want to assume, and mitigate those that we do not. For example, a typical corporate bond investment has three risk components – credit, interest rate and currency. If an investor wishes to retain only the credit exposure, derivatives allow us to hedge (remove) the currency
and interest rate exposures. This freedom gives us scope to create more efficient portfolios, which should lead to better returns.

Diversification

Diversification is widely accepted as being an effective way to reduce investment risk. However, during periods of market turmoil, correlations between asset classes can rise, so diversification at an asset level is not
foolproof. Absolute Insight has been designed to address this, by combining different fund strategies, asset types and management styles. In this way,
we have sought to build a portfolio of investments that will be able to perform well at different points in the economic cycle and under varying market conditions.
The relatively low correlation between the Funds meant that the risk-adjusted return for investors in the Fund of Funds was improved.

The underlying, Dublin-domiciled, funds are:

2. Absolute Insight European Equity Market Neutral Fund
3. Absolute Insight UK Equity Market Neutral Fund
4. Absolute Insight International Equity Market Neutral Fund
5. Absolute Insight Emerging Market Debt Fund
6. Absolute Insight Currency Fund

Performance of the Insight FoF, was:

The Fund returned 2.96% (gross of fees) from launch on 28 February 2007 to 31 December 2007, underperforming the benchmark (£ 3-month LIBID) return of 5.10% by 2.14%.

There is clearly exposure to market risk.

Schroder ISF (Luxembourg)
7. Absolute Return Bond. Just a dull government bond fund
8. Emerging Market Debt Fund US$ underlying. GBP hedged share class available. Bond fund. Positive return for the underlying fund since 1998, except 2005 (-1%)
9. Asian Bond US$ (GBP hedge option)

Mellon Evolution (Irish domicile)
10. Global Alpha Euro fund, GBP-hedged option

A quant-driven TAA process that invests only in highly liquid bond futures, equity indices and currencies. The fund aims to return Euribor +4% after fees and expenses.

11. Core Alpha Euro fund
12. Currency Alpha Option Euro fund

Newton
13. Offshore Strategy Alternative Assets Fund GBP

Morley
14. Diversified Strategy Fund
http://www.morleyfm.co.uk/dsf/
Managed to an absolute return target: cash +5% gross over rolling 5-year period
(actually down over 1 year)

Merrill Lynch Blackrock
15. UK Absolute Alpha
Nuff said

Henderson
16. Credit Alpha
Invested in Fixed Interest. Launched start of year.
17. Emerging Market Debt Absolute Return
Fixed interest. Does not appear to have any special absolute return characteristic - normal global bond fund.

Of course there are other funds:

http://www.trustnet.com/ut/funds/perf.aspx?sec=abr

Only a few of those listed actually show positive return over 1 year, and not all of these are truly absolute return:
Several are from CF Ruffer, which states 'At Ruffer LLP preservation of capital is at the heart of our investment philosophy.'
However CF Ruffer's Equity and General, fell almost 15% peak-trough 2006-2007- it is an Active Managed fund with a varying spread of bonds and equities
The Total Return fund is a cautious managed fund, and again fell 2006-2007.
Their European Fund is top of the balanced managed sector over periods 1 month to 5 years. It is not IMO, an absolute return fund, because the correlation with its index is obvious, however, the capital preservation over 5 years is excellent, no more than 5% peak-trough falls.

Then there is CF Arch Cru, which has been discussed before.It seems to follow the same approach as the 'Insight' fund above, investing in relatively uncorrelated asset classes.

And Threadneedle Absolute Return Bond. A bond fund using options to provide absolute return.

There is JPMorgan Cautious Total Return stating its objective:

To achieve over a medium - term horizon higher returns than those available from money market instruments denominated in Sterling by investing primarily in fixed income securities, convertible bonds, equity securities and short-term securities of issuers located in any country.

The chart:

http://www.h-l.co.uk/fund_research/fund_performance/sedol/B09RGK3.hl

is stable, positive, and does not appear to be correlated to a particular benchmark, but the returns are not impressive.

The listed CF Odey Continental Europe fund is clearly NOT an absolute return fund.

So in reality, for retail investors there are only about three or four true absolute return funds.

meester

purch wrote: »

Couldn't agree more.

Something our friend dunstonh calls 'fashion investing'

DEFINITELY fashion. A sector outperforms (China, Gold), all the investors pile in, miss the boat, lose money.

Then move on to the next sector.

In this case it's unlikely to be damaging in the way that investing in emerging markets at the wrong time, so perhaps this fashion is not as bad.

But I can't help thinking all the money going into these funds will depress returns and cause a proliferation of poor-quality products.