Absolute return funds are those funds whose significant aim is to deliver returns in every market conditions. In simple terms, these funds aim towards generating returns in every market whether it’s rising or falling.
Frequently managers of Absolute return funds use derivatives in their strategies for hedging. Sometimes they may also take short or long positions as per their market view. Managers may also invest in exotic securities, or they go for ‘fund of funds’ approach. In fund of funds approach, manager invests in several other funds.
Absolute return funds portfolio includes underlying investments. The underlying investments may include bonds, currencies, derivatives, money markets, swaps or other specialized financial instruments.
Investors returns always vary due to the different fund strategies, and funds may distribute the return in the form of a dividend, capital appreciation or a combination of both.
Absolute return funds may also invest in assets across different geographical regions across the world, or sometimes they shift there to focus on a particular market, such as the US, Australia or emerging markets.
The two sides of absolute return funds are:
- Absolute return funds diversify their portfolio with alternative assets which have less correlation with the performance of shares and bonds. Alternative assets may include currencies and commodities. During periods of market volatility these alternative assets may perform differently, perhaps the gains from alternative assets offset the financial losses from other investments and sometimes their losses may also offset other gains.
- The primary objective of fund managers is to return positive returns to the investors, but still, they can’t guarantee it.
- While investing, investors must investigate the ongoing charges and compare it with the other fund that they are not paying extra for the service which only benefits the Fund managers. Investors must keep in mind that these charges will have a significant impact on their returns over the long-term simply it will put a dent in the investor’s return, so it’s also an essential aspect for the investors to check so that they reap a higher profit.
- Absolute return funds may charge a performance fee, which is paid to the fund managers whenever the fund exceeds the benchmark. Fund managers generally decide this benchmark.
Investment techniques: Common investment techniques used by absolute return funds are:
- Fund managers use leverage against the assets of the fund so that they can increase the size of the investment portfolio and it may lead to greater returns, but leverage can lead to a greater loss.
- Fund managers can use derivative for hedging, or simply buy a futures contract, an option so that they can fix a price for security now, by doing this fund managers can offset the risk of loss from market fluctuations.
- The Fund manager may also apply a short selling strategy. In this strategy, the fund manager will borrow the security from the market that he/she believes is overvalued or in their view, it will go south and subsequently sell it, and later, they purchase back the security usually at a lower price and return it later.
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