Targeted absolute return funds have proved popular with investors seeking to reduce volatility during periods of economic uncertainty. By offering target returns of Cash + 4% or more and aiming to deliver positive returns in all conditions, and with less volatility than the wider market, it is easy to understand their appeal for investors to weather potential stock market storms.
Performance across the absolute return funds sector has recently been poor but it’s important to remember that you could still lose money, as these and all investments can fall as well as rise in value.
Absolute return funds invest in a wide range of assets, but unlike traditional managed funds, they may use more complex investment financial instruments – derivatives and currency hedging – to achieve their aims. Despite these funds having a similar overall objective, the particular investment strategy adopted by a fund will depend on the approach of the manager. Some of these funds, for example, invest in a single asset type, such as bonds or equities, while others include a broader range, including property, commodities, and currencies. They may also invest in assets across different geographical regions across the world, or focus on a particular market, such as the UK or emerging markets.
Absolute return funds often hold alternative assets such as currencies and commodities that have less correlation to the performance of shares and bonds. The currencies and commodities may potentially perform differently during periods of market volatility, perhaps offsetting losses from other investments but their losses may also offset other gains.
The sector has faced criticism recently because many funds have failed to perform as hoped. Some have taken such a cautious investment strategy that they have struggled to produce greater returns than cash over two years, proving that their strategy to protect capital doesn’t always work in investors’ favour. Other absolute return funds are considered to take greater risks with their investment strategy than might have been expected from this sector.
If you are considering investing in absolute returns funds, you should seek professional financial advice.