17 September 2016
Funds that promise to shelter investors from volatile markets can charge high fees
Absolute Return funds have exploded in popularity over the past two years as retail investors have flocked to invest, drawn by the promise that these funds will provide returns in all market conditions.
However, investment analysts covering the sector are concerned that the funds are tricky to understand, promise the impossible and charge high fees.
The funds’ performance has also been less than stellar of late. According to data from Morningstar, two-thirds of
All of this has attracted the attention of the
Here are the questions to ask if you are considering putting your cash into an absolute return fund:
What are absolute return funds, anyway?
Funds that fall into the “absolute return” category follow a very wide range of strategies, but they generally look to keep volatility low and deliver returns in all market conditions.
According to analysts at Morningstar, the funds can be broadly described as having strategies similar to those adopted by hedge funds - but with a few important differences. Like hedge funds, absolute return funds tend to take short positions and use derivatives to achieve returns. However, because they operate according to rules governing retail funds, they are not allowed to hold certain illiquid assets and they do not borrow money to make their trades.
Beyond these general similarities there are lots of different fund management strategies that all fall under the umbrella of “absolute return”. These range from relatively straightforward equity funds holding both long and short positions, right up to multi-strategy funds that run tens of different mini- strategies within them.
So what’s the problem, and why is the regulator concerned?
It is not clear at this point why the
Fund analysts, however, are worried that the funds promise too much. “I think it’s unrealistic to expect any fund to perform all of the time no matter what it does,” said
Another concern is whether investors really understand what they are buying.
But if you know what you’re getting into, are these funds a good buy?
Yes and no. “It’s like any other sector - most of the funds aren’t that good,” said
Performance across the sector has been poor this year, but
TD Direct Investing recommends Newton Real Return to its investors, while Hargreaves has chosen Newton, alongside Pyrford Global Total Return. Fidelity International’s investing team,meanwhile, has put Henderson’s
Bear in mind, though, that these funds can be expensive. Unlike most retail funds, absolute return funds tend to have performance fees and charge investors if the fund returns more than a set benchmark.
Copyright The Financial Times Limited 2016
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