Investors need to reassess their understanding of absolute return funds

16th July 2010

14 July 2010

Update: Financial adviser Patrick Connolly speaking in The Guardian says absolute return funds are not all they at first appear to be. He says: "The name 'absolute return' gives the perception of security and implies that funds can give positive returns in all environments. This is not the case."

Connolly from AWD Chase de Vere says the sector needs more clarity. Connolly says: "If they are simply diversified funds, then call them diversified funds. If they use hedge strategies, call them hedge funds."

And he's not alone. "The original terminology was that they would be boring but up," says Simon Moore at IFA firm Bestinvest. "They are meant to tick along nicely in a gloomy environment, but people expecting stellar returns might be a bit surprised."

The comments have met with little surprise from the investment community.

Commenting on the article, fluter says: "And is anybody surprised? What I've learned, as someone with not much money, is that complicated products are there to make money for the intermediaries.

"If you don't understand it, don't invest in it."

NE555 says : "Surprise surprise! another financial product proves to be a rip off.

"The only guarantee from the financial sector is they will make money at the cost of everyone else.

"Put your money in a tin box under the bed and only someone relatively honest like a thief will get their hands on it."

Although foolhardy tempers the view, saying: "The term 'absolute return' is defined as not trying to beat a standard benchmark, but it does not mean the manager cannot lose money.

"Shame on you if you ever thought so.

"By and large, if you speak with the fund manager of this type of strategy very, very few of them will tell you that their strategy can make their targeted returns under any and all conditions"

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Absolute Heroes?

There's no doubt that an investing style that can keep you ahead of the game under all circumstances sounds like a win-win situation. If only it were that simple.

One leading investment adviser warns that absolute return funds are seriously under-performing.

Here's a suggestion – by shorting the losers, or buying derivatives that would leave you in profit if (and when) they failed to deliver, you could play both the upside and the downside of the market at once, so that you stayed ahead under all circumstances.

Neat idea and yes, I know, it sounds decidedly shady.

Had the individiual who described it not been a world-famous icon of the investing world, I would have said it all sounded a bit sharky.

But he was an authority, and he clearly knew what he was on about.

Fifteen years on, absolute returns  – the name for the principle he was explaning –  has become a worldwide staple of the hedge fund industry. So no, in a way you weren't all wrong about it sounding shady either.

But that may also go on to explain why absolute return investing has gone on to become a popular technique for those of us in Britain who don't want to associate with remote tax havens.

Attractive returns

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