Absolute return funds
What are absolute return funds?
If you are familiar with the investment environment, then you may know that there are various types of funds that follow different strategies and goals. Also known as a target-return fund, an absolute return fund definition is an investment vehicle that seeks to generate positive returns regardless of the direction of markets. It differs from traditional mutual funds by the investment management methods applied. Absolute return funds meaning they can serve as an alternative to traditional bond and stock funds, as they use a variety of instruments across different asset classes.
Where have you heard about absolute return funds?
Absolute return funds have been around for decades, but only made big news after the 2008 financial crisis. The origins of the term go back to 1949 when Alfred Winslow Jones established the first absolute return fund in New York.
In the past few years, the absolute return approach has become one of the fastest-growing investment strategies worldwide. Typically, you will hear about absolute return funds from financial advisers and investment managers that sometimes offer them to retail clients to deliver stable returns.
Some examples of absolute return funds are John Hancock Global Absolute Return Strategies (JHAIX) and GMO Benchmark-Free Allocation (GBMFX).
What you need to know about absolute return funds...
Sometimes, absolute return funds can be compared to hedge funds, as they tend to become popular after stock market crashes. As absolute return funds promise a particular return regardless of the market conditions, they employ a much wider range of assets and strategies than traditional funds in order to navigate market storms, pursue its objectives and benefit from both rises and falls.
Absolute return investment strategies include investing in national and international equities and fixed-income securities, futures contracts and derivatives; utilisation of leverage; implementation of short selling, arbitrage and other techniques, which are not typically used by traditional bond and stock funds. They can also include investments in unconventional assets, such as commodities, loan notes or real estate, making it very similar to hedge funds. As they have a lower correlation to traditional funds and are less dependent on the direction of the underlying assets, an absolute return fund offers investors much-needed diversification.
Absolute return funds are usually seen as an ideal option for those who are looking for slow yet steady annual growth with reduced exposure to volatility. Some experts suggest that these funds are best for investors who are afraid to lose money during market downturns, or for those with a known spending need in the future, such as a property purchase. However, keep in mind that investing in these tends to be more expensive due to the higher fees charged by the funds.
Even in a scenario where markets are falling significantly, an absolute return fund still has the potential to generate income. Investment gains can never be guaranteed. However, by applying a range of techniques, absolute return funds provide investors with the opportunity to gain smoother returns throughout the market cycle, while managing downside risk and limiting the impact of volatility.
Note that absolute return funds don’t typically deliver very high returns themselves. Therefore, it may be more beneficial to add them to your portfolio, together with traditional stock and bond funds, to get a steadier rate of return over the longer term.