New figures published in The Telegraph today show that over half of absolute return funds failed to deliver an absolute return in 2011.
Only 8 of the 65 funds in the IMA Absolute Return sector delivered above-inflation real returns last year.
The Telegraph reports that one of the worst performers was the BlackRock UK Absolute Alpha Fund. This very popular £1.3bn absolute return fund lost 7% over twelve months.
Funds in the Absolute Return sector aim to deliver a greater than zero return in any market condition.
They have become increasingly popular with investors (and some advisers) since the credit crunch, with the number of funds growing from 16 in 2007 to 65 in 2011.
These funds typically use hedge fund style management techniques to ‘short’ certain stocks or other investment vehicles, with the aim of making a profit even if the markets are falling in value.
Another feature many of these funds have imported from the hedge fund world is performance related fees, often with very low hurdle rates for these 20% fees to be levied by the manager.
Last year should have been good for absolute return funds, with market volatility providing plenty of opportunities for the managers to capture profits. The frequency of these funds failing to meet their objectives in 2011 demonstrates that the name ‘absolute return’ can be very misleading to investors.
We understand that the Investment Management Association (IMA) will be publishing the results of their review into this sector in the early part of this year.
This follows the IMA review of the managed sectors which resulted in less misleading titles for the Cautious and Balanced Managed sectors.
Investors should treat the name ‘absolute return’ with a large pinch of salt.
Whilst this is a noble investment aim, it is impossible for any fund or manager to consistently deliver a greater than zero return in different market conditions.
Instead, investors would be better served ensuring the underlying asset allocation of their portfolios is well suited to their risk profile and investment goals.
Absolute return funds sound good; it is a shame they often fail to deliver what they indicate they should.
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