Absolute Return Funds

Absolute return funds (or Hedge Funds) aim to deliver returns in both rising and falling markets. 

The investment techniques adopted by Absolute Return Funds may be different to methods employed by traditional fund managers as the funds have greater scope to use derivatives, short positions, and exotic securities. History of Absolute Return Funds

Depending on the investment strategy employed by the fund manger investors may receive returns in the form of income, capital appreciation, or a combination of both.

Because the securities they invest in and their management techniques differ from traditional investment management, the performance of Absolute Return Funds is not highly correlated to the performance of traditional assets such as shares, property, or fixed interest.

Depending on the underlying investments and the manager's investment strategy, the risk profile of Absolute Return Funds can range from very conservative to aggressive.

Some of the investment techniques available to Absolute Return Funds include:

  • Short selling – where the manager borrows a security and subsequently sells the security with an obligation to purchase back the security and return it at a later date. This technique is utilised where the manager believes the security is overvalued or as part of a hedge or arbitrage strategy.
  • Hedging – where the manager utilises two or more securities that are likely to move in opposition to each other, thereby mitigating risk.
  • Arbitrage – where the manager attempts to profit from a temporary pricing inefficiency or discrepancy in either an individual security or a securities market. This technique may involve short selling and/or hedging.
  • Low liquidity or distressed securities – where the manager attempts to earn returns through investments in low liquidity or distressed securities outside the investment mandates of traditional fund managers.
  • Leverage – where the fund manger borrows or gears the assets of the fund to increase the size of the investment portfolio and potentially earn greater returns.

Absolute Return Funds have been one of the fastest growing investment products over the last decade with more than $1trillion of assets under management world-wide. 

Although every fund is different, the underlying investments in an Absolute Return Fund may include, stocks, bonds, currencies, mortgages, options, futures, metals, real estate securities, swaps, money markets, warrants, derivatives, and other exotic financial instruments. Absolute Return Funds Glossary. 

Absolute Return Funds can follow one of two structures:

  • The fund of fund structure, where the manager invests in a number of other funds.
  • The direct investment structure, where the manager invests directly into securities.

Absolute Return Funds may be appropriate for investors seeking:

  • Potential returns in rising and falling markets
  • Diversification into non-traditional financial instruments and management techniques
  • An investment with low correlation to Shares, Property, or Fixed Income
  • Returns from both income and capital appreciation