Alternative investments like absolute return funds have become increasingly popular in recent years among investors looking to diversify their portfolios. Unlike traditional investments like stocks and bonds, alternative investments aim to generate returns regardless of market conditions, providing investors with improved diversification and reduced volatility. This article provides an overview of alternative investment funds, specifically looking at absolute return funds, their investment strategies, net asset value (NAV) calculation, and pros and cons for investors to consider.
Absolute return funds follow an absolute return investment strategy
Absolute return funds aim to provide positive returns regardless of broader market conditions over a given period of time. These funds utilize diverse strategies across various asset classes to generate returns, including long/short positions, arbitrage, derivatives trading, and opportunistic investments. The goal is to produce positive returns, often in the range of 5-10%, over a full market cycle or calendar year. As a result, absolute return funds offer returns disconnected from common benchmarks like stocks and bonds.
NAV reflects portfolio value and fund share price
Like other funds, absolute return funds have a net asset value (NAV) which reflects the total value of the fund’s investment holdings divided by the number of outstanding shares. The NAV per share is used to determine the price at which investors can purchase or sell fund shares. NAV fluctuates based on the value of the fund’s underlying investments. Absolute return fund NAV should steadily rise over time as the fund managers generate consistent positive returns across market cycles.
Pros include diversification and lower volatility
A key advantage of absolute return funds is diversification across many asset classes and investment strategies not found in traditional stock and bond funds. This wider opportunity set allows the potential to generate returns in any market environment. Investor portfolios with absolute return funds also tend to experience lower volatility compared to those solely invested in equities.
Cons include higher fees and lower transparency
Absolute return funds do have some potential drawbacks. They tend to have higher fees given the complex investment strategies. The funds also provide lower transparency into the specific assets and positions compared to traditional mutual funds. Limitations on liquidity and redemptions are also common due to the use of less liquid asset classes.
Absolute return funds utilizing diverse alternative investment strategies can provide portfolio diversification benefits and positive returns uncorrelated to broader markets, as reflected in steady growth in their net asset value. However, investors should weigh higher fees and lower liquidity against the potential advantages.