Absolute return funds have become increasingly popular investment vehicles for investors seeking consistent positive returns regardless of market conditions. As an alternative investment, absolute return funds employ advanced strategies like short-selling, leverage and derivatives to pursue positive returns in both rising and falling markets. However, proper due diligence is required before investing in absolute return funds offered by alternative investment partners. This article takes a closer look at absolute return funds, including their strategies, pros and cons, and factors to consider regarding fund partners and pricing.
Common Strategies Used by Absolute Return Funds
Absolute return funds utilize a variety of advanced strategies to pursue positive returns in diverse market environments. Some common strategies include:
– Long/short equity – Taking long and short positions in stocks to profit from both rising and falling prices.
– Arbitrage – Exploiting price differences between related securities.
– Global macro – Making leveraged bets on anticipated price movements of stocks, bonds, currencies and commodities.
– Managed futures – Systematic trading in futures contracts across various asset classes.
– Event-driven – Investing around corporate events like mergers, bankruptcies, restructurings.
The wide range of strategies allows absolute return funds the flexibility to shift capital towards opportunities for positive returns in different market regimes.
Pros and Cons of Absolute Return Funds
Absolute return funds offer some advantages but also have drawbacks for investors to consider:
Pros:
– Seeks positive returns regardless of market direction. Provides diversification for traditional portfolios.
– Combines multiple strategies and asset classes for more opportunities.
– Uses leverage and derivatives to enhance returns.
Cons:
– Higher fees than traditional mutual funds due to active complex strategies.
– Derivatives and leverage increase risk of magnified losses.
– Lack of transparency on specific investment positions.
Choosing the Right Absolute Return Fund Partner
To maximize the benefits and minimize the risks of investing in absolute return funds, it is critical to pick the right partner. When evaluating absolute return fund managers, key factors to analyze include:
– Track record – Look for managers with a consistent history of positive returns over full market cycles.
– Risk management – Ensure the manager controls portfolio risk and limits drawdowns.
– Fees – Compare management fees and performance incentives across funds.
– Transparency – Partner with a manager who clearly communicates positions and strategies.
– Operations – Review how trading, settlements and reporting are handled.
Conducting thorough due diligence on managers allows identifying those with the expertise and infrastructure to successfully execute absolute return strategies.
Understanding Absolute Return Fund Pricing
Unlike traditional mutual funds, absolute return funds do not have a standard daily NAV pricing. Instead, fund partners typically offer quarterly or monthly pricing tied to the underlying assets and strategies.
Key factors influencing absolute return fund pricing:
– Performance fees – Managers earn incentive fees on positive returns, increasing prices.
– Asset valuations – Pricing accounts for values of complex instruments like derivatives.
– Liquidity terms – Prices reflect redemption restrictions and lock-up periods.
– Level of subscriptions/redemptions – High activity requires adjusting prices.
Understanding the pricing methodology provides insights into expected fund returns and risks. Investors should review pricing alignment with actual asset performance regularly.
In summary, absolute return funds allow investors to pursue positive returns in diverse market conditions through advanced strategies. However, the complexities require careful due diligence on fund partners and thorough comprehension of pricing models based on underlying assets and activities.