Absolute return funds aim to deliver positive returns regardless of market conditions, making them an attractive option for investors looking to reduce portfolio volatility. The S&P 500 index can serve as a benchmark example. While it has posted strong historical returns, it is still prone to drawdowns during market downturns. Absolute return funds employ alternative strategies across various asset classes to target steady gains without taking on excess risk. Their objective is to outperform cash returns while avoiding significant losses. As such, they can complement a portfolio focused on maximizing long-term growth. This article will explore how absolute return funds achieve their goals and why adding exposure can benefit investors.
Alternative asset classes and strategies allow absolute return funds to mitigate risk
Unlike traditional long-only funds, absolute return products utilize alternative assets like derivatives, currencies, commodities, and short positions. This expanded toolkit gives managers more ways to generate gains and hedge against market declines. For example, shorting overvalued stocks or assets can produce positive returns when prices fall. Absolute return funds also rely on diverse strategies ranging from global macro to managed futures and equity market neutral. This freedom to pursue returns across strategies and asset classes makes the funds more resilient across market cycles.
Combining low correlation assets leads to smoother and more consistent returns
Absolute return products tend to hold investment exposures that react differently to economic and market forces. This low correlation effect helps smooth out returns over time, leading to less volatility versus plain vanilla stock and bond funds. For instance, gains from short equity positions can counterbalance any losses from long commodity futures. Portfolio transparency and risk monitoring are key for managers to successfully blend these offsetting assets and strategies to target consistent returns.
Adding absolute return exposure allows investors to better manage portfolio risk
The S&P 500 and other stock benchmarks can post strong returns over long periods but remain vulnerable to periodic crashes. By introducing absolute return funds with their volatility dampening properties, investors can potentially achieve equity-like returns with less downside risk. This allows greater confidence in maintaining investments during inevitable bear markets instead of panic selling. An allocation in the 5-15% range balances achieving portfolio stability without sacrificing too much potential upside compared to a 100% stock portfolio.
In summary, absolute return investing aims to deliver steady positive gains across market cycles, providing investors with an alternative to reduce risk versus traditional stock and bond funds. As evidenced by major historical drawdowns, relying solely on the S&P 500 leaves portfolios exposed to volatility. Blending in absolute return funds through their usage of diverse strategies and asset classes can mitigate this risk. For long-term investors, the funds offer an attractive way to stabilize returns while still benefiting from capital appreciation over time.