Understanding absolute return

An absolute return in the purest sense is the size of a return over a set period of time and Absolute Return Funds aim to achieve just that – a positive return, although this is not guaranteed.

Techniques used by fund managers vary considerably but usually comprise of a combination of separate asset classes such as cash-based funds, bond funds with special strategies aimed at reducing interest rate risk and alternative investment vehicles such as hedge funds which frequently also use specialised strategies to reduce or minimise specific types of investment risk. In terms of risk-return profiles these sub-asset classes can sometimes display a degree of similarity, hence the basis for aggregating these into one risk-return bucket to simplify the asset class categorisation. Since the sole aim of the fund is to generate positive returns, the fund manager will not consider outside influences such as inflation, cash or the performance of other investments, meaning performance will not be directly comparable.

Before you choose an investment, you should be aware of the possible rewards and be comfortable with the level of risk involved.

 

Rewards

Absolute return investments aim to give positive returns whatever happens in the financial markets, even when they are falling, though this isn’t guaranteed.

Risks

Since fund managers can use a wide variety of investments and techniques, one fund can be very different to the next, and the exact make up of the fund can be hard to pin down. Benchmarks for success are usually set in cash, rather than the indexes used by unit trusts or Open Ended Investment Companies (OEICs), but success isn’t guaranteed and investors may not make a positive return in real terms. Although these investments aim to make a positive return, there is no guarantee and they can lose money.

Important information

The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.

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