According to Fitch Ratings and aggregate data from Lipper, European absolute return funds lost 2.5% and flexible funds lost 7.6% in the first three weeks of August, giving a year-to-date performance of -3.5% and -8.9%, respectively.
While data indicated flexible funds avoided 70% of the month’s market decline, only half of them outperformed a balanced bond and equity allocation, year-to-date.
The ratings agency said while European absolute returns aimed for positive returns in all market environments, not all funds in the top quartile managed to preserve capital.
“Making up for the 2011 losses has become a major challenge for many absolute return and flexible funds,” said Manuel Arrive, a senior director in Fitch’s fund and asset manager rating team. “As a result, the worst performers are likely to be driven out of the market as investors discriminate based on performance.”
Fitch said the magnitude of the general market sell-off had caught investors by surprise, with many managers too slow to lower their portfolios’ overall risk budget or move into cash.
The agency said its analysis indicated downside protection mechanisms, such as hedging strategies, proved ineffective at certain times throughout August.
