“Bond funds that make full use of the derivative toolkit available could also be labelled absolute return, such as the Kames Absolute Return Bond Fund, and these can be very appealing as long-term alternatives to cash or bonds in an environment where interest rates are ultra-low and expected to start rising in the next few years.”
Certainly, options have expanded significantly from a decade ago, when 130/30 funds were an exciting innovation for investors seeking to escape the shackles of long-only investing. Of the categories now incorporated in the absolute return bucket, long/short is arguably one that has lost some of its appeal.
Still, managers that deliver are seeing inflows, particularly in the current volatile climate for equities.
James Calder, research director at City Asset Management has been replacing long-only exposure in lower-risk portfolios with a mixture of long/short managers. This includes “steady” funds in the form of Henderson UK Absolute Return and BlackRock UK Absolute Alpha, and the “more racy” Polar Capital UK Absolute Equity Fund.
Calder acknowledges the funds will not deliver in all market conditions. “They struggled in the February sell-off. In that environment, everything is going down unless you massively reduce the size of the book and use lots of index shorts.
“It would be difficult to ride that one out, but it will be interesting if markets start normalising how quickly they revert back to delivering the return you are expecting. There is no guarantee these things will not lose you money but you have to hold them for a period of time to get the return.”
He says the big challenge for fund pickers is choosing strategies that are best placed to, if not guarantee growth, then at least limit some of the losses when the macro delivers us another curve ball. “It is difficult to compare apples with apples in that peer group because it covers all absolute return funds and rarely do you get two long/short funds with a similar strategy.”
