Absolute-return funds are those that aim to achieve positive returns regardless of whether the market is going up or down. For example, an absolute-return fund might bet on certain stocks going up, but might also short the overall market (bet on stocks falling). So even if the stockmarket falls, the fund would still show a positive return so long as its individual stock picks did better than the wider market.
Absolute-return funds sound an excellent idea in theory, but results show that not all funds of this type manage to live up to their promise. Out of the 37 funds in data provider FT Trustnet’s targeted absolute-return sector (those which have five-year records), only 19 have consistently achieved positive returns over one, three and five-year periods, says James Connington in The Daily Telegraph.
Over five years, all but one of the 37 funds achieved a positive return, with an average return of 21.8% – but it’s worth bearing in mind that absolute-return funds may in recent years have benefited from the “free ride” of a consistently rising market that has been artificially maintained by quantitative easing, as Connington points out.
What’s more, relatively few funds did well during the 2008 crisis, which is exactly the kind of market in which investors are most concerned about avoiding losses (those that did well include Ruffer Total Return and Troy Trojan).