Absolute return funds fail to deliver positive performance

Graph downNearly a quarter of all absolute return funds available to European investors have failed to deliver positive performance

since the beginning of 2012.

However, the “more favourable market conditions” during the period saw an increase in the number of funds that did perform positively compared to 2011, says Fitch Ratings, a ratings agency.

Absolute return funds seek to produce positive returns whatever the market conditions, with their managers’ asset allocation decisions being unconstrained by traditional benchmarks. Lipper data shows that assets under management in these funds almost doubled since the end of 2010 and are now close to €200 billion.

The agency says over 76% of funds posted positive performance in the period from the beginning of 2012 until the end of November 2013. This compares to 14.8% of absolute return funds posting losses in 2012 alone, and 74.4% posting losses in 2011.

Over the past three years, Fitch says short volatility strategies were the most successful as market volatility declined, while longer-term funds provided more stable returns.

Funds that employ short volatility strategies include strategies that exploit relative value and carry trades to make more money when volatility is low and directional strategies when volatility is high.

Absolute return funds suffered drawdowns between May and June that were more severe than in 2011. Fitch Ratings says this was a result of the rise in asset correlation and the funds' long credit exposure.

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