Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website

Chapter 3Absolute Return Funds

Synopsis

Absolute Return Funds have become tremendously popular in the wake of the 2008 crash as investors seek new forms of diversification. This classification contains a wide variety of strategies, and some funds offer an attractive level of risk and return that is uncorrelated with the market. Such funds are in the minority, however, since most of these strategies have returns that are driven by exposure to equities. Thus, investors need to do their homework, and cannot blithely assume that Absolute Return Funds will deliver what the name suggests.

Definition

Funds that aim for positive returns in all market conditions. The funds are not benchmarked against a traditional long-only market index but rather have the aim of outperforming a cash or risk-free benchmark.

Definition of the Lipper classification: Absolute Return Funds

Absolute Return Funds are heterogeneous by nature, and like most classifications, the definition continues to evolve. The prospectus-based definition used by Lipper describes an Absolute Return Fund as any fund that aims to provide a positive return over a rolling period, or a 12-month basis, regardless of market conditions. These funds are benchmarked against indexes that are typically positive, such as Treasury bills, the London Interbank Offered Rate (LIBOR), or the consumer price index (CPI) plus 100 to 500 basis points. Broad market indexes, such as the Standard & Poor's (S&P) 500, are not usually used as benchmarks. ...