Much of the absolute return investment strategy rests on investing in different assets, such as equities, commodities, property and bonds, and taking a view on whether a company share price or particular asset may fall in value.
The team behind the BlackRock Absolute Alpha Fund use a combination of approaches to either create a return or protect from a rocky market.
This includes ‘long investing’, believing that a company share price will rise and ‘synthetic-short investments’ which are based on a belief that a company stock price will fall, and also the flexibility to invest 100 per cent of the portfolio in cash or cash-like financial instruments.
The Standard Life Global Absolute Return Strategies Fund is managed by a multi-asset investing team which implement a variety of investment strategies while seeking to manage risk.
As a result absolute return funds’ portfolios may be relatively complex, not only investing in different assets and markets, but also taking positions on the performance of a market or asset. This could be a foreign exchange strategy that uses a financial instrument to take a position on the performance of one currency against another, such as the euro against the US dollar.
As with any fund directly exposed to markets the value of investments in absolute return funds can fall as well as rise, while there is no guarantee that the total return targets, independent of market conditions, will be met.
Also, in conditions where stock markets are rising strongly this type of fund may underperform a fund just investing in equities, as it has limited exposure to one type of asset.
As well as this, funds may make the wrong call on a particular market event or change, and suffer losses from being invested long or short at the wrong time. A strategy of having a diverse range of investments in the portfolio is designed to limit the potential impact of that risk.
There are a variety of absolute return funds available, as well as cautious managed or multi-asset funds which have similar aims to an absolute return fund but may take an approach more centred around holding a diversified portfolio.
In the Fair Investment Fund Supermarket, as well as the BlackRock and Standard Life funds, the Cazenove Absolute Target Fund and Threadneedle Absolute Return Bond Fund are also available.