What are Absolute Return Funds? Investing Explained

INVESTING EXPLAINED: What you need to know about Absolute Return Funds, which aim to deliver ‘positive’ returns regardless of market conditions

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Absolute Return Funds.   

What are they? 

A type of fund that aims to deliver an absolute or ‘positive’ return, whatever happens in the stock markets. 

Lower volatility is also part of the promise of this ‘all-weather’ variety of fund. They were enthusiastically marketed to private investors from 2005 onwards, with some being called ‘real return’ or ‘multi-strategy target income’. All pledged to provide portfolio diversification and a measure of protection in difficult markets. 

Back in 2015 and 2016, absolute return funds were the top-selling category. 

Steady: An Absolute Return Fund aims to deliver an absolute or ‘positive’ return, whatever happens in the stock markets

How do they work? 

There are various approaches. Some funds hold shares, others opt for bonds, while some own a mix of the two. 

A long/short investment strategy is popular. The managers of such funds invest in shares which they hope will rise in value, while ‘short-selling’ shares with poor prospects. This means that they borrow shares from their owners in order to sell them. 

They then buy back those shares (fingers crossed) at a lower price and return them to their owners. Some managers also use derivatives, aspiring to lower risk by entering into a contract to buy shares or bonds at a future date and at a set price. 

Have these funds delivered? 

Many have proved disappointing, which is aggravating for those who entrusted billions of savings to these funds and have had to pull out their cash at a loss. 

The failure to perform arose from what one insider considered to be ‘insurmountable obstacles’ which included a prolonged period of record-low interest rates an booming stock markets. Running an absolute return fund requires the ability to manage different types of assets, a task to which some managers may have not been equal. 

What happened to the largest? 

In its heyday of 2017-2018, Standard Life Global Absolute Return Strategy – known as ‘The Gars’ – was the UK’s largest fund, containing almost £22billion of investors’ money. It has subsequently dwindled to about one-tenth of this size. Other funds, dubbed the ‘sons of Gars’, have also shrunk, as investors have retreated. 

For some, it seems the last straw was many funds’ failure to provide a safe haven during the March 2020 stock market rout at the onset of the pandemic. These outflows continued in 2021 and more money has left in the first two months of this year. 

Is money still invested? 

Yes, but not a great deal. Financial advisers are rarely recommending absolute return – for obvious reasons. 

Also, private investors have become more cost-conscious: the fees on some absolute return funds were high. Some investors who have learnt their lesson from Gars are also looking for a fund ‘to do what it says on the tin’. Obfuscation tends to inspire more suspicion than it did only a few years ago. 

Is there a place for these funds? 

Certainly, which is why it’s a shame that absolute return has often not delivered. 

Several investment trusts aim to provide a security and a hedge against inflation but do not use the term ‘absolute return’. They include: Capital Gearing, Personal Assets, RIT Capital Partners and Ruffer.