Absolute return investors lose out

Stock market graphWhen absolute return funds were launched to much fanfare a few years ago, they were heralded as a way to ensure positive returns no matter what happened to the stock market.

But these promises proved empty when around 60% of the 65 funds in this sector lost investors money in 2011.

In fact, only eight of the absolute return funds available to UK investors managed to beat inflation to produce positive returns, while Polar Capital's UK Absolute Return fund plummeted by about 15% and BlackRock's popular UK Absolute Alpha fund lost 7% of its value in the past 12 months.

And this despite the fact that funds of this kind generally perform better in falling markets than when share prices are going up thanks to their managers' ability to smooth volatility by "shorting" shares or currencies.

"Shorting" means selling a stock or currency that you believe is about to fall in value, and repurchasing it when the price has gone down.

The opportunities to make money this way were plentiful last year, with the FTSE 100 index regularly dropping up to 4% in a single day. However, many absolute return managers failed to profit despite the volatile market.

James Inglis-Jones of the Liontrust European Absolute Return fund is one of the few managers in the sector who managed to produce positive returns for his investors.

His fund made 8% in the past 12 months and he told the Daily Telegraph newspaper that his success was due to a policy of "shorting".

"Many of the absolute return funds that have performed poorly are long-biased, with only a small short book," he said. "This means they have high correlation with the markets and when we have a year like this their funds will not outperform."

The Investment Management Association (IMA) launched the sector in May 2008 and it has quickly become one of the biggest sellers in the market.

However, confusion around the definition of absolute return funds has led to a review of the sector that is expected to conclude in the first half of 2012.
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