Right now, investors are re-evaluating how they approach risk, especially with global markets swinging between cautious optimism and sudden dips. It’s not just about chasing growth anymore — it’s about navigating uncertainty. That’s where absolute return fund are stepping back into the conversation.
“People want returns, yes — but more than that, they want predictability, or at least some cushion against volatility,” explains Emma Sinclair, Head of Investment Strategy at Fortis Asset Management. “And that’s what absolute return funds are designed to offer: the potential to generate a positive return regardless of the market environment.”
And they’re making a comeback. After a few quiet years, absolute return strategies are once again gaining traction with both retail investors and financial advisers, driven by changing market dynamics, economic headwinds, and — let’s face it — a rising appetite for smart risk management.
What Is an Absolute Return Fund?
At its core, an absolute return fund aims to deliver positive returns over a specific period — typically 12 months — regardless of whether the broader stock or bond market is up or down.
It’s different from a typical mutual fund or ETF that tries to beat a benchmark like the S&P 500. Instead, absolute return funds try to deliver consistent, steady growth while minimizing losses. Think of it as a strategy designed to make your money work in both sunshine and storms.
To do this, fund managers use a flexible toolkit: long and short positions, derivatives, options, hedging strategies, and tactical asset allocation. In plain terms, they have more freedom to protect capital and find growth opportunities, even in difficult markets.
Why Are Investors Interested Again?
In a world where interest rates, inflation, and geopolitical tensions continue to cause ripple effects across global markets, the appeal of steady, uncorrelated returns is obvious.
- Uncertainty in Equity Markets: Many investors are wary of stock valuations after a decade-long bull run and sporadic corrections. Absolute return funds offer a way to stay invested without being overly exposed.
- Bond Market Challenges: Bonds — once the safe haven — have also seen their own volatility with interest rate hikes. Traditional 60/40 portfolios no longer feel quite as “safe” as they once did.
- Portfolio Diversification: These funds often zig when others zag, making them valuable as a diversifier to reduce overall portfolio risk.
Emma Sinclair sums it up: “It’s not about finding the next tech unicorn anymore — it’s about building resilience. And absolute return funds offer that resilience.”
How Do They Work in Practice?
Let’s break it down simply. Suppose a fund manager sees an opportunity in the financial sector but is cautious about tech. They might go long (buy) select bank stocks while simultaneously going short (sell borrowed shares) on overvalued tech stocks.
If their analysis is right, even if the overall market falls, the gains from the short positions can offset or even exceed any losses from the longs. That’s how absolute return strategies aim to make money in both up and down markets.
Some funds even add exposure to commodities, currencies, or use volatility hedges — all to smooth returns and avoid large drawdowns.
Not All Funds Are Created Equal
Of course, like any investment, not all absolute return funds perform the same. There’s a wide range in strategy, risk level, and performance.
- Some focus on capital preservation, aiming for low volatility with modest gains (e.g., cash + 2–3% per year).
- Others are more aggressive, targeting higher returns using complex derivative strategies or leveraged trades.
The key for investors is to understand the fund’s strategy and risk tolerance. What are they aiming for? What are their best and worst years of performance? How do they behave in market corrections?
Pros and Cons of Absolute Return Funds
✅ Pros
- Flexibility: Managers are not constrained by index weightings or traditional asset classes.
- Risk Management: Built-in hedging strategies aim to protect capital.
- Diversification: Can reduce overall portfolio volatility.
- Performance in Different Market Conditions: Designed to thrive even when markets underperform.
⚠️ Cons
- Higher Fees: Active management and complex strategies come at a cost.
- Complexity: Strategies can be difficult for everyday investors to understand.
- Mixed Track Records: Not all funds deliver on their goals — some underperform in low-volatility environments.
- Manager Dependency: Success hinges on the fund manager’s skill and market insight.
Who Should Consider Absolute Return Funds?
These funds are ideal for investors who:
- Value capital preservation over aggressive growth
- Are seeking a steady, positive return regardless of market conditions
- Want to add a non-correlated asset to a broader portfolio
- Are comfortable with the higher fees and complexity that come with more active strategies
They’re especially useful in retirement portfolios, balanced allocations, or as part of a core-satellite investment strategy, where the fund acts as a stabilizing component.
Final Thoughts
Absolute return funds aren’t for everyone. They’re not a magic bullet, and they’re certainly not risk-free. But for investors looking to stay on course in a choppy market — and who understand what they’re buying — they can be a powerful tool.
“As long as your expectations are realistic, absolute return funds can add real value,” says Sinclair. “They won’t double your money overnight, but they can help you not lose it — and in today’s environment, that matters more than ever.”
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