HomeFinancial EncyclopediaHedge FundsA Absolute Return Fund
Ahedge fundthat aims to generate a stable return regardless of market performance. In other words, it is designed to deliver positive returns in all market conditions, with lowvolatility. In essence, fund managers need to get rid of all market risk in order to isolate their funds from market fluctuations. If the market risk is neutralized, the fund performance would depend solely on the managers skill (i.e.,alphafactor). This type of fund particularly addresses the needs ofconservative investorswho are typically concerned with risk reduction even if they would sacrifice some return (upside potential). Likefixed-income instruments, absolute-return funds generate fixed income, i.e., relatively steady but relatively low returns. A typical income target of these funds ranges between 8 and 10 percent (it is usually above the long-term rate of return onbondsand below the long-term rate of return onstocks).
Absolute return funds are also calledpure-alpha fundsornon-directional funds.
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