Absolute return has been one of the true buzz words of the last decade. As the term hedge fund fell out of favour following poor performance during the financial crisis, absolute return became the

The space has since grown massively, both in terms of AUM and the range of products and strategies that are considered to fit under the absolute return moniker. With a change in tide for markets underfoot however, the space deserves a closer look, not just because the potential for returns comes under threat, but also because its broad scope has created an environment of confusion and disappointment. Figures from Hedge Fund Research show assets have doubled since the financial crisis from $1.4trn in 2008 to $2.9trn at the end of the third quarter 2015. Fifteen years ago, in 2001, assets stood at $540bn less than a fifth of todays value. In the mutual fund space, the quintupling of assets has been even more rapid. The IA Targeted Absolute Return Sector has grown from 25 funds with a total of 12bn five years ago to 60 funds with 54bn by the end of Q3 2015. The biggest winners have been the large multi-strategy funds: Standard Lifes 26.7bn (as at 30 November 2015) Global Absolute Return Strategies fund, for example, accounts for over half the total 54bn assets in the sector.

However, the trend towards large multi- asset funds masks a growing problem for the absolute return sector that of confusion and disappointment among investors. As Dan Kemp, Morningstars chief investment officer, EMEA says: It is clear from the European market that the trend towards multi-strategy funds indicates people are faced with confusion they chose a broader fund that gives exposure to a large number of areas. Paralysis by analysis is a symptom of confusion. Absolute return is the one fund sector defined by outcome rather than asset exposure, which makes it particularly sensitive to confusion and disappointment. Furthermore, there is no clear industry-wide definition of what absolute return means and, therefore, what investors should expect from it. Morningstars Kemp says: Defining what is meant by absolute return has been a real problem for the industry over the last seven years. If someone defines it in terms of limiting short-term losses, that is not compatible with delivering long-term cash-plus returns. The challenge with absolute return funds as a category is that it tries to serve too many masters, which creates confusion and ultimately disappointment as funds will do one thing rather than both.

There is some broad agreement on what absolute return means positive returns appears in almost all of them. The timeframe over which returns must be positive differs widely, however, from 12 months to a full economic cycle, while others suggest performance should be positive in all or most market conditions. According to Caspar Rock, CIO at multi-manager solutions provider, Architas: The majority of absolute return funds target positive performance in all market conditions, with low volatility and low sensitivity to traditional asset classes. While some may invest in income-producing assets, the strategies are not generally run to produce a regular income for investors. Downside protection is often a key feature, with the managers ability to short various markets providing the tools to reduce the impact of volatility.

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