Key Post Understanding Absolute Return Funds ?

RichInSpirit

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I came a the following advertising by Irish Life on my Facebook page just a few minutes ago that look interesting.
Has anyone here any experience of such funds ?
Are they new to this type of fund market ?
Any comments good bad or indifferent ?
Thanks in advance !

"Understanding Absolute Return Funds
The language and reporting around investments can be tricky, particularly if you’re just getting started and learning the lingo.

Regardless of how financially savvy you are, most of us understand that a graph showing an upward trend, tends to be good news. So, it’s natural enough that investors learning the ropes could be drawn to fund graphs with spikes and trends on the rise and shy away from anything in red that points downwards.

The thing is, not all funds are built with the same logic and it’s entirely possible to make money irrespective of the direction the market’s moving in. "
 

Sarenco

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Absolute return is another term for a hedge fund.

They have no place in any retail investor's portfolio IMO.
 

RedOnion

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They've been available in the retail market here for about 10 years.

Some reading for you in below links.

Personally I don't like investing in something I don't understand, or giving my money to people to make bets on market movements.

They are not designed to outperform the market, but rather take advantage of market volatility. Theoretically, there is a benefit to them as a diversification in a falling market.

https://www.ft.com/content/a99748d2-7a87-11e6-b837-eb4b4333ee43

http://www.independent.co.uk/money/spend-save/absolute-return-funds-many-have-made-significant-losses-according-to-morningstar-figures-a6724921.html
 

PMU

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I've previously posted elsewhere on AAM about the risks to retirees of making lump sum investments in equities. https://www.askaboutmoney.com/threads/should-the-elderly-be-less-conservative-investors.156555/page-2#post-1518084. Since I made that post, I've talked to retirees I know and asked what advice, if any, they received on investing retirement lump sums. None of those I spoke to were advised to invest in equities, and by and large were advised to invest in e.g. SL GARS and equivalent absolute return products, i.e. hedge funds. The rational given by financial advisers was that these type of funds aim to give a return independent of the market, which, while correct, may not give a full idea of the risks involved in this type of investment, which as other posters have pointed out, are hedge funds.

Hedge funds are not an assets class, i.e. a claim on future returns of productive assets that share particular common characteristics. They are more a way of investing. Typical strategies, for example, for 'absolute return funds' are to go long on individual equities and short the equities' index by an equal amount. Any gain is pure alpha, gained by eliminating systemic risk, i.e. the risk for holding the asset class, and taking the gain for investing in specific assets within that class. You are still investing in equities, and are betting on the manager's superior skill in reducing / eliminating market risk, while giving you a return. The manager can also improve returns by adding leverage, which is generally frowned on as it increases risk, but, many investment trusts, i.e. long only vehicles, also take leveraged bets and do not seen to be dismissed out of hand for this.

Personally, I've a few of these in my portfolio, but for their diversification effect. So should you invest in them? Like all investments, it depends on (a) your current portfolio; (b) your risk profile and (c) the current economic environment. So only you can answer that question.

As for Irish Life saying “and it’s entirely possible to make money irrespective of the direction the market’s moving in. " Of course it is, by investing in asset classes that have low correlations with market movements, or by not taking market risk at all.
 

SBarrett

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Not all absolute funds are the same. Some are like a managed fund with a bit of derivatives to reduce the fall in equities during a bear market. Then you have funds like Standard Life GARS which is a very complex fund with a lot going on in it. They did a course that lasted a full day on how it works.

The marketing behind them was great, funds that perform in all markets. But markets have been rising since they were launched, so we don't really know how they will perform in all markets.

And of course, the derivatives have to be paid for, so they are more expensive.


Steven
www.bluewaterfp.ie
 

SBarrett

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whether Irish institutions should be marketing absolute return funds to the retail public on the basis of 'bank deposit returns plus 4-5%' when they seem incapable of delivering such returns
This is it.

Updating a plan for a client this morning. In the last 1.5 years, all of the funds in his pension have risen in value, except for one, the Absolute Returns fund. This is a fund that promised positive returns in all market environments and "equity style returns for deposit style risk". The funds aren't cheap either, you can expect to pay 35bps over the standard price for a fund that will underperform its peers.

I can understand a fund going through a blip and should be given time to show its value, but absolute return funds aren't doing what they are supposed to do.

Steven
www.bluewaterfp.ie
 

Zebedee

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I read through the paper and it is interesting reading. One interesting point he makes is about survivorship bias (ie many poor performing hedge funds get quietly shut down and drop out of the performance stats). Fees are another issue (2% of fund plus 20% of gains). And then there are funds of hedge funds....

I read somewhere that if Warren Buffett had taken these fees Berkshire Hathaway would today be worth 3% of its current value.

I think quite a few large funds (eg Canadian teachers) are getting out of hedge funds. So it is interesting to see Irish strategic funds going the other way.

Hedge funds and absolute funds are another fad from fund managers. Most fund managers are effectively acting as salesmen. Think about the incentive. The more they sell the greater the fees from annual management charges (and indeed performance charges). Once they have milked a particular story they move on to the next one and hope that inertia keeps the punters in the fund. They also have considerable expertise in explaining why they didn’t meet the benchmark performance.

To offer a new fund you need good past performance (people make decisions on this despite the warnings). Therefore by the time they start offering a fund it is close to the top of the market.

Another trick is to capitalise on randomness. One institution I used to work in had a huge number of funds. Most of these had little money in them. Every so often, quite randomly, one of these funds would put in a good performance. It was then marketed heavily to pull in cash until the performance turned and it was on to the next fund etc.

There are good fund managers out there. They are few and far between and difficult to find. Even respected fund managers such as Neil Woodford have recently hit the buffers. At the end of the day there are no riskless ways of outperformance, fund managers have to take a punt. Michael Hasenstab was feted when he invested in Irish bonds at the height of the crisis and made a killing. He then reinvested the money in Ukrainian govt bonds (oops).

Anyway, the latest fad I see emerging are funds now being managed using artificial intelligence and “algorithms”. Watch this space.
 

Zebedee

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Hi Brendan

There’s an Indian commentator who reckons it is 10pc. I can’t get the link in here but if you look up “If Warren Buffett ran a hedge fund”. This was not my original source as this guy only produced this recently. I read this somewhere else some time ago. I’ll try to find it.

Zeb.
 

RedOnion

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Hi Zebedee

If you find the source of that, you might let us know.

It does not sound right.

Brendan
3% is wrong.

Berkshire grew at an annual compound rate of approx 21% over 40 years.

If there had been a 2% annual charge, plus 20% of the gain (assuming growth was evenly spread), after 40 years, the net worth would be 88% lower.

Or, an initial 100 would only be worth 25k instead of 204k (the compound growth rate is approx 14.8% instead of 21%)
 

Zebedee

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I found this. It was Terry Smith who wrote this in 2010 in Investment Week. He worked out that $1,000 invested in 1965 would be $4.3m in 2010. On a 2/20 $4m would have gone to the fund manager. So my memory is a bit off (mea culpa).

Still shocking!
 

Steelstown

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Foolishly, I believed the hype about the Standard Life GARS fund when it was launched a few years ago and invested a few bob. To say that it has performed badly would be an understatement.
 
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