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Absolute return funds: useful in a sell-off?

Absolute return funds promise to make money in all market conditions – but you need to find the few that work
Absolute return funds: useful in a sell-off?

Recent market trauma makes the notion of an ‘absolute return’ fund an attractive prospect. They often promise you lower risk than equity funds with better returns than the likes of cash and a low correlation to broader markets – especially when they fall. Global equity markets have been gripped by volatility so far this year, making the search for effective diversifiers more urgent.

Unfortunately, many so-called absolute return strategies fail to consistently deliver their target performance while charging high fees for their efforts. Of the 101 funds in the Investment Association’s Targeted Absolute Return sector with a three-year track record, more than a quarter have suffered losses over three years, says Dzmitry Lipski, head of funds research at Interactive Investor.

That said, some funds have managed to perform broadly in line with their promises and can work well within a portfolio. Darius McDermott, managing director at Chelsea Financial Services, says you should lose “much less” with a suitable absolute return fund in times of volatility and allocates 15 per cent to such strategies in a cautious portfolio run by his firm. But the variety of outcomes, and the disparate make-up of the sector itself, means finding the right fund is no easy task.

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