Absolute Return Funds

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Anonymous's picture
Anonymous

MarketWatch's Chuck Jaffe recently slammed absolute return funds as the "Stupid Investment of the Week": http://bit.ly/fENX3GIn his column, he says:

  • It’s becoming so clear that Main Street investors understand so little about how absolute-return funds work that they are heading for disappointment.

The idea behind absolute return strategies is that they're supposed to deliver positive returns no matter what the market conditions. But according to Jaffe:

  • the average fund that had absolute return in its name in 2008 — and there were only about a dozen of them — lost 12.7% compared to a market loss of 37%.
  • While the funds did their job in a down market, they still posted losses — which hardly seems an “absolute return” — and the typical investor would have walked away from that experience feeling let down by the fund.

In a recent article posted on Registered Rep. ( http://bit.ly/hdMMiA), Stan Luxenberg reported that these funds, with their short track records, have failed their first tests, as most suffered losses in 2008. But fund families are rolling out these products like crazy, he reports. In November, I reported that advisor appetite for these types of strategies was up, according to a survey. Does absolute return have a future with advisors?  http://bit.ly/i5J7ac 

Times7's picture
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Joined: 2010-10-26

Here is a big secret: nothing can beat a simple mix of stocks, bonds and cash. Most people already own some real estate (their home). It's all about volatility. While you are selling the idea of better return with less volatility, you have to talk about fees. Hedges cost money, so does delegating the responsibility for managing volatitlity. There isn't enough cake to go around. Even if absolute return works at the institutional level, it can't generate enough $$ to compensate the retail advisor (planner). Anyone who has their head in the game can see, the #s don't work. It's just a dumb market. Most real return comes from interest and dividends. The purpose of owning something is more to keep up with inflation and get average growth. Unless you are Warren Buffet, who says " our holding period is forever". In which case, you just buy the company. Everything else is intermediary activity, like going to the casino. Owning ETFs is probably the closest the average advisor is going to get to acting like Buffet.

N.D.'s picture
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Joined: 2009-07-14

That's why they added "over a reasonable amount of time" to the fund description. I tell clients a full business cycle or at least three years depending on market conditions.

I definitely agree with you that "absolute" MFs are a play on the fear of investors and most likely will not be described correctly by some advisors.

Sportsfreakbob's picture
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Joined: 2008-08-24

Absolute Return Funds are not new. Putting the words into the fund name is whats new. All about marketing. Nobody wants buy and hold anymore (nor does it make sense for most of our clients, those in their 50's and 60's. Makes a lot of sense for someone in their 30's and 40's with the abilitiy to add money regularly.But back to Absolute Return funds, Blackrock Global is a great example of an Absolute Return fund thats been around for a long time. They just don't market themselves as one. But they are index agnostic, and go where they think they can make money. There are others, too numerous to mention.

lovindaindy's picture
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Joined: 2009-05-07

Times7 wrote:Here is a big secret: nothing can beat a simple mix of stocks, bonds and cash. Most people already own some real estate (their home). It's all about volatility. While you are selling the idea of better return with less volatility, you have to talk about fees. Hedges cost money, so does delegating the responsibility for managing volatitlity. There isn't enough cake to go around. Even if absolute return works at the institutional level, it can't generate enough $$ to compensate the retail advisor (planner). Anyone who has their head in the game can see, the #s don't work. It's just a dumb market. Most real return comes from interest and dividends. The purpose of owning something is more to keep up with inflation and get average growth. Unless you are Warren Buffet, who says " our holding period is forever". In which case, you just buy the company. Everything else is intermediary activity, like going to the casino. Owning ETFs is probably the closest the average advisor is going to get to acting like Buffet. Higher volatility doesn't mean lower returns.  And reducing volatility doens't guarantee a better return.Proper security selection can beat a mix of stocks, bonds and real estate most of the time and twice on sunday.  Absolute return can definitely work at the retail level.   

alexus's picture
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Joined: 2011-03-24

The 100 fund is going to act like a short duration bond fund, the 300 fund is going to act like a core bond fund, 500 is a balanced fund, and the 700 fund will act like a dividend focused equity fund. 

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