In today’s volatile financial climate, Targeted Absolute return funds might be the answer.

Targeted absolute return funds may appear to be the perfect investments. Their aim is to make you money, irrespective of what happens to global stock markets.

In this quick guide, we’ll provide an overview of what these funds are, how they work, and the associated benefits and risks.

What are targeted absolute return funds?

A targeted absolute return fund seeks to achieve positive returns in various market conditions. Usually, this happens within a specific timeframe.

These funds differentiate themselves from traditional investment funds, which usually focus on outperforming a benchmark index.

Instead, targeted absolute return funds aim to generate consistent returns above a stated target or hurdle rate, irrespective of market performance. Targeted absolute return funds aim to deliver positive returns in any market condition. It’s important to note that these positive returns are ‘targeted’ but aren’t guaranteed.

According to the IA Targeted Absolute Return sector rules laid down by the Investment Association, the return achieved must also be more demanding than a ‘greater than zero after fees’ objective.

Funds in this sector must also clearly state the timeframe over which they aim to meet their stated objectives. However, this mustn’t be longer than three years.

Types of Investment Strategies

Fund managers of targeted absolute return funds use various strategies to achieve their objectives. Some common approaches include:

1. Long/short positions: Managers take advantage of both rising and falling markets by holding long positions in assets they expect to appreciate and short positions in assets they expect to decline.
2. Using derivatives: Fund managers may use options, futures, and other derivatives to hedge against potential losses or to generate additional returns.
3. Multi-asset investing: Targeted absolute return funds often invest in a diverse range of asset classes, including equities, bonds, commodities, and alternative investments, to spread risk and enhance return potential.

Benefits of Investing in Targeted Absolute Return Funds

Investing in targeted absolute return funds can offer several advantages:

1. Consistent returns: These funds aim to deliver positive returns regardless of market conditions, making them an attractive option for investors seeking stability and predictability in their investments.
2. Diversification: Targeted absolute return funds invest in a range of asset classes and geographic regions, providing diversification and helping to spread risk across your portfolio.
3. Flexibility: The variety of strategies employed by fund managers means they can adjust their approach depending on market conditions, offering more flexibility than traditional funds that might be constrained by a specific investment mandate.

Risks and Considerations

However, there are some potential drawbacks to consider when investing in targeted absolute return funds:

Underperformance

In strong market rallies, targeted absolute return funds may underperform compared to traditional funds that focus on capitaliszing on market gains.

Complexity

The investment strategies employed in targeted absolute return funds can be complex, requiring professional management and a thorough understanding of the underlying instruments and techniques used.

Fees

These funds may have higher fees than traditional funds due to the complexity of their strategies and the expertise required to manage them effectively. Make sure to weigh the potential benefits against the costs before investing.

It’s fair to say that returns have been rather mixed. The best performers have delivered up to 19% positive returns over the past year*. However, the worst performers are in negative territory to the tune of -13%*. That’s quite a stark difference and illustrates the importance of doing your homework.

Overall, the data shows that 58 funds have made positive returns for investors over the past year, while 41 have lost money*.

Of course, it’s important to remember that not all funds in this sector are aiming for positive returns over 12 months. Some, for example, focus on rolling three-year periods.

How to Add Targeted Absolute Return Funds to Your Portfolio

If you’re considering adding targeted absolute return funds to your portfolio, follow these steps:

1. Assess your risk tolerance and investment objectives: Determine whether the goals of targeted absolute return funds align with your personal financial situation and risk profile.
2. Research different funds: Look for funds with a strong performance record, reasonable fees, and an experienced management team. Be sure to read the fund’s prospectus and any available marketing materials to understand its specific investment approach and objectives.
3. Don’t invest in anything you don’t understand.
4. Monitor your investments: As with any investment, it’s essential to keep a close eye on your targeted absolute return funds to ensure they continue to meet your expectations and financial goals.

Conclusion

Targeted absolute return funds can be a valuable addition to a diversified investment portfolio, particularly for investors seeking consistent returns and an alternative to traditional fund strategies.

By understanding their unique features, benefits, and potential risks, you can make an informed decision about whether they’re the right fit for your investment strategy.

*Source: FE Analytics, total returns in sterling, one year to 16 May 2023

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