Understanding Absolute Return Asset Class

The absolute return asset class is a type of investment that aims to generate positive returns in any market condition, regardless of the overall performance of the broader market.

This is achieved through a variety of strategies, including hedging, diversification, and risk management.

The goal of absolute return investing is to protect capital and provide a stable source of returns, often through a combination of low-risk investments and tactical asset allocation.

Absolute return funds can be invested in a range of assets, including stocks, bonds, commodities, and currencies.

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Absolute return strategies are designed to deliver positive returns regardless of the direction of equity markets. They often feature specialist investment managers that allocate capital to lesser-known sectors of the market.

These strategies can include global macro, trend following, equity market neutral, insurance-linked securities, and more. They're not limited to just a few types of investments.

Investors have traditionally built their portfolios with equities and bonds, but the environment of high valuations and low yields has made it clear that this approach isn't sustainable. In 2022, both equities and bonds declined in tandem, making it painfully obvious that investors needed to diversify their portfolios.

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Investing in absolute return strategies can help diversify a portfolio, making it more resilient to various economic environments. This approach can also increase the likelihood of achieving strong risk-adjusted returns for a total portfolio.

Some examples of absolute return strategies include merger arbitrage, convertible arbitrage, and relative value. These strategies are designed to deliver a relatively liquid source of attractive absolute returns with low volatility and minimal correlation with public capital markets.

The key attributes of absolute return investment strategies include:

Investing in absolute return strategies offers numerous benefits that can help investors achieve their financial goals. Absolute return strategies employ a wide range of investment instruments and focus on non-correlated assets, reducing exposure to directional market risk.

Portfolio diversification is a key advantage of absolute return strategies. By investing in non-correlated assets, investors can reduce their exposure to market selloffs and generate more stable and predictable returns.

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Investors can also benefit from the potential for superior risk-adjusted returns offered by absolute return strategies. These strategies are designed to deliver higher returns than traditional passive investing approaches at a given level of risk.

Absolute return portfolio managers use a wide variety of financial instruments to structure funds that exhibit a return profile with a large expected payoff should a trade be successful, while exposing the strategy to relatively low downside risk should they be wrong.

Here are some key benefits of investing in absolute return strategies:

Investors can also benefit from the risk management focus of absolute return strategies, which use techniques such as financial derivatives to protect portfolios from downside volatility.

Investing in absolute return strategies can be complex, but a well-constructed portfolio can offer clients a solution to deal with the challenges of the asset class while preserving its benefits.

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The absolute return asset class offers a unique way to diversify your portfolio and reduce exposure to directional market risk. This is because absolute return strategies employ a wide range of investment instruments and focus on non-correlated assets.

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One of the key benefits of absolute return strategies is their potential for superior risk-adjusted returns. According to Example 4, the Absolute Return Blended Index has a 3-year average annual return of 2.62%, compared to the Fund's 5-year average annual return of 4.00%.

The Absolute Return Fund aims to deliver attractive absolute returns in all market environments, as stated in Example 6. To achieve this, the fund uses a range of techniques to manage and mitigate downside risk, including the use of financial derivatives.

Here are some key performance metrics for the Absolute Return Fund:

These metrics are based on data from Example 4 and provide a snapshot of the fund's historical performance. It's essential to keep in mind that past performance is no guarantee of future results, and the fund's returns may vary in the future.

The Absolute Return Fund has a history of delivering consistent returns, with a 10-year average annual return of 3.17% as of Example 4. This is a testament to the fund's ability to generate returns consistently and predictably over time.

The fund's performance is also compared to a benchmark, the Lipper Alternative Global Macro Funds, which has a 10-year average annual return of 3.63% as of Example 4. This provides a useful benchmark for evaluating the fund's performance and identifying areas for improvement.

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Absolute return strategies can be complex, so it's essential to approach them with a clear understanding of their benefits and risks.

Investors can expect to see superior risk-adjusted returns from skill-based investment strategies, which are designed to take advantage of market inefficiencies and exploit opportunities through advanced investment techniques.

A well-constructed portfolio comprising a number of absolute return strategies investing across various sectors can help clients deal with the challenges of the asset class while preserving its benefits.

To evaluate absolute return strategies, consider the following key factors:

By considering these factors and working with an experienced team of investment professionals, investors can create a well-structured portfolio that balances risk and potential returns.

These strategies are designed to take idiosyncratic risk, not market risk, meaning they are less volatile than equity markets, with significantly lower drawdowns.

Investing in an absolute return asset class can expose you to various risks. Market Risk - Equities, for instance, may cause the market price of equities to decline due to factors affecting the issuer, its industries, or the economy.

Non-U.S. Investment Risk is another risk to consider, as the market prices of many non-U.S. securities fluctuate more than those of U.S. securities, making them less stable and more volatile.

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Risks associated with investing in this strategy are significant and can have a major impact on your portfolio.

One of the main risks is that the underlying portfolios may not perform as expected, exposing the strategy to all the risks of those investments. This can be a major concern for investors who are relying on the strategy to meet their financial goals.

The market price of equities can decline due to factors affecting the issuer, its industries, or the economy and equity markets generally, reducing the net asset value of the fund's shares.

Market-related factors can also cause the market price of fixed income investments to decline, including rising interest rates and widening credit spreads.

Investing in non-U.S. securities can be particularly risky, as their market prices fluctuate more than those of U.S. securities. Many non-U.S. markets are less stable, smaller, less liquid, and less regulated than U.S. markets.

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These strategies are designed to take idiosyncratic risk, not market risk, meaning they are less volatile than equity markets.

Significantly lower drawdowns are a result of this approach, which can be beneficial for investors who want to minimize their losses.

Low volatility and low correlation strategies are less affected by market fluctuations, making them a good choice for those who want to ride out market downturns.

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The fund's liquidity is a major advantage, especially when compared to private investments. This is because the strategies employed are used in liquid markets.

The fund offers enhanced liquidity, making it easier to quickly buy or sell assets if needed. This can be a significant benefit for investors who value flexibility.

Because these strategies are employed in liquid markets, the fund provides a higher level of liquidity than private investments.

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Investing in absolute return funds can provide a solution to deal with the challenges of the asset class while preserving its benefits.

A well-constructed portfolio comprising a number of absolute return strategies investing across a variety of sectors offers clients a solution to deal with the challenges of the asset class while preserving its benefits.

It's essential to leverage an experienced team of investment professionals that have the expertise to perform extensive due diligence to select funds and to construct and maintain a well-structured portfolio.

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By pooling together capital from various investors, one is able to reach scale, enabling significant negotiation of fees and terms, which may be more important in this asset class where fees are higher and funds are less liquid than traditional equity and fixed income strategies.

Some key characteristics of absolute return funds include:

A well-constructed portfolio comprising a number of absolute return strategies investing across a variety of sectors offers clients a solution to deal with the challenges of the asset class while preserving its benefits.

By investing in absolute return strategies on behalf of clients since 2004, we have seen first-hand the advantages of approaching the asset class in this way.

This was especially true for us in 2022 when our absolute return strategy was able to generate positive returns despite the challenging market environment, helping to buoy our clients’ portfolios.

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The absolute return asset class is designed to deliver attractive absolute returns in all market environments, with a focus on non-correlated assets that can provide more stable and predictable returns.

Absolute return strategies employ a wide range of investment instruments, including niche assets and smaller sectors, which offer higher levels of expected risk-adjusted returns due to their lesser research and following.

Portfolio managers use a range of techniques to manage and mitigate downside risk, including the use of financial derivatives, to ensure that portfolios are protected from downside volatility and generate returns consistently and predictably over time.

Here are some key characteristics of absolute return investment strategies:

Tax Efficient investments offer a unique advantage, especially for those looking to minimize tax liabilities. Most of the returns in these strategies come in the form of capital gains. This can be a significant benefit for investors who want to keep more of their hard-earned money.

Returns from Tax Efficient investments can be more stable than those from fixed income investments, but in a different way. Despite this, investors should still be aware of the tax implications of their investments.

Investors who prioritize Tax Efficiency often find that it's a worthwhile trade-off for the potential benefits.

When investing in a fund, it's essential to understand how prices and distributions work. A $10,000 investment in a hypothetical fund can grow significantly over time, but the growth is not without its nuances.

The chart shows that the fund's value can be compared with benchmarks, which may include a broad-based market index and a peer group average or index. However, these benchmarks do not include expenses, which are deducted from fund returns.

Returns on investments in this fund are calculated assuming reinvestment of dividends and capital gains, but sales charges are not included. This means that actual returns may be lower than what's shown.

The fund aims to deliver attractive absolute returns over the long-term with low volatility and low correlation with public equity and fixed income markets. This is achieved through specialized strategies that exploit inefficiencies in financial markets.

The fund's capital is allocated to a small number of world-class external managers who specialize in these strategies. These managers are chosen based on their organizational strength, commitment to honesty and transparency, and exceptional risk management.

The fund's returns come in the form of capital gains, which can be tax-efficient. This is because most of the returns in these strategies come in the form of capital gains, rather than ordinary income.

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Absolute return strategies can help investors diversify their portfolios by employing a wide range of investment instruments and focusing on non-correlated assets.

One of the key benefits of absolute return strategies is the focus on risk management. Portfolio managers use a range of techniques to manage and mitigate downside risk, including the use of financial derivatives.

These strategies can deliver higher returns than traditional passive investing approaches at a given level of risk. They are designed to take advantage of market inefficiencies and exploit opportunities through the use of advanced investment techniques.

Absolute return portfolio managers can adjust their investments quickly to changing market conditions. They use a wide variety of financial instruments to structure funds that exhibit a return profile with a large expected payoff should a trade be successful, while exposing the strategy to relatively low downside risk should they be wrong.

The ideal partners for absolute return strategies are world-class external managers who specialize in this area and have undergone extensive due diligence. They should offer organizational strength, the highest standards of honesty and integrity, and exceptional risk management.

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Investors can gain exposure to untapped or underrepresented markets by investing in niche assets and smaller sectors. These markets offer higher levels of expected risk-adjusted returns because they tend to be less researched and less widely followed than larger, more established markets.

Here are the key attributes of absolute return investment strategies: