Three years ago on this blog, I looked at Absolute Return Funds – funds that were still very much in vogue and in demand. They were the top selling fund type in 2016 and 2017 according to Investment Association figures. These funds typically offered cash plus 4% or more and the promise was that this would be delivered at a significantly lower risk level. Performance issues had already surfaced but the party-line for managers was to stick to their guns and rhetoric.
I thought it was a sector worth revisiting.
My conclusions three years ago were broadly that it was quite a challenging ask, lots of over-promise and under-delivery, and more than any other sector picking your manager was of key importance as there could be a wide range of returns.
The world has changed profoundly for Absolute Return funds and their managers. In the past two years (2019 and 2020), investors lost patience and this sector saw the worst redemptions in the industry. Redemptions were described as “brutal” by one manager. In 2019 and 2020, European domiciled Absolute Return funds saw over €40 billion head for the exit door. One very high profile fund went from £26.8 billion to £2.6 billion in 4 years.
The picture is similar with large pension funds though harder to map. While the overall allocation to Alternative Assets has grown, within the sector areas like Private Equity and Infrastructure have probably increased the most from a lower base. If we take hedge funds and multi-asset as a proxy for Absolute Return, in the very recent past they look to have lost ground. The picture is more stark in terms of future investing intentions. European pension funds plan to reduce allocation to hedge fund and multi-asset funds.
Many absolute return managers blamed the absence of volatility, and then, when there was volatility, it was the wrong type. Trends and asset moves became very short-lived and un-investable. Others blamed constant bull markets ,which reduced their shorting profits, even though relative performance is what determines absolute success in this sector.
I looked at the performance numbers for three of the major players in this space in the Irish market.
| One Year | Five Year | Ten Year | Volatility | |
| Fund A | -0.7% | 1% | 2.6% | 4.6% |
| Fund B | 4.1% | 0.2% | n/a | 5.9% |
| Fund C | 9.8% | 3.3% | 4.3% | 7.4% |
| Average Managed | 15.8% | 6.1% | 7.6% | 9.7% |
(Source: Aon; Annualised %pa)
A few things stand out.
Performance as we know has been poor but also it’s hard to see any broad recovery in the sector numbers in the near term despite what the managers may have hoped for. It is also interesting that the best of the three is the one with the highest volatility level – edging closer to that of a standard managed fund. This is also reflected in CityWire statistics in the UK where the better performers in their Absolute Return sector display higher volatility levels. This would seem to point to the difficulty of earning high returns while only taking on lower risk.
How did the Absolute Return industry respond?
There have been a number of responses.
We have seen fund name changes and modification of investment objectives. For example this summer, a long standing Absolute Return fund morphed into a “Flexible Macro” fund.
We have seen fund closures and cash returned to investors. One industry leader closed a high profile fund recently in the face of desperate performance and massive redemptions.
We have also seen changes in the people actually managing the funds in the hope that new faces or a new approach would do the trick. This has meant both retirements and sackings.
There is still a large number of Absolute Return funds out there, and making a choice between managers is more important than allocating to the sector given the range of returns which remains a feature.
There is little evidence to suggest that using hundreds of analysts, steering groups, and ending up with thousands of holdings actually works any better.
There is still a role for uncorrelated asset classes in portfolio construction. Currently asset classes such as Private Equity or Infrastructure garner most attention.
An absolute return fund with genuine alpha generation potential can play a role but it would help if there was a true reset of expectations in terms of what cash plus returns can consistently be achieved.
The simple learning from the emergence of Absolute Return funds is that the link between risk and return has not been broken.
Tradewinds 