Absolute Return Fund performance improves but is dependent on volatility – Fitch

Absolute return funds’ performance has improved with over 70% of funds posting positive performance in 2012 and 2013, Fitch Ratings latest report revealed.

According to Ftich’s figuers, returns have showed low volatility but have not always been independent of market conditions, notably volatility and correlation. Over the past three years, short volatility strategies have been most successful as market volatility declined, the report also said.

However, longer term funds that deploy different strategies for low and high market volatility provide more stable, longer term returns. The most successful funds employ short volatility strategies, for example exploiting relative value and carry trades to make more money when volatility is low and directional strategies when volatility is high.

Absolute return funds, which seek to produce positive returns whatever the direction of the markets, and do not compare performance to a benchmark index, continue to be popular among investors. Assets under management almost doubled to close to €200bn since end-2010, according to Lipper. The growth was driven by strong inflows, from investors who are keen to diversify sources of performance, in a context of low return expectations across traditional long strategies and asset classes.

“Most absolute return funds use short volatility strategies, which have fared better than long volatility strategies since end 2010. Carry and relative value performance engines (overall short volatility) supported higher return than directional strategies (overall long volatility), in a context of declining market volatility,” says Manuel Arrive, Senior Director in Fitch’s Fund and Asset Manager Rating team.

Relative value strategies have also benefited from the market normalisation at the country and asset class level while relative value at security levels suffered from low dispersion, or a low variability of relative returns, Arrive also said.

In Fitch’s view, anchoring allocations and avoiding excessive churning can prove beneficial in periods of sell offs and quick rebounds. This approach suggests a higher acceptance of short term drawdown from investors to protect alpha in the longer term, the report also highlighted.

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