German allocators question the truth behind the tag of ‘absolute return’ funds

German investors have added their names to allocators expressing disappointment with ‘absolute return’ products, and cutting their allocations, at the very same time the urgency to make money regardless of market conditions increases.

Investors say they want absolute returns, but that this is not what funds using that tag have delivered to them.

One family office investor said expectations among peers had perhaps been unrealistic for the fund category, “but I think we had realistic expectations and even then returns were disappointing.”

Speaking at a roundtable organised by Opalesque, family office investor Erik Crawford said: “I don’t see a tremendous amount of demand out there for absolute return, especially if it is called ‘hedge fund’. If you call it absolute return, that helps a little bit, but still there is a lot of scepticism.”

He said ‘Cash Plus’ strategies often based on macro or fixed income approaches have “struggled a lot”, and did not have particularly demanding targets “if cash is bringing you nothing. If the ‘plus’ is just bringing 1% or 2% too, then it is better than a money market fund, but it is still not giving you what you want, and you still have the risk of maybe getting minus 2%, which some of them have done.”

The investment committee at Crawford’s family office has tactically reduced, but not eliminated, its allocation to absolute return because of the prevailing low risk-free rate, he said. The office has also lowered its expectations of returns, resulting in lower allocations.

Nevertheless, he said discussions with his investing peers suggested Germany’s wealthy investors still have 10% to 12% in the field on average, with institutional investors lagging on 2% to 3%.

“Demand is weak because absolute return strategies have delivered disappointing returns in the past few years. In some cases allocations are being reduced.”

At the same time as Western world investors have been disappointed, said Sy Schlueter, manager at the 16-year old Hamburg-based Copernicus Fund, they have also become “increasingly dependent on generating absolute returns. Their pension funds and insurance companies have certain liabilities and they need to have investments with a certain yield to match these liabilities.”

For Schleuter, the problem with the industry is a lack of asset management expertise, built largely on long-only bonds and equities, not long/short.

“Managers pride themselves when they beat the benchmark even when they lose money. In my view, with the challenging markets, which we will be in for quite some time, they are an endangered species. We need a different quality of asset managers and we see them slowly emerging in the hedge fund industry.

“One reason why it so difficult at this stage to match the demand for yields and fulfill investor expectations is that there are too few managers who can deliver.”

Schleuter said: “Ultimately everybody is looking for absolute return and people try to get it by having exposure to a certain asset classes. However generally you could say that probably 50% of the time you make money by having an exposure to a certain asset class, and 50% of the time you do not.” He said equities had shown this over the past 10 years, and bonds would do so for the next 20 years

 

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