Funds, which are called alternative Ucits or Newcits, are developing rapidly – their size is of more than $300bn under management, according to Strategic Insight.
This success can be explained notably by the growing demand from institutional investors, forced to seek performance outside traditional management offers. The most frequent strategy is Long/Short Equity; the performance of this type of strategy depends on the quality of stock selection, their relative performance and does not depend much on the stock market direction. The best long/short equity fund manager can deliver equity like return with limited risk.
Why use such funds today?
Absolute return funds are expected to generate stable performance in all market conditions with a limited level of risk. This was the function attributed to bonds in portfolios.
However, with the prospect of a Fed rate hike, but also regarding the low interest rate environment in the bond market and the equity markets which remain quite expensive and have strongly risen, absolute return strategies such as Long/Short equity, Global Macro and Equity Market Neutral must be favoured.
The current rate level makes bonds more risky and less profitable. So, absolute return funds have to be introduced to portfolios today.
Thierry Crovetto is an independent fund analyst at TC Stratégie-Financière