An absolute return fund is a type of investment fund that seeks to obtain profitability, detaching itself from the markets to ensure the capital invested, controlling volatility
These types of funds not only offer profits when prices go up, but also when they go down. Therefore, they take advantage of both bull and bear markets. In addition, its success depends more on the experience and professionalism of the manager than on other factors.
On the other hand, these funds focus on minimizing risk, that is, volatility. Profitability is, on this occasion, secondary. Of course, the capital invested is important for these investments and their managers.
How does an absolute return fund work?
First of all, we must emphasize that these funds do not seek to follow market trends. In fact, they invest in various types of assets and, in addition, the management team has a high degree of freedom of action.
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What they do is choose those assets that offer profits regardless of the market trend. To achieve this objective, they can include assets of low credit quality, but which allow positive returns in the short term.
In this way, when we contract a fund of this type, the main characteristics appear in the contractual conditions. Thus, we will know in what type of assets it will invest, what its returns are, etc. With this information, we can decide if we are interested or not.
Portfolio diversification is common among investors. It is said that you should not put all the apples in the same basket and this is true. We must bear in mind that if we have an efficient portfolio, when some interest rates go down, others go up and compensate.
For this reason, an absolute return fund is a good idea to have a diversified portfolio. In addition, with them we can take advantage of bear markets in which, with all certainty, other of our investments may have losses.
We must not forget that when we invest we have to think in global terms. For example, if we have three types of shares and one brings us losses in a year of -5%, but the others 3% each, the overall return is positive, 1%.
Absolute Return Fund Example
Let’s see, finally, some examples of this type of investment:
SEB 1 Asset Selection Fund GC EUR. A fund that does not focus on the evolution of the markets, but on the return for the investor.
RENTA 4 PEGASUS FI CLASE R. This fund invests in equities and fixed income. In the latter, even in low credit quality debt to take advantage of possible bear markets.
PENTA INVERSION FI – CLASS A. This is an absolute return fund that uses a long/short strategy, that is, it takes long and short positions. Here, again, profitability is sought, even in periods when prices fall.