FSA to probe absolute return funds in autumn

The FSA is planning to investigate absolute return funds in the autumn, as pressure mounts on the controversial products.

A spokesperson for the regulator said it was not currently carrying out any investigative work in the absolute return space, but confirmed it would do so later in the year.

However, the FSA refused to give any details of areas to be covered by the probe.

Absolute return funds pledge to return positive performance regardless of the direction of the underlying stockmarket, but many of the funds have failed to do that since the sector first took off roughly seven years ago.

The regulator has previously briefed firms to advise them not to use the phrase ‘absolute return’ when naming funds, and warned earlier this year in its Retail Conduct Risk Outlook that the sector was a “potential concern”.

In the report, published in March, the FSA said warned investors could suffer “significant unexpected financial loss” if the funds they are sold underperform - especially as many investors felt ‘absolute return’ implied a guarantee or element of protection from losses.

The regulator also warned of potential misselling if advisers do not understand the sometimes complex strategies used by some funds.

According to the IMA, the Absolute Return sector saw £469.7m of net inflows in the first half of 2012, while the sector’s total assets under management swelled by 9.6 per cent to £23.9bn.

The IMA has recently completed its consultation on an overhaul of the Absolute Return sector, with a final outcome expected by the end of the year. The fund management trade body put three proposals to members, including splitting the sector by benchmark or by strategy.