FSA review must ban Absolute Return label
Last week the FSA announced it would be investigating the controversial area of absolute return funds this autumn. Providers of these funds, which have used new EU regulation to bring hedge fund-type investing to retail investors, will doubtless be furious. They will say they can manage the complexities and risks of absolute return funds – but so did hedge funds before many of them blew up in the financial crisis. Moreover, not all these funds have delivered regular absolute returns – and therein lies the industry’s ultimate flaw.
After the market falls of the financial crisis, funds in the IMA’s Absolute Return sector have been remarkably popular, as theoretically they have the toolkit to generate a regular absolute returns irrespective of market conditions. The sector has regularly been one of the IMA’s five best-selling on a monthly basis since the crisis. Not all funds, however, have generated absolute returns – meaning that there is a severe danger that some of these funds are being mislabelled and mis-sold. With its investigation, the FSA is very late to the party. Moreover, it has already risked repeating one of its biggest mistakes by allowing the use of the phrase ‘absolute return’ to continue. The FSA has been attacked by investors, advisers and even MPs over the fact it allowed the IMA to permit one of the funds in the failed Arch Cru range to be listed in its Cautious Managed sector – an error compounded by the regulator’s current stance that we should all have known the funds were high risk.
So far, the IMA has merely tentatively proposed changing the name of its Absolute Return fund sector as part of an overhaul of how the funds within it are compared. Individual fund providers are even less reluctant to stick their necks out in spite of the regulator dropping the word “mis-selling” into the mix. If the market cannot ban the phrase “absolute return”, the regulator must step in and do the job for it. It cannot afford to sit back and wait for the horse to bolt before slamming the stable door.
Nick Reeve is senior news reporter at Investment Adviser