Funds may be hazardous to your health
Absolute return funds have been very successful at limiting investors’ losses in negative markets
The FSA’s decision to intervene in the marketing of ‘absolute return’ funds was inevitable.
According to an IMF magazine published in June 2006, the number of hedge funds – historically the preserve of the ultra-rich – exploded amid the massive generation of wealth seen in the equity bull market of the 1990s.
But it wasn’t until more than a decade later in 2003 when the Ucits III directive came into force, enabling the managers of UK retail funds to take on heady levels of leverage and – crucially – to trade in derivatives for investment purposes just like hedge funds do.
For the first time ever, fund managers were in a position to promise retail clients that elusive holy grail of investing – the ability to own a fund which can continue to rise even if stockmarkets are falling.
Only a couple of ‘bad apples’ have racked up major losses, and arguably it falls to the FSA to investigate their competence rather than clamping down on the entire sector.
John Kenchington
But, of course, as the funds have faced up to the ultimate acid test of the financial crisis, very few of them have been able to consistently sustain positive performance.
The FSA on October 5 issued a consultation calling for ‘risk warnings’ on absolute return fund marketing – reminiscent of the ‘health warnings’ that have been added to cigarette packaging.
But the reputable absolute return providers have actually been very good about educating advisers and clients on the funds. This columnist recalls a BlackRock promotional event in 2007 for its pioneering UK Absolute Alpha fund, in which it was made painstakingly clear that positive performance was not guaranteed.
While most absolute return funds do not always go up in value, most of them have also been very successful at limiting investors’ losses in negative markets.
Only a couple of ‘bad apples’ have racked up major losses, and arguably it falls to the FSA to investigate their competence rather than clamping down on the entire sector.
Perhaps, rather than purely absolute return funds, the FSA should oblige all funds – regardless of aims – that have ever lost more than, say, 25 per cent of investors’ money from peak to trough to suffer the shame of wearing its health warning.
I suspect a more prudent approach to client money would be taken across the board if that were the case.
John Kenchington is acting editor of Investment Adviser