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Home > Opinion > FTAdviser Blog

Funds may be hazardous to your health

Absolute return funds have been very successful at limiting investors’ losses in negative markets

By FTAdviser Blog | Published Oct 15, 2012 | comments

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


Our Columnists

Hal Austin

Hal is editor of Financial Adviser and has been for more than a decade. He has previously worked on a number of local and national publications.

Ashley Wassall

Ashley is editor of FTAdviser and writes on all areas of retail finance. Previously supplements editor at Money Management and editor of a European private equity publication.

John Kenchington

John is editor of Investment Adviser and has written about investments for several years. He has worked at titles including City AM and was recently named in the MHP 30 To Watch list of up-and-coming media names.

Jon Cudby

Jon is editor of Money Management and has 12 years' experience covering retail personal finance. In 2005, Jon was launch editor of FTAdviser and most recently he was head of online content for Incisive Media's financial services titles.

Tony Hazell

Tony is a freelance financial journalist, having been editor of Money Mail at the Daily Mail for a number of years. He has been writing a column in Financial Adviser since 2005.

John Lappin

John is a weekly contributor to Investment Adviser with 15 years’ experience in financial journalism and 10 years writing on the IFA sector. He was formerly editor of an IFA trade magazine.

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