Absolute Return funds typically retain a significant position in equities throughout the market cycle, and so end up proving not to be the uncorrelated asset class clients expect, according to Charles Hovenden, portfolio manager at Square Mile.
Hovenden said: “Some people view the problem with these funds as being they got too big, or that they can't operate in an environment of unconventional monetary policy, that latter is a reason many of the fund managers in the sector themselves highlight, but I think the problem is simply poor execution of the strategy.
These funds raised a lot of capital, and initially they did well, then they did poorly. The problem is with the execution of the strategies, rather than anything in the wider market or the industry.”
He added that: “One of the issues with these funds is they tend to have a constant overweight to equities.
"When I ask them about this, they say it is because over the long-term, equities go up. But if you are overweight equities in all market conditions, then you get the volatility of equities, making these funds less of a diversifier.
"But also if you look at how these funds actually perform, they underperform during equity bull markets. So one gets lots of the volatility of equities, without getting lots of the upside of equities.”