Absolute-return funds: too good to be true?

Absolute-return funds are those that aim to achieve positive returns regardless ofwhether the market is going up or down. For example, an absolute-return fund mightbet on certain stocks going up, but might also short the overall market (bet on stocksfalling). So even if the stockmarket falls, the fund would still show a positive return solong as its individual stock picks did better than the wider market.

Absolute-return funds sound an excellent idea in theory, but results show that notall funds of this type manage to live up to their promise. Out of the 37 funds in dataprovider FT Trustnet's targeted absolute-return sector (those which have five-yearrecords), only 19 have consistently achieved positive returns over one, three andfive-year periods, says James Connington in The Daily Telegraph.

Over five years, all but one of the 37 funds achieved a positive return, with anaverage return of 21.8% but it's worth bearing in mind that absolute-return fundsmay in recent years have benefited from the "free ride" of a consistently risingmarket that has been artificially maintained by quantitative easing, as Conningtonpoints out.

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What's more, relatively few funds did well during the 2008 crisis, whichis exactly the kind of market in which investors are most concerned about avoidinglosses (those that did well include Ruffer Total Return and Troy Trojan).