Absolute return funds fall short of their name
Absolute return funds are failing to live up to their name – losses from the strategy last year mirrored those made by shares, leaving the sector struggling to justify the fees it charges.
Statistics published by data providers Eurekahedge yesterday found that long-only absolute return funds lost 43% on their investments last year, which was slightly more than the 42% fall suffered by the MSCI index of global shares.
Absolute return funds are typically long only, although they can employ some limited short selling activities to shield their investors from the full brunt of market falls. However, last year they failed to do so – and may now find it difficult to levy higher charges than cheaper passive tracker funds, which are designed to reflect market moves.
Hedge funds, which grant themselves far greater investment flexibility than does the long-only absolute return community, lost 19%, according to database Hedge Fund Research.
John Jagerson, an analyst at US investment research house Learning Markets, wrote in a recent analysis of absolute return funds: "Active management is expensive, and on average does not outperform passive indexing."
He said absolute return funds could charge a 5% initial charge, and 2.3% annually. "High fees and big promises are typical of this style of fund," he wrote.
Hedge funds, which charge more – typically 2% of assets and 20% of fresh profits – have come under fire this year for their levies, given their record losses in 2008.
But they did avoid more than half the stockmarket's slump last year, said one manager. He has not launched long only absolute return products, and dubbed them "an uneasy halfway house between long-only and long/short."
He said: "not being able to engage in short selling and other full-blown activities that hedge funds can do is like a manager tying one hand behind his back. With tracker funds, they're much cheaper again, but you know what you're going to get – the market's returns."
Absolute return funds have recouped 22% in the first half of this year, Eurekahedge said, but need to make 77% more from their present levels to make good their losses from last year. Hedge funds, by contrast, need only make 13% to do so. They had already made 9.5% by the middle of this year, Eurekahedge said.
Funds tracking global markets have made 15% this year, but they are still 33% below where they were at the start of last year.
-- Write to David Walker at dwalker@efinancialnews.com
del.icio.us
Digg
Newsvine
reddit
StumbleUpon