Riding the popularity of hedge funds, as well as a flat market, a number of money managers are launching mutual funds that deliver "absolute" returns. If recent history is any indication, however, they're success might be short-lived, a report form The Wall Street Journal reveals.
A focus on absolute returns, or steady gains when the markets are sluggish, is the philosophy that drives most hedge funds. Mutual funds, meanwhile, typically judge their performance against a benchmark. That means a mutual fund could lose money but still be successful if it beats its benchmark. Over the long-term, however, consistently beating a benchmark, or delivering "relative returns," usually portends good things for investors.
Nonetheless, Rockville, Md.-based Rydex Investments launched the Rydex Absolute Return Strategies Fund last month, while a fund from UBS Global Asset Management's absolute investment adviser unit was launched earlier this year. Federated Investors of Pittsburgh, Pa., is planning the Federated Absolute Advantage Fund.
But a number of financial advisers told the Journal that the enthusiasm for absolute-return mutual funds could wane once the stock market takes off and their benchmarks start out-performing them. Investor would likely bail. "People are always greedy," said William Berg, a Portland, Ore.-based adviser.
They could also go the way of the "market-neutral" funds of the late 1990s. Those were arguably the industry's first hedge funds, but their short-selling strategies spelled defeat during the tech boom. In addition, as Berg noted, investors have an asymmetrical view of performance: "They cherish absolute returns in bear markets, but relative returns in bull markets," he said.
And if the market were to surge, many investors "will probably fire me and hire an index fund," added Brian Singer, a regional chief investment officer at UBS, who oversees an absolute return fund.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.