Introduction to Absolute Return Funds

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Introduction to Absolute Return Funds

By: Murray Priestley

Absolute Return Funds are internationally known as Hedge Funds. Hedge Funds are often deemed high risk/high return investment products. This is because they have gained notoriety for making rich investors, like George Soros, John Henry & others, very rich. Hedge Funds use diverse investment strategies, so are typically deemed out-of-reach to the average investor. In fact, Absolute Return Funds are deemed to have the same volatility of bonds but with a much higher rate of return.

In this article you will discover:

  • What is an Absolute Return Fund?
  • How Absolute Return Funds play a part in your portfolio

What is an Absolute Return Fund?

Absolute Return Funds are actively managed investments that aim to produce returns in both rising and falling markets through the use of a broad range of investment techniques. Traditional investment funds tend to invest directly into stocks, which may go either up or down. Absolute Return Funds have greater scope to use derivatives, short positions, and non-traditional securities to ensure their positions are protected in bearish markets.

Absolute Return Funds are massively diverse in size, scope and philosophy. The investment strategy employed by the fund manger will dictate whether investors receive returns in the form of income, capital appreciation, or both. The risk profile of absolute return funds can also range from very conservative to very aggressive. The difference in return and risk profile is determined by the exact instruments used by the fund manager. These methodologies will be highlighted in the fund's Product Disclosure Statement or Prospectus.

The main characteristics of Absolute Return Funds are:

  • Non-traditional investment techniques such as short-selling, derivatives, warrants
  • Performance incentives to align investor and manager interests
  • The use of gearing to increase investment positions and potential returns
  • Accepting pf new investments to effectively implement their complete investment strategy
  • Minimal exposure to potential market actions

How Absolute Return Funds play a part in your portfolio

All fund managers try to achieve the best performance they can. Their entire reason for being is to maximize your return on investment. An Absolute Return Fund uses various investment instruments to derive the best consistent performance to you. Benefits of investing in an Absolute Return Fund are:

Returns in rising and falling markets

Absolute Return Funds main advantage over regular stocks is that they aim to give you return in both rising and falling markets. One of the keys to successful wealth accumulation is to continually move forward. Absolute Return Funds ignore bearish and bullish trends to be consistent performers in your portfolio.

Diversification in non-traditional investment instruments

Diversification in your investment portfolio is a key to success. Your portfolio should already contain shares, bonds, property, cash, fixed interest investments. Absolute Return Funds offer another weapon in your wealth accumulation armoury. You are able to diversify your portfolio further which gives you more security and, over time, a better return on investment.


Units in Absolute Return Funds are often available directly from the fund manager but are easily found, and traded, on the stock exchange. This makes your investment highly liquid. You have the ability to increase, or decrease your stake, in a particular fund at the click of a button.

Returns from both income and capital

Absolute Return Funds can give you both returns in both income and capital. This spread will assist your tax position as you are not overly exposed to any one kind of return.

Risk Management

Absolute Return Funds are actively managed. The managers also tend to have large amounts of their own personal wealth invested to reassure the investors that the managers are always trying to maximize their return on investment.

About The Author

Written & published by Murray Priestley, Managing Partner of Portofino Asset Management, private investment managers and publishers of the Portofino Report.


Help!-Ineedsomebody 24.08.2008. 01:48

Who funded Darwin's research?? who funded his reasearch on The origin of species??

thanks, sources welcomed


Admin 24.08.2008. 01:48

In 1831 Robert FitzRoy, the new commander of the HMS Beagle, a Cherokee class 10-gun brig-sloop of the Royal Navy (so, military, state owned) used for geographic and scientific/military coastal studies, was almost ready for the second expedition of his ship. He feared loneliness and to be prone to suicide, because he had previous episodes in his family, and the former commander of the HMS Beagle (Capt. Pringle Strokes) committed suicide during the first expedition. He had no commanding officer nor second captain and no one on board of his social or cultural level. He tried to convince his friend Harry Chester with the idea of Harry accompanying him, but this came to nothing.
In accordance with Janet Browne and Michael Neve introduction to a recent edition of Darwin's Voyage of the Beagle, that I quote "It was not unusual for naturalists to be invited on such expeditions as passengers paying their own expenses, and in August 1831 FitzRoy wrote hurriedly to the Admiralty, presumably to his friend and superior Captain Francis Beaufort, asking that an appropriate well-educated and scientific gentleman be sought out for this purpose. Beaufort's enquiries via his friend George Peacock at the University of Cambridge were turned down by the Reverend Leonard Jenyns, vicar of Swaffham Bulbeck, and by Professor John Stevens Henslow, who had other commitments. Both recommended the 22 year old Charles Darwin who had just completed his theology course and was then on a geology field trip.

Consequently, upon his return home, Darwin received letters from Henslow saying "I assure you I think you are the very man they are in search of" for the position "more as a companion than a mere collector", and from Peacock who said the post was at his "absolute disposal". At first Darwin's father rejected the proposal, but was persuaded by his brother in law Josiah Wedgwood II to relent and fund his son's expedition. Then FitzRoy wrote apologising that he had already promised the place to a friend, but when Darwin arrived for interview FitzRoy told him that the friend had just refused the offer, not five minutes before. The Tory FitzRoy was cautious at the prospect of companionship with this unknown young gentleman of Whig background and they spent a week together getting to know each other. Although FitzRoy nearly rejected Darwin on the basis that the shape of Darwin's nose indicated a lack of determination (see physiognomy), they found each other agreeable. Beaufort advised that Darwin's share of costs would be up to 500, he would be free to withdraw at any suitable stage and would have control over which "public body" his own collections went to.: end of quote
He paid his trip on the Beagle and the data collected during the 6 years trip were later used for "The Origin of Species" (so it was a self funded search). Pubblication of The origin of Species c/o Murray was for sure supported (but not paid) by Sir Charles Lyell, a Scottish lawyer and geologist who was the best support , in the tough word for the often naive Darwin


Douglas S 10.01.2010. 03:49

Why is international diversification so important? In reviewing several international etfs, VGK, VPL, ILF, MES etc., all of which followed the S&P down during the meltdown, why is exposure to international stocks considered so important? Wouldn't it be better to just buy a few stocks from around the world like PBR, AMX, NSRGY, IBN, CHL or TM and hedge the portfolio with a market short etf? I'm not saying buy them all or anything like that in fact I already own a few, it just bugs me that when all heck broke loose, everything fell, even the international stocks so can someone please tell me what I am missing about diversification? Paul?

Douglas S

Admin 10.01.2010. 03:49

Remember that old economic adage;
"When the US gets the sniffles, the rest of the world gets a cold."

It seems to me that over the last 30 months or so, the US got pneumonia, and the rest of the world got .....well....pneumonia too!

I'm not a "trader". I don't claim to be one, and those that are good at it have my respect, but they are few and far between. I have the license that allows me to act as a broker and trade for others, but I'm much better at structuring a buy and hold investment portfolio for a given risk tolerance, as opposed to trying to be a stock picker. One thing I've learned about ETF's and other new investment vehicles is that the introduction of many of them is demand driven. If there is an interest in a specific area or procedure or market trick or developing technology, some firm will issue a new ETF or UIT or CEF or Mutual Fund to serve that demand. Too many of these new issue securities are devised by guys with PHD's in mathematics who wouldn't know a weather related downturn in a commodity (as a random example) from a turned down bed.

Much of modern portfolio theory got thrown out the window during 2008 and early 2009 because it seemed as if there was no safe asset class at all. But that was a once in a lifetime event. If every recession and market correction was as severe as what we all just went through (and are still going through, to be sure) it wouldn't really matter where you put your money.

But luckily, most recessions and market corrections aren't like that.

I still think MPT ( ) and diversification has merit and I am a firm believer in trying to mitigate risk whenever possible. But the world is a very different place from the days when that theory was devised. Hell, when that theory was first formulated, the primary transport for the overwhelming majority of Chinese was the bicycle. I think you're aware of how much things have changed.

I don't really have an answer for you, Douglas. I don't think you are missing anything, to be honest.

Want to know what the absolute perfect play would have been from Oct. of '07 when the Dow peaked at over 14,000 to the end of 2008? It's easy to see in retrospect, but damned few people did this, I'll bet and it is the antithesis to being diversified;

If you had sold every single equity position you had in early October of 2007 and bought new or recent issue, 30 year Treasury bonds the same day, you could have bought those bonds for between 90 and 95% of par. Those bonds were paying a 4.5% coupon at the time. If you had held those bonds for just 14 months - from Oct. 07 to December of 08 and sold them, you would have seen the bonds increase in value from $950 a piece to around $1400 a piece AND been paid $45.00 per bond in interest payments. In December of 2008 the yield on the 30 year fell all the way to 3% AND BELOW! It bottomed out at 2.53% on December 18, 2008. That was the perfect play. No tricks, no options, no shorting, just simply exchanging equities for long treasuries. And you would have seen a +45% return on your money for the year while every long equity portfolio on the planet was DOWN about the same.

Almost every conservative portfolio model I have dealt with, and by that I mean ones with a Beta of less than 1, had the international sleeve as less than 25%, usually WAY less. The more aggressive the mix, the higher the international percentage. That has or will likely change over time as the BRIC's of the world get past the stage of being "emerging" and become more established. There are two billion people between India and China that now have access to information on an unprecedented scale and they will all want what people in the west take for granted; Cars, Air conditioning, refrigerators and other appliances, modern sanitation systems, highways, etc. etc. etc. So counting them out in the coming decades would be a mistake.

All is not lost for the USA though. In spite of many opinions I have read on the internet regarding the failures of the American system, in the past, many people and countries have underestimated the ingenuity and capability of the American people to bounce back.

They will do so again at their own peril.

There is another old adage;
Buy on panic, Sell on euphoria,

I'll add one more thing. Where is the absolute last place you would consider investing? What geographical area or asset class would you currently consider as something to be avoided at all costs?

THAT is the one to start taking a hard look at now.


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