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Absolute return – an actor with many masks

There are two types of absolute return funds, and there are only 40 alternative Ucits funds to pass the hedge fund test. As a matter of fact, absolute return funds are far from a straightforward concept.


PA Europe

The majority of Europe’s fund selectors these days invest in absolute return funds, but there is no simple answer to the question what an absolute return fund actually is and what it is supposed to do, apart from providing an ‘absolute return’. Andrew Summers, head of fund selection at Investec Wealth & Investment in London, differentiates two kinds of absolute return funds. “There are absolute return funds which try to generate returns across the cycle regardless of market conditions. Secondly, you can find absolute return funds which provide you with some level of insurance in situation when you get a substantial equity market correction,” he said during a panel debate of fund selectors at EI’s first Pan-European Congress in London.

Is only long/short equity Ucits-fit?

Parveen Joynathsing, director of hedge fund selection at Lyxor AM, just considers funds in this second category, and only a select few of them. “The alternative Ucits universe has approximately 1400 funds, but if you only look at the funds that mimic hedge fund strategies, there are probably only about 40 funds in our universe we can invest in, carving out the ones too close to long only and these that are too different from their offshore original,” he said. 

“I would argue only equity long/short is well represented in the Ucits-format. Given the current market volatility, investors are now turning to CTA’s and global macro, but it’s much more difficult to find hedge fund like products in this sort of strategies,” he added.

“Many managers don’t want to do Ucits versions of their funds, as they would have to carve out too much of their portfolios to meet the [concentration and liquidity] guidelines. So in the end we have a pretty small universe to build a portfolio from,” he concluded. The consequence of this is that the biggest chunk of Lyxor AM’s hedge fund portfolios still consist of offshore hedge funds.

Long/short equity funds are the most popular of all absolute return strategies among European fund selectors. These funds are much more in demand than long/short bond, global macro and even multi-strategy funds.

Quite possibly, that is the case because they are easier to find in Ucits-format than other strategies. “We still struggle a little bit finding good Ucits offerings in the alternative space. We find opportunities in long/short equity, but elsewhere it’s more difficult,” said Niclas Hiller, CIO of the Norwegian wealth manager Formuesforvaltning. “We keep looking, and are open to anyone with a good proposition, but it’s a hard bargain.”

Click here to see a full overview of delegate voting results from the Pan-European Congress London.

And click here to see a slideshow of photos taken at the event.