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Diversified Alternatives – introducing Absolute Return

For financial professionals only

Our newest asset class, Diversified Alternatives, includes Absolute Return. Following a different risk/return journey to funds used elsewhere in portfolios, this brings exciting correlational benefits in pursuit of better risk-adjusted outcomes for your clients.

What is Absolute Return?

Absolute Return is an alternative to traditional investing, sharing closer similarities to hedge funds. They grew in popularity following the introduction of the UCITS III directive in 2004. This allowed increased use of derivative powers, meaning more freedom and the ability to access new types of instruments.

An Absolute Return focus is radically different to many funds where success is measured by whether they outperform a specific benchmark. Instead, the aim here is a positive return regardless of market direction, ideally with lower volatility.

This is achievable through investing in both long and short positions. A short position’s value will increase when the underlying stock or market falls. By taking both long and synthetic short positions, it’s possible to reduce the fund’s net exposure, providing downside protection.

Taking on short exposures should mean funds fall less than the wider market in times of stress. However, the flip side is they’re unlikely to rise to the same extent, since those short positions will lose money as the stocks’ value increases. That’s why such funds in our solutions sit in an asset class outside of equities or bonds, given they provide a return not necessarily aligning directly with markets.

Selectivity is key in this diverse sector

Aside from the aim of achieving positive returns in a low-risk manner, the funds in the Investment Association Targeted Absolute Return sector have little in common.

For example, some invest long and short in equities or entirely in bonds. Others seek global macro-opportunities, potentially looking for return from areas such as currencies. In-depth research and analysis is essential to understand the risks involved in these different strategies. Undoubtedly, the sector has disappointed the wider market historically, with the Investment Association changing the sector name to include the word ‘Targeted’ in 2013, so ‘absolute’ could not be misconstrued as a guarantee.

Which Absolute Return fund was selected for Diversified Alternatives?

Our search began by screening the sector for strong risk adjusted returns and low correlations to equities and bonds. Following an in-depth review involving rigorous quantitative and qualitative analysis, we landed on Janus Henderson Absolute Return.  Both investment process longevity and portfolio construction robustness stand this product in good stead and as a UCITS fund it is subject to strict rules around liquidity and risk management.

The fund is now included in Diversified Alternatives, offering property, infrastructure, and short-dated corporate bonds (as well as the wider portfolio), which should help provide a smoother long-term return profile for clients.

The value of an investment and the income from it can go down as well as up, and your clients could get back less than originally invested. There is no guarantee the solutions or funds will meet their objectives. Past performance is not a reliable indicator of future returns.