Absolute return investing

Absolute return investing offers an alternative to traditional mutual funds that invest in stocks, bonds, or money market securities. By definition, absolute return strategies are independent of asset classes and can take steps to reduce market risk. Absolute return funds look for a wide variety of positive return opportunities and seek to reduce unwanted risks through the use of hedging strategies.

Absolute return funds have flexibility to reduce risk

Absolute return
Relative return
  • Defines success as positive returns
  • Seeks low volatility and limited market risk
  • Can go anywhere — universe is not limited by a benchmark
  • Defines success as beating a benchmark, even if negative
  • Sets no absolute volatility targets
  • Typically favors investments within its benchmark

Freed from stock and bond allocations, absolute return strategies can pursue results less volatile than the markets

Absolute return fund
Relative return balanced fund*
Absolute Return Fund for DCIO
  • No fixed allocations
  • Flexible to respond to changing markets
  • Can be largely independent of market volatility
Allocations to Stocks, Allocation to Bonds, Discretionary Allocations
Relative Return Balanced Fund
  • 60% stocks
    40% bonds
  • Standard stock and bond weightings tied to benchmark
  • Vulnerable to market volatility

*Lipper defines balanced funds as typically having stock/bond ratio ranges around 60%/40%. Absolute return funds have fewer limitations on where they can invest as compared with balanced funds. They have the ability to move among security types (e.g., stocks, bonds, cash, and alternatives), capitalization ranges, styles, durations, credit qualities, and geographic regions. This flexibility in terms of asset allocation offers the advantage of improved portfolio diversification as compared with many balanced funds. Absolute return funds may also have additional risks that balanced funds might not incur such as investing in derivatives and commodities, and from the use of leverage.