In spring, as the poet Tennyson once said, a young man's fancy lightly turns to thoughts of love. Th...
In spring, as the poet Tennyson once said, a young man's fancy lightly turns to thoughts of love. This spring, however, with world equity markets still struggling and central banks continuing to walk a tightrope between rising inflation and falling consumer confidence, investors' fancy is likely to turn towards thoughts of not losing too much money.
As we all know, the value of investments can go down as well as up. But that does not detract from the fact that we would all rather they didn't. In a rising inflation environment, though, parking all one's assets on deposit could still lead to capital loss as the real value of money falls over time.
So what is to be done? This is where absolute return products come in, though they come in such a variety of forms that they can hardly be said to be a single investment solution.
For several years now - particularly in the bear market that marred the early years of this century - retail investors have been eyeing the returns available from hedge funds with envy. The Financial Services Authority in the UK has been consulting on the possibility of making funds of hedge funds available to a wider audience for several years now, but, as the news on page 5 reveals, this could now be a step closer to becoming reality.
Even hedge funds, though, are far from guaranteed to achieve the perfect formula of inflation-beating returns without excessive volatility. As the hedge fund space has become more crowded, quantitative trading systems have arguably added to volatility in the market, making life more difficult for everyone.
Structured products often offer quasi-guaranteed returns subject to a certain set of conditions, such as two or three indices not falling by a specified amount. But they can risk catastrophic loss should these index falls come to pass, and the credit crunch has made the derivatives on which they depend more expensive, which may result in a drop in issuance.
The fund profiled on page 36 this month, BlackRock UK Absolute Alpha, seems to be going about things the right way, having posted positive returns even during the extreme volatility seen in January. But surely it would be better to have more funds run along these lines so that investors can make meaningful choices.
In the UK, the Investment Management Association is introducing an absolute return sector, where investors can see the performance of funds pursuing an aim of absolute returns side by side. However, the IMA has warned that investors should not use this sector as a means of comparison, as the funds within it will use a wide range of strategies to try to achieve broadly the same thing.
Who would have thought that simply trying not to lose money could make life so complicated?
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