Absolute Return Funds Vs. Bonds

[AyG]

Over the last year or so I've been disappointed that my bond and equity investments have both plunged. (I'd thought they were supposed to be negatively correlated - I guess I'm just naive.)

Anyway, I'm considering replacing half my bond investments with Absolute Return Funds. These (at least some of them) appear to be able to provide consistent returns with far less risk to the capital.

I know that the charges for such funds are definitely rather high, but the (apparent) protection of capital and decent income seem to make them worthwhile.

However, I'm a little uncertain and would appreciate your thoughts.

[AFKAFSinLOS]

Black Rock do some interesting abosulte funds. eg Black Rock UK Absolute Alpha, has been showing nice consistent positive returns over the last year or so, despite falling markets. I hold this fund and it's been a nice little comfort in these times. You can buy thru various discount fund supermarkets, and usually discount the initial charge to almost zero.

I think these type of funds have a place in diversified investment portfolios. But: be careful:

- Steady consistent performance like Black Rock is not always easy to replicate. Other fund management companies have tried with less success. Depth of knowledge and skills in these type of funds among fund managers is less than in say long only equity funds.

- They can short some investments as well as going long others at the same time. One day they will get both sides wrong, and you will be hit with a double whammy. Only a matter of time. Hence part of a portfolio yes. Complete replacement or all of a portfolio no. Don't be greedy in wanting consistent success all the time. Accept most investments will lose money over some period of time at some point.

- They also often have performance charges in contrast to normal mutual funds or unit trusts. So even if you get in at no initial charge long run costs may be higher. Accept you are paying more for smoother returns.

- In falling markets they look good. In bull markets which are consistently rising they tend to do less well than long only equity funds. We already had some falls since October peaks, so be careful you are not buying your protection too late after the horse has bolted.

Personally I'd say don't try and get the timing right. Go for the fundamentals. Unless you are a trader, an investor should be looking for diversification. Hence they have a place, but be careful not to chase the fad, as they do look good comparatively at the moment, and have had a good run. Think of them as simply another basket to but your eggs in, and don't get too much hung up on timing. They're having their time in the spotlight looking good at the moment. They'll get their time in the doghouse at some point.. Just diversify a little and enjoy the ride

Edited June 27, 2008 by AFKAFSinLOS