Absolute Return Funds

Saw an article on  Bloomberg.com, about absolute return funds.  The premise of the story is that "Absolute Return"  does not describe a strategy so much as a desired outcome.  This makes comparing funds difficult.  What the heck, let's give it a go anyway.

First, a li8ttle ground work.  Absolute return strategies are common in the hedge fund arena, describing funds that attempt to provide a positive return each month.  Most of the strategies are either arbitrage or market neutral in their approach.  (There are some funds investing in illiquid assets calling themselves absolute return, but the illiquidity masks the volatility of the asset values.)  These strategies rely on techniques that greatly reduce the risks associated with specific market exposure.  Portfolios tend to have roughly equal long and short exposures.

I ran a screen on Morningstar's Principia product, seeking funds in the Morningstar categories "Market Neutral" and "Long-Short".  We searched for distinct portfolios only that had started operations before January 1, 2008, and had a= 3-year annualized return through March 31, 2011 greater than 0%.  The screen returned 24 funds.

Since we are looking for returns that are not correlated with any markets, I checked the Best Fit R-Squared and found five funds with a score below 30.  One was closed and one showed no assets (?).  One has very relatively volatile returns. The two remaining look interesting.

JP Morgan Research Market Neutral (JMNAX, Cl A) is managed by JP Morgan in a market- and sector- neutral strategy.  Through March 21, 2011, it has a 3-year annualized return of 2.20% including -1.06% in 2008.  Its best Fit R-Square is 8.  It has an expense ratio of 1.50% (capped until  2/29/2012).

Managers AMG FQ Global Alternatives (MGAAX, Cl A) is managed by First Quadrant L.P. in a quantitative strategy that seeks to remain neutral across markets, sectors, and currencies.  The fund returned 1.16% annualized for the 3 years ending March 31, 2011, including 4.84% in 2008.  It has a Bet Fit R-Squared of 22w and an expense ratio of  1.99% (capped until 3/31/2012).

These two funds are available in multiple shares classes, so an advisor should be able to find the fund that meets the all client goals.  Either fund should provide some dampening of capital volatility while producing a return well in excess of cash equivalents.