The Absolute Return Mutual Fund is a Strange Breed

Almost any guidebook on how to invest in mutual funds will quite naturally discuss the many and varied types of funds one can choose from. When you come to the chapter on absolute mutual funds it might be somewhat difficult reading however, and also somewhat lengthy. Most funds in this category bear little resemblance to one another, or to any other type of fund. The chapter may on the other hand be quite brief, describing this type of fund as being nothing more than a hedge fund, and letting it go at that. Hedge funds can also require a sometimes lengthy explanation, but investors for the most part tend to at least be more familiar with the term.

What is an Absolute Value Mutual Fund?

This type of investment is designed to give a positive return, when averaged over a lengthy period of time. It is also designed to outperform most other types of mutual funds. It is a fund type that once was only available to those who had a great deal of money to invest. It is also a fund whose performance is based on absolute terms rather than expressed in terms relative to the performance of other funds. In many respects this type of fund defies an easy description. It does go by another name however. It is often referred to as a hedge fund.

What is the Performance of These Funds Typically Tied To?

The performance of these types of funds are not tied to that of other funds, nor are they tied to any of the commonly used market indexes, such as the Standard and Poor's 500. A fund of this type is usually tied to an index that is almost always positive and therefore able to smooth out the bumps and valleys characteristic to most stock indexes. In other words, the index a given fund of this type is tied to is usually a custom-made index which could be based on several different things such as the Consumer Price Index, Treasury Bills, or some other investment type or measurement. This is one reason why the performance of one of these funds cannot meaningfully be measured relative to that of another.

Are There Any Common Traits Shared by Absolute Return Mutual Funds?

There are some common traits, although nothing much that will help an investor make a decision. One thing that all of these funds have in common is that they are all very different. Different fund managers employ different strategies. The time horizons that performance forecasts are made against can vary from a year to ten years or more. The portfolios are unique to a given fund and can often be quite dynamic as a fund manager strives to keep the performance of his fund positive. It is also worth mentioning that many times the strategies that are employed are unproven. They are not necessarily wrong, but in being unproven it adds to an investor's risk.

Can You Invest in a Fund That is Guaranteed and Still Lose Money?

You should probably not invest in a fund that is guaranteed to give you a positive return. No fund can really make that claim, although some might try. The term absolute value admittedly leads some investors to believe that such a fund will always deliver, and the person selling shares in such a fund will likely not argue otherwise. What an investor needs to be aware of is the fees or other expenses charged by the fund. Inflation also has to be taken into account as do taxes. Fees alone can sometimes cancel out any positive gains a fund has made over a given time period, especially if the returns are positive, but low. Unproven strategies, mentioned previously, can also cause losses if a fund takes a sudden dip and the fund manager does not have a strategy for recovery.

Is an Absolute Fund's Past Performance of Any Value?

There's an old adage in the stock market that past performance does not guarantee future results. The same applies here. One thing an investor has to watch out for is investing in mutual funds that have had a 'hot' year. Investors flock to these funds, other investors sell their shares in the funds to reap their profits, and the institutions that manage the funds cannot always cope with the changes. This is why some funds limit the number of new investors they will accept during a certain time period. When a large number of investors jump into a 'hot' fund, the performance of that fund often suffers. Many of those new investors then bail out, compounding the problem.

Absolute value mutual funds were, for a long time, available only to big investors. That has changed, but the small investor needs to be very careful when investing in one these funds. It would probably not be wise to put too many eggs in this one basket. While these funds seem to on the average outperform many other funds, the strategies of many of them are unproven. The indexes these funds are based on can sometimes be somewhat of a moving target, making it difficult at times to try to predict in which direction the fund is going to move. In addition, some of these funds have high expenses associated with them.

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