Also called “non-directional fund,” an absolute-return fund is designed to generate a steady return no matter what behaviour the market display at that time. An absolute-return fund has another reference name “pure-alpha fund.” Here, the fund manager attempts to remove all market risk in order to create a fund that does not vary with market performance. If the manager removes all the market risk, the fund’s performance comes entirely from the manager’s skill, which in academic terms is called ‘alpha.’
An absolute-return strategy is most appropriate for a conservative investor who wants low risk and is willing to give up some return in exchange. The return target on an absolute-return fund is usually higher than the long-term rate of return on bonds, though. A typical absolute-return fund target is 8-10%, which is above the long-term rate of return on bonds and below the long-term rate of return on stocks.
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