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What are the risks of investing in absolute return fund?

What is an absolute return fund good for?

These mutual funds provide an opportunity for you not to have to choose an investment area if you want to achieve a return. The investment direction is chosen by the fund manager for you in the hope of achieving a positive return. Regardless, keep in mind that there is no investment that is completely risk-free, yet has a worthwhile return.

the risk of the absolut return fund

What is an absolute return investment fund?

This type is a group within an investment fund whose investment policy gives the fund manager more leeway. The aim is not to outperform other investment funds investing in similar areas, but to achieve a positive return in the current market environment. That is, they exceed risk-free returns.

What does the average investment fund invest in?

There are several types of mutual funds. These types were created precisely because, according to the investment policy, they can only and exclusively invest in a given direction. The fund manager can move within a relatively narrow range in the following areas:

  • level of risk
  • selected asset class
  • the ratio of that asset
  • geographical area
  • industry exposure

What does an absolute return fund invest in?

The investment policy of absolute return funds gives the fund manager a high level of freedom, and accordingly it can invest in virtually anything that the fund manager deems good. Here’s how to choose traditional directions:

  • government securities
  • bonds
  • stocks
  • commodity market products
  • real estate
  • it can also act as a fund of funds, ie it can also buy units of other investment funds.

All this at the same time without geographical or industry restrictions.
In addition to these, of course, they can choose any asset class according to where the fund manager sees the opportunity.

How is an absolute return fund different from a traditional investment fund?

The way money is managed

Given that the palette from which the fund manager can choose is very wide, the only thing that cannot be realized is passive asset management. You will find an absolute return fund in an actively managed form. These funds can also take a buy and sell position, meaning they can benefit not only from a rise in the price, but also from a fall in the price.
In addition, this type of investment fund may use derivative instruments.

How to select the device

Even absolute-return investment funds marketed by the same fund manager may choose the assets to be included in the fund in different ways. Then, like the tools, the fund manager can choose from a wide range.
Of these, for example:

  • purchase of undervalued shares after individual analysis
  • global macro strategy
  • selection of non-correlated instruments
  • fundamental analyzes (inflation, geopolitical events, corporate revenue, etc.)
  • technical analyzes (analysis of exchange rate movements and trends)

The reference index

In the case of an absolute return fund, the goal is to achieve a return with a positive sign, ie the highest possible return in absolute terms. Since they do not invest here in a single direction, but with a single objective, the benchmark (the benchmark against which they measure their own performance) is not the other funds of the same, but e.g. the RMAX. RMAX is an index of bonds with a maturity of more than 3 months but less than 1 year. (You can already read about what the index is in the section on ETFs.) Its annualized return is just over 0%, so if it is exceeded, the expectation of a positive return is realized.
Before you ask how the hell can they exceed the inflation, I would add that they may know more, they won’t stop right away once that’s been achieved.

yields of the absolut return funds

As you can see, a fund with an absolute return can achieve good results, although like any other investment, a return is not guaranteed here. That is, you can get out with a negative value.

What are the risks of investing in an absolute return fund?

These risks are typically due to fluctuations in the price of the assets that make up the investment fund. There are many things that affect the exchange rate of these, but among them the fund manager is sure that he is not there, so he cannot influence it, nor can he know the direction or extent of it in advance.

Instead of listing 10 pages of risk for you, and that’s guaranteed to deter you from any investment, let’s look at the top risks now.

Real interest risk

You’ve read about the meaning of the real interest before, it’s nothing more than a change in purchase value.
Absolute-yield funds target returns above risk-free returns, which typically include returns on government securities. Although there is a strong correlation between government bond yields and inflation, it is nevertheless possible that inflation may exceed government bond yields. And this carries with it the possibility of a negative real return. This means that even though the sign of your return is positive, you still don’t get as much for your money as if you hadn’t invested.

Risk arising from derivative transactions

Different funds may use this tool to different degrees. The liquidity of derivatives may fall significantly (ie they can only be sold at a significant loss or not sold at all in a short period of time) and they can also operate with significant leverage. Leverage provides an opportunity to realize more returns, but it also carries the same risk of loss.

Currency exchange rate risk

The fund manager can not only invest in domestic currency, but also add assets to the portfolio that e.g. are expressed in euro or in dollars. In this case, investors may even experience significant exchange rate fluctuations.

Investment risk

Although a careful selection process precedes the fund manager’s choice of an asset, there is no guarantee that the investment fund will not suffer a significant exchange loss due to the asset selected. The fund manager has no influence on this and, as it is typically caused by unforeseen events, he cannot even calculate with it. However, the price of the fund is negatively affected.

Partner risk

Like investment devices, the fund manager carefully selects its cooperating partners. Nevertheless, if the selected partner does not fulfill its obligations under the contract for any reason, it will also have a negative effect on the price of the investment fund.


  1. To what extent would you leverage absolute return funds into your own portfolio?
  2. For these funds, the recommended term is over 3 years. To what extent do you see this in line with the available return and the risk taken?
  3. How suitable do you see an absolute return investment fund for capital building?

If you would like to know if this type of mutual fund is actually for you, please contact us. This turns out in a personal conversation.

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