June 12th, 2012 by

Advisors call for rethink of absolute return definitions By Chris Salih

11 June 2012 8:00 am

Advisers have called for a simplified definition for the absolute return sector after the Investment Management Association published three potential proposals for an overhaul of its current structure.

The trade body is considering redefining and dividing the sector to group the funds alongside traditional asset-based sectors.

One option being explored is to sub-divide the existing absolute return sector, indicating which funds are targeting more stable outcomes, based on cash benchmarks. Other funds would remain within the existing umbrella sector.

Another option could see the funds sub-divided by hedge fund-style categories such as long/short and global macro. The third option is to keep funds within a single sector and allow it to grow but rename and redefine it and supply additional information to allow investors to filter funds by criteria such as assets and investment strategy.

Hargreaves Lansdown senior analyst Meera Patel says: “I understand the IMA has a tough job but some of these explanations are as clear as mud. I think some of these definitions would be too difficult for clients to understand and they need to be simplified.”

Skerritt Consultants head of investments Andy Merricks says: “There would not be many problems if the funds in the sector followed the definition in the first place. They should be targeting a return above cash so the first proposal probably makes the most sense.”

Over 60 per cent of absolute return funds failed to produce a positive return in 2011, highlighting concerns over the sector definition.

Bestinvest senior investment adviser Adrian Lowcock says: “Using hedge fund definitions is way too complicated for investors although you could make that argument for all of the proposals. I think the idea of indicating which funds are targeting more stable outcomes is the one that can be best communicated to clients.”

Absolute return funds are designed to offer investors a positive return over a certain period regardless of market conditions. The IMA launched the sector in May 2008 and it has quickly become one of the biggest sellers in the IFA market.

A final conclusion on the sector is expected by the end of the year.

The IMA’s three proposed options

  1. Sub-divide the existing sector to indicate which funds are targeting more stable outcomes. The proxy for this new sector would be based on a cash benchmark(s), the other funds would remain under the umbrella of the existing sector
  2. Sub-divide the existing sector by hedge fund-style categories, for example, long/short, global macro
  3. Retain a single sector and let it continue to grow but rename and redefine it and supply additional information on the IMA website to allow users to filter by a number of criteria such as assets, investment strategy and SRRI rating
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