The Analyst: why absolute return funds are back in focus

Absolute return funds have regained the attention of investors over the past year. Factors such as political instability, uncertain monetary and trade policies, elevated market valuations and increased volatility have driven demand for investment strategies that aim to minimise risk and generate positive returns regardless of market conditions.

Over the past five years, the Investment Association Targeted Absolute Return sector has delivered an annualised return of almost 4%, despite experiencing outflows totalling £17.5 billion during the period. However, while investors on the interactive investor platform were net sellers of absolute return funds in 2023 and 2024, they have been buying them more actively so far this year.

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Source: Morningstar as of 30 June 2025. Past performance is not a guide to future performance.

The traditional 60% equities and 40% bonds portfolio worked well in the past, mainly due to ultra-loose monetary policies from central banks that boosted both asset classes, with inverse correlation typically remaining intact. However, as inflation expectations began to rise, interest rates followed suit, triggering a sharp sell-off in both equities and bonds in 2022 and breaking their historical negative correlation. This shift led some professional investors, including BlackRock, to question the effectiveness of the 60/40 model and explore alternative strategies.  

With volatility and uncertainty dominating the markets, absolute return strategies may be an appealing option for cautious investors to explore, given their objective of delivering long-term returns that outperform both inflation and cash, while maintaining significantly lower volatility.

What are absolute return funds?

Absolute return funds typically use investment strategies that differ from traditional funds and are often associated with hedge funds. On top of this, despite sharing a similar broad objective, funds in the sector vary considerably on the ways they achieve it.

Some invest only in a single asset class, such as equities or bonds or geographical region. But many are multi-asset funds, with holdings in equities and bonds as well as in commodities, currencies, or property. These funds are usually global, allowing them to invest in assets around the world.

In terms of strategies employed, they can be long/short, market neutral or global macro funds able to blend a number of different investment strategies and assets together, making multiple bets on a broad range of assets as each strategy is likely to perform differently at different times of the economic and market cycle.

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Absolute return funds also extensively use derivatives, currency hedging and other complex investment techniques that aim to reduce volatility and preserve capital. A typical absolute return strategy is designed to deliver equity-like returns with half the volatility of equities.

One of the implications of these wide differences between funds is that their risk levels can vary greatly: some aim for a cautious risk-return profile, while others are prepared to be more adventurous.

As well as having been, at times, one of the most popular among investors, the sector has been subject to a lot of scrutiny. As investors continue to buy these funds, their performance has been less impressive of late.

For example, some funds are so cautious that they struggle to deliver returns better than cash, while others are overly aggressive and far more volatile than you would expect for this sector.

In 2013, the Investment Association (IA) added the word “Targeted” to the previous designation of the “Absolute Return” sector to ensure that there is no doubt that positive returns are a target and not guaranteed.

Investors in the past have been concerned that absolute return funds are usually complex and difficult to understand, and some have unrealistic objectives along with high fees. All this has attracted the attention of the Financial Conduct Authority (FCA). The regulator said that it is going to investigate the sector as part of its review of the asset management industry.

Why invest in absolute return funds?

A good quality absolute return fund may be a useful way to diversify your portfolio and protect capital over the longer term. As they often hold alternative assets, they are less correlated to other asset classes such as equities or bonds. This means they may perform differently at times of market volatility, potentially helping to offset losses in other parts of your portfolio.

By using sophisticated investment strategies such as short selling or pair trading, they can provide consistent returns with less volatile performance than traditional funds, especially during market sell-offs.

Absolute Return funds are probably suited to more cautious investors who are less comfortable with the volatility of equities. They can also be used for capital preservation strategies that do not require high returns.

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A further use might be for pension portfolios for investors near retirement who want a stable income and are less concerned about maximising capital returns.

The ongoing shift in market landscape to higher interest rates and sticker inflation means much lower returns with higher volatility to come – an environment that could warrant considering absolute return strategies within portfolios.

A typical allocation of around 20% can serve as a useful guideline, given that absolute return strategies are considered part of the alternative asset class. However, this allocation should be adjusted depending on the objective behind including these strategies in a global well-diversified portfolio.

It is important to recognise that absolute return strategies carry their own risks and challenges. They are often more complex in structure and may involve the use of derivatives, requiring a thorough understanding and careful risk management.

Absolute return funds to consider

If you'd like to add an absolute return fund to your portfolio, there are a number of good options that investors might consider. These include the Janus Henderson Absolute Return, TM Fulcrum Diversified Core Abs Return and Trojan Fund.   

Trojan Fund: managed since its inception in 2001 by Troy founder Sebastian Lyon, alongside co-manager Charlotte Yonge, Trojan fund seeks to protect and grow capital. It is cautiously run, with a focus on downside protection and quality. Allocation is flexible and currently defensively positioned, favouring short-dated fixed income across Treasury Inflation Protected Securities (TIPS) (24% of portfolio), UK Gilts (10%) and Japanese Government bonds (8%), while equities form 38% and gold 11%. Although, like many similar funds, it has struggled to outpace the UK’s high inflation rate over the past three to five years, the Trojan Fund has a strong long-term track record of delivering real returns with low volatility.

TM Fulcrum Diversified Absolute Return Fund is a differentiated and erudite strategy that draws on the house’s alternative investment capabilities and aims to deliver a return of 3-5% above base rate with low volatility. Headed by CIO, Suhail Shaikh, the fund employs an unconstrained, macro-driven approach. The team makes dynamic allocation calls driven by macro views across equity regions and themes, fixed income, commodities and currencies, as well as allowing both long and short positions. The ultimate return profile is quite uncorrelated with global equity or bond markets. While having seen a period of weakness around 2016-18, the fund hasn’t produced a negative calendar return since and performance in a difficult 2022 for equity and bond markets stood out as impressive.

Unlike the options mentioned earlier, the Janus Henderson Absolute Return Fund takes long/short positions across equities, targeting positive returns through differing market environments with lesser volatility than equity markets. It has been run by managers Ben Wallace and Luke Newman since 2009 and is heavily tilted to the UK but permitted an allocation of up to 40% overseas.

The fund invests across equities, contracts for difference (CFDs), index futures and cash to control its net exposure to the equity market, which is currently at around 14%. Arguably the task of protecting capital while confined to the realm of equities only is challenging compared with more flexible asset allocation strategies, but this fund has consistently delivered. Over the past decade, the fund has rarely posted negative returns for a calendar year and has delivered returns a little above the Bank Rate with remarkably low volatility.