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Appetite for absolute return funds falls to new low

Appetite for all three absolute return categories has dropped to its lowest level since Expert Investor started to gather investment sentiment data in spring 2015. 

Only one in five investors intend to increase their exposure to long/short equity funds over the next 12 months, down from almost two in five just one year ago. Long/short bond funds and multi-strategy funds have seen similar declines in sentiment. 

Saturation could be one reason for the decline, as many investors have built up sizeable allocations to absolute return funds in recent years, and have now reached a satisfying exposure to such non-directional funds.   

But the decline in interest could also have more opportunistic reasons. Absolute return funds have struggled to deliver returns after fees amid record-low volatility. 

“We will always have some money in absolute return funds because it remains a good diversifier. But long/short funds can’t produce good returns in this sort of market [with volatility being so low], so we have reduced exposure,” says David Karni, head of portfolio management at the Italian bank BCC Risparmio & Previdenza. 

“Bond managers for example spend a lot of money to short bonds but generate almost no returns,” he added. 

Indeed, the main reason investors have gone on an absolute return buying binge in recent years is to be prepared when markets turn.

However, as there has been no serious market correction for more than a year now, owning absolute return funds has felt like an unnecessary luxury. It’s like walking around in rubber boots and a rain coat while the sun is actually shining.