Investors have been drawn to absolute return funds by their resilience to market turbulence and new investment ideas. However, their popularity means these funds can quickly reach capacity.
In the latest edition of Selector Snapshot, a fund selector shares the process that he goes through when one of his preferred funds soft-closes.
Selector: Andreas Marnett
Company: Sal. Oppenheim (Germany)
We like absolute return strategies with new approaches, but successful funds in this area sometimes reach their capacity limits very quickly as the demand in the industry is very high. After that, you have to find alternative opportunities to invest in.
When we are invested in a fund that is being closed we have to review the investment. If it no longer fits our criteria, we consider selling the fund.
We also review a fund that reaches its capacity limit before it is closed. So, we talk to the fund managers and to the fund companies. If we expect the fund volume to increase further, we will probably sell the fund.
The criteria we use for evaluating funds depend on the nature of the fund. For example, there are different limits for a small-cap fund compared to a large cap long/short equity fund. It depends on the investment universe and on the sector.
A well-diversified quant fund with 150 securities in a big universe will be treated differently than a fund which focuses on picking, say, 25 securities from a smaller investment universe.
After last year, several long/short equity and market neutral funds reopened after investors had taken money out of them. Funds often reopen because investors take their money out due to underperformance or drawdowns.
Last year, many fund managers disappointed and lost money in the absolute return space. As a consequence, many investors lost their patience and look for alternatives.
Among long-only funds it is easier to find funds that outperform the benchmark this year compared to 2016. Absolute return funds have performed better so far in 2017, too. Last year was tricky because of major events such as Brexit, the election of Donald Trump, or the big sector rotations.