How do I Choose the Best Absolute Return Fund?

Selecting a successful absolute return fund, which is an investment strategy typically run by hedge fund managers but which has gained traction among some mutual fund providers, is an endeavor that can present risks. The investment can also deliver robust returns unavailable elsewhere, because the strategy is designed to perform well during downturns in the financial markets. There are ways to determine the best absolute return investment for you. These methods include examining the historical performance of a particular absolute return fund in addition to researching the risk and reward profile and researching the management style of the particular firm you are considering.

Hedge funds are not known for providing the best transparency or a window into their trading strategies and even performance. That is why it might be necessary to have a relationship with other hedge fund investors in order to learn about the ins and outs of a particular fund, including an absolute return fund. An absolute return fund manager uses complex trading strategies involving derivatives, futures and options, for instance, and employs non-traditional methods such as short selling, or betting that a security will decline in value. This level of sophistication makes it even more important to be selective when choosing an absolute return fund.

There are hedge fund database companies — services that typically require some subscription fee — that provide a glimpse into the trading activity of investment funds, including hedge funds. In this spreadsheet, you can learn about investment manager fees and profit expectations. There might also be details about a minimum investment to enter an absolute return fund, for instance. This information can be vital in determining which investment vehicle is right for you, and you can begin searching for these service providers online.

In addition to hedge funds, an absolute return investment strategy could be run by a mutual fund manager. The mutual fund will employ a similar trading technique to the hedge fund and will strive to generate returns that are generous enough during market downturns to compensate for any lagging performance in the absolute return strategy during an upward market. A key difference, however, is that mutual funds are required in some jurisdictions to file a prospectus with the regulatory agency. In this document, you can uncover historical trading patterns, fee structures and investment styles that can help you narrow down your search for an absolute return fund.