Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Nothing absolute about 'absolute return' funds

New funds aim to make money in any market. If only it were that simple.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Paul J. Lim, Money Magazine senior editor

Paul J. Lim is a senior editor at Money Magazine. Email him at plim@moneymail.com.

(Money Magazine) -- After two of the worst bear markets in history, you're probably craving reassurance. Well, the mutual fund industry is hungering to give it to you.

You may have noticed that several investment firms have introduced funds whose goal is to make money regardless of how the stock and bond markets fare -- and with lower volatility than traditional funds. There are now 21 of these " absolute return" funds, up from two in 2004. But you have to wonder: If such a strategy works, why weren't companies pushing it before the bear?

"This is classic Wall Street," says Greg Schultz, a Walnut Creek, Calif., financial planner. "After the fact, let's make up a product that people wish they had owned."

Aside from the suspicious timing, the real problem with these funds is that there's nothing absolute about them, except the killing that the fund companies make. Fees average 1.6% of assets and often exceed 2%.

For that kind of payout you might expect in return some sort of guarantee that you'll make money in good times or bad. Or insurance against losses in any year. But most of the funds that were around at the start of 2008 lost money for the year, including UBS Absolute Return Bond (down 23.1%).

The funds' stated goal is simply to achieve a positive result over a reasonable period, which could be as long as several years. (Putnam's funds shoot for a specified return over Treasury bills.) But doesn't every investor seek to make money in that time frame?

Absolutely confusing

Another issue is that "everyone has a different view of what it means to manage money in this fashion," says Lipper's Jeff Tjornehoj. Funds such as Western Asset Absolute Return are bond alternatives. Others, like Putnam Absolute Return 700, aim for equity-like results.

In terms of strategy, some are long-short portfolios, which means they're allowed to invest in stocks but also bet against them. The managers of Putnam's offerings are free to go almost anywhere; they can invest in assets from blue-chip stocks to junk bonds to currencies. And many absolute-return funds use derivatives and leverage to try to protect you. "You really have to look under the hood," says S&P's Todd Rosenbluth.

If reducing risk is your aim, there's a simpler, cheaper way. It's called asset allocation. Cut risk by investing more in bonds. Will that guarantee you won't lose money? No. But neither does Wall Street's latest high-priced solution.  To top of page

Send feedback to Money Magazine
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Banned! 10 things you won't find in China China says it wants to open its economy more to the rest of the world, but Beijing keeps a tight grip on technology and access to media. These 10 items are still off limits. More
A morning at the AltSchool, an education startup that Silicon Valley is crazy about The AltSchool is a system of "micro schools" and an education software maker that has raised about $133 million from investors like Andreessen Horowitz and Mark Zuckerberg and Priscilla Chan's philanthropic fund. More
Coolest cars for $18,000 These are the best budget cars, according to the experts at Kelley Blue Book. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play