I remembered a film by this name (Absolute Beginners) existing but as I look at that movie poster it rings no bells.In my readings I stumbled across an absolute return OEF which sent me looking for others in the category that I hadn't previously heard of just to take a look under the respective hoods and see if there were any themes that carried over or any other trends to learn from.
It seems there can be many different flavors of absolute strategies, almost a catch all (not a criticism). As I looked at the holdings of a few of them I only noticed a couple of recurring things.
The first thing was liberal use of ETFs to presumably just capture pure exposure of broad markets or big sectors. It is interesting to see ETFs show up in mutual funds.
Some might squawk about a fund owning a fund but one common strategy is pairs trading and using an ETF for at least one side of the pair can reduce risk. Instead of shorting Citigroup (C) and having to pay out almost 6% in dividends might it make more sense to use ProShares Ultra Short Financials (SKF)? After all C and iShares Financial (IYF), which is what SKF is double shorting, have an 0.89 correlation and instead of paying out Citi's dividend you can collect SKFs t-bill interest.
Some fund managers would find that line of thought compelling which is why ETFs show up in some funds but some obviously will not think ETFs make sense.
Another thing that showed up was high, think 40-50%, cash balances. Keep in mind that the reported holdings were old and these funds may not have high cash now. A lot of cash is valid but with cash rates so low it means the rest of the portfolio needs to work harder if the goal of the fund is something like CPI plus X%.
If Ken Heebner opened an absolute return fund and said he was going to put 90% in t-bills and split the remaining 10% between two stocks he said would go up at least 100% in the next 12 months the implied return would be something close to 12% and I think people would line up around the block. While that example is ludicrous a lot of cash does not have to be bad depending on the overall strategy.
If you have interest in the effect created in this space you probably need to explore the various approaches that exist (or as many as you can find anyway) and find the best intellectual and emotional fit. If a manager likes 30% cash balances and you don't it's probably a bad fit for you.
It also seems like most of the funds in this space are expensive, in the vicinity of 2%. Given the differentiation in the space I think shopping for a cheap one might be very difficult. Maybe I'm wrong but with absolute return I think you really are betting on the brains of the manager as opposed to something like an actively managed large cap value fund. If LCV is doing very well it is likely that your LCV fund is going to do well too but if LCV does poorly your fund would also do poorly and it would be deemed acceptable.
But a fund manager who uses some sort of arbitrage to deliver absolute needs to deliver the same return with his strategy in all market conditions. If he can actually do that he might be worth 2%. Obviously if 2%, or something close to it is too much for you then you shouldn't buy the fund.
4 comments:
Roger - I'm currently using a CA muni fund to capture the "absolute return" portion for a portfolio. Do you think this is valid, or am I just fooling myself? I switched out of a more traditional absolute return vehicle into muni's when that market went off-kilter. In addition to the (then) market distortion in muni's, I also think the theme has legs from a future tax-risk standpoint (higher taxes making muni's more valuable), which should help offset the interest rate risk. I am curious about where you draw the line between fixed income, cash and total return?
Roy, don't know if you are kidding yourself. i doubt whatever you are using can be a permanent proxy for absolute but who knows?
Bond prices are a two way trade. rates up, prices down and vice-versa. obviously the bond market is vulnerable to ugly albeit short dislocations too.
if someone is running an absolute return fund it may not always work but it should be capable of always working like long short equities. in the worst bear market there are stocks that go up. a manager may or may not find them but they are there.
cash (not forex) as an absolute strategy potentially has a negative real return, at least some of the time. it can be used as a tool but just cash can be negative.
Right - definitely not a permanent proxy and probably not even one that can be reproduced today, since the market distortion was short lived. Absolute return is very challenging in a taxable account, due to the various turnkey products throwing off primarily short term gains.
Absolute Beginners was an earlier English version of Wall Street, set in London's pop scene, pre The Beatles and The Stones. Michael Douglas' brilliant Donald Trump-like Wall Street raider Gordon Gecko is to David Bowie's slimey executive producer at Vendice Partners, what Wall Street broker Charlie Sheen's Bud Fox is to Eddie O'Connell's photographer Colin, both young upstarts suffering a crises of conscience while trying to break into the big leagues. Daryl Hannah played a role similar to Patsy Kensit's trophy girlfriend. The major difference in the two films is one is blessed with the creative genius that is Oliver Stone, the other was made by some guy who made decent music videos (and the film 'Earth Girls Are Easy') - probably why you don't remember it, Roger !
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