Absolute Return Funds: Challenges and Opportunities

At different times I’ve talked about adding more absolute return in if we can no longer rely on equity returns the way we used to.

That sounds ok I guess but finding absolute or market neutral products that are not prone to bouts of anxiety, even if just temporary, might be tough to do.


The chart captures a bunch of names from the space, there are others that I did not include. The ones charted are:

  1. Merger Fund (MERFX)
  2. Arbitrage Fund (ARBFX)
  3. Hussman Strategic Growth (HSGFX)
  4. JP Morgan Multi Cap Market Neutral (OGNIX)
  5. Permanent Portfolio (PRPFX)
  6. TFS Market Neutral (TFSMX)

I’m not sure about the ticker symbols WRT to class of funds, A, B, C and so on.

The worst of the lot is down just under 15% YTD through Monday versus a drop of over 30% for the S&P 500. In thinking about an absolute or market neutral, is down 15% in a down 30% world acceptable? There is no right answer, to you that either is or is not acceptable.

PRPFX has been the laggard, and maybe it should not be considered in the group, but most of that lag came in the last three months. It rolled over a little starting in May but since August 1st it is down 16.5%. Keep in mind that at the same time SPX was down 26%. Great performance but I’m not sure if that is what someone seeking absolute or neutral has in mind.

TFMSX had a great run into its high in July. From July 1 it dropped about 15% versus 23% for SPX. Again, I think that is an excellent result but someone expecting flat might not be happy with an 8% beat or even a 12% beat in that circumstance.

OGNIX was, to the eye, the least volatile of the bunch. If you wanted boring (not being critical) you got it with this fund.

HSGFX was low octane the vast majority of the time (again it may be a mis-characterization to include this fund in the post but many people view it in this context) but it did have a few hiccups along the way. Coming into October it was up 4% on the year and then dropped 6% through Monday. Again, way better than SPX but I bet at least one fund holder panicked out during the hiccup.

Both MERFX and ARBFX were dull all year, had early October freak outs and are now working back. The credit market freeze potentially gets in the way of the strategies employed by the funds.

I have two funds from this category (not charted) in my ownership universe. The Nakoma Absolute Return Fund (NARFX) is down less than 5% YTD which is probably a good result by any measure but a back in May it was down 10% for the year which at the time was worse than the market. People who were patient came out very well. The other name I use (and have mentioned many times) is the Rydex Managed Futures Fund (RYMFX) which is up a little over 5% for the year. Again that is a good result but it got smacked around some when oil started to rollover but before the rebalance took oil out of the fund.

Assuming my picking RYMFX was just luck, should I put 10% of the portfolio into it? It has done pretty well so why not? The current event has shown repeatedly that things don’t always work as they are supposed to, this has happened countless times in fact. Putting 10% in absolute/neutral as an asset class would be one thing (not sure I like that number, just an example) but all in one fund no matter how much I like is more than I would do.

There are ways to build your own market neutral using long versus inverse ETFs (this would not be perfect and could be labor intensive) that could be done in conjunction with owning a fund.

Anyone having any interest in pursuing this in their portfolio needs to have their own expectations and realize that every so often these funds are going to have a bit of a spasm and then it will go back to doing its thing. No product can offer perfect protection 100% of the time. If you find something that has been “perfect” thus far great but at some point it will hit a rough patch. If it really is a good fund then the rough patch would be short lived. Well hopefully.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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