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Alternative Market Briefing

But what is real absolute return? Buyers beware, says Ineichen

Tuesday, December 14, 2010

Benedicte Gravrand, Opalesque Geneva:

The term “absolute return” has been used a lot lately – some say overused. It normally denotes hedge funds’ investment philosophy, but the long-only fund world employs it whenever some hedging technique is used. On the other hand, some find that “absolute return” rings better than “hedge fund” to some investors’ ears.

“Absolute return, in my mind, is an investment philosophy. Its main attribute is active risk management,” explained Alexander Ineichen, founder of Swiss research boutique Ineichen Research & Management, at Terrapinn’s Hedge Fund World Zurich conference last week. “Which means in a nutshell, profits are good and losses are not.” Indeed, one differentiating characteristic of the absolute return investment philosophy, when compared to the relative return paradigm, is the aim to survive financial accidents and avoid negative compounding.

The “absolute returns” moniker has been abused, Ineichen explains in his April-2010 report called “Absolute Returns Revisited.” If a long-only fund is re-branded to include the “absolute returns” moniker, it does not mean that it is indeed an absolute returns vehicle. A TAA (tactical asset allocation) program that is fully invested at all times also doesn’t fit the premise of an absolute return vehicle. Buyers beware. A lot of mischief has been done with this term, he argues.

The absolute return model is de......................

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