February 29, 2012
Absolute Return Funds – Absolutely no better than a patient, diversified approach. Are these funds just a passing fad? Per Morningstar, of the 871 total funds classified as “alternative”, only 68 have inception dates prior to 12/31/01 (10 years). Otherwise called “long/short”, “absolute” or “market neutral”, the only thing notable I see from these funds is a very high expense ratio. The largest two such funds in existence for at least 10 years as of 12/31/11 were the Robeco Long/Short and Aberdeen Equity Long/Short. The Robeco fund’s high average annual return for the period (9.95% average annual return) is significantly due to the 80% it earned in 2009 (lucky?). It certainly was not spared in 2008 (isn’t that the point of owning this kind of fund?), as it lost over 21% that year. The Aberdeen fund’s average annual return of 2.26% doesn’t seem impressive, considering the S&P 500 earned an average annual return of about 2.9% over the same period. Even the Vanguard Market Neutral fund (expense ratio 1.84%!) wasn’t impressive, at a 2.4% average annual return. Further, the average annual return of a diversified portfolio (80% stocks, 20% fixed income) was over 7% for that period. I would take the diversified portfolio every time.
Source of data & disclaimer:
Fund research from Morningstar Office.
Returns for a diversified portfolio are per the DFA Matrix Book 2011 2002-2011 average annual returns as provided by various indexing companies Investors cannot invest directly in an index. These returns do not take into consideration the effect of fees, trading costs or taxes