Absolute-return investing: time for clarity
Fans of absolute-return investing claim it represents ‘the future of asset management’, its attackers that it is just a fad. Most investment fads are intellectually lazy: they describe concepts but appeal to emotions. The most appealing of investment concepts are versions of the free lunch: the ‘something for nothing’ culture. For absolute-return products, the claimed USP is that you can generate much more upside return than you risk in absolute loss and that this is more efficient and rational than harvesting long-term risk premiums from volatile assets by accepting large interim losses.
In this new position paper from No Monkey Business Limited, we put the claim to a ‘no nonsense’ test. Absolute-return investing is faddish. It is not the new paradigm. It is mostly not even absolute. But a hybrid form of absolute and relative investing adopted by many hedge funds, which can be used as the basis of multi-asset class portfolios, is meeting real investor needs.
Rather than try to prove intrinsic superiority between absolute and relative approaches, we aim to make the differences clear enough for investors to choose between them (or even combine them). They can do this by relating them either to suitability for their own tasks or to persistent biases in their risk preferences. But to do this, they have to get beyond the sales.