Warnings over absolute return funds being a safe haven

Absolute return funds, which aim to deliver positive returns whether markets are rising or falling, could be turning into Europe's next investment mis-selling row, it is claimed.

As freefalling equity and bond markets ravage people's savings, private investors globally are piling into the funds. Demand has driven the assets held in absolute return funds to €182.1 billion globally as of the end of June 30, data from Lipper shows.

This is almost a fifth higher than a year ago and double the assets held in such funds at the start of 2009 and there are concerns that investors may think they are safe havens and can't lose money. But they can, with experts warning that they are more like the sophisticated hedge funds beloved of wealthy speculators than traditional mutual investments.

Britain's Financial Services Authority fears people may be buying them because they misunderstand the funds' objectives, believing labels like 'real return' or 'absolute' mean their initial investments are either protected or guaranteed to grow.

‘The danger with that of course is that is not what they are selling at all,’ says Bruce Moss, founder of UK based Advisa Centa, which develops risk management tools for financial advisers.

‘They are selling an investment strategy that may or may not be successful over a period of time, which again is not defined,’ he added.
It's not just ordinary investors who are at risk. Swiss watchmaker Swatch Group is seeking damages of around $30 million from UBS after an investment it made in an absolute return fund failed to meet expectations.

A source familiar with the details of the case, who requested anonymity in respect of the legal process, told Reuters that Swatch is arguing it invested in the product because it was assured the capital it invested was safe, and was guaranteed against downside risk.
A spokeswoman for UBS said the bank had given the court a statement of defence of its product and marketing materials but declined to elaborate, in line with company policy on commenting on live lawsuits. Swatch declined to comment pending resolution of the case.
The funds have been on the radar of the FSA for several months, as pension investors spooked by volatile stock markets have stepped up efforts to lock in some kind of return.

It warned in March that consumers, and their investment advisers, could find it difficult to assess how much risk they are exposed to in the funds as the strategies used by managers become more and more complex.