Last year, overall, was a good year for AR funds, with 80% of funds, as in 2013, capturing positive returns averaging 3%. Yet, changing market conditions in mid-2014 have favoured trend-following strategies (such as macro / momentum CTA (commodity trading advisors). By contrast, the environment became less supportive of the yield and fixed income-based strategies that are widely exploited by AR funds, as demonstrated by their carry and short volatility biases. European Central Bank's quantitative easing programme in January 2015 may again tempt AR fund managers to increase their overall market exposure, participating in the European "reflation trade".

In Fitch's opinion, AR fund managers may be more willing to exploit more directional, long volatility strategies as yield expectations fall in 2015. In addition, higher volatility and disparity in returns may also provide more opportunities for stock and bond picking, and for long/short strategies.

Stronger-rated funds are those that remain loyal to their investment approach, while adapting performance drivers (e.g multi-strategy funds) as market dynamic change, thereby providing more stable, less correlated returns. Fitch also closely monitors those hidden biases or style drifts that would not be consistent with the stated investment approach of an AR fund.

The report, "Absolute Return Funds: January 2015", is available at fitchratings.com

Fitch Ratings S.A.S.
fitchratings.com.

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