Absolute Return Fund vs. Hedge Fund?

by Tim Plaehn

Hedge funds are pools of money privately manged for high net worth investors. These funds use advanced strategies and techniques not usually available to the general investing public. Absolute return funds are the fund industry's attempt to bring hedge fund tactics to the retail investing public.

Hedge Funds

A hedge fund is a private investment fund where the fund manager has a wide latitude of investment choices and strategies. Hedge funds attempt to make money in a range of different markets and in all market conditions. Strategies may include going long on investments to profit from price increases and short selling securities to profit from declines. Some funds look for arbitrage opportunities, or scenarios in which price deviations between similar securities may result in profit when the mispricing is corrected by market action. Hedge funds may trade stocks, bonds, options, futures, precious metals and/or currencies.

Hedge Fund Objectives

The managers of hedge funds attempt to use their favored strategies to produce profits for investors in the funds in all market conditions. Whether the stock and bond markets are going up or down, a hedge fund should be earning profits for investors. That is one of the selling points and a major appeal to investors -- the probability, depending on how a fund is managed, of making significant profits in all types of markets and economic conditions.

Absolute Return Funds

Absolute return funds are mutual funds which use the same or similar trading tactics as hedge funds. These mutual funds are designed with a goal of providing a positive return to investors in all markets and tout the likelihood that returns will be better than an investor could earn by safely investing in U.S. Treasury securities. These funds can use hedging strategies such as holding both long and short stock positions, investing in commodities or using derivative securities to avoid the periodic downturns which affect regular stock and bond mutual funds.

Considerations

Absolute return mutual funds allow investors with smaller amounts of money to invest with managers using hedge fund trading tactics. Traditional hedge fund managers earn a portion of the profits the generate for investors, which is something not allowed by mutual fund regulations. Running a hedge fund allows money managers to build significant wealth along with the clients of the fund. In both hedge funds and absolute return funds, the tactics and strategies used do not always function as predicted and investors can lose money -- sometimes a lot of money. An investor should do her own due diligence before investing in either type of fund.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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