Periods of market instability are highlighting a simple yet often overlooked reality: investors benefit far more from steady, disciplined compounding than from short-lived bursts of outperformance, according to Datt Capital.
As global markets continue to face structural and cyclical challenges, the firm says interest in absolute return funds has risen sharply.
Unlike traditional strategies that aim to beat an index, absolute return funds are designed to generate stable, positive returns regardless of broader market direction. With unpredictability shaping much of the past decade, this approach has gained renewed traction among investors focused on capital preservation.
“Uncertain markets have defined the past decade. Inflation cycles, geopolitical shocks, liquidity shifts and persistent valuation dispersion have made it harder for investors to rely on traditional risk models,” the firm says.
“More investors now seek strategies designed to preserve capital first, then grow it responsibly. An absolute return strategy meets this requirement by aiming to deliver positive returns regardless of the broader equity market direction.”
Datt Capital says absolute return strategies are most effective when their return behaviour is independent from broad equity movements.
“Correlation is a critical measure of this independence. When returns do not track major indices, investors gain a diversifying component that reduces concentration risk and stabilised outcomes through volatile cycles.”
According to the firm, avoiding deep losses is a fundamental driver of long-term wealth creation. “Recovering from a drawdown consumes time, capital and opportunity. Absolute return funds protect capital by managing exposure, maintaining liquidity and avoiding the constraints of benchmark-driving investing.”
Absolute return funds provide a practical advantage by protecting capital, reducing volatility and delivering stability across uncertain markets through disciplined research, according to Datt Capital – and they rely on multiple return drivers rather than a single market trend, supporting lower volatility and steadier performance.
This structure also enables flexible use of asset classes. Without benchmark constraints, managers can sidestep unattractive pockets of the market and redirect capital toward segments with more favourable risk-reward dynamics.
“Exposure can shift between equities, cash, credit, hybrids or special opportunities depending on conditions. Flexibility acts as a natural risk management tool.”
During rising markets, the firm believes absolute return funds can participate selectively while avoiding excess risk and crowded trades. In range-bound environments, they draw on several return sources beyond equity beta.
“During market shocks, their controlled exposures and liquidity discipline limit drawdowns and protect capital.”
Several structural forces are increasing the relevance of absolute return funds for Australian investors – including unpredictable inflation cycles.
Last week’s CPI surprised to the upside, with headline inflation at 3.8 per cent and core inflation at 3.3 per cent. “Inflation volatility increases dispersion across industries. Rigid index exposure may struggle in this environment, while flexible strategies adjust more effectively.”
The figures have fuelled speculation that the Reserve Bank may hike interest rates within the next six months. “Interest rate reversals create uncertainty around equity valuations. Absolute return funds reduce reliance on this single variable,” Datt Capital said.
“Absolute return funds provide a practical solution for investors who want stability during uncertain periods without giving up the ability to grow capital. Lower drawdowns, flexible positioning, independent research and broad diversification help deliver more consistent outcomes over time.”
