Investors need to consider absolute return strategies within the context of a balanced portfolio to minimise risk associated with market volatility, according to Henderson Global Investors.
Diversifying across stocks can result in investors becoming “100 per cent exposed to market risk”, said Henderson's head of alternative Australian equities, David Rosenbloom.
“In markets like we’ve experienced over the past few weeks, and in fact years, alternative investment options which better manage risk and smooth out returns, are becoming increasingly attractive,” he said.
Mr Rosenbloom said the current economic climate had seen a “refocus” on capital preservation among investors, leading to a renewed interest in absolute return funds.
“There have been significant market changes over the past three years, from large declines in commodity prices and the Australian dollar to the continued flight to yield by many investors. In this environment, capital preservation has become a key theme,” he said.
Absolute return funds aim to deliver positive returns regardless of rises or falls in the market, bearing “little or no correlation to traditional asset classes”, and Mr Henderson noted investors are increasingly seeing benefits in these strategies.
“As alternative investments become more transparent, and more liquid, investors recognise the value of investing in assets that are less correlated, can provide protection on the downside and deliver stable returns across all market cycles,” he said.