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How to distinguish total return and absolute return funds in the KIID
I hope this question is on-topic. It is not relally a quant question but it is a question that quants in risk management in asset management firms have to answer:
In the KIID (key investor information document) directive investment funds have to be categorized as market funds, life-cycle funds, structured funds, total return and absolute return funds (see an ESMA paperhere) in order to decide about the methodology to calculate the SRRI (synthetic risk reward indicator).
The difference between an absolute return fund and a total return fund is hard to tell in practice. Which are your strongest arguments/relevant traits of the fund that you use to decide?
How would you categorize: a multi asset class (stocks, bonds) momentum strategy – how a multi asset class risk parity strategy?
In general, Absolute Return is from pure price appreciation, Total Return includes all related asset cashflows (dividends, coupons etc.) aswell.
According to the ESMA document, it has nothing to do with that: A Total Return Fund is a fund with a return target to be achieved at smallest possible (but unbounded) risk, an Absolute Return Fund has a Risk (VaR) limit under which the return is maximized.
A momentum strategy is long-short for maximum return, so its Total Return Fund.
A risk parity strategy defines a maximum risk level, under which the portfolio is then optimized for maximum return, so its Absolute Return Fund.
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