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Only one in four absolute return funds hit the target

Funds designed to avoid losses come what may rarely keep their promises, research finds

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Only a quarter of the funds that aim never to lose money have managed to keep their promise over the past five years, according to research forTelegraph Money.

The findings come at a time when savers are piling into these absolute return funds, whose main objective is to achieve positive returns in all market conditions.

In April, the funds, recently given the new official name of targeted absolute return funds, attracted record sales, according to the Investment Association, the trade body for the fund industry. It was the bestselling fund sector, with 529m invested.

Since the start of the year 1.2bn has flooded into these funds, making them the second-bestselling sector after European funds. Experts put the boom down to investors becoming more cautious following the strong rise in global stock markets over the past five years.

But research by FE Trustnet, the analyst, has found that only one in four absolute return funds has managed to consistently produce positive returns each year since 2010.

Just eight of the 39 absolute return funds with a five-year track record achieved the feat.

Financial advisers said the findings showed that absolute return funds struggled to live up to their name.

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Absolute return funds aim to smooth market volatility by using a specialised technique called short selling. This normally involves borrowing a share or other asset that is thought to be about to fall in value. The asset is then sold. If, as expected, the price then falls, it can be bought back more cheaply and returned to the lender, creating a profit.

Martin Bamford, a chartered financial planner at Informed Choice, said the funds often failed to get this process right.

I have never been a fan of these funds and have not changed my mind. They consistently fail as a group and it is down to a lack of expertise. Betting against shares over a short-term period is not easy and, unfortunately, most fund managers do not have the skills to make the right calls, Mr Bamford said.

Patrick Connolly, an adviser at Chase de Vere, said the funds were too correlated to the stock market.

Although funds in the sector can take hugely different approaches, there is ongoing concern that many are highly correlated to equity markets, meaning that if these markets fall investors still lose money, he said.

It is, therefore, essential for investors to understand exactly what theyre buying and the likely risks involved. The name gives the perception of security and implies that these funds will give positive returns in all environments, but this is very unlikely to be the case.

The analysis by FE Trustnet named the three funds in which investors would have lost the most money.

It looked at the maximum loss an investor would have faced if they had bought and sold at the worst times.

The Thesis Cartesian UK Absolute Alpha fund had a maximum loss of 35pc, while the figures for Premier ConBrio Managed Multi-Asset and City Financial Absolute Equity were 33pc and 26pc, respectively.

At the other end of the scale, the most an unlucky investor in the Insight Absolute Equity Market Neutral and Insight Absolute Insight funds would have lost over the past five years is 3pc.

These are two of the eight funds that managed to produce positive returns over the past five calendar years.

Out of the eight funds, Standard Life Investments Global Absolute Return Strategies is by far the most popular, holding 25bn.

This fund is fiendishly complicated, running market return, directional and relative value strategies. But it has kept its promise, producing positive returns each year. The maximum drawdown was 3.2pc.

Research by Telegraph Money in March found that just three funds had managed toproduce positive returnsin both rising and falling markets since 2007.

The performance of Ruffer Total Return stood out. In 2008, a terrible year for most markets, it returned 21pc.

Similarly, the Troy Trojan and Miton Cautious Multi Asset funds also delivered positive returns in 2008 and 2011. In each case, the fund managers took big bets in the interest of investor safety, shunning shares and fleeing to cash.