Absolute-Return Funds: A Buyer's Checklist

Absolute return is a goal — make money in any market. Systematic is a method — rules, not hunches. Don't confuse the two. (A note on the jargon.)

Two pieces of fund-industry jargon often get muddled. Absolute return describes a goal: to deliver a positive return whatever the market does, rather than simply beat a benchmark. Systematic (or "quant") describes a method: decisions made by fixed rules run on computers, rather than a manager's judgement. A fund can be one, both, or neither — they are not the same thing.

Both now reach ordinary investors through "liquid alternative" funds and rules-based exchange-traded funds. The pitch is appealing: returns that may not rise and fall with the stock market, and discipline that removes human emotion.

Be sceptical. Many absolute-return funds have charged high fees for returns that, across a full market cycle, trailed a simple mix of shares and bonds. "Uncorrelated" strategies often turn out to be shares in disguise just when markets fall together. And complexity makes it genuinely hard to know what you own.

So here is the actionable part. Before buying any such fund, work through the short checklist shown in the chart. If you cannot explain in one sentence how it makes money, if it has not been tested through a real downturn, or if a plain low-cost fund would do a similar job more cheaply — walk away.

Illustrative example: the questions to ask first

The chart lists the checks worth making before you buy. For most retirement savers the honest answer is that these strategies belong, at most, as a small satellite around a simple, low-cost core — and more often not at all. The burden of proof sits with the expensive, complicated product, never with the simple, cheap one.