When I look at mutual funds, I find absolute value mutual funds intriguing. Unlike typical funds that focus on relative performance compared to benchmarks, absolute value funds aim to deliver positive returns regardless of market conditions. In this article, I’ll share what absolute value mutual funds are, how they work, their strategies, benefits, risks, and how I think about using them in my portfolio.
Table of Contents
What Are Absolute Value Mutual Funds?
Absolute value mutual funds focus on generating positive returns over time without comparing their performance to a benchmark like the S&P 500. Their goal is to achieve positive returns in all market environments — whether the market is rising, falling, or flat.
This approach contrasts with many traditional funds, which seek to outperform a benchmark but may still post negative returns if the overall market declines.
How Absolute Value Mutual Funds Work
Absolute value funds use investment strategies designed to protect capital and generate gains regardless of market direction. Some common strategies include:
- Long/short equity: Buying undervalued stocks (long positions) and short selling overvalued stocks to profit from both rising and falling prices.
- Market neutral: Balancing long and short positions to reduce market risk.
- Global macro: Investing across asset classes and geographies to exploit global economic trends.
- Alternative assets: Including derivatives, commodities, or real estate to diversify sources of return.
Because of these strategies, absolute value funds often have lower correlation to traditional stock or bond markets.
Why Absolute Value Funds Matter to Me
I value absolute value funds because they:
- Aim for positive returns in all market cycles — useful during downturns.
- Help reduce portfolio volatility through diversified strategies.
- Offer a potential hedge against inflation or market crashes.
Measuring Absolute Value Fund Performance
Since these funds don’t track a benchmark, I focus on absolute returns. Here’s the formula I use:
\text{Absolute Return (\%)} = \left(\frac{\text{Ending NAV} - \text{Starting NAV} + \text{Distributions}}{\text{Starting NAV}}\right) \times 100This formula measures the fund’s pure growth, including distributions, over a period.
Example: Calculating Absolute Return
Suppose I invested in an absolute value fund with:
- Starting NAV = $25.00
- Ending NAV = $26.50
- Distributions = $0.50
Calculating absolute return:
\text{Absolute Return} = \left(\frac{26.50 - 25.00 + 0.50}{25.00}\right) \times 100 = \left(\frac{2.00}{25.00}\right) \times 100 = 8%Benefits of Absolute Value Funds
| Benefit | Explanation |
|---|---|
| Positive Return Focus | Designed to generate gains regardless of market conditions |
| Diversification | Use of alternative strategies reduces correlation to stocks/bonds |
| Downside Protection | Hedging and short strategies help protect during downturns |
Risks to Consider
Absolute value funds are not without risks:
- Higher fees: Complex strategies often come with higher expense ratios.
- Strategy risk: If the fund’s approach fails, returns can suffer.
- Liquidity: Some alternative assets may be less liquid.
- Performance variability: Returns can vary widely by fund and market environment.
Should I Include Absolute Value Funds in My Portfolio?
I consider absolute value funds a useful tool to:
- Reduce overall portfolio risk
- Smooth returns during volatile periods
- Complement traditional stock and bond holdings
However, I balance these with simpler, low-cost index funds to maintain broad market exposure and low fees.
Final Thoughts
Absolute value mutual funds offer a way to seek positive returns without relying on market direction. For investors like me who value capital preservation and smoother returns, these funds provide an interesting option. I weigh their benefits against fees and risks, always aligning choices with my long-term goals and risk tolerance.
