A recent study by BNY Mellon entitled "New Frontiers of Risk: Revisiting the 360O Manager", illustrates a key finding that investors are no longer placing emphasis on generating alpha, but instead investing with absolute return funds.
And it makes a lot of sense too.
Generating alpha looks at outperforming a market benchmark over a given period of time. But what if the market benchmark drops 5%, and the fund drops only 2%? Should investors be complacent and satisfied with their return (or loss in this case)? One would hope not.
No loss of capital should be seen as good.
Emphasis On Targeting Absolute Returns
An absolute return fund seeks to make positive returns regardless of how the overall market moves by employing investment strategies that differ from traditional mutual funds and stock investing. Modern analytical tools, investment flexibility and management skills are key to achieving absolute returns.
Avoiding downside risk is now at the forefront of many investor's minds due to the 2008 financial crisis and has played an important role in this shift.
So the next time you see a fund focusing on generating alpha, proceed with caution.