Some European absolute return and multi-asset flexible funds failed their “clearest test since the Lehman fallout” during the recent market turmoil, according to Fitch Ratings.
Research carried out by the agency’s fund and asset manager rating group shows European absolute return and flexible funds lost 2.5 per cent and 7.6 per cent respectively over the first three weeks of August, when concerns over the eurozone debt crisis and global growth sparked volatility in the markets.
Absolute return funds attempt to achieve positive returns in all market conditions, while flexible products strive to deliver and higher returns on the upside and lower returns on the downside when compared with a balanced bond and equity allocation. Fitch says its findings suggest the funds are not always successful in achieving these aims.
“The market volatility seen in August has increased fund return dispersion, particularly on the downside. Compensating for 2011 losses has become a major challenge for many AR and flexible funds, which must adhere to strict risk budgets,” Fitch says.
The research claims that some managers were “caught by surprise” when the sell-off began and certain protection mechanisms, including macro or tail risk hedges, were shown to be “ineffective” in some cases.
In addition, Fitch says the worst performing funds are at risk of being driven out of the market, owing toå the fact investors tend to make their decisions based on performance.