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Fitch points to funds that failed turmoil test

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 fund and asset manager rating group shows European absolute return and flexible funds were down by 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 try to achieve positive returns in all market conditions while flexible products strive to deliver 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.

It says: “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 absolute return and flexible funds, which must adhere to strict risk budgets.”

Skerritt Consultants head of investments Andy Merricks says: “Like any other funds, absolute return funds have to be positioned in line with the managers’ views on the market. If the market becomes volatile they can suffer the same dramatic falls that a traditional fund can see regardless of their long/short positions.

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