Absolute Fund Management has designed the absolute fund, a fund of hedge funds that aims to produce growth while trying to preserve the original capital.
AFM is a new company founded by Charles Hovenden and Christopher Aldous. Hovenden is a former associate director of Rothschild Asset Management and has been involved in hedge funds since 1993. Before founding AFM, Aldous was a managing director of US investment bank Robertson Stephens and has also worked as an executive director of UBS.
The absolute fund will deliver returns that are independent of stockmarket movements, with a lower level of volatility than stocks and shares. It will invest in a range of hedge funds that use different types of hedging strategies, including long and short equity, merger and reorganisation and convertible abitrage strategies.
Long and short equity is the most popular strategy. Going long means the fund manager buys stocks they think will rise in price, which all fund managers have the ability to do. Whereas selling short is where a fund manager borrows stocks when their value is low, sells them when the price rises and buys them back when the prices fall again. Only hedge fund managers are allowed to do this.
Convertible arbitrage strategies involve buying a company's convertible bonds and selling the underlying investments short to exploit the difference in price between the two assets. And merger and reorganisation strategies means buying shares in companies that are about to be taken over before their share prices go up.
Unlike some funds, this will steer clear of the riskier global macro strategy, which involves gambling on changes in economies around the world and exploiting changes in interest rates. Alongside the fund of funds approach, this makes the absolute fund a lower-risk product in a high-risk investment field.