Mark Lyttleton's UK Absolute Alpha among portfolios resistant to weakness by using hedge fund approach
Sophisticated vehicles using hedge fund techniques delivered the best performance among the range of target return vehicles during February's stock market correction.
Investment Week examined the performance of 10 absolute return funds during the period when equity markets across the world tumbled. These vehicles are sold and marketed as being able to generate positive performance in all market conditions
Only three of the 10 funds delivered positive bid to bid returns during the three weeks to 16 March, according to Morningstar data. Over the period, the average UK All Companies fund lost 3.64%.
The best performer was Mark Lyttleton's Merrill Lynch UK Absolute Alpha, which was up 2.05% over the three weeks.
Swip Absolute Return Macro and UBS Absolute Return bond also delivered positive gains over the three-week period.
All 10 managed to deliver stronger returns than the average UK All Companies fund however.
Lyttleton adopts a long/short strategy on UK equities, using contracts for difference to take short positions.
By contrast, Swip's Macro fund, managed by Ken Adams, uses a multi-asset strategy including equities, fixed interest, alternative assets, money market instruments, cash and derivative contracts.
The Swip fund was the only vehicle to generate gains in all three weeks and ended 1.08% up over the period.
JPMorgan's Cautious Total Return was one of the funds that failed to deliver positive returns when the markets fell.
Co-manager Taleb Sheikh, who blends equities, fixed interest and cash to produce total returns, said he was disappointed the fund fell during the period.
"We expected a market setback but did not cut our equity exposure back," he said. "Although some total return funds did better than us, over a three-year period we are confident we can deliver on our target of cash plus 3%."
Insight Investment's Diversified Target Return, managed by Patrick Armstrong, was the best performing of the five funds that sit in the Cautious Managed sector and is another product that uses hedge fund techniques. "Our short positions really helped us over the three weeks," he said. "We shorted the US small-cap index, the Russell 2000, and also Goldman Sachs Commodity Index."