Investment Week takes a closer look at how the absolute return sector performed last month as global stockmarkets went into freefall.
Fears a slowdown in China could be more severe than previously predicted led to panic-selling across Asian and global markets in August.
The Hang Seng Composite index shed over 10% during the month, while the FTSE 100 dropped almost 6%. On the 24 August, Black Monday, £96bn was wiped off the UK's blue-chip index alone.
However, bond markets were more insulated from the China fallout, with the JPM Government Bond Index Global posting a 1.3% gain as investors fled from equities.
So how did absolute return funds fare in the month that saw the 'Fear' index, or VIX, record its largest ever weekly rise of 118.5%?
In total, only 29 out of the 89 funds in the IA Targeted Absolute Return sector posted a positive return in August, with a 15 percentage point difference between the best and worst performers.
Here, Investment Week considers the drivers and detractors for the best and worst performers in the sector over the summer months. (See table below for performance comparisons over the past year).
Top five performers in August
1. City Financial Absolute Equity fund
Managed by David Crawford (pictured), this £127m fund has significant exposure to small- and mid-cap companies, which were not as badly hit as large-cap names during the sell-off. The manager can also use derivatives and equity index futures. Current long positions include financial services companies Just Retirement and Aberdeen, while Crawford has a large short position to US shale oil.
2. JPM Multi Asset Macro fund
This tiny fund has just £9.3m in assets under management and is managed by James Elliot, Shrenick Shah and Talib Sheikh. It currently holds 62% in equities, 26% in cash and 11% in bonds, with 20% of the equity portion allocated to Japan and 20% to North America.
3. Columbia Threadneedle Credit Opportunities fund
Another fund with a trio of managers, this £722m fund is run by Barrie Whitman, Alasdair Ross and Michael Poole. The portfolio focuses on the high yield and investment grade markets. During July, the managers said directional high yield, event high yield and relative investment grade positions contributed to positive returns, helped by US-dollar denominated new issues from names such as ABN Amro.
4. Jupiter Absolute Return fund
Investing in a wide range of assets including equities, cash and fixed interest, this £203m fund is managed by James Clunie. His top shorts include both UK and US treasuries, while he is long financials and oil and gas. Clunie was prepared for a market set-back, saying in July that the third quarter of 2015 looks "adverse" with very low or negative medium-term returns, suggesting equity markets are looking vulnerable to shocks.
5. Man GLG Alpha Select Alternative fund
Investing in large-cap companies, this $113m fund aims to have a low correlation to equity markets and other long/short equity funds. According to managers Nick Judge and Charles Long, notable winners during July included long positions in Imperial Tobacco, Barclays and Shire, although problems in China affected its holding in Prudential.
Bottom five in August
1. CF Eclectica Absolute Macro fund
Hugh Hendry's fund had a tough time in August, although this follows a strong run for the year to April.
At 31 July, the fund had 87.5% equity (long) and 2.2% equity (short) as a % VaR. At this time, Chinese equity futures represented 12% of NAV (6.2% in Hang Seng CEI and 5.8% in A-shares). These positions had been larger earlier in the year, but were sold in August. The fund's Chinese equity exposure had already started to be reduced before last month.
Hendry said the "nature of the recent sell-off" prompted the team to reduce risk "significantly" on the portfolio, although this remains under constant review. The team said recent events are not dissimilar to those seen during the 1987 sell-off - i.e. where investors suffer a crisis of confidence, rather than a 2008-style scenario where there is an obvious feedback into the real economy
2. 7IM Unconstrained fund
The asset allocation team which runs this £45m portfolio said risk had been added in its July update, leaving the fund exposed during a volatile August. It had "meaningful" exposure to Chinese H-shares, which were badly hit during the month, down over 10%. The fund also had positions in a Topix Index Future, European equities and an MSCI All Countries Asia ex Japan Index Future in its top ten holdings.
3. Insight Global Absolute Return fund
This £275m multi-asset fund is managed by Steve Waddington. Around 35.3% in fixed income is split between government bonds, investment grade and emerging market bonds and its 24.3% equity position includes almost 5% each in UK, US and emerging markets.
4. BlackRock Dynamic Return Strategy
This £142m fund, which only launched in April this year, has almost 40% in fixed income and 27.4% in equities. Manager Andy Warwick divides the portfolio into tactical, thematic and cyclical strategies. In July, he warned sustained instability in the Chinese financial system would have a profound impact on the broader emerging markets area, but also noted the short-term buying opportunities in Chinese equities as a result.
5. S&W Saltus Multi Asset Class fund
Managed by David Cooke and Simon Armstrong, this fund of funds has its highest weightings in UK equities (22%), international equities (20%) and high yield credit (16%). In July, the managers warned "erratic price movements in stock, bond and foreign exchange markets is unlikely to dissipate ahead of an expected change in the direction of US monetary policy sometime this autumn."
Investment Week is also running an absolute return conference later this month, with a number of strategies represented. Click here for more information.
The US dollar is close to peaking and the risks now seem to be on the downside.
Latest news and analysis
Fallout from Haywood suspension
Songs from writers Johntá Austin, Sean Garrett and Rico Love
Strategic public equity