Absolute Return Strategies Revisited

Abstract

Observing that many absolute return fund-of-funds managers focus on the low correlation of their returns to broad equity markets, the author uses the equity market weakness of the last several quarters to evaluate the relationship between non-directional fund-of-funds and equity market returns in a variety of environments. He concludes that there has been a surprisingly high degree of stability in the correlation coefficients of these strategies relative to a variety of equity market indices and that these correlations have tended to be higher than one might have expected. He suggests that the focus on correlation may be misplaced and that it might be redirected to the funds' particularly high Sharpe ratios, which explains the non-directionality of the strategies, and which recent substantial cash flows into the industry might jeopardize.