How Does an Absolute Return Mutual Fund Work?
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Introduction
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Absolute return mutual funds are a new kind of investment. Generally, the success of a mutual fund is determined by how it compares to competitors' funds or to Standard & Poor's 500 index. Unlike traditional mutual funds, which usually follow the movement of the stock market, absolute return mutual funds are designed to make money no matter how the stock market is doing. With absolute return mutual funds, the idea is create a steady return on investment.
Absolute Return Mutual Funds Versus Hedge Funds
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According to Investopedia, a Forbes company, "Alfred Winslow Jones is credited with forming the first absolute return fund in New York in 1949. In recent years, this so-called absolute return approach to fund investing has become one of the fastest growing investment products in the world and is more commonly referred to as a hedge fund." The similarities between hedge funds and absolute return mutual funds include the pooling of investors' money and the professional management by trained investment advisers. The two investment products have a few differences as well. Absolute return mutual funds are regulated by the government or the Securities and Exchange Commission. These funds are usually best for small or inexperienced investors. On the other hand, hedge funds are for the more advanced investor and these funds are unregulated. To invest in a hedge fund, you must be a certified investor with assets of at least $1 million. The initial deposit with hedge funds also is large, and investors are expected to leave their money in the accounts for a longer period of time. With most absolute return mutual funds, you can open an account with $500 to $1,000, and you can sell your shares at any time. Both hedge funds and mutual funds are aggressively managed to create the highest rate of return using a variety of investment techniques and investment products.
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How Absolute Return Mutual Funds Work
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Investors, called shareholders, open an absolute return mutual fund account and deposit money. This money is combined with other shareholders' money and used to buy and sell stocks, bonds and other investment products.
One of the main benefits of investing in a mutual fund is the management by experienced investments advisers. These fund managers are responsible for all of the investment decisions and for the success of the fund. The mutual fund's portfolio contains all of the investments in the fund. Many traditional mutual funds have a narrow focus of investments, usually a portfolio of stocks and bonds. Absolute return mutual funds have more variety and flexibility. Absolute return mutual funds managers usually invest in complex and sophisticated investments that traditional mutual funds avoid. These types of investments include options, commodities, futures, convertible-bond arbitrage, short selling, currencies, derivatives, distressed debt, convertible-bond arbitrage, real estate and merger arbitrage. Higher risk is generally associated with these types of investments, but the diverse portfolio can balance out that risk so there are no extreme losses or gains.
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