A modern shield for volatile markets

Insurance tends to get more expensive when it looks like you might need it most. Markets are giving off that message loud and clear today. Traditional safe havens, such as gold, or US treasuries, either look very expensive, or not very safe. The absolute return sector should be a useful source of portfolio protection for investors worried about the environment, but not quite ready to sell out of their US technology holdings just yet. 

The challenge with absolute return funds

The problem is navigating all the various choices on offer. With the absolute return sector, beauty is very much in the eye of the beholder. The sector groups together funds that aim to deliver “a positive return in any market conditions.” However, it sets no volatility, drawdown or risk parameters around that goal. 

Some investors may want something that looks like a cash return with a bit extra. That means low volatility, minimal drawdowns month to month, and no nasty surprises. Others may care less about drawdowns, but really prioritise uncorrelated returns. They want something that will protect them when conventional equity and bond markets are going south. 

What absolute return funds aim to deliver

Absolute return funds don’t all aim for the same thing, and one of the biggest differences between them is the benchmark they target. Many measure themselves against SONIA — the Sterling Overnight Index Average — which is essentially a proxy for a very low-risk, cash-like return. Some funds aim to beat SONIA by a small margin, while others try to beat it by a much larger amount. The larger the target, the more risk the managers generally have to take to reach it.

They also vary considerably in the amount of time over which they look to achieve an absolute return. Some go with 12 months, but plenty look over three years or, more flexibly, ‘a business cycle’. Because the sector is so varied, one helpful way to compare funds is by looking at their Sharpe ratio. This metric shows how much return a fund has generated for the level of volatility (or risk) it has taken. A higher Sharpe ratio suggests the fund is delivering its returns more efficiently which is exactly what investors typically want from an absolute return strategy.

How absolute return funds try to achieve their goals

To deliver returns in all market conditions, absolute return managers typically use a wider toolkit than traditional long-only funds. This can include taking both long and short positions in equities or bonds, using derivatives to hedge specific risks, and adjusting exposures dynamically as market conditions change. 

Some strategies rely on macro views, such as interest-rate or currency positioning, while others focus on stock-picking or relative-value trades. The common thread is flexibility: these funds are designed to generate returns that come from skill and strategy rather than simply riding market direction.

Three absolute return funds for your portfolio

The Janus Henderson Absolute Return fund has shown its mettle as a consistent option. This long/short equity fund aims to provide a positive (absolute) return, regardless of market conditions, over any 12 month period. It has largely delivered on this brief. The fund’s delivered a positive return in eight of the past 10 years*. The most recent, was a very small set back in 2022, falling 0.7%, but this needs to be set against a decline of 7.8% in the MSCI World index*. Five year cumulative volatility on the fund has been low – at 2.9 — compared with 11.8 for the MSCI World index**.

The return has been generated by carefully calibrated stock picking and portfolio construction. Manager Ben Wallace says: “Against a backdrop of heightened macroeconomic and geopolitical uncertainty, we believe the importance of diversifying absolute return solutions has become increasingly evident, particularly those designed to capitalise on heightened trading opportunities amid elevated volatility and dispersion. Indeed, greater separation between the winners and losers within equity markets has created an environment ripe with opportunities on both the long and the short side.” 

The fund looks to balance a variety of risks. For example, it is careful to look at the interest rate exposure of the fund. In 2022, a lot of fund managers were caught out by the correlation of all assets to the interest rate cycle. More recently, Ben has been taking profits in UK banks, switching the proceeds into select REITs and homebuilders to balance exposure to interest-rate sensitive assets.

The BlackRock European Absolute Alpha fund has a slightly higher volatility profile, but still far lower than for a conventional equity fund, at 6.2%**. It also has a 12 month time horizon to deliver an absolute return. It dropped 2.7% in 2022 and has had a tougher year in 2025 to date, but manager Stefan Gries has shown himself to be a capable stock picker, delivering a positive return in eight of the past ten years*. 

The SVS RM Defensive Capital fund has seen greater highs and lows, with a volatility of 6.9%**. This is largely a function of its stated target, which is positive absolute returns in any market conditions over rolling three-year periods, meaning returns in any single year can be more variable. Its focus is much more on uncorrelated returns, investing in an eclectic mix of asset classes, grouped into Capital Preservation & Income, Capital Growth and Diversifiers. This latter group includes a range of lower correlation investments, including commodities and structured notes. Despite this broader remit and the variability it can introduce, the fund has delivered positive returns in eight of the past ten years. Importantly, it has rebounded strongly with the fund up 12.5% year to date, rivalling even the MSCI World, which is up 13%*. 

The role of absolute return today

Absolute return funds could fulfil an important role for investors in the current environment. The key with any absolute return fund is to understand the risk and return profile it is seeking to achieve. The title ‘absolute return’ comes with no guarantees and investors need to make sure they will deliver the protection they want. 

*Source: FE Analytics, discrete calendar year performance, 17 November 2025

**Source: FE Analytics, five year cumulative volatility, 17 November 2025